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Life-Cycle Costing Tutorial

JAMES J. HIRSCH & ASSOCIATES


June 2009
© James J. Hirsch & Associates
12185 Presilla Road.
Camarillo, CA 93012-9243
Phone 805.553.9000 • Fax 805.532.2401
eQUEST Life-Cycle Costing
Life-Cycle Costing (LCC) Tutorial Table of Contents

Table of Contents

Overview 4

Basic Concepts 8

LCC Calculations and Equations 15

LCC Examples Using Tabular Data 20

User-Friendly LCC Spreadsheet 22

LCC Examples Comparing Hand Calculation with Spreadsheet 29

Simple Payback Method 36

EEM Wizard LCC Example (Example 1) 40

Detailed Interface LCC Example (Example 2) 62

LCC Results Reports 68

Additional LCC-Based Measures of Merit 73

Summary 75

References, Bibliography, and Glossary 77

Appendix A, Comparing Results with BLCC 84

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Life-Cycle Costing (LCC) Tutorial Overview

Life-Cycle Costing Tutorial


Overview
Life-Cycle Costing

Objectives
The objectives of this tutorial on Life-Cycle Costing are:

 understand the basic terminology and concepts of Life-Cycle Costing (LCC), with emphasis on
the LCC approach developed and recommended by National Institute of Standards and
Technology (NIST) at the direction of the Federal Energy Management Program (FEMP)
 be able to conduct a basic LCC analysis
 be able to discuss LCC results with clients and colleagues
 be able to anticipate the general impact on LCC results due to changes in basic LCC analysis
assumptions
 understand the limitations of Simple Payback

The Integrated Whole Building View of Design


Properly viewed, a building is understood to be a “system of systems” which is more than the sum of its
constituent parts (Figure 1). While prescriptive measures of building energy efficiency standards, e.g.,
California’s Title 24 and ASHRAE’s 90.1, have been effective at capturing efficiency gains at the
component level (i.e., opaque exterior envelope, envelope fenestration, HVAC systems, lighting, etc.),
whole building design recognizes that there can be significant tradeoffs or gains in efficiency via the
synergy between building systems.

Figure 1 A building is a
Whole Building
Design system of
systems …
Whole Building Design
recognizes that a building optimum
is a whole, i.e., a system of performance
systems, not merely the
sum of its parts and requires
requires an integrated building
design approach among
the entire design team systems
(see Figure 2). integration
Harvesting the synergy between building systems requires that the conventional serial-sequential design
process, where mechanical or lighting design is not considered until after earlier design stages such as

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Life-Cycle Costing (LCC) Tutorial Overview

envelope are well developed, be converted into a more integrated process (Figure 2), where the impacts of
one building system design can be considered on other building systems, before finalizing the design.
Integrated systems via whole building design YIELDS a building that is:
 comfortable for the occupants
 more productive for the occupants
 less costly to operate
 less costly to build

Integrated systems via whole building design REQUIRES:


 Increased Collaboration across the design team
 Whole-building simulation
 Integrated analysis
 Life-Cycle Costing

As a result of the growing emphasis on sustainability via whole building performance (e.g., USGBC’s
LEED™ rating system [10]) and the increasing role this has created for performance compliance paths
within California Title 24 [11] and ASHRAE 90.1 [12], whole building design and analysis tools such as
eQUEST [13] are in increasing demand.
The increased breadth of scope implied in whole building design is complimented by the broader life cycle
perspective of a building implicit in life-cycle costing. Life-cycle costing is consistent with this trend to
consider the impact of our building design and operations decisions more broadly, i.e., globally.

Figure 2 Design + Engineering disciplines =


Integrated Energy
Design Whole-Building analysis
Treats a building as a complete system to identify
Integrated design views
the building and the Integrated Design Strategies.
design team as a whole,
not merely as the sum
of its parts. Integrated
design can yield value
throughout the
building’s life cycle. ALL of the parts, well integrated,
will provide a design of enduring value.
Figure 3 and 4 on the following page illustrate the relatively large role that building utility costs play in
facility (Figure 3) or total owning cost overhead (Figure 4). Employee payroll and dept service are
excluded from the survey used to develop Figure 3. The source of the data used to compile Figures 3 and
4 is the Building Owners and Managers (BOMA) annual Experience Exchange Report [14]. Figure 5
illustrates some conservative assumptions comparing the 30 year amortized cost of design with the annual
costs of facility operations (includes energy) and employee payroll. The large role of payroll suggests that
care should be exercised not to jeopardize employee productivity in the pursuit of energy savings.

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Figure 3
Life-Cycle Admin.
FACILITY Costs Energy
(U.S. Average) 18%
30%
The chart at right
illustrates the relative Grounds 10%
magnitude of facility
costs (excludes
employee payroll and 19% 23%
dept service), indicating
the high cost of energy Cleaning Maint.
in facility overhead.
(source: BOMA 2000)

Figure 4 Design
Life-Cycle Total Energy
OWNING Costs Constr.
(U.S. Average) 20%
13%
The chart at right Debt Maint.
illustrates the relative
Service 19%
10%
magnitude of total
owning costs (includes (Ammort. 10% Cleaning
employee payroll and 50 yrs)
dept service), indicating 16%
the high cost of energy Grounds
in overhead. Property
(source: BOMA 1985) Admin.
Taxes

Figure 5 100
Life-Cycle Costs,
Design, Operating, 80
Assumptions:
Payroll $40,000/yr/employee (ave.)
Percent (%)

300 sqft/person occupancy


The chart at right 60
utility costs = ~ $2 to $3 / sqft
illustrates the relative
magnitude of design, 40
operating, and payroll
costs, indicating the
large role in total costs 20
played by payroll costs.
Energy savings should
not jeopardize First Costs Ongoing Costs Payroll
employee productivity. 2% (Includes Energy) 91%
7%

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Life-Cycle Costing (LCC) Tutorial Overview

Background
Life-Cycle Costing (LCC) is an economic analysis method widely accepted to identify cost optimal
building design options… yet LCC is not widely used with confidence, even within the federal sector
where its use is mandated.
The Federal Energy Management Program (FEMP) of the U.S. Department of Energy (DOE) has
codified the rules for performing LCC analysis of investments for energy and water conservation and
renewable energy resource projects in the Code of Federal Regulations, 10 CFR 436, Subpart A,
"Methodology and Procedures for Life-Cycle Cost Analysis" [1]. These rules apply to both new and
existing buildings owned or leased by the Federal Government. These economic evaluations are required
by the Federal Energy Management Improvement Act of 1988 (Public Law 100-6 15) and the National
Energy Conservation Policy Act (NECPA) of 1978 (P.L. 95-6 19). More recently, these requirements have
been renewed in Executive Order 13123 [2], "Greening the Government through Efficient Energy
Management", issued on 3 June 1999 (available online) and Executive Order 13423 [3], “Strengthening
Federal Environmental, Energy, and Transportation Management”, 24 January 2007 (available online).
At the direction of FEMP, and drawing on standards work by the American Society for Testing and
Materials (ASTM) [4], the National Institute of Standards and Technology (NIST) has developed
standardized LCC nomenclature and conventions so that the buildings industry can speak one "language"
when conducting LCC analysis. These are thoroughly documented in NIST Handbook 135, Life-Cycle
Costing Manual for the Federal Energy Management Program [5] by S. Fuller and S. Pedersen (available at
http://www1.eere.energy.gov/femp/information/download_blcc.html).
The centerpiece to NIST's LCC contributions is a computer program called BLCC, the Building Life-Cycle
Cost Program [8], which automatically applies the FEMP/NIST LCC conventions in LCC analyses. BLCC
is a stand-alone computer program available as freeware for both Windows™ and DOS, downloadable via
the link cited above. If this link becomes out of date, a search for “Building Life-Cycle Cost” and “BLCC”
using any search engine is sure to return a current link. This tutorial describes the Life-Cycle Costing
procedures recently added to eQUEST which are based on BLCC and NIST Handbook 135 [5].
Almost all LCC programs are designed to follow a familiar three step process: 1) collect the relevant user
input describing the parameters of the analysis (e.g., including inflation rate, fuel price escalation rate,
annual utility costs, acquisition costs, etc.), 2) click the “calculate” button to allow the LCC program to ‘go
away’ to calculate results, and 3) to post the results to one or more reports for user review. Both BLCC
and eQUEST’s EEM Wizard follow this familiar organization. Not withstanding the thorough
documentation of the theory that’s widely available regarding LCC (including Handbook 135 cited above),
a frequent concern expressed by LCC users is that this common three step procedure can seem a little too
much like a "black box" procedure, or given the available documentation, at least a "grey box" procedure.
As an alternative to this conventional three step implementation of LCC, eQUEST’s Detailed Interface
also provides a spreadsheet-like "glass box" implementation of its LCC routines where all intermediate
LCC calculations and results are displayed and their formulae can be examined. An Excel® spreadsheet
version of eQUEST’s LCC procedures, called the User-Friendly Life-Cycle Costing spreadsheet, is also
available via free download at http://www.doe2.com.
Life-Cycle Cost Analysis (LCC or LCCA) should not be confused with Life-Cycle Assessment (LCA).
LCA is an assessment of the environmental aspects and potential impacts associated with a product,
process, or service. LCA compiles an inventory of relevant energy and material inputs and environmental
releases; evaluates the potential environmental impacts associated with identified inputs and releases, and
interprets the results to help designers identify more sustainable design solutions.

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Life-Cycle Costing (LCC) Tutorial Basic Concepts

Basic Concepts
Life-Cycle Costing
Weighing First Costs and Operating Costs
With regard to building energy efficiency, there seems to be a rule of nature which holds that whatever
project design options cost least to acquire tend to cost most to operate, and conversely. In other words,
more energy efficient project design alternatives tend to cost more than less efficient alternatives.

Figure 6 B
Building 1st Costs vs LCC
Operating Costs Weighs 1st

First Cost
The curve at right
illustrates the tradeoff that Costs vs
frequently exists between A
building first costs and
Operating
operating costs. LCC is Costs
used to weigh these costs.
Operating Costs

For a hypothetical project, if the first costs for all design alternatives were plotted against their respective
operating costs, a curve similar to the one in Figure 6 would result. The ideal design alternative would lie
as close as possible to the origin of the graph (i.e., zero operating cost and zero first cost). If first costs are
valued over operating costs, the preferred choice is A. If operating costs are valued most, the preferred
choice is B. Life-cycle costing is a rational method to weight first costs versus operating costs.
First cost versus operating cost data for glass type options from an actual new construction project are
plotted in Figure 7 below, whose ‘shape’ resembles Figure 6. In Figure 7, glass type #1 would be the
preferred choice if least operating cost was the principal concern. Conversely, glass type #5 would be the
preferred choice if minimum first cost was the principal concern. Glass types #3, #4, and #5 present
other options that weigh the relative importance of first versus operating costs differently. Clearly, the best
choice lies on the imaginary line bounding glass types #1 through #5. According to multiple criteria
decision methods [6], the other glass types (un-numbered in Figure 7) are said to be dominated by glass
types #1 through #5. Which of the non-dominated options (1 thru 5) are favored will depend on the relative
importance given to first versus operating costs. Life-cycle costing is the recognized means to weigh first
costs against future (e.g., operating) costs. The principle used to do this is the "time value of money".
Figure 7 $500,000

Building First Costs $450,000

versus Operating $400,000

$350,000
Costs
First Costs ($)

$300,000
(actual data) 1
The chart at right illustrates $250,000

the tradeoff between $200,000


2
building first costs and $150,000

building operating costs for $100,000


3
glass alternatives in a large $50,000
4 5
$0
institutional new $620,000 $630,000 $640,000 $650,000 $660,000 $670,000 $680,000 $690,000
construction project. Annual Utility Costs ($)

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The Time Value of Money


Figure 8 through 10 illustrate some of the most fundamental concepts of life-cycle costing, that savings
that result from investment(s) in high efficiency must outweigh the costs (Figure 8), that the evaluation of
costs and savings should take into account the life cycle of the investment, i.e., the high efficiency upgrade
(Figure 9), and that life-cycle costing is a tool that can help the building owner and design team add up the
costs over the life cycle to determine the least cost, i.e., the least life-cycle cost design options (Figure 10).

Figure 8
Weighing Savings
and Costs
When ‘weighing’ future Costs
savings and initial costs,
the savings must out
Savings
weigh the costs.

Savings must exceed costs

Purchase
Cost
5%
Figure 9
See the Whole Maint &
Picture… Repair
Initial costs versus 7%
20-year operating costs
for an electric motor

Energy
Cost
88%

Figure 10
Life-Cycle Costs ($)

Add up the Costs


over the Life Cycle

Life-cycle costing is a Operating Costs


tool that can help the
building owner and
design team add up the
costs over the life cycle Investment Costs
to determine the least
cost design options
over the life-cycle. Alternative Alternative
A B

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Inflation and Opportunity Cost


Thinking as investors, we intuitively recognize that a dollar today does not have the same value as a dollar
in the distant future. Consider the following example illustrated in Figure 11 below. An investor is to be
repaid $400 in four years, but proposes an accelerated repayment schedule of the borrower, i.e., $100 per
year for each of four years. Most investors (and borrowers) would intuitively recognize that $100 per year
for four years is worth more than $400 in year four (Figure 11a), i.e., there is a “time value” to money. The
“time value of money” (Figure 12) results from two considerations: 1) inflation, which is the ‘erosion’ of
future purchasing power and 2) "opportunity cost", which for existing capital is the cost of forgone
investment opportunities and for borrowed capital is the cost of borrowing (i.e., the loan rate).

Figure 11a Most investors would prefer to receive (save)


Comparing Future money earlier rather than later, due to ... the time value of money
Income Streams $400
$ $
In the absence of
special tax
considerations, most
investors would prefer
to earn money earlier $100 $100 $100 $100
than later, due to the
$0 $0 $0
‘time value of money’.
yr 1 yr 2 yr 3 yr 4 yr 1 yr 2 yr 3 yr 4

Figure 11b How much of a discount would you offer for early payment… $1… $200?
Comparing Near- $399 $400 $400
$ $
term and Future
Income Streams
Most investors would
$200
accept a small penalty in
order to receive
earnings early… but
how large a penalty? $0 $0 $0 $0 $0 $0

yr 1 yr 2 yr 3 yr 4 yr 1 yr 2 yr 3 yr 4

Figure 12
The “Time value of
Money” Inflation
The time value of money   

results from: 1) inflation,


the ‘erosion’ of future the loss of purchasing power
purchasing power and
2) the opportunity cost:
a) for existing capital, the “Opportunity
cost of forgone
investment options; Cost”   

b) for borrowed capital,


the cost of borrowing. forgone investment returns
or the cost of borrowing

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Of the two, inflation and opportunity cost, most designers have a more intuitive feel for the process of
inflation, where future increases in prices for goods and services causes an effective loss in the future
purchasing power of our dollars. The concept of an opportunity cost recognizes that a fair comparison of
the economic benefit between two or more building design options must also consider either 1) the
forgone returns an owner is able to earn on his or her money in order to make the investment in
efficiency upgrades (if the building owner is financing the efficiency investment ‘out of their own pocket’),
or 2) the cost of borrowing the capital necessary to invest in the efficiency upgrades (if the building owner
must borrow to finance the efficiency upgrade) should. Either ‘cost’ should be included in the cost of the
efficiency upgrades. Life-cycle costing considers both inflation and opportunity cost in weighing the value
of present costs against future costs.

The Discount Rate and the Minimum Acceptable Rate of Return


Returning to the previous example (Figure 11 above), is there a lesser amount, i.e., a ‘discounted’ one time
accelerated payment (to be made in year one) that would be considered equal to the original $400 payment
in year four? The rate of return necessary to grow a discounted present amount to equal the agreed upon
future amount would be the ‘minimum acceptable rate of return’ (Figure 13).

Figure 13 At the ‘minimum acceptable rate of return’ (MARR), the


The Minimum discounted amount could be ‘grown’ to equal the
Acceptable Rate of agreed upon future amount $400
$
Return $???

The rate of return


necessary to grow a … ‘minimum acceptable
discounted present rate of return’ (MARR)
amount to equal the $100 $100 $100 $100
agreed upon future
amount is the ‘minimum $0 $0 $0

acceptable rate of return’. yr 1 yr 2 yr 3 yr 4 yr 1 yr 2 yr 3 yr 4

The discount rate is the rate of interest that makes an investor indifferent between cash amounts
received at different points in time.
 For an investor’s money, this is the investor’s ‘minimum acceptable rate of return’ (MARR).
 For borrowed money, this is the borrower’s loan rate.
 The Discount Rate accounts for the time-value of money.

General Inflation
General inflation is the rate of increase in the general level of prices of goods and services, including the
cost of building components and trade labor, but excluding the cost of energy (see ‘Escalation’).

Escalation
The concept of escalation is identical to the concept of general inflation, except that the FEMP/NIST
LCC conventions reserve the term ‘escalation’ to describe the inflation incurred by energy prices, i.e., the
rate of increase in the price of energy sources such as electricity and natural gas.

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“Real” Escalation
A “real” escalation rate is the rate of increase in the price of energy sources relative to the rate of increase
in the general level of prices, i.e., relative to general inflation. This is alternately referred to as “differential”
escalation.

“Real” Discount Rate


A “real” discount rate is the discount rate expressed relative to general inflation, i.e., a discount rate that
has been adjusted (reduced) to express the ‘net’ opportunity cost (relative to the cost of inflation). In the
usual case where both the discount rate and the inflation rate are positive numbers, this adjustment results
in a reduction in the magnitude of the discount rate. A discount rate that has not been adjusted to express
the net opportunity cost is said to be a ‘Nominal’ discount rate. The adjustment is given by equation (2) in
the next section.

“Current” Dollars
“Current” dollars refers to the price of an item at the time it is purchased, i.e., includes the effect of
inflation. To estimate future costs using TODAY’s dollars, the change in price due to inflation must be
added into the total future cost. The adjustment is given by equation (3) in the next section.

“Constant” Dollars
As a mater of considerable convenience, future costs of items may be stated in TODAY’s prices, if we use
a REAL discount rate and REAL escalation rates. This allows us to use dollars of constant purchasing
power.

Two Approaches to Treating Inflation


While inflation must be treated to properly account for the time value of money, it may be treated in
either of two ways:
1) Explicitly: Specify all costs in CURRENT dollars and use a NOMINAL discount rate
(i.e., not adjusted for inflation)
2) Implicitly: Specify all costs in CONSTANT dollars and use a REAL discount rate (pre-adjusted
for inflation)
 Both methods will yield the same results.
 Using REAL rates and CONSTANT dollars (i.e., treating inflation implicitly) is the method
recommended by NIST because it makes performing LCC analyses easier.

