ANALYSIS
Option
Initial Capital Costs ($/m2)
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
NPV
Carpet
35
$13.64
$12.40
$11.27
$10.25
$9.31
$8.47
$7.70
$7.00
$6.36
$19.28
141
Vinyl
75
$4.55
$4.13
$3.76
$3.42
$3.10
$2.82
$2.57
$2.33
$2.12
$1.93
106
Ceramic Floor Tiles
120
$1.82
$1.65
$1.50
$1.37
$1.24
$1.13
$1.03
$0.93
$0.85
$0.77
132
In the above example, the vinyl has a higher initial capital cost than the carpet but is the cheapest option based on a simple 10-year analysis using NPV techniques. The choice of discount rate can change the outcome of an analysis. The choice of discount rate can be determined based on various methods. The most common method of determining the discount rate is the interest rate for Government borrowings for the term of the analysis. This is commonly the long-term bond rate which, as at the time of writing, is 2.73%.
Operation Costs Carpet
$15/m2/year
Cleaning costs each year
Vinyl
$5/m2/year
Cleaning costs each year
Ceramic Floor Tiles
$2/m2/year
Cleaning costs each year
$35/m2
Replacement cost in year 10
Repair Costs Carpet
CONCLUSION The preparation of a whole-of-life costing has several benefits. Whole-of-life costing provides a methodical technique for the analysis of the total project costs over a buildings lifetime. It allows decisions to be made on verifiable amounts and not just assumptions. It is a forecasting tool and a measurement tool of actual versus forecast costs. As life cycle costs can be two to three times that of the original capital costs, they need to be accounted for in the forecast budgets for any organisation that holds assets over the long term.
A methodical analysis of project options
An accountable and transparent analysis
Planning of future costs and analysis against actual costs
Part 2 of Whole -of-life Costing will feature in the December edition of The Building Economist.
Potential to select materials and designs on their best overall life cost
Securing funding for Government projects
This article has been written by Andrew Park, Associate Director, mbm- independent advisors to the Australian property and infrastructure sectors.
THE BUILDING ECONOMIST - SEPTEMBER 2018 - 45
