4.5
4.2.1 Life-Cycle Cost Net Savings
Life-cycle cost net savings is a robust cost-benefit metric that sums the costs and benefits of a code
change over a specified period. Sometimes referred to as net present value analysis or engineering
economics, LCC analysis is a well-known approach to assessing cost-effectiveness. Because the key
feature of LCC analysis is the summing of costs and benefits over multiple years, it requires that cash
flows in different years be adjusted to a common year for comparison. This is done with a discount rate
that accounts for the time value of money. Like most LCC implementations, DOE’s method sums cash
flows in year-zero dollars, which allows the use of standard discounting formulas. Cash flows adjusted to
year zero are termed present values. The procedure used for discounting is taken directly from the FEMP
cost-effective methodology for federal buildings
3
as described in NIST Handbook 135 (Fuller and
Petersen 1995). In actual practice, these procedures have been implemented in a spreadsheet format to
produce identical results, rather than using the manual worksheets included in NIST Handbook 135 or the
FEMP Building Life Cycle Cost computer program.
4
Formulas shown in Table 4.4 are taken from or
adapted directly from formulas in NIST Handbook 135. Where situations are not covered by the FEMP
cost-effective methodology, DOE will apply concepts from two ASTM International standard practices,
E917 (ASTM 2010a) and E1074 (ASTM 2010b), or as outlined in the ASHRAE HVAC Applications
Handbook (ASHRAE 2011). The resultant procedure is both straightforward and comprehensive and is
in accord with the methodology recommended and used by NIST.
5
Present values can be calculated in either nominal or real terms. In a nominal analysis, all
compounding rates (discount rate, mortgage rate, energy escalation rate, etc.) include the effect of
inflation, while in a real analysis inflation is removed from those rates. The two approaches are
algebraically and economically equivalent, and for commercial analysis DOE intends to use a real
analysis for Scenario 1. In Scenario 2, nominal discounting is applied for constant future cash flows such
as loan payments and related tax deductions, while a private sector real discount rate is applied to account
for inflation on items such as maintenance and replacement costs, property taxes, and energy savings.
6
This approach is equivalent to a nominal analysis. Scenario 3 is a nominal analysis from a private-
ownership viewpoint.
LCC is defined formally as the present value of all costs and benefits summed over the period of
analysis. For Scenarios 1 and 2, DOE will typically use NPV of savings as the commercial test metric,
which is one of three equivalent ways to quantify LCC:
• Calculate the LCC of both options, including all costs (first, maintenance, replacement, and energy),
independently and compare them. In this case, the lower LCC would be the preferable alternative,
and the case representing the new code would need a lower LCC than the old code case to be
considered cost-effective.
• Calculate the present value of the incremental costs and subtract the present value of the incremental
benefits. The result is the LCC of the change, expressed as a cost. In this case, the net cost should be
negative to justify the change.
3
See 10 CFR part 436, subpart A, “Methodology and Procedures for Life Cycle Cost Analyses,” Jan. 1, 2004.
4
See http://www1.eere.energy.gov/femp/information/download_blcc.html.
5
For a detailed discussion of LCC and related economic evaluation procedures specifically aimed at private sector
analyses, see Ruegg and Petersen 1987.
6
Using a real discount rate to discount uninflated future values is equivalent to using a nominal discount rate to
discount inflated future values.