Present Value (PV)


Given the time value of money, life-cycle cost analysis requires that all costs be expressed in a common
time frame. The NIST recommended LCC convention is to discount future cash flows to present value
(abbreviated, ‘PV’). Alternative, but equivalent terminology is ‘Present Worth’.
Figure 14 on the next page illustrates the Life-Cycle Cost convention in which all costs are expressed in
terms of the same time frame, i.e., the present. Owing to the influences of inflation and opportunity cost,
the process is referred to as "discounting" future costs to their "present value" (PV). Some cash flows are
annually recurring (blue) while other cash flows are discrete single-value (i.e., one-time) events (red). Cash
flows shown above the time line are costs. Cash flows shown below the time line are income or residual

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value. Considering an LCC analysis to be calculating COSTS, the normal sign convention is to represent
COSTS as a positive value and INCOME (or residual value) as a negative value.

Figure 14
Discounting Future
Costs to Present Value

Operating Costs
Owing to the time value of
money, life-cycle cost
analysis requires that all
costs be expressed in a
common time frame, e.g., in
present value. Some cash Investment Costs Capital
Replacement
flows are annually recurring Cost
(blue). Others are one-time Operations, Maintenance & Repair Costs (OM&R)
(red). Cash flows above the Energy Costs

line are costs; below the line Residual


Value Year N
are income or residual value. First Cost Year 0 Year 1 Year 2 

Study Period

Life-Cycle Cost Equation and Net Savings


The basic Life-Cycle cost equation is given in Figure 15. Note that the initial investment does not need to
be discounted to present value (PV) since it is already in present value. Note also that the present value of
the residual value carries the opposite sign of the other cost items. Net Savings is simply the LCC of a
base case minus the LCC of an alternative design. If the Net Savings is positive (i.e., the LCC of the
alternative is less than the LCC of the base case), LCC recommends the alternative investment.

Figure 15 LCC = Initial investment costs (I)


LCC Equation
The basic Life-Cycle Cost + PV replacement costs (Repl)
equation sums the initial
investment (already in + PV energy costs (Engy)
today’s costs) and all future
cash flows (discounted to
– PV Residual Value (Res)
present value) where costs + PV O&M (O&M)
carry a positive sign and
income or residual value
carries a negative sign. Net Savings = LCCbase - LCCalt

Common LCC Assumptions


Common assumptions for life-cycle cost analyses include the following:
 Life-cycle costing assumes at least two alternatives
 All alternatives satisfy performance standards
 The best solution is only as good as the alternatives evaluated
 Use end-of-year cash flow convention, i.e., assume any mid-year or monthly cash flows occur
once annually at the end of the year.

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 LCC is NOT required for a design alternative where,


o the first cost is decreased  AND operating cost is decreased  (should be
accepted without further analysis)
o the first cost is increased  AND operating cost is increased  (should be
rejected without further analysis)

Life-Cycle Costing seeks the least life-cycle cost option; therefore LCC tends to focus on the difference or
‘deltas’ between alternatives. Consider only the Relevant Costs or Benefits:
 Consider only the costs that change between design alternatives. For example, if maintenance
costs do not vary between design alternatives, they may be omitted without affecting the results.
Although omitting them WILL change the LCC for each alternative, the difference or delta
between the life-cycle costs (i.e., the Net Savings) will NOT be affected.
 Exclude any ‘sunk’ costs. A sunk cost is a cost that has already been incurred or committed and
which cannot be changed or affected in any way by the design decision under consideration.
 Consider only significant costs. Given the uncertainties implicit in any engineering analysis, small
differences in the final life-cycle costs indicate no difference in LCC alternatives.
 In brief, identify all costs that will be affected by the design decision(s).
It is helpful to distinguish Investment-Related costs from Operational costs.
 Investment-related costs include:
o Acquisition Costs
o Replacement Costs
o Residual Value
o Utility Incentives
o Tax Credits
 Operational costs include:
o Utility Costs (Energy, Water, etc.)
o Operating, Maintenance, and Repair Costs
Concerning the length of the study period:
 Use a time period that is consistent for all alternatives
o Use the same time period for all alternatives
o Use the same time period for calculating all economic measures
 Use an appropriate length of study period. An appropriate time period will:
o accommodate investors time horizon
o reflect the expected life of systems being evaluated
 Use residual value to credit remaining service life in equipment remaining equipment life.
 The maximum study period allowed for Savings By Design analyses (and by FEMP) is 25 years.
As an example, if an HVAC design option compares package rooftop service (~15 year equip. life)
with central plant service (~25 year equip. life); either 15 or 25 years would be an appropriate length
of the study period. In either case, a ‘residual value’ will be needed to credit remaining equip. life.

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Life-Cycle Costing (LCC) Tutorial LCC Calculations and Equations

LCC Calculations and Equations


Life-Cycle Costing
See NIST Handbook 135 [5] for a complete discussion of these conventions.
The basic Life-Cycle Cost equation (1) sums the present value (PV) of all cost components.

LCC = Initial investment costs (1) (1)


+ PV replacement costs
- PV Residual Value
+ PV energy costs
+ PV OM&R

Step 1: Select a nominal discount rate.


Case A: If the investor is using his or her own money, the nominal discount rate should be the investor’s
Minimum Acceptable Rate of Return (MARR), i.e., the rate of return that is sufficiently large to make the
investor indifferent to when s/he experiences a cash flow. The test of indifference is normally taken as the
willingness of an investor to leave his or her own capital in its current custodial investment. The MARR is
the interest currently being earned by the custodial investment. Note that this implies that both the energy
efficiency investment and the custodial investment share the same level of risk. Given that the custodial
investment is normally a conservative investment with low risk, if the risk perceived by the investor to be
associated with the efficiency investment is greater than the risk associated with the custodial investment,
then it is reasonable to increase the discount rate to reflect the investor’s perceived level of risk.
Case B: If the investor must borrow the capital needed to make the efficiency investment, the nominal
discount rate should be the investor’s (i.e., the borrower’s) loan rate.

Step 2: Convert the nominal discount rate to a real discount rate


(optional, but recommended)
The FEMP/NIST LCC procedures recommend treating inflation implicitly by ‘factoring’ inflation out of
the nominal discount rate. This is done by converting the nominal discount rate to a real discount rate
using equation (2).
1 D
d  1 (2)
1 i
where:
d = the "real" discount rate, exclusive of inflation
i = the assumed rate of general inflation
D = the assumed "nominal" discount rate,
for existing capital, D is the minimum rate-of-return on an alternative investment
for borrowed capital, D is the cost of borrowed capital, i.e., the loan rate
If the nominal discount rate is converted to real, skip the next step, Step 3.

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Step 3: Estimate future costs using present costs


(not required with real discount rate).
This step is required only if a nominal discount rate is used. If a real discount rate is used (see Step 2), this
step may be skipped.
If the analysis is to be performed using nominal rates, the future value of costs such as equipment
replacements can be estimated from present costs and an assumed inflation using equation (3).

Ft  P0  1  i 
t
(3)
where:
Ft = future value of a present cost, P0, in year t
P0 = present cost of goods or services in year 0
i = the assumed rate of general inflation
t = future year assumed in the calculation

Step 4: Discount single (discrete) future costs using the


Single Present Value Factor (SPV),
e.g., equipment replacements

Single future amount (year t) PV = Ft x SPV(t,d)

SPV Ft
PV

A single discrete future cost or savings (i.e., not annually recurring such as equipment replacement) or
future value (a residual value due to unexpended life of an equipment option) is discounted to its present
value using the Single Present Value (SPV) Factor. For Nominal Discount rates, use equation (4). For Real
Discount rates, use equation (5).
Single Present Value Factor (SPV) using a nominal discount rate:
1
PV  Ft  (4)
(1  D) t
where:
PV = present value of the future cost of goods/services
Ft = future cost of goods/services in year t (estimated using equation 3)
t = future year assumed in the calculation
d = the assumed "discount rate",
for existing capital, D is the minimum rate-of-return on an alternative investment
for borrowed capital, D is the cost of borrwed captial, i.e., the loan rate
Using a real discount rate, d, in place of nominal discount rate, D in equation (4), yields equation (5) in
which a user does not need to explicitly adjust future costs, Ft, for inflation.

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Single Present Value Factor (SPV) using a real discount rate:


1 1
PV  Ft   P0  (5)
(1  D) t
(1  d ) t
where:
PV = present value of the future cost of goods/services
Ft = (future cost of goods/services in year t) = P0 if d is "real", where P0 is the cost in year 0
t = future year assumed in the calculation
d = the assumed discount rate (real)

Example assume: t = 10 yrs


d = 8%
1
PV  $216   $216  0.4632  $100
1  0.0810

Of course, any investor would hope for a minimum rate-of-return that would out pace the influence of
general inflation, else, the net value of their investment return is negative, i.e., a loss. Hence, they would
hope that their realized rate-of-return is greater than the inflation rate, i.e., D > i.

Step 5: Discount annually recurring uniform future costs using the


Uniform Present Value Factor (UPV), e.g., annual maintenance costs

Recurring annual amount (over n years) PV = A0x UPV(n,d)

PV UPV
A0

For annually recurring future costs that are uniform, i.e., do not vary annually other than by the influence
of general inflation (e.g., annual maintenance costs), a future cash flow stream is discounted to its present
value using the Uniform Present Value (UPV) Factor. For real Discount rates, use equation (6). For
nominal Discount rates, replace d in equation (6) with D.

1 1 1 1
PV  A0   A0   A0     A0 
1  d 1
1  d 2
1  d 3
1  d n
PV  A0  
n
1
 A0 
1  d   1
n (6)
t 1 1  d t
d 1  d 
n

where:
PV = present value of the stream of annually recurring future costs of goods/services
A0 = annually recurring cost of goods/services in year 0 (assumed to change only due to
inflation)
n = last year assumed in the analysis
d = the assumed discount rate (real)

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Example assume: t = 10 yrs


d = 8%

PV  $100 
108
.  1
10
 $100  6.710  $671
0.08108
. 
10

Step 6: Discount annually recurring non-uniform future costs using the


Modified Uniform Present Value Factor (UPV*),
e.g., annual future utility costs that escalate at a uniform rate

Uniformly escalating annual amount (over n years) PV = A0 x UPV*(n,d)

UPV*
PV A2
A0 A1

For annually recurring future costs that are not uniform, i.e., that escalate annually, but which escalate at a
uniform escalation rate, (e.g., annual utility costs that are projected to escalate at a uniform rate), a future
cash flow stream is discounted to its present value using the Modified Uniform Present Value (UPV*)
Factor. For real Discount rates, use equation (7). For nominal Discount rates, replace d in equation (7) with
D and replace e with E (the nominal uniform energy price escalation rate).
A1 A2 A3 An
PV  1  2  3 
 1  d   1  d  1  d  1  d  n
1  e  1 1  e 2 1  e 3 1  e n
PV  A0   A   A   A  (7)
1  d  1 0
1  d  2 0
1  d  3 0
1  d  n
n
 1 e 
t
1  e   1  e  n 
PV  A0      A0  1  

t 1 1  d
  d  e   1  d  

where:
PV = present value of the stream of annually recurring future costs of goods/services
A1 = annually recurring cost of goods/services in year 1 (assumed to change due to inflation and
uniform fuel price esclation)
A0 = annually recurring cost of goods/services in year 0 (assumed to change only due to
inflation)
n = number of years assumed in the analysis period
t = future year assumed in the calculation
e = the assumed uniform (does not vary from year to year) energy price escalation rate (real)
d = the assumed discount rate (real)

Example assume: t = 10 yrs


d = 8% & e = 3%
.
103   103 .  
10

PV  $100  1      $100  7.777  $778


 0.08  0.03  .  
108

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Step 7: Discount annually recurring non-uniform future costs using the


FEMP Modified Uniform Present Value Factor (FEMP UPV*),
e.g., annual future utility costs that escalate at a non-uniform rate

Non-uniformly escalating annual amount (over n years) PV = A0 x FEMP UPV*(n,d)


FEMP
UPV*
PV A1
A0 A2

For annually recurring future costs that are not uniform, i.e., that escalate annually, but which escalate at a
non-uniform escalation rate, (e.g., annual utility costs whose projected escalatation rates vary from year-to-
year), a future cash flow stream is discounted to its present value using the FEMP Modified Uniform
Present Value (FEMP UPV*) Factor. For real Discount rates, use equation (8). For nominal Discount rates,
replace d in equation (8) with D and replace e with E (the nominal annual energy price escalation rate).

A1 A2 A3 An
PV  1  2  3 
 1  d  1  d   1  d  1  d  n (8)
(1  e1 )1 (1  e2 ) 2 (1  e3 ) 3 (1  en ) n
PV  A0   A   A   ...  A 
(1  d )1 (1  d ) 2 (1  d ) 3 (1  d ) n
0 0 0

where:
PV = present value of the stream of annually recurring future costs of goods/services
A1 = annually recurring cost of goods/services in year 1 (assumed to change due to inflation and
uniform fuel price esclation)
A0 = annually recurring cost of goods/services in year 0 (assumed to change only due to
inflation)
n = number of years assumed in the analysis period
t = future year assumed in the calculation
e1 = the assumed energy price escalation rate for year 1 (real, varies from year to year, see
reference [7] for annuall values)
d = the assumed discount rate (real)
For an example, see the next section.
While goods and services are assumed to inflate at the same rate, i.e., the general inflation rate, the
FEMP/NIST LCC procedures require that inflation of energy prices be treated separately. Accordingly,
general price inflation is distinguished from energy price inflation by referring to the latter as energy price
"escalation". As with the use of the discount rate, the energy price escalation rates are "real" (i.e., net or
differential). The U.S. DOE publishes official projections for future energy prices annually [7] each April
for the residential, commercial and industrial sectors, broken down by region of the country, for six
energy types (electricity, natural gas, LPG, distillate fuel oil, residual fuel oil, and coal).

Step 8: Calculate Life-Cycle Costs for at least two alternatives and select the
alternative with the lowest LCC
The final step in an LCC analysis is to calculate the LCC for at least two alternatives and then select to
implement the design alternative having the lowest LCC. See the following section for a tabular example.

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LCC Examples Using Tabular Data


Life-Cycle Costing
The U.S. DOE publishes projections for future energy prices annually each April [7] for the residential,
commercial and industrial sectors, broken down by region of the country and energy type (Figure 16). It is
available at http://www1.eere.energy.gov/femp/information/download_blcc.html.

Figure 16
U.S. DOE Energy Price
Indices and Discount
Factors for LCC Analysis
This reference is published as an
annual update to the NIST
Handbook 135 each April and is
available via download at the web
link above.

It provides discount rates and


FEMP UPV* energy price
escalation rates for use in federal
and FEMP LCC analyses.

LCC Tabular Data Example 1


Present Value (PV) of Future One Time Replacement Cost using SPV

Using the SPV Factor to


Discount a One-Time
Future Cost
Since the future cost is a one-time
cost, use the SPV factor from the
NIST annual update. This
example assumes year 5 and a 3%
real discount rate.

Replacement Cost : $10,000


Time of Replacement: year 5
Discount Rate: 3%

PV = Ft x SPV
PV = $10,000 x 0.863
PV = $8,630

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LCC Tabular Data Example 2


PV of Annually Recurring Maintenance Cost using UPV

Using the UPV Factor to


Discount an Annually
Recurring Future Cost
Since the future cost is an annually
recurring maintenance cost, use the
UPV factor. This example assumes
10 years and a 3% real discount
rate.

Annual Cost : $400


Time Period: each year for 10 years
Discount Rate: 3%

PV = A0 x UPV
PV = $400 x 8.530
PV = $3,412

LCC Tabular Data Example 3


PV of Energy Costs that Increase at a Constant Rate using UPV*

Using the UPV* Factor to


Discount Annual Future
Energy Costs that Increase
at a Constant Rate
Since the future cost is annually
recurring energy that escalates at a
constant rate, use the UPV* factor.
Assume a 10 year analysis period,
real discount rate = 3%,
real energy price escalation = 2%

(today’s $)
Annual Energy Cost : $15,000 (today’
Time Period: years 1 - 10
Discount Rate: 3%
Annual energy price increase: 2%

PV = A0 x UPV*
PV = $15,000 x 9.48
PV = $142,200

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LCC Tabular Data Example 4


PV of Energy Costs that Increase at year-by-year Rates using FEMP UPV*

Using the FEMP UPV* The U.S. regional map at


Factor to Discount Annual left places Los Angeles in
Future Energy Costs that the western energy price
Increase at Yr-by-Yr Rates region.
Since the future cost is annually The FEMP UPV* table
recurring energy that escalates at a below covers the western
constant rate, use the UPV* factor. region.
Assume a 25 year analysis period,
real discount rate = 3%,
energy price escalation via FEMP,
fuel type = electricity
utility rate type = commercial
building location = Los Angeles

Annual Energy Cost : $20,000 (today’


(today’s $)
Time Period: start 2006 for 25 years
Bldg Location: Los Angeles
Fuel Type: Electricity
Rate Type: Commercial

PV = A0 x UPV*
PV = $20,000 x 14.81
PV = $296,200

User-Friendly LCC Spreadsheet


Life-Cycle Costing via an easy-to-use spreadsheet
The FEMP/NIST LCC procedures used in BLCC have been implemented into an easy-to-use Excel
spreadsheet [9]. Updates are posted annually as the NIST annual update to Handbook 135 becomes
available (usually each April). Users report finding the LCC spreadsheet to be more ‘transparent’ than
other LCC tools since all of the intermediate results are displayed. The spreadsheet is available via free
download at www.doe2.com. Figures 17, 18, and 19 illustrate main sheets in the LCC spreadsheet.
General data for the LCC analysis are entered on the General data, including discount rate (assumes a real
rate), years of analysis period (25 max), second fuel type (electricity is always the first energy type) and
either 1) FEMP year-by-year energy price escalation rates (requires inputs to energy price region and utility
sector), or 2) input for uniform energy price escalation rates (if omitted, assumes FEMP rates). See Fig. 17.
Data for each design alternative are entered on separate sheets, on sheet per alternative (“LCCn” where n
indicates the alternative number and “LCC0” for the base case). See Figure 18. A table that summarizes
LCC results from each case (sheet) is provided (Figure 19). A graphic summary (Figure 20) is also
provided.

