Research Study on Life Cycle Costing

Research Study on Life Cycle Costing

1. EXECUTIVE SUMMARY

The research reports a keen assessment and comparison of two brand new vehicles after a 5-year Life Cycle Costing. Notably, life cycle costing ensures that the decision-making process for selecting the optimum cost-effective vehicle suitable for family use within the determined period is easy. The family achieves this through the analysis, making several assumptions, with elaboration and breakdown of all expenses and rate essential in the costing and an illustrative Life Cycle costing cash flow for each model.

Considering Honda VTi-LX Hybrid and VTi-LX Petrol, Honda VTi-LX Hybrid is slightly expensive, but both are suitable for family use and got similar operational costs. Comparatively, petrol’s resale value depreciates slower than the hybrid, hence having a higher resale value. Therefore, according to LCC analysis, after keen considerations on costs and revenue, Honda VTi-LX Petrol is cheaper than Honda VTi-LX Hybrid.

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2. INTRODUCTION

The life cycle costing technique is critical for economic evaluation, which accounts for all relevant capital and operational costs. Life Cycle costing goes ahead to bring all aftertime costs to a tailored current single value.

This report has a complete Life Cycle Costing for 5-years comparing two vehicles Honda VTi-LX Hybrid and VTi-LX Petrol. Both are automated gears with similar specifications; the major difference is that one is Petrol-powered while the other uses hybrid technology.

This report entails several assumptions based on the critique, an elaboration on funds flow giving all expected costs to current value, a well-detailed structure on all accompanying costs and an exact Life Cycle Costing for the two vehicles. Principally, after considering all costs and factors, the analysis determines which car has the lowest NPV.

3. PRESUMPTIONS

This assumption has been made to determine variables reviewed in this Life Cycle Costing analysis.

• Based on Life Cycle Costing, this report will be carried out using the Net present value criteria for 5-years.
• The purchase is to be facilitated by a 5-year car loan covering all drive away costs.
• The family enjoys travelling to various destinations for holidays; this new vehicle will be a spacious back model to give more room for luggage and accommodate everyone comfortably.
• The report will compare these two vehicles in terms of their specific features and retail market price.
• The model is a family vehicle meant for private use; therefore, this report will not consider tax implied if meant for Public Service.
• The family intends to resell the vehicle after 5-years, and the report will give an estimated resell value with the help of Life Cycle Costing analysis.
• LCC will not consider licenses fees, measures and requirements that the car will have incurred over 5-years.
• The family will cover insurance on an annual basis for a period of 5-years.
• Before licensing, the vehicle will have to be inspected.
• According to Australian vehicle licensing, there will be a secondary third party indemnification, also known as car injury financial protection.
• Previously, the family records no accident cases; thus, this analysis assumes there will be no involvement in accidents throughout the period in which they have the car.
• This report will not take into consideration technical repairs like tyre replacement. Otherwise, the calculations will consider,
•  Operational costs annually.
• The loan will be at a constant rate of 6% per annum in terms of capital cost.
• Fuel prices are also assumed to be the same for the consecutive five years,
• It is presumed that no calamities or unexpected occurrence will have an effect on the Life CC model

4. DISCOUNTED CASHFLOW TECHNIQUE

The life cycle pricing for these two vehicle models analyses will use the (NPV) technique to integrate all the revenues and expenditures over the five years to a current time base. Ideally, the process involves several steps. First, the selection of a markdown rate depending on the opportunity cost. Ideally, the discount rate selection in this step will apply the car loan interest comparing rate (6%) that is the price of the car as the Nominal IR (n). Essentially, the nominal IR comprises two differing components. The first component is inflation (i), while the second is the rate of return (RR). In this case, the life cycle costing is inconsiderate of the inflation rate within the money flow assessments (Hasan et al., 2021). Therefore the discount rate excludes the inflation rate too. Hence the markdown is calcul