Lifecycle Cost Analysis for Dummies
Aryani, Giant, Law & Order
Lifecycle cost analysis (LCA) is a commonly employed decision tool. It is employed to select between alternative vehicle choices as well as to determine the best vehicle replacement policy. Its use is widespread in private sector fleets. Yet, the majority of law enforcement fleets do not employ such a decision tool even though the data necessary for a LCA is readily available and collected by most agencies.
A basic LCA can serve as an effective tool and is simple to implement. The three simple ingredients of a basic LCA are: 1) an understanding of basic math, 2) the collection of cost data such as vehicle purchase price and various operating costs, and 3) a healthy dose of common sense.
Do you represent a smaller agency that may not be able to afford to contract with a fleet management consulting firm or does not have access to suitable fleet management software? Maybe, you have access to a spreadsheet as part of your computer system's word processing office tools to facilitate your analysis? Then the following example of a basic LCA can help you to carry out such a simple analysis for your own agency using your own circumstances and data.
Assume that a hypothetical small law enforcement agency procures Ford Crown Victoria Police Interceptors (CVPI) for patrol and traffic duties. Like many agencies this small hypothetical agency buys its squads outright. Therefore, there are no financing or leasing costs to consider in this example. This agency employs shift rotation squads and not take-home vehicles.
It retains its patrol squads in service for five years or about 100,000 miles before rotating them out of service and auctioning them off at public auction. Based on these rotation criteria, the average annual miles driven are 20,000 miles per unit. The LCA then spans the five-year time frame from calendar year 2005 to the end of calendar year 2009. The CVPIs procured are model year 2005 vehicles delivered in January of 2005.
In a LCA costs are analyzed in periodic time intervals such as on an annual basis in order to derive meaningful and readily to compare numbers. A basic LCA covers only actual vehicle cost data. It does not entertain overhead cost in order to keep the analysis simple.
The cost data required for a basic LCA are: initial vehicle acquisition price, emergency equipment cost, insurance cost if applicable, fuel cost, maintenance cost, and repair cost. Other data required are figures for the cost escalation rate and the discount rate. A LCA is not valid without due consideration of escalation and discount rates.
The cost escalation rate is an approximate measure for future cost of living/cost of doing business increases. Assume that the escalation rate is 3%. Figures for the escalation rate can be derived from past consumer price index (CPI) numbers or future forecasts. Changes in the CPI represent a commonly employed measure for the inflation rate. The US Department of Labor's Bureau of Labor Statistics publishes these figures and they are available on the Internet.
Preliminary figures put the average annual inflation rate based on CPI changes at 2.7% for 2004. The same statistical rate for 2003 and 2002 was 2.3% and 1.6%. A 3% assumption for the years ahead represents a reasonable estimate for the future given the slight increases in the inflation rate during the past three years and current economic trends.
The discount rate is an approximate measure to determine today's value of an expense or income to be paid or received in the future. The process of determining this value is called discounting. Discounting is simply looking backward from the future to the present. Future expenses and income are discounted because their nominal cash value in the present is less than in the future due to society's overwhelming consensus.
This is the same logic that lottery officials across the country apply. …