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Figure 17, User-Friendly LCC Spreadsheet, General Data Input Sheet


This is the ‘General Data’ sheet. Items in blue font are user inputs, including: discount rate, years of analysis
period, energy price region, utility sector, year-by-year occupancy level, a calculator for converting nominal-to-real
rates, & uniform energy price escalation rates (optional). The circled #’s enumerate steps explained 2 pgs below.

2
3

5
1
6

Figure 18, User-Friendly LCC Spreadsheet, LCC Case Inputs Sheet


This is an example of one of the ‘LCC’ sheets (one LCC sheet for each alternative). Items in blue font are
user inputs, including: one-time costs for acquisition, replacement, and overhaul (for yrs 0 thru N up to 25)
and annually recurring costs for energy utilities (up to 2) and maintenance (year 0 entry). All rows sum across
and all columns sum down. FEMP annual energy price escalation rates (vary by year) are displayed (if
uniform escalation rates are NOT entered). The total LCC is shown in the lower right-most cell.
Base Case Glazing Analysis Month/Year: 4/2007 Years of Project Service: 25 FEMP Fiscal Year: 2007 DOE Region: West
13 Single Clear Yrs before "On-Line": 0 Years in Analysis Period: 25 22 Disc. Rate: 3.0% Analysis Sector: Commercial

NON-ANNUAL RECURRING COSTS ELECTRIC COSTS NATURAL GAS COSTS ANNUAL TOTAL COSTS
RECURRING COSTS
Investment-Related Costs Operations-Related Costs Annual Electric Discounted Annual Nat Gas Discounted Annual Discounted Discounted
(e.g., 1st cost, replacement, residual) (e.g., non-annual maintenance) Recurring Real Electric Recurring Differential Nat Gas Recurring Recurring Total
Year Description Discounted Description Discounted Electric Escalation w/Fuel Esc. Nat Gas Escalation w/Fuel Esc. (e.g., maintenance) Year Costs
# of Cost Constant $ PV $ of Cost Constant $ PV $ Constant $ % PV $ Constant $ % PV $ Constant $ PV $ Date PV $
0 First Cost 14 $54,300 $54,300 n/a n/a n/a $656,310 18 $25,320 19 $0 20 $54,300
1 $0 $0 $0 $0 $656,310 -0.59% $633,459 $25,320 -3.18% $23,801 $0 $0 2007 $657,260
2 $0 $0 $0 $0 $656,310 -1.65% $604,855 $25,320 -3.18% $22,372 $0 $0 2008 $627,227
3 $0 $0 $0 $0 $656,310 -2.28% $573,860 $25,320 -3.61% $20,937 $0 $0 2009 $594,797
4 $0 $0 $0 $0 $656,310 -2.94% $540,739 $25,320 -3.08% $19,701 $0 $0 2010 $560,440
5 $0 $0 $0 $0 $656,310 -2.15% $513,706 $25,320 -1.82% $18,780 $0 $0 2011 $532,486
6 $0 $0 $0 $0 $656,310 -0.82% $494,663 $25,320 -2.89% $17,706 $0 $0 2012 $512,369
7 $0 $0 $0 $0 $656,310 -0.43% $478,170 $25,320 -0.48% $17,108 $0 $0 2013 $495,278
8 $0 $0 Overhaul 17 $0 $0 $656,310 -0.04% $464,040 $25,320 -0.36% $16,551 $0 $0 2014 $480,591
9 $0 $0 $0 $0 $656,310 0.74% $453,866 $25,320 0.36% $16,126 $0 $0 2015 $469,992
10 $0 $0 $0 $0 $656,310 0.91% $444,654 $25,320 1.56% $15,900 $0 $0 2016 $460,554
11 $0 $0 $0 $0 $656,310 -0.09% $431,333 $25,320 -1.88% $15,146 $0 $0 2017 $446,479
12 $0 $0 $0 $0 $656,310 -0.99% $414,632 $25,320 -2.76% $14,299 $0 $0 2018 $428,931
13 $0 $0 $0 $0 $656,310 -0.13% $402,032 $25,320 0.62% $13,968 $0 $0 2019 $416,000
14 $0 $0 $0 $0 $656,310 0.30% $391,509 $25,320 0.61% $13,645 $0 $0 2020 $405,153
15 Replace 15 $0 $0 $0 $0 $656,310 0.35% 23 $381,423 $25,320 1.22% 23 $13,409 $0 $0 2021 $394,831
16 $0 $0 $0 $0 $656,310 0.04% $370,473 $25,320 1.81% $13,253 $0 $0 2022 $383,726
17 $0 $0 $0 $0 $656,310 0.17% $360,303 $25,320 1.07% $13,004 $0 $0 2023 $373,308
18 $0 $0 $0 $0 $656,310 0.26% $350,713 $25,320 0.59% $12,700 $0 $0 2024 $363,412
19 $0 $0 $0 $0 $656,310 0.34% $341,668 $25,320 0.23% $12,358 $0 $0 2025 $354,026
20 $0 $0 Overhaul $0 $0 $656,310 0.00% $331,717 $25,320 0.58% $12,068 $0 $0 2026 $343,785
21 $0 $0 $0 $0 $656,310 0.13% $322,468 $25,320 1.39% $11,879 $0 $0 2027 $334,347
22 $0 $0 $0 $0 $656,310 0.51% $314,682 $25,320 1.25% $11,677 $0 $0 2028 $326,360
23 $0 $0 $0 $0 $656,310 0.47% $306,946 $25,320 2.47% $11,618 $0 $0 2029 $318,564
24 $0 $0 $0 $0 $656,310 0.25% $298,763 $25,320 1.32% $11,428 $0 $0 2030 $310,191
25 Residual 16 $0 $0 $0 $0 $656,310 0.25% $290,796 $25,320 0.87% $11,191 $0 $0 2031 $301,988

$54,300 $54,300 $0 $0 $16,407,750 $10,511,471 $633,000 $380,627 $0 $0 21 $10,946,397

24 NOTE: User input fields are indicated in blue.


You may wish to hide/unhide columns J, K & L and P, Q & R

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LCC Tutorial User-Friendly LCC Spreadsheet

Figure 19, User-Friendly LCC Spreadsheet, Results Summary Sheet


This is a view of the ‘Results Summary’ sheet (contains one row for each LCC alternative sheet). The data
represent results from the glass type analysis illustrated in Figure 7. The upper half of the table reports
COSTS for the base case and all alternative cases. The lower half of the table reports SAVINGS for all
alternative cases (no base case row included since savings = base case minus alternative case). Items in pale
blue font report positive savings. Items in pale red font report negative savings (i.e., increases in cost
compared with the base case). Using minimum simple payback (SPB), Alt 1 (single pane Azurlite™) is the
preferred choice. Minimum LCC would select Alt 9 (dual pane SolarBan2000™). Red and blue borders are
added to emphasize incremental first costs, life-cycle savings, net savings (same as life-cycle savings), and
simple payback. The bottom-most row indicates the delta between the LCC choice and the SPB choice. The
circled #’s enumerate explanations two pages below.

Life-Cycle Costs Summary


Glazing Selection Example Analysis
Saving Adjusted
-to- Internal
One-Time Costs Total Utility Maintenance Total Net Simple Discnt'd Investment Operations Invest Rate-of-
1st year LCC 1st year LCC 1st year LCC LCC Savings Payback Payback Related Related Ratio Return
Case Description $ PV $ $ PV $ $ PV $ PV $ NS yrs yrs PV $ PV $ SIR AIRR

25 Life-Cycle COSTS
Base Single Clear $54,300 $54,300 $681,630 $10,892,097 $0 $0 $10,946,397 n/a n/a n/a $54,300 $10,892,097 n/a n/a
Alt 1 Single Pane Azurlite ** $74,880 $74,880 $655,380 $10,471,618 $0 $0 $10,546,498 n/a n/a n/a $74,880 $10,471,618 n/a n/a
Alt 2 Calif Series - Water White Crystal $482,040 $482,040 $645,720 $10,316,667 $0 $0 $10,798,707 n/a n/a n/a $482,040 $10,316,667 n/a n/a
Alt 3 Calif Series - Sea Foam Low-E Clear $383,760 $383,760 $639,220 $10,214,313 $0 $0 $10,598,073 n/a n/a n/a $383,760 $10,214,313 n/a n/a
Alt 4 Calif Series - Tahoe Blue $332,280 $332,280 $639,140 $10,210,731 $0 $0 $10,543,011 n/a n/a n/a $332,280 $10,210,731 n/a n/a
Alt 5 Viracon - VE1-55 - Low-E Clear $169,650 $169,650 $642,060 $10,263,368 $0 $0 $10,433,018 n/a n/a n/a $169,650 $10,263,368 n/a n/a
Alt 6 Viracon - VE1-85 - Low-E Clear $174,330 $174,330 $662,150 $10,584,924 $0 $0 $10,759,254 n/a n/a n/a $174,330 $10,584,924 n/a n/a
Alt 7 Viracon - VE7-55 - Low-E Azurlite $256,470 $256,470 $626,930 $10,020,348 $0 $0 $10,276,818 n/a n/a n/a $256,470 $10,020,348 n/a n/a
Alt 8 Viracon - VE7-85 - Low-E Azurlite $245,540 $245,540 $636,780 $10,178,597 $0 $0 $10,424,137 n/a n/a n/a $245,540 $10,178,597 n/a n/a
Alt 9 PPG - SolarBan 2000 * $224,660 $224,660 $628,370 $10,042,939 $0 $0 $10,267,599 n/a n/a n/a $224,660 $10,042,939 n/a n/a
* alternative with least life-cycle cost
** alternative with most rapid simple payback
26 Life-Cycle SAVINGS (negative entries indicate increased costs)
Alt 1 Single Pane Azurlite ** ($20,580) ($20,580) $26,250 $420,479 $0 $0 $399,899 $399,899 0.8 0.8 $20,580 $420,479 20.4 16.2% **
Alt 2 Calif Series - Water White Crystal ($427,740) ($427,740) $35,910 $575,430 $0 $0 $147,690 $147,690 11.9 16.6 $427,740 $575,430 1.3 4.2%
Alt 3 Calif Series - Sea Foam Low-E Clear ($329,460) ($329,460) $42,410 $677,784 $0 $0 $348,324 $348,324 7.8 9.8 $329,460 $677,784 2.1 6.0%
Alt 4 Calif Series - Tahoe Blue ($277,980) ($277,980) $42,490
28 27 $681,366 $0 $0 $403,386
27$403,386 6.5 8.0 $277,980 $681,366 2.5 6.8%
Alt 5 Viracon - VE1-55 - Low-E Clear ($115,350) ($115,350) $39,570 $628,729 $0 $0 $513,379 $513,379 2.9 3.2 $115,350 $628,729 5.5 10.2%
Alt 6 Viracon - VE1-85 - Low-E Clear ($120,030) ($120,030) $19,480 $307,173 $0 $0 $187,143 $187,143 6.2 7.6 $120,030 $307,173 2.6 6.9%
Alt 7 Viracon - VE7-55 - Low-E Azurlite ($202,170) ($202,170) $54,700 $871,749 $0 $0 $669,579 $669,579 3.7 4.2 $202,170 $871,749 4.3 9.2%
Alt 8 Viracon - VE7-85 - Low-E Azurlite ($191,240) ($191,240) $44,850 $713,500 $0 $0 $522,260 $522,260 4.3 4.9 $191,240 $713,500 3.7 8.6%
Alt 9 PPG - SolarBan 2000 * ($170,360) ($170,360) $53,260 $849,158 $0 $0 $678,798 $678,798 3.2 3.5 $170,360 $849,158 5.0 9.8% *
* LCC Choice
** Simple Payback choice
LCCa choice vs Simple Payback choice 29 ($149,780) ($149,780) $27,010 $428,679 $0 $0 $278,899 $278,899

Analysis Assumptions: DOE/FEMP Fiscal Year 2007


Real Discount Rate for this Analysis 3.0%
Study Period (years covered by the LCC analysis) 25
# of Years before Project Occupancy or Opration 0
DOE Fuel Price Escalation Region 4 (West)
Analysis Sector 2 (Commercial)

Figure 20 Cumulative Life-Cycle Savings


User-Friendly LCC
$800,000
Spreadsheet, 33
Single Pane Azurlite **
$600,000
Summary Graph Calif Series - Water White Crystal
30
This graph plots $400,000 34 Calif Series - Sea Foam Low-E Clear
Calif Series - Tahoe Blue
Cummulative LCS

cumulative life-cycle $200,000


Viracon - VE1-55 - Low-E Clear

savings by year for each 32 Viracon - VE1-85 - Low-E Clear


Viracon - VE7-55 - Low-E Azurlite
alternative (base costs $0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Viracon - VE7-85 - Low-E Azurlite

minus alternative costs). ($200,000) PPG - SolarBan 2000 *

The point where the ($400,000)


* Life-Cycle Cost Choice
** Simple Payback Choice
curves cross the X-axis 31
($600,000)
represents discounted Years
payback.

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Directions for Use of the LCC Spreadsheet


“General Data” tab (refer to Figure 17 above):
1 Use the Nominal-to-Real calculator to convert a nominal discount rate to real for use in the LCC
spreadsheet. See equation (2) above.
2 Enter the Service Date, the year the project ‘comes on-line’, (i.e., begins to incur operating costs). To
allow for construction, this may be up to five years into the future. Note that the Base Year is
assumed to be the current year, i.e., the year the analysis is performed, using DOE energy price
escalation rates released during the current year.
3 Enter a real discount rate to be used for the analysis. For most federal projects, this should be the
current year FEMP discount rate. For others, this should either be the cost of borrowing the needed
capital or the forgone rate of return on a custodial investment (i.e., the MARR). To convert the
discount rate from nominal to real, see 1 above.
4 Enter the number of years for the Study Period (30 max, i.e., 25 years max Service Period plus up to
5 years for a Planning/Construction Period). The Study Period should be consistent with the
investor’s time horizon and the expected useful life of the options being evaluated.
5 Select the DOE energy price escalation region (1 - 4, 5=U.S. average, see the map).
6 Indicate the analysis utility sector, Residential, Commercial, or Industrial.
7 If applicable, select a second fuel type (electric is assumed for all). Only one additional fuel can be
specified: none, Natural Gas, LPG, Distillate Oil, Residual Oil, or Coal. Inputs at 5 6 are used
to retrieve DOE energy price escalation rates from the “DOE Fuel Esc Rates” tab of the spreadsheet.
8 Uniform energy price escalation rates (do not change from year to year) are optional. If omitted (the
default), all LCC analyses will use the U.S. DOE energy price escalation rates for the current year. To
enter custom energy price escalation rates that vary year to year, go to the tab “DOE Fuel Esc Rates”
and enter custom escalation rates (e.g., from a local utility) at cells V9 – W38. IMPORTANT: these
energy price escalation rates must be REAL. To convert from nominal to real escalation rates, see
1 above.

9 If the building will not be in full use (i.e., generate full utility consumption) during the entire Service
Period (e.g., during initial lease out for an office building), enter occupancy/use multipliers to
indicate approximate level of full utility usage. These inputs are used as multipliers on each year’s
energy use (for both fuel types).
10) Current federal fiscal year discount rates, FEMP, OMB Short- and Long-term, are provided for
reference.
11) Comments for each of the input cells are provided (see the small red triangular indicators at the top
right corner of input cells). View these comments by hovering the mouse pointer over the
commented cell.
12) Inputs cells are shown in blue font. Only the input cells are unprotected. The remainder of the
General Data tab sheet is protected, but can easily be unprotected if edits to protected cells are
desired. To unprotect any sheet, from the menu select "Tools", "Protection", "Unprotect Sheet…")

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“LCCn tabs” (refer to Figure 18 above):


Data unique to each alternative are input on each of the "LCC" tab sheets. Sheet "LCC0" is assumed to be
the base case. Sheets "LCC1", "LCC2", etc., are for project alternatives. Nine alternative sheets are
provided on the example available for download. To add additional “LCC” sheets, press and hold down
the ‘Ctr’ key while using the left mouse button to drag and drop an existing “LCC” sheet (e.g., drop a copy
of an existing “LCC” sheet to the right of the copied sheet). An "LCC" sheet is illustrated in Figure 18
above.

13 Two cells area provided to name the project alternative, e.g., "base case", "alternative 1", etc. The
two cells are concatenated into the description filed of the summary results table.
14 Enter investment-related costs (e.g., first cost) at year 0, 15 capital replacement costs at future years,
and 16 residual values, if any, at the last year of the analysis. Estimate each in today's dollars, entered
in the year in which they are expected to occur. If a real discount rate is used, there is no need to
inflate these future costs before entering them.
17 Enter operations-related capital costs, e.g., non-annually recurring maintenance such as overhauls;
each estimated in today's dollars, entered in the year in which they are expected to occur
18 Enter annual electric costs, estimated in today's dollars. Normally these are entered for the first year
only and assumed to repeat each year thereafter. If energy use (not just cost) varies by year, either use
the % Occ/Use inputs on the General Data sheet (see 9 on Figure 17) or unprotect the sheet (see
12 above) and edit the cells as required.
19 Enter annual second fuel costs, e.g., natural gas, LPG, etc., estimated in today's dollars. Normally
these are entered for the first year only and assumed to repeat each year thereafter. If energy use (not
just cost) varies by year, see item 18 above.
20 Enter annually recurring costs, e.g., ongoing operations, maintenance, and repair (OM&R). Normally
these are entered for the first year only and assumed to repeat each year thereafter. See item 18 .
21 The total life-cycle cost is reported in the lower right-most cell. Note that all LCC results are
summed across each row (for each year) and down each column (for each LCC cost component, e.g.,
investment-related, operations-related, utility costs, annually recurring costs).
22 General data from the "General Data" tab sheet are echoed at the top of each LCC sheet, e.g.,
FEMP fiscal year, discount rate, length analysis period, DOE region, and analysis sector.
23 Year-by-year "real" (i.e., differential) energy price escalation rates are displayed for each of the two
energy types. If no user input is provided on the General Data tab for uniform energy price
escalation, then these escalation rates will default to the U.S.DOE projected escalation rates based on
input on the General Data sheet for region and sector. User input for uniform energy price
escalation rates on the General Data tab sheet will override the DOE escalation values. Alternately, if
a user obtains local energy price projections (e.g., specific to a particular utility) for any of the analysis
years, these may be input by going to the tab “DOE Fuel Esc Rates” (not shown) and entering
custom escalation rates at cells V9 ― W38. IMPORTANT: these energy price escalation rates must be
REAL. To convert from nominal to real escalation rates, see above.
24 Columns J, K, L, and P, Q, R are normally hidden and may be unhidden by un-protecting the
worksheet (see 12 above). These columns are not actually used in the analysis. They display nominal
energy price escalation and the separate results of discounting and escalating the annual energy costs,
only for educational purposes.

