Asset life cycle analysis

Agencies that want to get the most out of their budgets will want to consider that the cost of owning an asset isn't limited to its purchase price. Depending on the asset type, owning and operating the asset will involve a wide variety of additional costs.

A vehicle is an obvious example, because every car owner is familiar with the costs of owning a car: registration, insurance, fuel, maintenance, and so on. If all of these costs are considered, an inexpensive car might cost more to own over a number of years than a car with a higher purchase price. For example, a hybrid has a higher purchase price, but fuel costs will be lower over the life of the car.

But how much lower? Are the savings greater than the difference in the purchase price? Asset life cycle analysis helps you answer these questions by projecting all of the costs you expect to incur over the life of an asset.

The analysis is mostly a process of listing all of the expected costs of owning and operating an asset and then adding them up. The one complication is that future costs must be converted to present values. Because money tends to lose value over time, all future costs must be discounted so that their present values can be  compared. The net present value (NPV) of each projected cost (PC) is calculated using the equation below, where r is the discount rate and n is the number of years in the future. The discount rate is the rate at which money is expected to lose value over time.

NPV = PC/(1+r)n

For example, suppose the discount rate is 5%. In that case, a projected cost of $1,000.00 to be incurred 3 years from now has a net present value of:

$1,000.00/(1.05)3 = $863.84

Infor Public Sector breaks down projected costs by type and year. Different types of costs are represented by cost items, which are organized into cost groups for easier management. For example, a Vehicle Maintenance cost group would include code items such as oil, tire, and so on.

Each course of action you want to consider is represented by a scenario that projects one or more cost groups over a specified number of years. For each cost item, you can record a projected cost for each year covered by the scenario. Infor Public Sector then calculates the NPV of each projected cost, and sums all of these values to calculate the total NPV for the scenario. By comparing NPVs for different scenarios, you can determine which is most cost-effective.

For example, a city might want to determine the best material to use for the sidewalks in a new park. In comparing the different possibilities, such as concrete, asphalt, and gravel, the city will consider not only the installation costs, but also the projected maintenance, operation, and disposal costs.

In Infor Public Sector, the city can create as many different scenarios as it wants to consider, each covering a certain number of years. For example, one scenario might consider concrete sidewalks, another might consider gravel, and a third might consider a combination. There might also be different scenarios for different sidewalk widths, lengths, locations, and so on.

For each scenario, the city can then add the correct cost groups for the expected costs. Some cost groups and cost items will be included in every scenario, and others will vary depending on the details. For example, each scenario in the sidewalk analysis will include a maintenance cost group, but the actual maintenance cost items will vary somewhat depending on the material.

After all the cost items are recorded, the city can compare the net present value of each scenario and make the best decision. By reducing a set of future costs to a single present value, asset life cycle analysis helps the city get the most for its money.