Life Cycle Costing - Assignment Example

LIFE CYCLE COSTING Name: Course: Instructor: Institution: Date of Submission: Word Count: 1778 words LIFE CYCLE COSTING EXECUTIVE SUMMARY This report undertakes to carry out a lifecycle costing calculation of a 7-seater motor vehicle for family use. The report will use the method of determining the initial costs incurred in the purchase of the motor vehicle and subject this price to other calculations such as the Net Present Value, depreciation and the discount rates. Essentially, this report seeks to conduct an evaluation based on a set of assumptions that shall be outlined below. The data presented here takes into consideration the all the necessary LCC tabulations and further describes the data used in the calculation and sourcing of the data. INTRODUCTION. The use of LCC technique has been done extensively in the estimation of the ownership costs. This technique serves particular importance especially in quantifying the costs of assets. Further, Life cycle costing aids in the decision making process whereby it provides the breakdown structure of projects and identifies the various sources of the data sources as well as the probable uncertainties that may arise with the use of the data (Domansky, 2006). In this particular case of the motor vehicle, the assessment shall involve the consideration of the various costs such as the initial, ownership, and operating costs. The initial cost is basically the cost incurred in the purchase of the motor vehicle. Similarly, the ownership cost involves the costs incurred in the maintenance of the vehicle. This is going to involve the cost of replacing car parts such as tyres and the costs incurred in con ducting car service. Additionally, operating costs involve the costs incurred on the motor vehicle on operations such as transport. This, therefore involves projection of fuel costs, parking fees, and insurance costs. In addition to this, this costs also embark on determining the appropriate costs on disposal. This report is highly dependent on the use of Net Present value in the lifecycle costing. Moreover, it takes consideration of market factors such as inflation and also includes depreciation (Pandey, 2010). However, taxation is not included in determining the total amount spent in the six years. ASSUMPTIONS AND DATA SOURCES In the calculation of the Net Present Value, several assumptions have to be made in order to arrive at relatively conclusive information. The vehicle used for this report is a 7-seater Nissan Pathfinder. The assumptions made in the calculation of the vehicle are that: 1. The car operates on average 25,000km per annum 2. The car does not experience any damage or crash during its useful life 3. Throughout its useful life (for the next six years), the car is kept in good shape through regular servicing. Further, the major assumptions in carrying out analysis of the data in the valuation of the vehicle is that the charges incurred on the motor vehicle remains consistent over the 6 year period. Further, the governmental policies should equally remain the same throughout this period. While this is practically impossible, this assumption aids in ensuring a predictable pattern throughout the 6 year period, therefore making it possible to predict and tabulate outcomes. In the calculation of LCC, many assumptions are made so as to generate data that will produce reliable results. First, the assumption here has to be made regarding the discount rate whereby the discount has to be varied periodically. In this case, the percentage average deduction will be set to change on annual basis. Further, the premium fee used at the beginning of the calculation is to be used as the basis for calculation of the discount (Reddy et al, 2014). In analyzing the servicing of the car, the assumption made here is that the car is able to make do with three Care Services per year. Further, the vehicle will get other major service at the end of each year alternating between the Royal Automotive Club’s Gold and Blue services. Moreover, an assumption has to be made that on the fourth year, the company should be taken for a substantial service as it will have reached 90,000 kilometers considering that the car travels an annual distance of 25,000 kilometers. Further, in the calculation of the fuel pricing, an important assumption has to be made on the prices of the fuel. Essentially, the assumption here should be that the fuel prices will follow a pattern. This pattern should be such that the data obtained from the past six years should be reflective of the anticipated pattern in the fluctuations in the percentage increases and decreases in the fuel prices in the next six years. This predictive model aids in producing accurate yet highly reliable data (Laird, 2009). In determining the extent of the fuel efficiency, the rate is to be maintained at 7.45 per m over the time period. Finally, the costs incurred in parking fee are to be maintained at $600 per annum. Information regarding car services were basically obtained from the Royal Automobile Club Insurance website. Similarly, information regarding the prices were also obtained from the site. LIST OF COSTS The information contained below was gathered from the official Australian Nissan website. Brand: Nissan Model: Pathfinder Price: $29,320 Car Specifications: Type of Transmission: Automatic Efficiency in fuel consumption: 7.45/100KM Engine type: Regular Unleaded V-6 Gross