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“Results Summary” tab (refer to Figure 19 above):


Key results from each LCC worksheet are compiled into the upper half of the Summary Results table
presented on the “Summary Results” tab (one row for each LCC worksheet). Using minimum simple
payback (SPB), Alt 1 (single pane Azurlite™) is the preferred choice. Minimum LCC would select Alt 9
(dual pane SolarBan2000™). Red and blue borders are added to emphasize incremental first costs, life-
cycle savings, net savings (same as life-cycle savings), and simple payback.

25 The upper half of the table reports COSTS for the base case and all alternative cases.
26 The lower half of the table reports SAVINGS for all alternative cases (no base case row included
since savings = base case minus alternative case).
27 Items in pale blue font report positive savings (uses automatic conditional formatting).
28 Items in pale red font report negative savings (i.e., increases in cost compared with the base case).
29 The bottom-most row indicates the delta between the LCC choice and the SPB choice.

“Graph” tab (refer to Figure 20 above):


Key results from each LCC worksheet are compiled into the upper half of the Summary Results table
presented on the “Summary Results” tab (one row for each LCC worksheet). Using minimum simple
payback (SPB), Alt 1 (single pane Azurlite™) is the preferred choice. Minimum LCC would select Alt 9
(dual pane SolarBan2000™). Red and blue borders are added to emphasize incremental first costs, life-
cycle savings, net savings (same as life-cycle savings), and simple payback.

30 The graph plots cumulative life-cycle SAVINGS (baseline life-cycle costs minus alternative life-cycle
costs), not life-cycle COSTS.
31 .Each curve on the graph represents one of the glass type options. Each begins showing negative
cumulative savings, indicating the incremental additional first cots associated with each.
32 The point (year) where each curve (glass type option) crosses the X-axis (savings have accumulated
to a point that equals the first costs) represents the discounted payback.
33 At year 25, Alt 9 (SolarBan 2000, shown as a bold blue line) achieves the greatest cumulative life-
cycle savings (same as Net Savings)… $678,798 from Figure 19.
34 Alt 1 (single pane Azurlite), the glass type having the most rapid simple payback (SPB), is shown as
the bold magenta line… $399,899 from Figure 19.

Example Results
Figures 19 and 20 illustrate example results from the User-Friendly LCC spreadsheet. The data are from
the same example plotted in Figure 7, i.e., glass type options for a large institutional new construction
project. In Figure 19, the tabular results are divided into an upper and lower half. The upper half reports
life-cycle costs. The lower half reports life-cycle savings. Cells in the cost portion of the table (upper
portion) are linked directly to the "LCC" tab sheets for the base case and each alternative. Cells in the
savings portion of the table (lower portion) are calculated from the upper portion of the table, by
subtracting a row for each project alternative from the base case. Thus, two columns, "Total LCC
Savings" and "Net Savings" are identical. Using the results in Figure 19, we can answer the question posed
previously regarding the "best" glass type illustrated in Figure 7. Alternative #2 in Figure 7 (Alternative 9
in Figure 19) yields the lowest life-cycle cost (i.e., the maximum Net Savings) and is therefore the LCC-
recommended choice of glass type for this analysis.

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Limitations and Strengths


Limitations of the User-Friendly LCC spreadsheet, as compared with BLCC, include:
 BLCC supports several modes of U.S. federal LCC analysis, including
o FEMP (Federal Energy Management Program) energy project ― federal agency-funded energy
and water conservation and renewable energy projects under the FEMP rules
o ECIP (Energy Conservation Investment Program) ― federal projects financed through Energy
Savings Performance Contracts (ESPC) or Utility Energy Services Contracts (UESC) as
authorized by Executive Order 13123
o OMB (Office of Management and Budget non-energy project) ― projects subject to OMB
Circular A-94, i.e., most non-energy and non-water, federal government construction projects
o MILCON (Military Construction)― military funded energy conservation, water conservation,
renewable energy, and non-energy projects; also military ECIP projects
The User-Friendly LCC spreadsheet only implements the FEMP LCC conventions.
 In the LCC spreadsheet, only end-of-year cash flow convention is possible. BLCC permits either end-
of-year, or mid-year cash flow convention.
 BLCC permits user input describing the number of years and months for length of analysis and
occurrence of costs (e.g., capital replacement costs). The spreadsheet assumes whole year time steps.
 In the spreadsheet, only two utility energy types may be included, electricity plus any one additional
fuel type, e.g., none, Natural Gas, LPG, Distillate Oil, Residual Oil, or Coal. BLCC supports up to
four utility energy types.
 BLCC supports LCC analyses that include income tax (as does the implementation in eQUEST).
Income taxes cannot be included in the current release of the User-Friendly LCC spreadsheet.
 BLCC5, the Windows version of BLCC, performs continuous compounding whereas BLCC4, the
DOS version of BLCC (still supported and updated with each years new energy price escalation rates)
performs discrete (annual) compounding. The LCC spreadsheet also performs discrete annual
compounding. Hence results from the LCC spreadsheet typically agree only within four or five
significant digits of BLCC5 (Windows) while the LCC spreadsheet results agree to within 6 or 7 digits
of BLCC4 (DOS).
Based on user comments, advantages of User-Friendly LCC spreadsheet, as compared with BLCC include:
 Life-cycle costing done in the spreadsheet format seems more ‘transparent’ since the intermediate
calculations, results and input assumptions are presented year-by-year for recurring as well as non-
recurring costs. Each "LCC" tab sheet (one design alternative per tab sheet) is formatted to print out
on a single page, self-documenting all of the significant analysis assumptions and results.
 Any number of project alternatives are easily reviewed and compared side-by-side in one spreadsheet
"workbook". Additional project alternatives (i.e., LCC sheets) can be added by simply copying existing
LCC sheets (drag and drop using the ctrl key + left mouse button).
 Being in a spreadsheet, comparative and summary results are possible in user-controllable tabular
and/or graphic formats, e.g., Figures 19 and 20 above.
 DOE energy price escalation rates are shown year-by-year in real (i.e., differential) and nominal form,
and can be easily replaced with uniform or non-uniform user rates or with actual utility-projected rates
for any portion of the analysis period.
 LCC results can also be dynamically linked to other analysis results spreadsheets (e.g., detailed energy
and water conservation simulation results). Iterative changes in either the conservation estimates or
the general LCC parameters (e.g., discount rate) require no rerunning of the LCC calculations — they
are recalculated and updated automatically, facilitating "what-if" LCC iterations.

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LCC Examples Comparing Hand Calculation with Spreadsheet


Life-Cycle Costing
The following example compares a hand-calculated LCC analysis (using U.S. DOE tabular data as in
Example 1 through 4 above) with the same LCC analysis prepared using the User-Friendly LCC
spreadsheet. Subsequent examples will compare eQUEST LCC results with the User-Friendly LCC
spreadsheet results.

LCC Tabular Data Example 5


LCC of Rooftop versus Central Plant Building Design Options
For convenience, Figure 21 below duplicates Figure 15.

Figure 21 LCC = Initial investment costs (I)


LCC Equation
The basic Life-Cycle Cost
+ PV replacement costs (Repl)
equation sums the initial + PV energy costs (Engy)
investment (already in
today’s costs) and all future – PV Residual Value (Res)
cash flows (discounted to
present value) where costs + PV O&M (O&M)
carry a positive sign and
income or residual value
carries a negative sign. Net Savings = LCCbase - LCCalt

Figure 22 • Base Case: High Eff. Rooftop HVAC (15 yrs)


LCC Example 5
• Alternative: High Eff. Central Plant (25 yrs)
Basic analysis assumptions
• Assumptions:
for LCC example 5
– Location: Los Angeles, CA
Discount and Escalation – Discount Rate: 2007 FEMP discount rate (3.0%)
rates will be taken from U.S. – Cost amounts: Prices stated in constant dollars
DOE tabular sources. LCC – Energy Prices: Local energy prices and DOE price
results will be developed escalation rates
using by hand calculation
– Commercial Electricity rates
and using the LCC
spreadsheet. – Analysis Period = 25 years
– Both systems meet performance criteria of building

For the purposes of this example, the useful life of the central plant will be assumed to be 25 years, while
the useful life of the package rooftop equipment will be assumed to be 15 years. A standard source for
estimating HVAC equipment life is ASHRAE [15].

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Figure 23 Base Case: High Eff. Rooftop HVAC


LCC Example 5
Base Case, • Purchase & Installation Cost: $75,000
INPUTS
• Replacement Costs: $65,000 (at year 15)
Analysis assumptions for
LCC example 5 • Residual value (33%): $65,000/3 (at year 25)
Base Case rooftop units. • Annual electric cost: $62,500
• Annual Maintenance cost: $1,000
• Useful Life: 15 years

Figure 24 Base Case: High Eff. Rooftop HVAC


LCC Example 5 • I = $75,000 (a cost)
Base Case, • PV Repl = Replacement cost x SPV15, 3.0%
RESULTS • = $65,000 x 0.642 = $41,730 (a cost)
Analysis results for LCC • PV Energy = Annual Electric Cost x UPV* (Reg 4, Com, Elec, 25 yrs)
example 5, Base Case • = $62,500 * 16.02
rooftop units. • = $1,001,250 (a cost)
• PV Resid = 5 years remaining life x SPV25, 3.0%
The 2006 NIST update to = $65,000 * 1/3 * 0.478
Note the negative
Handbook 135 use din this • = $10,357 (an asset) sign, i.e., Residual
• PV O&M = Annual Maint. x UPV25, 3.0% Value is an ASSET in
example is provided in this COST calculation
Appendix A. • = $1000 x 17.41
• = $17,410 (a cost)
• LCC = $75,000 + $41,730 + $1,001,250 – $10,357 + $17,410
• LCC = $1,125,033

Figure 25 Alt Case: High Eff. Central Plant


LCC Example 5
Alternate Case, • Purchase & Installation Cost: $120,000
INPUTS • Replacement Costs: $0
Analysis assumptions for
• Residual value :(33%): $0
LCC example 5
Alternate Case Central Plant. • Annual electric cost: $58,000
• Annual Maintenance cost: $500
• Major Maintenance ea 10 yrs $5,000
• Useful Life: 25 years

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Figure 26 Alt Case: High Eff. Central Plant


LCC Example 5
• I = $120,000
Alternate Case,
• PV Repl = $0
RESULTS
• PV Energy = Annual Electric Cost x UPV* (Reg 4, Com, Elec, 25 yrs)
Analysis results for LCC • = $58,000 * 16.02
example 5, Alternate Case • = $929,160
Central Plant.
• PV Resid = $0
• PV O&M = Annual Maint. x UPV25, 3.0% +
The 2006 NIST update to
• Non-Annual Maint. x (SPV10 + SPV20)
Handbook 135 use din this
• = ($500 x 17.41) + ($5,000 x (0.744+0.554))
example is provided in
• = $8,705 + $6,490
Appendix A.
= $15,195
• LCC = $120,000 + $0 + $929,160 – $0 + $15,195
• = $1,064,355
Note the negative
sign, i.e., Residual
Value is an ASSET in
this COST calculation

Figure 27 Life Cycle Cost Decision


LCC Example 5
Decision Based on • Base Case = $ 1,125,033
Hand Calculations
• Alternative = $ 1,064,355
Net Savings for
LCC example 5
via hand calculations
• Net Savings = $ 60,678
Since the Net Savings
exceeds $0, the investment  since Net Savings (NS) > $0,
in the central plant is recommend the design alternative,
recommended.
i.e., the central plant

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Figure 28, User-Friendly LCC Spreadsheet, General Data Input Sheet, LCC Example 5
Input illustrated below match those given above in Figure 22.

Figure 29, User-Friendly LCC Spreadsheet, LCC0 Base Case Inputs Sheet, LCC Example 5
Input illustrated below match those given above in Figure 23. The items circled are to be compared with the
results hand calculated in Figure 24 above.

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Figure 30, User-Friendly LCC Spreadsheet, LCC0 Alternate Case Inputs Sheet, LCC Example 5
Input illustrated below match those given above in Figure 25. The items circled are to be compared with the results
hand calculated in Figure 26 above.

Figure 31
LCC Example 5
Life Cycle Cost Decision
Comparison of
Hand Calculation and Hand Calc Spreadsheet
Spreadsheet Results • Base Case = $ 1,125,033 $ 1,124,890
Net Savings for • Alternative = $ 1,064,355 $ 1,064,124
LCC example 5
via hand calculations and
LCC spreadsheet.
• Net Savings = $ 60,678 $ 60,766
This example resulted in a
$6 difference in the Net
Savings.  since Net Savings (NS) > $0,
recommend the investment

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LCC Tabular Data Example 6


Example 5 Repeated as a Life-Cycle SAVINGS Calculation (using only ‘deltas’)
Example 6 repeats the calculations from Example 5, except where Example 5 separately calculated two
life-cycle costs, one for the base case and one for the alternate case, and then subtracted the LCC for the
alternate case from the LCC for the base case.

Figure 32 NS =  Initial investment costs ( I)


Life-Cycle Savings Eq.
This is the basic Life-Cycle +  PV replacement costs ( Repl)
Cost equation from Figure 21,
re-expressed as a Life-Cycle
+  PV energy costs ( Engy)
SAVINGS equation where –  PV Residual Value ( Res)
each component is the same,
only included incrementally, +  PV O&M ( O&M)
i.e., as deltas where the delta,
 = base ― alternate,
for each component. Net Savings = Life-Cycle Savings

Figure 33
Life-Cycle Savings Base - Alt Savings
Calculation
NS = ( $75,000 - $120,000 ) $-45,000 ( I)
The calculation at right takes
the results for the base case + ( $41,730 - $0 ) $41,730 ( Repl)
(from Figure 24) and
+ ($1,001,250 - $929,160 ) $72,090 ( Energy)
subtracts from each the
results for the alternate case - ( $10,357 - $0 ) $10,357 ( Res)
(from Figure 26).
The same Net Savings + ( $ 17,410 - $15,195 ) $2,215 ( O&M)
results (compare Figure 27). $60,678 Net Savings

Figure 34 on the following page illustrates the results from using the LCC spreadsheet to calculate Net
Savings using the Life-Cycle Savings form of the LCC equation (Figure 32). The Net Savings calculated in
this manner using the LCC spreadsheet agrees exactly with the Net Savings calculated in Figure 29, 30 and
31 and within $6 with the hand calculated Net Savings.

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Figure 34, User-Friendly LCC Spreadsheet, Life-Cycle SAVINGS Inputs, LCC Example 6
Input illustrated below match those given above in Figure 33. Initial costs, operating costs and residual value are
entered as incremental values, i.e. baseline cost minus alternative case cost. The items circled are to be compared
with the results hand calculated in Figure 33 above.

 Operations $ +  Annual Recurring$ = $2,218

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Life-Cycle Costing (LCC) Tutorial Simple Payback

Simple Payback Method


Simple Payback Method vs Life-Cycle Cost Method
The measure of merit most commonly used throughout the buildings industry to make project investment
decisions is Simple Payback (SPB). This is unfortunate because simple payback frequently fails to identify
the most economic solution measured over the project life cycle. In part, this is not surprising since simple
payback considers only initial costs, i.e., incremental initial investment cost and incremental first year
utility savings. It is calculated using equation (9):

Incremental First Cost ($)


SPB  (9)
First Year Annual Savings ($)
where:
SPB = Simple Payback
Incremental Fisrt Cost = Alternative First Cost – Baseline First Cost,
the incremental additional acquisition cost associated with the high
efficiency design alternative
First Year Annual Savings = Baseline First Year Utility Cost – Alternative First Year Utility Cost,
the first yer’s annual utility cost savings associated with the high
efficiency design alternative

SPB Limitations: Blind to Future Costs and Savings


The main failing of Simple Payback is that it ignores all future costs and benefits, e.g., capital replacement,
residual value, life-cycle utility costs (including any estimate of energy price escalation), operations and
maintenance costs (OM&R), and the time value of money in treating any future costs or savings. In
summary, decisions made using simple payback are often inferior because they are ‘short-sighted’. By
analogy, this short-sightedness is similar to refusing to invest in preventative maintenance, i.e., long-term
operating costs are entirely ignored in favor of short-term cost (i.e., investment) savings.
As an example of SPB versus LCC, in Figure 19 above, if the glass type is selected based on minimum
SPB, Alt 1 would be the recommended selection, which would yield $655,380 in annual utility costs and
$368,123 in net total 25-year life-cycle cost savings. Alt 1 in Figure 19 corresponds to point #4 in Figure 7.
Alternatively, if the selection of glass type is based on minimum life-cycle costs (equivalently, on
maximum net savings), Alt 9 would be selected, which yields $628,370 in annual utility costs and $618,879
in net total 25-year life-cycle cost savings. Alt 9 in Figure 19 corresponds to point #2 in Figure 7. In this
example, selecting based on minimum life-cycle costs, rather than minimum simple payback adds
$170,360 in first costs, but also adds $421,819 in 25-year life-cycle utility savings or $250,756 in net total
25-year life-cycle cost savings. Figure 20 illustrates cumulative life-cycle savings for all alternatives an
illustrates that the LCC-recommended alternative (Alt 9, shown as the bold blue line) accumulates a much
larger life-cycle savings than does Alt 1 (shown as the bold magenta line), the SPB-recommended
selection.
Consider several common objections to choosing the LCC recommendation (Alt 9) over the SPB
recommendation (Alt 1):

 The cumulative savings for Alt 9 may appear larger than the cumulative savings for Alt 1 but when
the larger first cost for Alt 9 is deducted, the total savings for Alt 9 are much closer to the savings

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for Alt 1. — The cumulative savings shown in Figure 20 have already had the first costs subtracted from the
totals, i.e., the cumulative savings are net of the first costs.
 The additional first cost for the LCC-recommended glass type (Alt 9) could have been better used
in some alternative investment, i.e., we can’t afford to tie up that much additional capital in this
investment. — The total cumulative savings shown in Figure 20 for all alternatives have already be adjusted
(reduced) by the opportunity cost, i.e., the cumulative savings have been reduced by the discount rate to capture the
effect of earnings from an alternative investment that had to be forgone in order to make this investment. The return
on the alternative custodial investment was assumed to be the minimum acceptable rate of return (MARR), a value
that should reflect a reasonable alternative custodial investment. If it does not, then the discount rate should be
altered and the analysis re-run. CAUTION: the assumed return on the alternative custodial investment should
reflect a similar level of risk as incurred by the efficiency investment, i.e., presumably a conservative level of risk.
 The more rapid return of the invested capital offered by the SPB-preferred alternative (Alt 1) is
appealing since this frees the original capital to ‘return to work’ in an alternative investment. —
As in the previous concern, the opportunity cost of the investments have been accounted for by using a discount rate
that reflects the expected minimum acceptable rate of return (MARR) for the investment option awaiting the freed
capital. If a rate of return higher than the MARR is expected to become available in the early years of the life of a
project, then ‘rushing’ to regain one’s capital to permit its reinvestment in the new investment is justified.
 The additional first cost for the LCC-recommended glass type (in this case ~$150,000) is too
great, i.e., the budget cannot bear the additional cost. — If the first cost was too high, regardless of how
good the investment proved to be, the alternative should have been omitted from the analysis.

