Life-Cycle Cost Analysis: A Smart Financial Decision-Making Tool

Did you know that many types of electricity- and gas-using equipment found in commercial buildings have lifetime operations costs that are higher than their purchase prices? You might be tempted to consider only the sticker price when purchasing new equipment or retrofitting your building’s shell. However, you may be able to realize substantial energy and cost savings in the long run if you consider the lifetime utility and maintenance costs of a purchase. This well-established practice is known as life-cycle cost analysis and is used by businesses and institutions of all sizes.

Life-cycle cost analysis allows you to compare the lifetime expenses of two or more options for a given building system. These lifetime expenses typically include the cost of owning, operating, maintaining, and disposing of the system. Future costs need to be converted (or “discounted”) to their present values to account for energy, labor, and parts price escalation (inflation) as well as for the time value of money—the idea that a dollar received today is worth more than a dollar received in the future. The option with the lowest life-cycle cost is the most economical choice.

Consider, for example, the decision of whether or not to install light-emitting diode (LED) exit signs to replace conventional exit signs. Should you make a switch? You can use life-cycle cost analysis to make the optimal financial decision.

A life-cycle cost analysis of this question yields the results shown in the table. Though replacing the conventional signs with LED signs requires a $570 outlay up front, over the course of 10 years this action saves $2,757. If you had not used life-cycle cost analysis and simply looked at up-front costs, you likely would have missed this substantial cost-saving opportunity.

This calculation was done with a simple Microsoft Excel–based calculator available free of charge from Energy Star. This calculation was done with a simple Microsoft Excel–based calculator available free of charge from Energy Star. You can access this calculator and many others—including calculators for compact fluorescent lamps, HVAC equipment, and commercial kitchen equipment—on the US Small Business Administration’s Energy Saving Calculators from Energy Star website. Additional calculators for computers and electronics, ice machines, residential appliances, and water fixtures can be found on the Energy and Cost Savings Calculators for Energy-Efficient Products website from the US Office of Energy Efficiency & Renewable Energy. For larger retrofit projects, request that your contractor complete life-cycle cost analyses of the alternatives. Another option is to use the US Department of Energy (DOE)’s free Building Life-Cycle Cost Program, which can be downloaded from the DOE website. The Investment Analysis chapter of the Environmental Protection Agency’s Building Upgrade Manual is another source for guidance.

Life-cycle cost analysis is a smart business practice that you can use to better inform your capital purchases and reduce your utility bills.

Life-cycle cost analysis of conventional versus LED exit signs
You’ll find that Energy Star’s easy-to-use life-cycle cost calculators will produce simple results such as these, and they could help you save thousands of dollars.
Content last reviewed: 
06/19/2013