Weight of the vehicle: 1600 kg Similarly, it was possible to obtain critical information regarding insurance covers through accessing the Royal Automobile Club of Western Australia website. A quotation form was filled and the following data was availed. Type of Cover: Comprehensive Cover Cover Price: $601.24 per annum. Insurance cover provider: The Royal Automobile Club Insurance Company. Details about the vehicle: 1. For private and personal use 2. No alterations made on the vehicle 3. Vehicle is Registered 4. Has zero modifications 5. Condition of vehicle 0 km. Details about the Insurance cover: 1. Date of purchasing cover: 15/10/2014 2. Price of the Purchase: $24,045 3. Fee in excess of the insurance: $750 4. On insuring based on fixed price: $25,000 5. The data below was obtained from the Australian transport ministry: License fee for light vehicles: $296.64 per annum Insurance fees for 3rd parties: $203.65 per annum License fee for the vehicle (Total) $532.07 per annum Vehicle fee per a hundred Kgs $21.54 Fees for Light weight vehicles: Flat fee +Recording Fee Therefore, the Light Vehicle Licence fee totals to = + 6.60+15.05= 366.29 Insurance Data The data presented on the table shows the changing percentage average reduction in a bonus rating arrangement where there is a no claim. Year Percentage Average Reduction 1 20% 2 30% 3 40% 4 50% 5 + 60% Percentage average reduction deduced from rac website The data on the average pricing of the petrol as at 2014 is represented in the table below. The average consumption for the past six years is calculated and represented as a percentage and used to project the anticipated consumption for the next six years. For Year Ended ULP Cents per litre Increase Rate Annual Year 1 2009 124 -3.23% Year 2 2010 121 -2.48% Year 3 2011 134 9.70% Year 4 2012 141 4.96% Year 5 2013 142.8 1.26% Year 6 2014 146.4 2.46% All prices are inclusive of GST obtained from RAC website The calculation of the annual increase rate embarks on taking the current year and previous year prices and determining the difference against the current year prices as shown below. This gives the following for data as provided above such that For example year 6 For the Year Ended Price (cents)/litre (predicted) Price per Kilometer (cents)/Kilometer Fuel Efficiency 2015 Year1 146.4 10.91 7.45L/100Km 2016 Year 2 142.77 10.64 2017 Year3 156.62 11.67 2018 Year 4 164.39 12.25 2019 Year 5 166.46 12.4 2020 Year 6 170.55 12.71 The calculation involved in prediction of future prices is as: This gives for example in year 2015, Obtaining the Price per kilometer on the other hand involves using the predicted price multiplied by the fuel efficiency DEPRECIATION Depreciation was done on reducing balance method. This method was the most appropriate as it includes the various relevant variables that show the annual decrement in the cost of the vehicle. Further, the use of reducing balance method is more efficient when 15% until the fourth year Year Rate of Depreciation $24,045.00 Year 0 20% $19,236.00 Year 1 15% $16,350.6 Year 2 15% $13,898.01 Year 3 15% $11,813.31 Year 4 15% $10,041.31 Year 5 10% $9,037.18 Year 6 8% $8,314.21 Therefore, at the end of the sixth year, the value of the vehicle stands at $8314.21 DISCOUNT RATE. For the purpose of effective and accurate data on both the inflation and interest rates, the rates were obtained in the website of the Reserve Bank of Australia. Rate of inflation (percentage): 2.9% Interest rate: 2.5% Using the inflation rate and the interest rate, the discount rate was tabulated to be at -0.39% as follows (Kinney, 2013). Therefore, the discount rate will be: Year -0.39 percent Present Value Factor Cash Flow Present Value Y0 1.00 -$28,504.79 -$28,504.79 Yead 1.003902439 -$4,448.94 -$4,466.29 Year2 1.007820107 -$5,108.87 -$5,148.82 Year 3 1.011753064 -$4,668.57 -$4,723.43 Year 4 1.015701368 -$4,847.2 -$4,923.3 Year 5 1.019665081 -$5,192.05 -$5,294.13 Year 6 1.023644262 $3,785.4 $3874.89 Net Present Value -$58,815.44 CONCLUSION. To conclude the analysis of the analysis of the value of the vehicle, it is calculated that the motor vehicle has a net present value amounting to $54,355 at the end of the six year period. An average of $4900 is spent on managing the running costs of the motor vehicle per annum. From this report, it is possible to conclusively argue that the motor vehicle will have a disposable value of $8,314.21 at the end of the period. REFERENCES. Car insurance. 2014 Royal Automobile Club http://rac.com.au/ Domansky, Leon R. 2006. Automobile industry: current issues. New York: Novinka Books. Introduction to corporate finance. 2012. Mason, Ohio: South-Western Cengage Learning. Key information 2014. Reserve Bank of Australia http://www.rba.gov.au/ Kinney, Michael R., and Cecily A. Raiborn. 2013. Cost accounting: foundations and evolutions. Cincinnati: South-Western CENGAGE Learning. Laird, Philip. 2009. Back on track: rethinking transport policy in Australia and New Zealand. Sydney NSW: UNSW Press. Newton, Peter. 2008. Transitions Pathways Towards Sustainable Urban Development in Australia. Csiro. Pandey, I. M. 2009. Financial management. [Delhi]: Vikas Publishing House. Reddy, V. Ratna, Mathew Kurian, and Reza irdArdakanian. 2014. Life-cycle cost approach for management: a primer. Swedroe, Larry E., and Jared Kizer. 2008. The only guide to alternative investments you'll ever need the good, the flawed, the bad, and the ugly. New York: Bloomberg Press. Read More