SPB Limitations: Tends to Promote Modest Investments in Efficiency


Interestingly, for the glass type selection example illustrated in Figures 17 to 20, no capital replacement
costs or residual values were considered appropriate and OM&R costs were assumed to be identical for all
glass types and hence were omitted, i.e., the only future costs this example included were utility costs,
however, even in the case where most future cost components are absent, simple payback failed to select
the life-cycle minimum cost alternative.
Consider an example. One wishes to investigate the economic merit of increasing roof insulation beyond
code minimum levels. Accordingly, one identifies the code minimum level and two or more increased
levels. As in many efficiency investment decisions, analysis reveals ‘diminishing returns’, i.e., each
incremental additional investment in efficiency yields a diminished incremental benefit (see Figure 36).
Given diminishing returns, SPB tends to favor the option with the lesser capital investment.

Figure 35 Consider roof insulation alternatives…


Using SPB to Identify
the Optimum Level of • R-19 base, R-30 and R-38 alternatives
Efficiency • R-11 base, R-19 and R-30 alternatives
In any decision for level of • R-7 base, R-11 and R-19 alternatives
efficiency where there will be
diminishing returns Simple Payback would always pick the
(see Figure 36), the Simple lesser alternative insulation R-value
Payback (SPB) method will
tend to favor the minimum This would often imply that code minimum
efficiency option. R-Value is optimum

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Life-Cycle Costing (LCC) Tutorial Simple Payback

Figure 36 $1,400
Roof Insulation Annual
Hot Climate
Utility Savings versus $1,200
Warm Climate
Incremental First Cost

Annual Utility Savings ($)


$1,000
The curves at right illustrate
the ‘diminishing returns’ $800

associated with increased $600


levels of roof insulation. The
baseline case assumed R-3 $400

insulation. Alternatives
$200
increase this to a maximum 10 20 30 40 50 60
Insulation R-value (F-Hr-sqft/Btu)
of R-60. Two climates, $0
Sacramento and Palm $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

Springs CA, are shown. Incremental First Cost ($)

In Figure 36, roof insulation upgrades for a 30,000 sqft roof on an office building are investigated for two
climates, Sacramento (warm climate) and Palm Springs (hot climate). To emphasize the effect of
diminishing returns, the baseline case assumes only minimal insulation, i.e., R-3, well below code
minimum. Only incremental results are presented, i.e., both axes represent the difference between the
assumed baseline case (R-3 minimal insulation) and the increased insulation cases (R-7 through R-60). The
curves in Figure 36 illustrate ‘diminishing returns’ associated with increased levels of roof insulation,
where the curve of increased benefit for increased insulation (and increased first cost) flattens out
(approaches an asymptote) as the level of additional insulation increases.
Given that the slope of ‘benefit’ illustrated in the curves in Figure 36 represent the change in savings
(benefit) divided by the change in first cost (incremental cost), simple payback (SPB) may be understood
as the reciprocal of these benefit slopes, i.e., the change in incremental first cost divided by the first year
annual savings (or benefit, see equation 9 above). For comparison, Figure 37 below transposes the X and Y
axes in Figure 36 above. The slopes of the curves in Figure 37 below are literally the SPB for the
incremental increase in insulation level and associated cost. For efficiency measures that suffer from
‘diminishing returns’, SPB will tend to favor the smallest investigated step in efficiency gain. In other
words, for efficiency measures that suffer from ‘diminishing returns’, which are very common in building
energy efficiency decisions, SPB often ‘says’ “the best investment building efficiency investment just
happens to be the one that that also requires the least capital expense.” There is little wonder why SPB is a
popular energy efficiency analysis method.
$30,000
Figure 37
Hot Climate
Roof Insulation $25,000
Warm Climate
Incremental First Cost
Incremental First Cost ($)

$20,000
versus Annual Utility
Savings $15,000
The axes in the figure at
right have been swapped $10,000

with the position illustrated


in Figure 36. $5,000

$0
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400
Annual Utility Savings ($)

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Life-Cycle Costing (LCC) Tutorial Simple Payback

SPB Strengths
Simple Payback may be used as a supplemental measure of merit, i.e., in addition to other considerations.
Simple payback is:

 easy to calculate
 good for gross sanity check
 is a direct estimate of how rapidly an investment is re-cooped
 can be used to approximate the rate of return (see Figure 42 below)
The graph below relates the rate of return to simple payback. Note that an approximation that recognizes
7% rate of return yields approximately 10 years simple payback can be used to estimate the rate of return
for other payback periods (see magenta line on graph below), e.g., twice as rapid a simple payback yields
approximately twice the rate of return (e.g., 3.5 years simple payback ~ 20% rate of return).

100%
Figure 38
Estimating Rate of 90% Actual
Equivalent* Rate of Return

80% Approx
Return using Simple
Payback (SPB) 70%
60%
Since 10 years SPB (magenta
50%
line) yields approx 7% rate
40%
of return (blue line), e.g., half
30%
the SPB yields approximately
20%
twice the rate of return (e.g.,
3.5 years SPB ~ 20% rate of 10%

return). 0%
15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Years to Simple Payback
* Assumes first costs & energy savings only (no maintenance or replacement costs or savings)

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

EEM Wizard LCC Example (Example 1)


Part 1 of 5, Estimate Annual Utility Costs
EEM Wizard LCC Example 1 will illustrate the inputs required to conduct a simple LCC analysis using
eQUEST’s EEM Wizard and will be used to explore the role of key LCC parameters such as discount rate
and energy price escalation by introducing these LCC parameters one at a time and then examining how
their use altered the economic performance of the measure. To set up the example, launch eQUEST,
open the Schematic Design Wizard and follow the steps indicated in Figures 36 through 49 below.

Figure 36
Schematic Wizard
Screen #1, 4
General Information 1

Use this screen to specify


properties described in the
steps indicated below. 2

1 Office Bldg, 2 stories


3
2 Location: Los Angeles
3 Size: 50,000 sqft
Savings By Design,
2006 or after

Figure 40
Schematic Wizard
1
Screen #3
Building Footprint

Use this screen to specify


properties described in the
steps indicated below. 2

1 Footprint = ‘U’ Shape


2 Length of east wing = 3

195 ft
3 Total area ~ 30,000
sqft per floor

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Figure 41
Schematic Wizard
Screen #17
Main Schedule Info.

Use this screen to specify


properties described in the 1

steps indicated below. 2


3
1 Day type 1, Mon – Fri
Day type 2, Weekends
2 Office opens: 7:00am
Office closes: 7:00pm

Figure 42
Schematic Wizard
Screen #19
HVAC System
1

Use this screen to specify 2

properties described in the


steps indicated below.
3

1 Cooling Source =
DX Coils
2 Heating Source =
Furnace
3 System Type =
Packaged Single Zone
with Furnace

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Figure 43
Schematic Wizard
Screen #17
Main Schedule Info.

Use this screen to specify 1

properties described in the 2


steps indicated below. 3

1 Typical Unit Size =


135-204 kBtu/hr
2 Condenser Type =
Air-Cooled
3 EER = 9.5

Figure 44
Title 24 Minimum
Efficiency for Unitary
Air Conditioners

The table at right is taken 1

from the Title 24 standards


and is used to establish the
default efficiency levels
used in eQUEST.
1 EER for 135-240 kBtu

units = 9.7
2 0.2 EER credit for

furnace heating, i.e.,


EER = 9.5
2

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Figure 45
Schematic Wizard
Screen #25
1 2
HVAC Fan Schedule

Use this screen to specify


fan operating hours as
described in the steps
indicated below.

1 Start fans 2 hours prior


to occupancy 3
2 Stop fans 3 hours after 4
occupancy
3 Fans on Sat: 8:00am
Fans off Sat: 6:00pm

To continue with EEM Wizard LC Example 1, press the button to exit the Schematic
Design Wizard, then launch the EEM Wizard by clicking the EEM Wizard button (left side or top
center of the tool bar) and follow the steps indicated in Figures 46 through 49 below.

Figure 46
EEM Wizard Run Info
Screen

Use this screen to indicate 1


the type of measure to be
Package HVAC Efficiency,
as described in the steps
below.

1 Measure Category =
HVAC System
2 Measure Type =
Package HVAC
Efficiency

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Figure 47
EEM Wizard Run Info
1
Screen

Use this screen to indicate


the type of measure to be
Package HVAC Efficiency,
as described in the steps
below.

1 EEM Run Name =


Pkg HVAC Eff EEM 2
(EER=10-8)
2 Click the “EEM Run
Details” button
to open the next
screen.
3 Cooling Efficiency =
10.80

To continue with EEM Wizard LC Example 1, press the button to exit the EEM Wizard, then
run a simulation by clicking the button (left side of the screen) and follow the steps
indicated in the following Figures.

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Figure 48
EEM Wizard Run Info
Screen

After clicking the


“Simulate Building
Performance” button, the
EEM Run Selection dialog 1
is presented.

1 On the EEM Run


Selection screen click
the Simulate button.
2 While the simulation is
running, a progress 2

bar will be displayed.


3 After the simulation is
completed, a
Simulation Complete
dialog will be
displayed with three
buttons. Click the
“View Summary
3
Results/Reports”
button.

Figure 49
Annual Building Summary Results Report

At the lower left corner of the screen, select: the ‘Reports button
Select ‘Annual Building Summary’ from the list of reports (second from the bottom of the list).

On the floating tool bar , click to view page two .


1 Total annual incremental utility savings = $2,582.

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

EEM Wizard LCC Example 1


Part 2 of 5, Calculate Simple Payback
In Part 2 of this example, future costs such as equipment replacement costs and energy price escalation
will be initially ignored, as will discounting. These LCC parameters will be added one at a time to illustrate
their impact on the results. Initially assuming no replacement costs, energy price escalation or discounting,
this part of the example focuses on simple payback for the high efficiency roof top air conditioner.
Year zero costs, i.e., first costs, will be added at this part of the example. Numerous cost estimating
sources are available for use in estimating the construction costs of building design options. Some of the
available sources include the following:
 Means Cost Data (many publications), http://www.rsmeans.com/
 Dodge Unit Cost Book
 Craftsman National Building Cost Manual, http://www.craftsman-book.com/
 Books, e.g., Rule-of-Thumb Cost estimating for Building Mechanical Systems, by James H Konkel
 The California Energy Commission’s 1996 Measure Cost Study
 California 2004-05 DEER database, http://www.energy.ca.gov/deer/

Figure 50
2005 DEER Cost Data

Access the DEER cost data via


http://eega.cpuc.ca.gov/deer/.
1
See the link on the right side of the
DEER database home page
2 From the DEER cost database for
package unitary HVAC, an EER 10.8
costs an additional $110.89/ton

DEER 2005 Cost Data

135-240 kBtu/hr high efficiency package AC (EER 10.8)  cost = $111/ton

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Figure 51
eQUEST Air-Side Summary tab view

Return to the Project View are of eQUEST’s Detailed Interface by clicking the ‘Return to Building
Description Mode’ button (upper left area of the View Results screen).
Then select the ‘Air-Side HVAC’ button near the top right hand area of the Project View
screen. From the Air-Side HVAC screen, select the tab then the ‘Project’ item
from the component tree (on the left side of the screen), then select the ‘Summary’ tab to view the
Air-Side Summary Input/Output report (see below).
1 Scroll to the bottom of the Air-Side Summary Input/Output report, and find total cooling tons.

Figure 52
Simple Payback Calculation
EEM Wizard Example 1
Simple Payback cost of upgrade
Simple Payback =
Calculation annual utility savings
Calculate simple payback
assuming 127 ton peak load
(round up to 150 tons of $110.89/ton * 127 tons (use 150)
AC) at $111/ton $2,582/year
incremental cost.

Simple Payback = 6.4 years

Figure 53
Simple Payback
EEM Wizard Example 1
Simple Payback Issues • Easy to calculate and widely
Simple Payback is widely accepted
used in making building • Easily compared to holding period
design decisions but is ‘blind of property
‘to all future costs &
benefits. (See the previous • Good for gross ‘sanity check’
section regarding Simple • Blind to the future
payback.)
• Tends to promote a ‘narrow’ view
of building quality investments

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Initially, eliminate the impact of discounting and energy price escalation by entering 0% for both the
discount rate and energy price escalation.

Figure 54
EEM Wizard Project &
Baseline LCC Data

Return to the EEM Wizard


by clicking on the EEM
Wizard button (left
side or top center of the
tool bar) and follow the
steps indicated below.
1

1 On the EEM Run


Selection screen click
the Project &
Baseline Run EEM 2 3
Data button.
2 Indicate 0% uniform
energy price
escalation.
Indicate 0% federal
and state tax rate and
0% discount rate.

Figure 55
EEM Wizard EEM Run
LCC Data

1 On the EEM Run


Selection screen click
the EEM Run LCC
Data button.
On the measure LCC
1
data screen, enter the
incremental first cost 2
for the package
HVAC system
efficiency upgrade =
$110.89/ton * 127
tons (use 150) =
$16,633

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Return to the Results View by clicking on the button (left-most button on the tool bar at the top of the
screen). In the Results View, on the project tree (on the left side of the screen) select ‘Life-Cycle Savings
Graph’.

Figure 56
EEM Example 1 Results
Cumulative Net Savings
1 With the discount rate = Cumulative Savings becomes
0% and energy price positive at 6.4 years, for this
escalation = 0%, the example, this is Simple Payback
cumulative net savings
curve becomes a straight
1
line (compare Figure 72).
2 When the cumulative net

savings curve passes


through the X-axis,
payback is achieved (i.e.,
cumulative net savings =
2
$0). Given that this
example include no
discounting (0%) or
energy escalation (0%),
this payback is a simple
payback, matching the
hand calculated SPB in
Figure 52.
Still in the Results View, on the project tree (on the left side of the screen) select ‘Life-Cycle Costs
Summary Report’.

Figure 57
Life-Cycle Costs Summary Report
1 The Simple Payback reported here agrees with the hand-calculated SPB in Figure 52.

The same results may be calculated using the LCC Spreadsheet...

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Figure 58, LCC Spreadsheet, General Data Input Sheet, EEM Wizard LCC Example 1
Inputs illustrated below match those given in Figure 54 above, i.e., discount rate = 0%,
energy price escalation = 0% (for both energy sources).

Figure 59, LCC Spreadsheet, LCC0 Base Case Input Sheet, EEM Wizard LCC Example 1
Incremental first cost = $0. Inputs for annual utility costs match those given above in Figure 49.

 cost of the Base = 0  Base: Elec $ = $108,433 Gas $=$1,474

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Figure 60, LCC Spreadsheet, LCC0 Alternate Case Input Sheet, EEM Wizard LCC Example 1
Incremental first cost = $16,634 (from Figure 55). Inputs for annual utility costs match those given above in
Figure 49.

 EEM cost = $16,634  EEM: Elec $ = $105,851 Gas $=$1,474

Figure 61
EEM Example 1 Cumulative Savings
LCC Spreadsheet becomes positive at
Cumulative Net 6.4 years
Savings Graph
Cumulative Net Savings for
EEM LCC Example 1
via the LCC spreadsheet.

Note the agreement in


Simple Payback with Figures
52 and 56.

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

EEM Wizard LCC Example 1


Part 3 of 5, Add Replacements Costs
In this part of the example, replacement costs will be added.

Figure 62
EEM Wizard EEM Run
LCC Data

1 On the EEM Run


Selection screen click
the EEM Run LCC
Data button.
2 Under Investment-
1
Related Costs, scroll
down to input the cost
of replacement rooftop
units in year 12. Use
the same $16,633 cost
from year zero. 2

Return to the Results View by clicking on the button (left-most button on the tool bar at the top of the
screen). In the Results View, on the project tree (left side of the screen) select ‘Life-Cycle Savings Graph’.

Figure 63
EEM Example 1 Results
Cumulative Net Savings When is Simple
(w/ Equip. Replacement) Payback achieved in
1 Since the discount rate = this example?
0% and energy price
escalation = 0%, the
cumulative net savings
curve still has no
curvature but does show 1
the impact of the 2
replacement cost. .
2 With the cumulative net

savings curve passing


through the X-axis twice,
when is Payback achieved
in this example?

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Figure 64, LCC Spreadsheet, Alternate Case Input Sheet, EEM Wizard LCC Example 1
Inputs illustrated below match those given above in Figure 62.
EEM replacement cost at year 12 = $16,634

Cumulative Life-Cycle Savings

Figure 65 $40,000

EEM Example 1
LCC Spreadsheet $30,000

Cumulative Net Savings


Graph $20,000
Cummulative LCS

EER=10.8 **
(w/ Equip. Replacement)
$10,000
Cumulative Net Savings for
EEM LCC Example 1 $0
via the LCC spreadsheet, with 0 2 4 6 8 10 12 14 16 18 20 22 24

equipment replacement cost ($10,000)

added.
Note the agreement with ($20,000)

Figure 63. Years

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

EEM Wizard LCC Example 1


Part 4 of 5, Effect of Energy Price Escalation and Discount Rate
In this part of the example, energy price escalation and a discount rate are added. Figures 66 and 67
illustrate the impact on cumulative Net Savings due to energy price escalation and discounting. In
Figure 66, positive energy price escalation (i.e., future energy prices increase) has the effect of ‘bending’
upward the cumulative Net Savings line, i.e., as future energy prices increase, Net Savings increase each
year due to annual energy savings. Negative energy price escalation (i.e., future energy prices decrease) has
the effect of ‘bending’ downward the cumulative Net Savings line, i.e., as future energy prices decrease,
the cumulative Net Savings of the annual energy savings decrease each year.

$100,000
Figure 66 4%
Effect of Energy Price $80,000 3%
Escalation 2%
Cummulative Net Savings

What will be the effect on $60,000 1%


future annual savings, if… 0%
$40,000 -1%
-2%
-3%
future energy prices increase? $20,000 -4%
… future savings increase.
$0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
future energy prices decrease?
($20,000)
… future savings decrease.?
($40,000)
Years

In Figure 67, adding a discount rate > 0% has the effect of ‘bending’ downward the cumulative Net
Savings line, i.e., as the future value of energy savings is discounted, cumulative Net Savings decreases. In
the typical energy efficient building design decision, added efficiency costs more ‘up front’ but may save
enough in the long run to make the investment attractive. Increasing the discount rate will have the effect
of eroding the value of future energy cost savings, thereby making it harder to justify efficiency
investments, i.e., finding it harder to compete with a custodial investment having a high MARR.

Figure 67 $60,000
Effect of the Discount
Rate $50,000
0%
What will be the effect on $40,000 1%
Cummulative Net Savings

present value of future annual 2%


$30,000
savings, if… 3%
4%
$20,000 5%
we assume an increased 6%
7%
$10,000 8%
discount rate, i.e., if we discount
future cash flows more? $0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
($10,000)
we assume a decreased
discount rate, i.e., if we discount ($20,000)
future cash flows less? Years

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

In this part of the example, a 3% real discount rate is added (assuming ~2% general inflation, ~5.1%
nominal discount rate, see equation 2a below).

Figure 68
EEM Wizard EEM Run
LCC Data

1 On the EEM Run


Selection screen click
the Project & Baseline
Run LCC Data button.
On the Project-wide
LCC Data dialog, input
a 3% real discount rate 1 2

To convert real to nominal:


1 d
D 1 (2a)
1 i
where D = nominal discount rate
d = real discount rate
i = general inflation rate

Return to the Results View by clicking on the button (left-most button on the tool bar at the top of the
screen). In the Results View, on the project tree (left side of the screen) select ‘Life-Cycle Savings Graph’.

Figure 69
EEM Example 1 Results
Cumulative Net Savings
(w/ 3% real discount rate)
1 With discount rate = 3%

(but energy price escalation


= 0%), the cumulative net
savings curve show a slight 1

downward curvature, 2

reflecting the discounted


valued placed on future
costs. See Fig. 67 above.
2 Under the influence of the

3% discount rate, the initial


payback has been extended
from 6.4 years to 7.3 years
(the discounted payback)

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Figure 70
Annual Building Summary Results Report & Life-Cycle Costs Summary Report
1 Total annual first year utility cost is reported on both the Annual Building Summary Results
Report and on the Life-Cycle Costs Summary Report
Total LCC is also reported on both the Annual Building Summary Results Report and on the
Life-Cycle Costs Summary Report, however, if any LCC parameters are edited, the Life-Cycle
Costs Summary Report will automatically be updated without re-running the simulation while the
simulation must be re-run for the Annual Building Summary Results Report to be updated.

1 2

1 2

Net Savings = $16,662 (> $0, therefore LCC recommends this investment)
equivalent: AIRR = 4.9% (> discount rate of 3%, thus LCC recommends this investment)

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

In this part of the example, a U.S. DOE energy price escalation is added.

Figure 71
EEM Wizard EEM Run
LCC Data

1 On the EEM Run


Selection screen click
the Project & Baseline
Run LCC Data button.
2 On the Project-wide
LCC Data dialog,
uncheck Uniform Price 2
1
Escalation Rates
(accepts default U.S.
DOE year-by-year
energy price escalation)

Return to the Results View by clicking on the button (left-most button on the tool bar at the top of the
screen). In the Results View, on the project tree (left side of the screen) select ‘Life-Cycle Savings Graph’.

Figure 72
EEM Example 1 Results
Cumulative Net Savings
(w/ default DOE energy
price escalation)
1 Compared with Figure 65,

the effect of the default


DOE energy price 2
1
escalation is to reduce the
value of future energy
savings, i.e., the DOE
energy price escalation
tends to be negative (less
than general inflation).
2 Payback has been extended

from 7.3 years to 8.3 years

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EEM Wizard LCC Example 1


Part 5 of 5, Effect of Changing Location from Los Angeles to Fresno
As the final portion of this example, the location of the project will be changed from Los Angeles (CZ06,
a mild coastal climate) to Fresno (CZ13, a hotter inland climate).

Return to the Schematic Design Wizard by clicking the button (upper left area of
eQUEST’s screen) and follow the steps indicated in Figure 73 below.

Figure 73
Schematic Wizard
Screen #1, 1
General Information

Use this screen to specify


properties described in the
2
steps indicated below.

1 Change the Project


name as preferred
2 Change the location
from Los Angeles
(VCZ06) to Fresno
(CZ13)

Leave the Schematic Design Wizard by clicking the button and run a simulation by clicking

the button (left side of the screen). When the simulation run is completed, click the
button and follow the steps indicated in the Figure 74.

Figure 74
eQUEST Air-Side Summary tab view
Select the ‘Air-Side HVAC’ button near the top right hand area of the Project View screen,
then select the ‘Summary’ tab to view the Air-Side Summary Input/Output report.
1 Scroll to the bottom of the Air-Side Summary Input/Output report, and find total cooling tons.

Round 152 tons up to 170 tons for cost estimate. 170 tons * $110.89/ton = $18,850

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Life-Cycle Costing (LCC) Tutorial EEM Wizard LCC Procedures

Figure 75
EEM Wizard EEM Run
LCC Data

1 On the EEM Run


Selection screen click
the EEM Run LCC
Data button.
2 On the measure LCC
data screen, enter the
incremental first cost
& replacement cost
for the package
system upgrade =
$110.89/ton * 152
tons (use 170) =
$18,850

Figure 76
Annual Building Summary Results Report

Return to the Results View by clicking on the button (left-most button on the tool bar at the top
of the screen). At the lower left corner of the screen, select: the ‘Reports’ button
. Select ‘Annual Building Summary’ from the list of reports (second from the
bottom of the list).

On the floating tool bar , click to view page two .


1 Total annual incremental utility savings = $4,885. 1
2

Return to the Results View by clicking on the button (left-most button on the tool bar at the top of the
screen). In the Results View, on the project tree (left side of the screen) select ‘Life-Cycle Savings Graph’.

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Figure 77
EEM Example 1 Results 5
Cumulative Net Savings
1 The first cost is increased
CZ06
from $16,663 to 3
2 $18,850.

3 The discounted payback

has decreased from


3 8.3 years to 4.6
years
5 The total Net Savings has 1
CZ13 6

increased from 5 $9,935


to $40,266
Although the warmer climate
caused the first cost to
increase, both the discounted 4

payback and Net Savings


improved, due to the larger
cooling load.
2

Still in the Results View, on the project tree (on the left side of the screen) select ‘Life-Cycle Costs
Summary Report’.

Figure 78
Life-Cycle Costs Summary Report
The improved economic performance (both improved payback and Net Savings) of the high
efficiency air conditioner confirms the intuitive understanding high efficiency air conditioning is a
more attractive efficiency measure in the warmer climate of Fresno.

For For
CZ06, CZ06,
was 6.4 was 8.3
years years

For CZ06, this was $9,935 For CZ06, this was 4.2%
Net Savings = $40,266 (> $0, therefore LCC recommends this investment)
equivalent: AIRR = 6.4% (> discount rate of 3%, thus LCC recommends this investment)
The same results may be calculated using the LCC Spreadsheet...

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Figure 79, LCC Spreadsheet, LCC0 Base Case Inputs, EEM Wizard LCC Example 1, part 5
Incremental first cost = $0. Inputs for annual utility costs match those given above in Figure 76.
Base Case LCC from spreadsheet = eQUEST LCC ($1,877,496)

Figure 80, LCC Spreadsheet, LCC0 Base Case Inputs, EEM Wizard LCC Example 1, part 5
Input illustrated below match those given above in Figures 74 through 76.

Alt Case LCC from spreadsheet ≈ eQUEST LCC ($1,837,230)

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Detailed Interface LCC Procedures


Detailed Interface LCC Example (Example 2)
Continuing with the previous example, Example 2 illustrates the LCC inputs and procedures available
within eQUEST’s Detailed Interface.
Life-Cycle Costing in eQUEST’s Detailed Interface uses a spreadsheet-style interface very similar to the
User Friendly LCC Spreadsheet described in previous sections.

Figure 81
Building Shell
Screen
(Detailed Interface)
with 3-D Geometry 2
view selected

From any screen in


3
eQUESTs Detailed
Interface, to access LCC
inputs, 2 pull down the
Tools menu and select
3 “Life-Cycle Costing”.

Numbers refer to steps in


LCC Example 2 below.

1) NOTE: It is NOT necessary to change from Wizard Data Edit to Detailed Data Edit mode to view
and edit the LCC parameters spreadsheet from within eQUEST’s Detailed Interface.
2 Pull down the Tools menu and 3 select Life-Cycle Costing.

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Detailed Interface LCC Example 2


Part 1 of 3, General LCC Inputs
Figure 82, eQUEST LCC Spreadsheet, General Data Input Sheet
This is the ‘General LCC Data’ sheet in eQUEST’s Detailed Interface. Items in blue font are user inputs,
including: base year, marginal federal and state income tax rate, discount rate (% and type), years of analysis
period, energy price region, utility sector, uniform energy price escalation rates (optional), and a calculator for
converting nominal-to-real rates.

4
5

6
1
7

10

“General LCC Data” tab (refer to Figure 82 above):


1 (Optional) use the Nominal-to-Real calculator to convert a nominal discount rate to real for use in
the LCC spreadsheet.
2 Enter the Base Year, the year the analysis is conducted. Note that the Base Year is assumed to be the
current year, i.e., the base year for the U.S. DOE energy price escalation rate projections.
3 If income taxes are appropriate to be included in the analysis, enter the applicable marginal federal
and state income tax rate.
4 Indicate whether rates are Real or Nominal and whether the rates are net of taxes or prior to taxes.
5 Enter a discount rate consistent with the selections made for .

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6 Enter the number of years for the analysis (25 years max, does not currently allow for a
Planning/Construction Period). The Study Period should be consistent with the investor’s time
horizon and the expected useful life of the options being evaluated.
7 Select the DOE energy price escalation region (1 - 4, 5=U.S. average, see the table at the bottom of
this screen , not shown in Figure 82). Alternately, if a user obtains local energy price projections (e.g.,
specific to a particular utility), these may be input on tab “User Defined Fuel Esc Rates” (not
shown). This item must be set to “6” (User Defined).
8 Indicate the analysis utility sector, Residential, Commercial, or Industrial.
9 If applicable, select a second fuel type (electric is assumed for all). Only one additional fuel can be
specified: none, Natural Gas, LPG, Distillate Oil, Residual Oil, or Coal. Inputs at 7 8 are used
to retrieve DOE energy price escalation rates from the “DOE Fuel Esc Rates” tab of the spreadsheet.
10 Uniform energy price escalation rates (do not change from year to year) are optional. If omitted (the
default), all LCC analyses will use the U.S. DOE energy price escalation rates for the current year. To
enter custom energy price escalation rates that vary year to year, go to the tab “DOE Fuel Esc Rates”
and enter custom escalation rates (e.g., from a local utility) at cells V9 – W38. IMPORTANT: these
energy price escalation rates must match the type (real or nominal) indicated at 4 . To convert
from nominal to real escalation rates, see 1 above.
11) Current federal fiscal year discount rates, FEMP, OMB Short- and Long-term, are provided for
reference.
12) Comments for each of the input cells are provided (see the small red triangular indicators at the top
right corner of input cells). View these comments by hovering the mouse pointer over the
commented cell.

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Detailed Interface LCC Example 2


Part 2 of 3, ‘LCC0’ Baseline Inputs
Figure 83, User-Friendly LCC Spreadsheet, ‘LCC0’ (Baseline) Inputs Sheet
This is an example of the ‘LCC’ sheet used to describe the baseline case LCC inputs (one LCC sheet for each
alternative, including the baseline case). Items in blue font are user inputs, including: one-time costs for
acquisition, replacement, and overhaul (for yrs 0 thru N up to 25) and annually recurring costs for energy
utilities (up to 2) and maintenance (year 0 entry). All rows sum across and all columns sum down. FEMP
annual energy price escalation rates (vary by year) are displayed (if uniform escalation rates are NOT entered).
The total LCC is shown in the lower right-most cell.

13 22

14 18 19 20

15 17

23 23

16
21

“LCC0 tab” (refer to Figure 83 above):


Data unique to each alternative are input on each of the "LCC" tab sheets. Sheet "LCC0" is assumed to be
the base case. Sheets "LCC1", "LCC2", etc., are for project alternatives. The number of project
alternatives LCC tabs is determined by the number of EEM Wizard alternatives or the number of
Parametric alternatives included in the project. The "LCC0" (baseline) sheet is illustrated in Figure 83
above.

13 Two cells are provided to name the project alternative, e.g., "Base”, “Baseline Design", etc. The label
in the lower cell (“Baseline Design in the example above”) is used on various reports and as the run
name on the project tree in the Results View (see the LCC Results Reporting section below).
14 Enter investment-related costs (e.g., first cost) at year 0, 15 capital replacement costs in future years,
and residual values, if any, at the last year of the analysis. Estimate each in today's dollars, entered
in the year in which they are expected to occur. If a real discount rate is used, there is no need to
inflate these future costs before entering them. If a nominal discount rate is used, each future cost

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must be inflated using equation 3. In the example above, no incremental first cost, replacement cost
or residual value was associated with the baseline case.
17 Enter operations-related capital costs, e.g., non-annually recurring maintenance such as overhauls;
each estimated in today's dollars, entered in the year in which they are expected to occur
18 Enter annual electric costs, estimated in today's dollars. These are entered for the first year only and
assumed to repeat each year thereafter.
19 Enter annual second fuel costs, e.g., natural gas, LPG, etc., estimated in today's dollars. These are
entered for the first year only and assumed to repeat each year thereafter.
20 Enter annually recurring costs, e.g., ongoing operations, maintenance, and repair (OM&R). These are
entered for the first year only and assumed to repeat each year thereafter.
21 The total life-cycle cost is reported in the lower right-most cell. Note that all LCC results are
summed across each row (for each year) and down each column (for each LCC cost component, e.g.,
investment-related, operations-related, utility costs, annually recurring costs).
22 General data from the "General LCC Data" tab sheet are echoed at the top of each LCC sheet, e.g.,
FEMP fiscal year, discount rate, length analysis period, DOE region, and analysis sector.
23 Year-by-year "real" (i.e., differential) energy price escalation rates are displayed for each of the two
energy types. If no user input is provided on the General LCC Data tab for uniform energy price
escalation, then these escalation rates will default to the U.S.DOE projected escalation rates based on
input on the General Data sheet for base year, region, and sector. User input for uniform energy
price escalation rates on the General Data tab sheet will override the DOE escalation values.
Alternately, if a user obtains local energy price projections (e.g., specific to a particular utility) for any
of the analysis years, these may be input on tab “User Defined Fuel Esc Rates” (not shown). Item
(Figure 82) also must be set to “6” (User Defined). IMPORTANT: these user defined escalation
rates must mach the Discount rate type entered at (see Figure 82). To convert from nominal to
real escalation rates, see 1 above.

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Detailed Interface LCC Example 2


Part 3 of 3, ‘LCCn’ (Alternate Case) Inputs
Figure 84, User-Friendly LCC Spreadsheet, ‘LCC1’ (Alternate Case) Inputs Sheet
This is an example of the ‘LCC’ sheet used to describe the design alternate case LCC inputs (one LCC sheet
for each alternative, including the baseline case). The ‘LCC1’ sheet layout illustrated below matches the
‘LCC0’ sheet described in Figure 83 above.

24 33

25 29 30 31

26 28

34 34

27
32

“LCC0 tab” (refer to Figure 84 above):


Data unique to each design alternative are input on each of the "LCC" tab sheets. Sheet "LCC0" is
assumed to be the base case. Sheets "LCC1", "LCC2", etc., are for project alternatives. The number of
project alternatives LCC tabs is determined by the number of EEM Wizard alternatives or the number of
Parametric alternatives included in the project. The "LCC0" (baseline) sheet is illustrated in Figure 83
above.
24 Two cells area provided to name the project alternative, e.g., "Base”, “Baseline Design", etc. The
label in the lower cell (“Baseline Design in the example above”) is used on various reports and as the
run name on the project tree in the Results View (see the LCC Results Reporting section below).
25 Enter investment-related costs (e.g., first cost) at year 0, 26 capital replacement costs in future years,
and residual values, if any, at the last year of the analysis. Estimate each in today's dollars, entered
in the year in which they are expected to occur. If a real discount rate is used, there is no need to
inflate these future costs before entering them. If a nominal discount rate is used, each future cost
must be inflated using equation 3. In the example above, the incremental first cost = $18,850. Since
the discount rate is entered as real (see at Figure 82 above), the replacement cost is entered
without inflating the future cost (i.e., Constant Dollars). No residual value is assumed to be

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associated with the alternative case since the air conditioner equipment is assumed to have the same
life for the baseline and alternative design.
28 Enter operations-related capital costs, e.g., non-annually recurring maintenance such as overhauls;
each estimated in today's dollars, entered in the year in which they are expected to occur (none in this
example).
29 Enter annual electric costs, estimated in today's dollars. These are entered for the first year only and
assumed to repeat each year thereafter.
30 Enter annual second fuel costs, e.g., natural gas, LPG, etc., estimated in today's dollars. These are
entered for the first year only and assumed to repeat each year thereafter.
31 Enter annually recurring costs, e.g., ongoing operations, maintenance, and repair (OM&R). These are
entered for the first year only and assumed to repeat each year thereafter.
32 The total life-cycle cost is reported in the lower right-most cell. Note that all LCC results are
summed across each row (for each year) and down each column (for each LCC cost component, e.g.,
investment-related, operations-related, utility costs, annually recurring costs).
33 General data from the "General LCC Data" tab sheet are echoed at the top of each LCC sheet, e.g.,
FEMP fiscal year, discount rate, length analysis period, DOE region, and analysis sector.
Year-by-year "real" (i.e., differential) energy price escalation rates are displayed for each of the two
energy types. These escalation rates should be identical for all ‘LCC’ sheets.

LCC Results Reports


Comparison Reports

Figure 85:
Reports Tree
(Detailed Interface, Results View)
The reports tree in the Results View lists all
currently available graphical reports in LCC
eQUEST. Reports
In this section, only the LCC-related
Comparison Reports will be reviewed.

Things to Know:
a) Comparison Reports are designed to display results for multiple projects or runs (in the case of
EEM runs or Parametric runs). The maximum number of project or runs varies by report.
b) Select projects or runs for display using Comparison Reports via the Projects Tree (accessible via
the Projects/Runs tab at the lower left hand portion of the Results View screen).

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Figure 86
Life-Cycle Cost Summary
Reports and compares life-cycle costs by cost
component for each of up to eleven projects or runs.

Things to Know:
a) The report above displays results from Example 2, however, any projects
and/or runs for which there are simulation results may be displayed.
b) No default acquisition, replacement, or maintenance costs are provided. If
no user input is provided for these, the LCC results above should be
interpreted as the Net Present Value of life-cycle utility costs and savings.
Example c) If the LCC parameters (e.g., discount rate, energy price escalation, etc.) are
Project/Runs list changed, the results reported above will be automatically recalculated
for Figure 86 without re-running the simulation. If model changes cause the annual
utility costs to change, the simulation must be re-run.
d) The order in which projects and/or runs are selected for inclusion in the
Life-Cycle Cost Summary report will determine the top-down order of
presentation in the report (last selected will be top-most above). Care is
required to ensure costs reflect the total costs of all measures included in
each run.

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Figure 87
Life-Cycle Savings Graph
Compares cumulative Net Savings (i.e., Life-Cycle
Savings) for up to eleven projects or runs.

Example
Project/Runs list
for Figure 87

Things to Know:
a) The graph above displays results from Example 2.
b) No default acquisition, replacement, or maintenance costs are provided. If no user input is
provided for these, the cumulative net savings above will start at year zero at 0$ and the resulting
cumulative net savings should be interpreted as the cumulative NPV of utility savings.
c) eQUEST’s LCC analysis is based on NIST’s BLCC. See eQUEST’s LCC Tutorial for details.
d) If the LCC parameters (e.g., discount rate, energy price escalation, etc.) are changed, the results
reported above will be automatically recalculated without re-running the simulation. If model
changes cause the annual utility costs to change, the simulation must be re-run.
e) The graph above displays multiple runs from the same EEM Wizard run set, however, separate
projects and/or runs may be displayed.
f) If multiple runs are not cascaded (each run independently), costs must be only for each
independent case. If multiple runs are cascaded (each on top of the previous), costs should be
cumulative for each run.

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Figure 88
Life-Cycle Savings Comparison
Compares various Life-Cycle Cost related metrics for
up to seven projects or runs.

Example
Project/Runs list
for Figure 88

Things to Know:
a) For demonstration purposes, the graphs above DO NOT display results from Example 2.
b) The example used for the graph above ran simulations where each subsequent run was made on
top of all previous runs (cascaded), i.e., each new run added an additional measure to a cumulative
package of all previous measures, therefore, these results are for the cumulative performance of
each package of measures.
c) No default acquisition, replacement, or maintenance costs are provided. If no user input is
provided for these, the resulting net savings should be interpreted as the net present value of
utility savings.
d) If multiple runs are not cascaded (each run independently), costs must be only for each
independent case. If multiple runs are cascaded (each on top of the previous), costs should be
cumulative for each run.

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Graphical LCC Results Reports


Parametric Reports
Figure 89
Annual Building Summary (Costs, pg 2 of 2)
Reports annual utility and life-cycle costs and incremental and
cumulative utility and life-cycle savings for up to fourteen runs.

Things to Know:
a) The graph above displays results from Example 2.
b) No default acquisition, replacement, or maintenance costs are provided. If no user input is
provided for these, the resulting net savings should be interpreted as the net present value of
utility savings.
c) Unlike the Life Cycle Cost Summary report (Figure 86), the LCC results in the Annual Building
Summary report do NOT automatically update. If LCC parameters are changed, the simulations
must be re-run for the LCC results in this report to be updated.
d) If multiple runs are not cascaded (each run independently), costs must be only for each
independent case. If multiple runs are cascaded (each on top of the previous), costs should be
cumulative for each run.

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Life-Cycle Costing (LCC) Tutorial Other LCC Measures of Merit

Additional LCC-Based Measures of Merit


SIR and AIRR
In the previous discussion of Life Cycle Costing, three measures of merit have been discussed:
 Life Cycle Cost (LCC)
 Net Savings (NS) or alternatively, Life-Cycle Savings (LCS)
 Simple Payback (SPB), not a LCC-based measure of merit
Two additional LCC-based measures of merit are briefly discussed in this section:
 Saving-to-Investment Ratio (SIR)
 Adjusted Internal Rate of Return (AIRR)

Additional LCC-based Measures of Merit


Savings-to-Investment Ratio, SIR
The SIR is ratio that expresses the relationship between savings and increased investment cost (in present
value). SIR is a variation of the Benefit-to-Cost Ratio for use when benefits occur primarily as reductions
in operation-related costs. Like Net Savings, SIR is a relative measure of performance; i.e., it can only be
computed with respect to a designated base case. This means that the same base date, study period, and
discount rate must be used for both the base case and the alternative.
A project alternative is generally considered economically justified relative to a designated base case when
the SIR exceeds 1.0. This is equivalent to saying that the savings of a design alternative are greater than the
incremental investment costs of the design alternative. If SIR > 1.0 then it is also true that the Net Savings
of the design alternative > 0. Important: when evaluating project alternatives, the alternative with the
lowest LCC is always the most cost effective alternative; however, the design alternative with the lowest
LCC is not generally the alternative with the highest SIR. For efficiency options having diminishing
returns, SIR will suffer similar shortcomings as does SPB (see Figure 35 above). Do NOT use SIR to
select among several design alternatives. The SIR for a project is most useful as a means of ranking that
project along with other independent projects as a guide for allocating limited investment funding.
E  W  OM &R
SIRalt / base  (10)
I 0   Re pl   Res
where:
SIRalt/base = Ratio of operational savings to investment-related additional costs, computed for the
alternative relative to the base case
E = Savings in energy costs (E) attributable to the alternative, Ebase – Ealt
W = Savings in water costs (W) attributable to the alternative, Wbase – Walt
OM&R = Difference in OM&R costs, OM&R base – OM&R alt
I0 = Incremental initial cost (I0) attributable to the alternative, I0alt – I0base
Repl = Difference in capital replacement costs, Repl alt – Repl base
Res = Difference in residual value, Repl alt – Repl base
all amounts are in PV

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Life-Cycle Costing (LCC) Tutorial Other LCC Measures of Merit

Additional LCC-based Measures of Merit


Adjusted Internal Rate of Return, AIRR
The AIRR is a measure of the annual percentage yield from a project investment over the study period,
i.e., AIRR is the hypothetical rate of return on capital invested in efficiency upgrades that will cause the
life-cycle savings attributable to the efficiency upgrades to just equal (balance) the investment costs to
accomplish the efficiency upgrades. Similar to Net Savings and SIR, AIRR is a relative measure of cost
effectiveness that must be computed relative to a designated base case. The same base date, study period,
and discount rate must be used for both the base case and the alternative.
The AIRR is compared against the investor's minimum acceptable rate of return (MARR), the rate of
return on the investors custodial investments which is generally equal to the discount rate used in the LCC
analysis. If AIRR > MARR, the efficiency upgrade is considered economic viable; if AIRR < MARR, the
efficiency upgrade is not a justifiable investment.
You can use the AIRR for the same applications as the SIR. You can use it to decide whether to accept or
reject a single project alternative (relative to a base case) or to allocate a given investment budget among a
number of independent projects. Like the SIR, the AIRR should NOT be used to select among multiple,
competing design alternatives. The alternative with the highest AIRR will NOT generally be the alternative
with the lowest LCC.
In contrast to the conventional Internal Rate of Return (IRR), AIRR explicitly assumes that the savings
generated by a project is reinvested at the discount rate for the remainder of the study period. The IRR
implicitly assumes that interim savings (avoided costs) can be invested at the calculated rate of return on
the entire project. This assumption leads to over-estimating the efficiency investment's yield whenever the
IRR is higher than the MARR.
For these reasons, the AIRR is generally considered to be a more accurate measure of the rate of return
on a capital investment and more consistent with the overall LCC method. In addition, it can be calculated
directly by using a simple mathematical formula, whereas the IRR must be approximated by iteration.

(11)
where:
AIRR = the Adjusted Internal Rate of Return
r = the assumed reinvestment rate, i.e., the MARR (the discount rate)
SIR = The Savings-to-Investment ratio (see equation 10)
N = the number of years in the study period

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Life-Cycle Costing (LCC) Tutorial Summary

Summary
Life-Cycle Costing
Types of Efficiency Investment Decisions
The types of decisions that often arise in energy efficient building design projects include the following.
 Accept/Reject decisions, i.e., to upgrade or not upgrade. Examples include,
o Glass or roof upgrade, HVAC system change
 Optimum Level of Efficiency, i.e., when there is a spectrum of possible efficiency levels,
what level of efficiency is the best? Examples include,
o Roof or wall R-Value, how high to go?
o Cooling kW/ton, how low to go?
 Optimum Combination of Interacting Measures, i.e., it often happens that the number
of worthy efficiency ideas exceeds the available budget. When this happens, how can the
designers identify the optimal subset of all the good ideas? For example,
o Insulation + Glazing + Shading + Daylighting + Lighting + HVAC + Controls,
which three or four among these would provide the best overall package of
measures that will fit within an available budget?
 Funding authorities are often faced with the task of evaluating competing, independent
projects (that may have very different lengths of analysis and other assumptions). How
to rank order independent projects when their periods of analysis may differ? Examples
might include:
o an HVAC replacement for one school versus a lighting retrofit for a hospital.

Analysis Strategies for Each Type of Efficiency Investment Decision


Life-cycle costing offers effective tools (i.e., analysis strategies) for each of the types of energy efficient
building design decisions listed above.
 Accept/Reject decisions, i.e., selecting the better among two alternatives
o Calculate the life-cycle cost (LLC) for each of the alternatives and select the case
having the minimum LCC (may be the base case)
o Calculate the Net Savings (NS) for each of the alternatives and select the case
having the maximum NS (may be the base case)
o Calculate the Adjusted Internal Rate of Return (AIRR) for the alternative case. If the
AIRR exceeds the discount rate (i.e., the minimum acceptable rate of return,
MARR), the alternative case is recommended. If the AIRR ≤ MARR, the base case
is recommended.
o Calculate the Savings-to-Investment Ratio (SIR) for the alternative case. If the SIR
exceeds 1.0 (SIR > 1.0), the alternative case is recommended. If the SIR ≤ 1.0, the
base case is recommended.

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Life-Cycle Costing (LCC) Tutorial Summary

 Optimum Level of Efficiency, i.e., when there is a spectrum of possible efficiency levels,
what level of efficiency is optimal?
o Calculate the life-cycle cost (LLC) for each of the levels of efficiency (e.g., for each
R-Value level or each EER rating). Select the case having the minimum LCC (may
be the base case).
o Calculate the Net Savings (NS) for each of the levels of efficiency (e.g., for each
R-Value level or each EER rating). Select the case having the maximum NS (may be
the base case).
 Optimum Combination (i.e., Packages) of Interacting Measures ― When the number of
worthy efficiency ideas exceeds the available budget, how can the optimal subset of all
the good ideas is best?
o Calculate the life-cycle cost (LLC) for each package of possible measures. Select the
package having the minimum LCC (may be the base case).
o Calculate the Net Savings (NS) for each package of possible measures. Select the
package having the maximum NS (may be the base case).
 Funding authorities who must rank order competing independent projects that have
very different LCC parameters, e.g., differing lengths of analysis periods or differing
discount rates). When these basic LCC parameters are not held constant for all
alternatives, the usual methods (minimum LCC or maximum NS) are not valid (the LCC
of an alternative will tend to increase if the period is extended, therefore to fairly
compare alternatives using LCC, the period of analysis must be the same for each).
o Use SIR to rank order competing independent projects is their periods of analysis or
discount rates differ.

Conclusions
Two points are offered in conclusion.
 To provide value for the life cycle, we must design for the life cycle
 Life-cycle design should consider Life-Cycle Costs

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LCC Tutorial References and Bibliography

References, Bibliography, and Glossary


Life-Cycle Costing
LCC References
[1] Code of Federal Regulations, 10 CFR 436, Subpart A, Methodology and Procedures for Life Cycle Cost
Analysis, effective November 20, 1990. For a full PDF version, http://www.gpoaccess.gov/cfr/index.html
and search for "10CFR436", then search your results (search on the results page) for “Subpart A”. For a
web page that presents each section of 10CFR436, Subpart A, for separate download, go to
http://www.access.gpo.gov/nara/cfr/waisidx_04/10cfr436_04.html
[2] Executive Order 13123, Greening the Government through Efficient Energy Management, 3 June 99 (available
at: http://www1.eere.energy.gov/femp/pdfs/eo13123.pdf). For guidance regarding LCC required by
EO 13123, see the link at http://www1.eere.energy.gov/femp/program/lifecycle.html
[3] Executive Order 13423, Strengthening Federal Environmental, Energy, and Transportation Management, 24
January 07 (for info and download, see: http://www1.eere.energy.gov/femp/about/eo_fedmgmt.html).
[4] ASTM Standards on Building Economics, American Society for Testing and Materials, Fifth Edition,
Philadelphia, PA, 2004. Also, Standard Practice for Measuring Life-Cycle Costs of Buildings and Building Systems,
ASTM Standard E917-05
[5] Fuller, S.K. and S.R. Petersen, Life-Cycle Costing Manual for the Federal Energy Management Program, NIST
Handbook 135, National Institute of Standards and Technology, Gaithersburg, February 1996. For a
PDF version, visit http://www.bfrl.nist.gov/oae/publications/handbooks/135.html. Order a free printed
copy by phone from the DOE Help Desk at (1-800-363-3732).
[6] Fandel, G. & Spronk, J., Multiple Criteria Decision Methods and Applications, Springer-Verlag, Berlin, 1985
[7] Fuller, S.K., Annual Supplement to NIST Handbook 135, Energy Price Indices and Discount Factors for Life-
Cycle Cost Analysis 1999, NISTIR 85-3273-9, National Institute of Standards and Technology,
Gaithersburg, October 1994 (revised annually, available each April). For a PDF version, visit:
http://www.eere.energy.gov/femp/information/download_blcc.cfm#annual_supplement.

LCC Software
[8] BLCC, The NIST “Building Life-Cycle Cost” Program, NISTIR 5185-2, National Institute of Standards and
Technology, Gaithersburg, MD, April 1999. To download a free copy and manual, visit:
http://www.eere.energy.gov/femp/information/download_blcc.cfm
[9] User-Friendly Life-Cycle Costing, Addison, M.S. 1982 (in Excel format) Available via free download at:
http://www.doe2.com.

BLCC Supporting Software


The following programs are often used in support of BLCC. To download a free copy and manual for any
of the programs listed below, visit the FEMP information resources web site:
http://www.eere.energy.gov/femp/information/download_blcc.cfm
EMISS: A Program for Estimating Local Air Pollution Emission Factors Related to Energy Use in Buildings, User’s
Guide and Reference Manual, NISTIR 5704, National Institute of Standards and Technology,
Gaithersburg, MD, October 1995.
ERATES: A Computer Program for Calculating Time-of-Use, Block, and Demand Charges for Electricity Usage,

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User’s Guide and Reference Manual, NISTIR 5186-2, National Institute of Standards and Technology,
Gaithersburg, MD, October 1996.
DISCOUNT--A Program for Discounting Computations in Life-Cycle Cost Analyses, User’s Guide and Reference
Manual, NISTIR 4513, National Institute of Standards and Technology, Gaithersburg, MD, January 1991.

Other References
[10] LEED®, “Leadership in Energy and Environmental Design”, is an environmental building
performance rating developed and provided by the U.S. Green Building Council (USGBC). See
http://www.usgbc.org/ for more information.
[11] California Building Energy Efficiency Standards for Residential and Non-residential Buildings, Title
24. The current standards, the ‘2005’ standards, became effective 1 October 2005. Recent previous
versions were released in 2001, and 1998. See http://www.energy.ca.gov/title24/ for more information.
[12] American Society of Heating Refrigerating and Air Conditioning Engineers (ASHRAE) Standard 90.
Standard 90.1 covers non-residential and high-rise residential buildings. Standard 90.2 covers low-rise
residential buildings. See http://www.ashrae.org/technology/page/548 for more information.
[13] eQUEST, the “Quick Energy Simulation Tool”, is designed to support whole building energy use
analysis. It is based on an enhanced version of DOE-2 that through the use of ‘Building Design Wizards’
is easy to use yet yields sophisticated building energy analysis in an affordable level of effort. eQUEST is
available as freeware via http://www.energydesignresources.com/ or http://www.doe2.com/.
[14] Building Owners and Managers (BOMA) Experience Exchange Report, published annually, see
http://www.boma.org/
[15] 2003 ASHRAE Handbook: HVAC Applications, Chapter 35, American Society of Heating,
Refrigerating and Air Conditioning Engineers (ASHRAE), Atlanta, 2003
[16] Fuller, S.K., Guidance on Life-Cycle Cost Analysis Required by Executive Order 13123, National Institute of
Standards and Technology, Gaithersburg, April 2005 (available at:
http://www1.eere.energy.gov/femp/pdfs/lcc_guide_05.pdf).

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Glossary
Life-Cycle Costing
The following is based on the glossary provided in NIST Handbook 135, Life-Cycle Costing Manual for the
Federal Energy Management Program [5] by S. Fuller and S. Pedersen (available at
http://www1.eere.energy.gov/femp/information/download_blcc.html).
Adjusted Internal Rate of Return (AIRR) — Annual yield from a project over the Study Period, where
reinvestment of interim returns (i.e., avoided utility costs) is assumed to be made at the discount rate, i.e.,
at the minimum acceptable rate of return (MARR). Contrast AIRR with IRR (Internal Rate of Return)
where IRR implicitly assumes the reinvestment of interim returns (avoided costs) is made at the IRR rate.
In the context of energy efficient building design, the savings are actually avoided utility costs, hence it is
more reasonable to assume these avoided costs would reside in a custodial investment earning a return
equal to the MARR (equal to the discount rate).
Alternative Building System — The installation or modification of a building system intended primarily
to reduce operating-related costs, including energy and/or water costs.
Annually Recurring Costs — Those costs which are incurred each year in an equal amount throughout
the Study Period, or which change from year to year at a known rate.
Annual Value (Annual Worth) — The time-equivalent value of past, present, or future cash flows
expressed as an Annually Recurring Uniform amount over the Study Period.
Annual Value (Annual Worth or Uniform Capital Recovery) Factor — A discount factor by which a
present dollar amount may be multiplied to find its equivalent Annual Value, based on a given Discount
Rate and a given period of time.
Base Case — The building system against which an Alternative Building System is compared.
Base Date — The beginning of the first year of the Study Period, generally the date on which the Life-
Cycle-Cost analysis is conducted.
Base Year — The first year of the Study Period, generally the year in which the Life-Cycle-Cost Analysis
is conducted.
Base-Date Price — The price of a good or service as of the Base Date.
Capital Costs (Capital Investment Costs) — Costs which are paid from capital funding accounts rather
than from agency operating funds. For projects subject to the FEMP Rules, these include initial
investment, capital replacements, and residual values.
Cash Flow — The stream of costs and savings (expressed for the purpose of this requirement in
Constant Dollars) resulting from a project investment.
Compound Interest Factors or Formulas — See Discount Factors or Formulas.
Constant Dollars — Dollars of uniform purchasing power tied to a reference year (usually the Base Year)
and exclusive of general price inflation or deflation.

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Cost Effective — The condition in which an Alternative Building System saves more than it costs over
the Study Period, where all Cash Flows are Discounted to their equivalent value at a common point in
time.
Current Dollars — Dollars of non-uniform purchasing power, including general price inflation or
deflation, in which actual prices are stated. For example, when estimating a future one-time cost such as
equipment replacement cost, if Current Dollars are used (must be used with nominal rates), the
replacement cost in today’s dollars must be adjusted (increased) to account for inflation When using
Constant Dollars (and real rates), no inflation adjustment would be necessary. With zero inflation, current
dollars are identical to constant dollars.
Demand Charge — That portion of the charge for electric service based on fixed plant, equipment, and
transmission costs associated with providing maximum required capacity.
Differential Cost — The difference in the costs of an Alternative Building System and the Base Case.
Differential Escalation Rate — See Real Escalation Rate
Discount Factor — A multiplicative number used to convert a Cash Flow occurring at a given point in
time (usually in the future) to its equivalent value at a common point in time (usually the Base Date).
Discount Formula — An expression of a mathematical relationship which enables the conversion of
dollars at a given point in time to their equivalent amount at some other point in time.
Discount Rate — The rate of interest, reflecting the investor's Time Value of Money (or opportunity
cost), that is used in Discount Formulas or to select Discount Factors which in turn are used to convert
("discount") Cash Flows to a common time. Real Discount Rates reflect Time Value of Money apart from
changes in the purchasing power of the dollar and are used to discount Constant Dollar Cash Flows;
Nominal Discount Rates include changes in the purchasing power of the dollar and are used to discount
Current Dollar Cash Flows.
Discounted Payback (DPB) Period — The time required for the cumulative savings from an
investment to pay back the Investment Costs and other accrued costs, taking into account the Time Value
of Money.
Discounting — A technique for converting Cash Flows occurring over time to time-equivalent values, at
a common point in time, adjusting for the Time Value of Money.
Disposal Cost — See Residual Value
Economic Life — That period of time over which a Building or Building System is considered to be the
lowest-cost alternative for satisfying a particular need.
Energy Conservation Measure — An installation or modification of an installation in a Building which
is primarily intended to reduce energy consumption cost, or allow the use of a renewable energy source.
Energy Cost — The annual cost of fuel or energy used to operate a building or building system, as billed
by the utility or supplier (including Demand Charges, if any). Energy Costs are incurred during the Service
Period only. Energy consumed in the construction or installation of a new building or building system is
not included in this cost.
Escalation Rate — The rate of change in price for a particular good or service (as contrasted with the
Inflation Rate, which is for all goods and services). See Real Escalation Rate and Nominal Escalation Rate.

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Federal Government — The U.S. Government.


Future Value — The time-equivalent value of past, present, or future Cash Flows expressed as of some
future point in time.
Incremental Costs — An incremental cost is the additional cost associated with an energy efficient
upgrade. It is calculated as high efficiency building option cost minus the baseline building equipment cost
for the stand efficiency option. Where the cost of the high efficiency design or equipment alternative
exceeds the cost of the less efficient baseline design or equipment option, the incremental cost will be a
positive number. Where the cost of the less efficient baseline design or equipment option exceeds the cost
of the high efficiency design or equipment alternative, the incremental cost will be a negative number.
When incremental costs are used, they are normally only entered for the alternative case(s), i.e., the
incremental costs for the baseline case are considered to be zero.
Inflation — A rise in the general price level, i.e., the price level for all goods and services. (A negative
change in the general price level is called "Deflation.")
Initial Investment Costs — The initial costs of design, engineering, purchase and installation, exclusive
of "Sunk Costs," all of which are assumed to occur as a lump sum at the beginning of the Base Year or
phased in during the Planning/Construction Period.
Internal Rate of Return — Annual yield from a project over the Study Period, i.e., the compound rate of
interest which, when used to discount Cash Flows of an Alternative Building System, will result in zero
Net Savings (Net Benefits).
Investment Costs — The Initial Investment Cost of a building or building system and capital
Replacement Costs, less Residual Value, plus Disposal Cost, if any.
Life-Cycle Assessment (LCA) — LCA is a technique to assess the environmental aspects and potential
impacts associated with a product, process, or service, by: compiling an inventory of relevant energy and
material inputs and environmental releases; evaluating the potential environmental impacts associated with
identified inputs and releases; interpreting the results to help designers identify more sustainable design
solutions.
Life-Cycle Cost (LCC) — The total discounted dollar costs of owning, operating, maintaining, and
disposing of a building or building system over the appropriate Study Period (see Life-Cycle Cost
Analysis). Section 707 of Executive Order 13123 defines life-cycle costs as “…the sum of present values
of investment costs, capital costs, installation costs, energy costs, operating costs, maintenance costs, and
disposal costs over the life-time of the project, product, or measure.”
Life-Cycle Cost Analysis (LCCA) — A general approach to economic evaluation that encompasses
several related economic evaluation measures, including Life-Cycle Cost (LCC), Net Benefits (NB) or Net
Savings (NS), Savings-to-Investment Ratio (SIR), and Adjusted Internal Rate of Return (AIRR), all of
which take into account all dollar costs related to owning, operating, maintaining, and disposing of a
project over the appropriate Study Period. From Ref 16: Life-cycle cost analysis (LCCA) is an economic
method of project evaluation in which all costs arising from owning, operating, maintaining, and disposing
of a project are considered important to the decision. LCCA is well suited to the economic evaluation of
design alternatives that satisfy a required performance level but may have differing investment, operating,
maintenance, or repair costs, and possibly different life spans. It is particularly relevant to the evaluation of

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investments where high initial costs are traded for reduced future cost obligations. NOTE: LCCA should
not be confused with LCA, Life-Cycle Assessment (LCA, see above).
Liquid Petroleum Gas (LPG) — Propane, butane, ethane, pentane, or natural gasoline.
Measures of Economic Evaluation — The various ways in which project cash flows can be combined
and presented to describe a measure of project cost effectiveness. The measures used to evaluate FEMP
projects are Life-Cycle Cost (LCC), Net Savings (NS), Savings-to-Investment Ratio (SIR), Adjusted
Internal Rate of Return (AIRR). Discounted Payback (DPB) and Simple Payback (SPB) are measures of
evaluation not fully consistent with the LCCA but are used as supplementary measures in some federal
programs.
Modified Uniform Present Value (Worth) (UPV* or UPW*) Factor — A discount factor used to
convert an annual amount, changing from year to year at a given escalation rate, to a time-equivalent
Present Value. The FEMP UPV* Factor indicates a discount factor published in the Annual Supplement
to Handbook 135 for use in computing present-value energy costs, based on energy price escalation rates
provided for this purpose by DOE's Energy Information Administration.
Mutually Exclusive Projects — Projects where the acceptance of one precludes acceptance of the
others. Examples are whether to use single-glazing, double glazing or triple-glazing for a window; or R11,
R19, or R30 levels of insulation in an attic.
Net Savings (NS) or Net Benefits (NB) — Time-adjusted savings or benefits less time adjusted
differential costs taken over the Study Period, for an Alternative Building System relative to the Base Case.
Nominal Discount Rate — The rate of interest (market interest rate) reflecting the time value of money
stemming from both inflation and the real earning power of money over time.
Nominal Escalation Rate — The projected annual rate of change in actual (market) prices for a
particular good or service.
Operational Costs — See Operating, Maintenance, and Repair Costs
Operating, Maintenance, and Repair (OM&R) Costs — Non-investment costs related to the use of a
building or building system, including energy and water costs.
Planning/Construction (P/C) Period — The period beginning with the Base Date and continuing up
to the Service Date during which only Initial Investment Costs are incurred.
Present Value (Present Worth) — The time-equivalent value of past, present or future Cash Flows as of
the beginning of the Base Year.
Present Value (Present Worth) Factor — A discount factor by which a future dollar amount may be
multiplied to find its equivalent Present Value as of the Base Date. Single Present Value Factors are used
to convert single future amounts to Present Values. Uniform Present Value Factors and Modified Present
Value Factors are used to convert Annually Recurring amounts to Present Values.
Real Discount Rate — The rate of interest reflecting the portion of the time value of money attributable
to the real earning power of money over time and not to general price inflation.
Real Escalation Rate — The difference between the rate of annual price change for a particular good or
service and the rate of general Inflation.

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Renewable Energy — Energy obtained from sources that are essentially inexhaustible (unlike, for
instance, fossil fuels of which there is a limited supply). Renewable sources of energy include wind energy,
geothermal energy, hydroelectric energy, photovoltaic and solar energy, biomass, and waste.
Replacement Costs — Capital costs incurred to replace the project during the Study Period. Sometimes
referred to as Capital Replacement Costs. Replacement costs as used in this handbook do not include the
cost of replacing system components that are paid out of current operating budgets; these are considered
to be Operation-Related Costs.
Residual Value — The estimated value, net of any Disposal Costs, of any building or building system
removed or replaced during the Study Period, or remaining or recovered through resale or reuse at the end
of the Study Period (also called Resale Value, Salvage Value, or Retention Value).
Retrofit — The installation of an Alternative Building System into an existing building.
Risk Attitude — The willingness of decision makers to take chances or to gamble on investments of
uncertain outcome. Risk attitudes are generally classified as risk-averse, risk-neutral, or risk-taking.
Risk Exposure — The probability of investing in a project whose economic outcome is less favorable
than what is economically acceptable.
Salvage Value — See Residual Value
Savings-to-Investment Ratio (SIR) — A ratio of economic performance computed from a numerator
of discounted energy and/or water savings, plus (less) savings (increases) in other operation-related costs,
and a denominator of increased Initial Investment Costs plus (less) increased (decreased) Replacement
Costs, net of Residual Value (all in present-value terms), for an Alternative Building System as compared
with a Base Case.
Sensitivity Analysis — Testing the outcome of an evaluation to changes in the values of one or more
system parameters from the initially assumed values.
Service Date — The point in time during the Study Period when a building or building system is put into
use, and operation-related costs (including energy and water costs) begin to be incurred.
Service Period — The period of time starting with the Service Date and continuing through the end of
the Study Period.
Simple Payback (SPB) Period — A measure of the length of time required for the cumulative savings
from a project to recover its Initial Investment Cost and other accrued costs, without taking into account
the Time Value of Money. SPB is usually measured from the Service Date of a project.
Single Present Value (Worth) (SPV or SPW) Factor — The discount factor used to convert single
future benefit and cost amounts to Present Value.
Study Period — The length of the time period covered by the economic evaluation. This includes both
the Planning/Construction Period and the Service Period.
Sunk Costs — Costs which have been incurred or committed to prior to the Life-Cycle Cost analysis.
These costs should not be considered in making a current project decision.
Time-of-Use Rate — Charges for service (usually electricity) that vary from period to period, based on
the cost of supplying the service during that period.

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Time-Value of Money — The time-dependent value of money, reflecting the opportunity cost of capital
to the investor during that time period. See Discount Rate.
Uniform Present Value (Worth) (UPV or UPW) Factor — The discount factor used to convert
uniform annual values to a time-equivalent Present Value.
Useful Life — The period of time over which a Building or Building System continues to generate
benefits or savings.

Appendix A, Comparing Results with BLCC


Building Life-Cycle Cost Program
excerpted from page 7 above… The Federal Energy Management Program (FEMP) of the U.S. Department of
Energy (DOE) has codified the rules for performing LCC analysis of investments for energy and water
conservation and renewable energy resource projects in the Code of Federal Regulations, 10 CFR 436,
Subpart A, "Methodology and Procedures for Life-Cycle Cost Analysis" [1]. These rules apply to both new
and existing buildings owned or leased by the Federal Government. These economic evaluations are
required by the Federal Energy Management Improvement Act of 1988 (Public Law 100-6 15) and the
National Energy Conservation Policy Act (NECPA) of 1978 (P.L. 95-6 19). More recently, these
requirements have been renewed in Executive Order 13123 [2], "Greening the Government through
Efficient Energy Management", issued on 3 June 1999 (available online) and Executive Order 13423 [3],
“Strengthening Federal Environmental, Energy, and Transportation Management”, issued on 24 January
2007 (also available online).
At the direction of FEMP, and drawing on standards work by the American Society for Testing and
Materials (ASTM) [4], the National Institute of Standards and Technology (NIST) has developed
standardized LCC nomenclature and conventions so that the buildings industry can speak one "language"
when conducting LCC analysis. These are documented in NIST Handbook 135, Life-Cycle Costing Manual
for the Federal Energy Management Program [5] by S. Fuller and S. Pedersen (available at
http://www1.eere.energy.gov/femp/information/download_blcc.html).
The centerpiece to NIST's LCC contributions is a computer program called BLCC, the Building Life-Cycle
Cost Program [8], which automatically applies the FEMP/NIST LCC conventions in LCC analyses. BLCC
is a stand-alone computer program available as freeware for both Windows™ and DOS, downloadable via
the link cited above.
The life-cycle cost procedures illustrated in this Tutorial and implemented into the LCC spreadsheet [9]
and into eQUEST [13] are based on BLCC’s procedures. Functional and usability differences between the
LCC spreadsheet, as compared with BLCC, are discussed on page 28 above. These same differences also
apply to a comparison between BLCC and eQUEST. This appendix briefly illustrates a comparison of
numerical results between the tabular LCC procedures, the LCC spreadsheet and BLCC.
The key issue affecting agreement in results between BLCC and the LCC spreadsheet (or eQUEST) is the
method of compounding used in the programs. BLCC5, the Windows version of BLCC, performs
continuous compounding whereas BLCC4, the DOS version of BLCC (still supported and updated with
each years new energy price escalation rates) performs discrete (annual) compounding. The LCC
spreadsheet (and eQUEST) also performs discrete annual compounding. Hence results from the LCC
spreadsheet (and eQUEST) typically agree only within four of five significant digits of BLCC5 (Windows)
while the LCC spreadsheet and eQUEST results agree to eight+ digits of BLCC4 (DOS). See Figures A.1
through A.4 on the following page.

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Figure A.1, BLCC5, Inputs Matching Tabular Data Example 5


Inputs for this BLCC5 example match those used in Tabular Data Example 5. Compare Figures 22-27 and
Figures 28-30.

Use the tabs to


specify attributes
of each
component and
to add or delete
components
Use the
component ‘tree’
to navigate to
selected screens

 End-of-year cash flow


 Constant Dollars
 3.0% Real Discount
rate

 $62,500 annual
electric cost

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Figure A.1, BLCC5, Inputs Matching Tabular Data Example 5, continued


Inputs for this BLCC5 example match those used in Tabular Data Example 5. Compare with Tabular Data
Example 5 results illustrated in Figures 22-27 (tabular procedure) and Figures 28-30 (LCC spreadsheet)

 $75,000 initial
cost
 15 year expected
life

 $65,000
replacement cost
at year 15
 15 year expected
life

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Figure A.1, BLCC5, Inputs Matching Tabular Data Example 5, continued


Inputs for this BLCC5 example match those used in Tabular Data Example 5. Compare with Tabular Data
Example 5 results illustrated in Figures 22-27 (tabular procedure) and Figures 28-30 (LCC spreadsheet)

 $1,000 annually
recurring
maintenance
cost

Figure A.2, BLCC5, Outputs, Compare with Tabular Data Example 5


Outputs from BLCC from inputs illustrated in Figure A.1 above. Compare with Tabular Data Example 5.
results illustrated in Figures 22-27 (tabular procedure) and Figures 28-30 (LCC spreadsheet).

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Figure A.3, BLCC4, Outputs, Compare with Tabular Data Example 5
Outputs from BLCC4 using inputs matching those used in Figure A.1 above. Compare with Tabular Data
Example 5 results illustrated in Figures 22-27 (tabular procedure) and Figures 28-30 (LCC spreadsheet).

Figure A.4, Comparison of Results, Tabular Data, LCC Spreadsheet,, BLCC4, BLCC5
The table below compares outputs from four methods used to calculate Example 5, tabular procedure (see
Figures 22-27), the LCC spreadsheet (see Figures 28-30), BLCC version 4 (see Figure A.3), and BLCC
version 5 (see Figure A.2).
LCC
Tabular Spreadsheet BLCC4 BLCC5
High Eff Package Rooftop HVAC
+ Initial Cost: $75,000 $75,000 $75,000 $75,000
+ PV replace cost: $41,730 $41,721 $41,721 $41,720
– PV residual value: $10,357 $10,245 $10,245 $10,245
+ PV electricity: $1,001,250 $1,001,001 $1,001,001 $1,001,072
+ PV annual maint: $17,410 $17,413 $17,413 $17,414
+ PV non-annual maint: $0 $0 $0 $0
LCC: $1,125,033 $1,124,890 $1,124,890 $1,124,961

High Efficiency Central Plant


+ Initial Cost: $120,000 $120,000 $120,000 $120,000
+ PV replace cost: $0 $0 $0 $0
– PV residual value: $0 $0 $0 $0
+ PV electricity: $929,160 $928,929 $928,929 $928,994
+ PV annual maint: $8,705 $8,707 $8,707 $8,707
+ PV non-annual maint: $6,490 $6,489 $6,488 $6,489
LCC: $1,064,355 $1,064,125 $1,064,125 $1,064,190

Net Savings $60,678 $60,765 $60,765 $60,771

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