The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained therein Introduction What is Life Cycle Cost Analysis? Life Cycle Cost Analysis (LCCA) is a methodology that enables you to compare the cost of different products on the basis of both their initial and future costs. It takes into account costs and benefits such as maintenance, replacement of parts, energy use and disposal, and evaluates them on the basis of Net Present Value -see Glossary for definition. What are the benefits? Life Cycle Cost Analysis can provide greater accuracy in your procurement decisions and, in many cases, will support investment in higher quality and more sustainable products, since these often involve a higher initial cost but result in future benefits such as lower energy and water use, and CO2 impacts. How can this tool help me? This tool allows you to carry out a Life Cycle Cost Analysis of energy consuming and /or water consuming equipment over a 25 year life cycle and compare this with 2 alternative options. The tool can be used for either individual components, or entire buildings, and can be used at various stages during the design and planning process. For example, you may wish to make an initial comparison of different building types and, later on, when more information becomes available, compare your options in more detail. In addition to monetary cost, this tool also allows you to compare the energy consumption and resultant CO2 emissions, factors which are becoming increasingly important in local authorities' procurement decisions. The tool is aimed at procurement staff and others involved in making procurement decisions. It should be read in conjunction with the accompanying User Guide (pdf), also available at http://www.iclei-europe.org/deep Life Cycle Cost Analysis Tool Calculate Life Cycle Cost, Energy Consumption and CO2 GO TO 'Contents'The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained therein Contents The tool also contains a Glossary explaining the technical terms used within it. START Life Cycle Cost Analysis Tool Input + Result The Life Cycle Charts Reference Calculator This is the main worksheet where you will enter your own data. This data includes general information, for example on energy prices, as well as some specific data on the items that are being considered, e.g. capital cost, maintenance costs, etc. This worksheet also provides you with the numerical results of your LCCA calculation. This worksheet contains calculations that SHOULD NOT BE MODIFIED. It presents various cashflows and the cumulative NPV on a year to year basis. This worksheet provides a graphical display of the NPV over a 25 year period of the three options for which you have provided data in Step 1. This worksheet contains data used within the tool -it should NOT BE MODIFIED. This tool allows you to calculate the energy used per year for electrical equipment, so that you can then complete the relevant section in the Input+Results worksheet. It requires you to enter wattage and typical hours of use. The ‘Calculator’ sheet can also be used independently.The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool reflect the opinion of the European information contained thereinThe DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool Input + Results General Parameters currency unit -select from scroll down list € Energy costs per kWh carbon factors On -peak electric tariff 0.10 € /kWh 0.56 kgCO2/kWh Off -peak electric tariff 0.03 € /kWh 0.56 kgCO2/kWh Other electrical tariff 0.01 € /kWh 0.43 kgCO2/kWh Gas tariff 0.02 € /kWh 0.19 kgCO2/kWh Other fuel tariff 0.02 € /kWh 0.50 kgCO2/kWh water tariff 0 € /m3 Discount Rate (%) 3.0 % Price escalators On -peak electric tariff price escalator 2.57 % increase per annum Off -peak electric tariff price escalator 2.57 % increase per annum Other electric tariff price escalator 2.57 % increase per annum Gas price escalator 0.29 % increase per annum Other fuel price escalator 3 % increase per annum water price escalator 2 % increase per annum Enter your data in all yellow shaded cells. Scroll down to view results Life Cycle Cost Analysis ToolThe DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool Project specific costs Option 1 Option 2 Option 3 [e.g.frequent replacements] [expensive option] Initial capital cost 1000.0 € 600 € 1500 € And then replaced every 10 years 3 years 15 years with a cost of 500 € 200 € 600 € and a disposal cost of 100 € 150 € 100 € Annual servicing and maintenance 20 € 1 € 1 € Annual cost of consumables and spare parts 20 € 3 € 3 € Total annual fixed cost: 20 € 4 € 4 € Annual On -peak electric use 1 kWh 10 kWh 100 kWh Off -peak electric use 1 kWh 10 kWh 100 kWh Other electric use 1 kWh 10 kWh 100 kWh Gas use 1 kWh 10 kWh 100 kWh Other fuel use 1 kWh 10 kWh 100 kWh annual water use 50 m3 45 m3 55 m3 Name: [e.g.base case] Name: Name:The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool Results Total un-discounted cost over life cycle € € € NPV at end of life € € € Total energy use over life cycle kWh kWh kWh Total water use in m3 over life cycle m3 m3 m3 Total CO2 emissions over life cycle t CO2 t CO2 t CO2 Energy use life time (kWh) On -peak electric tariff 25 14 250 140 2500 1400 Off -peak electric tariff 25 14 250 140 2500 1400 Other electric tariff 25 10.8 250 108 2500 1075 Gas tariff 25 4.75 250 47.5 2500 475 Other fossil fuel tariff 25 12.5 250 125 2500 1250 5.600 -1772 -2379 -1901 125 1375 -1955 -3040 -1807 The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained therein 1250 12500 1250 1125 0.056 0.560The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool The Life Cycle DO NOT CHANGE VALUES -THIS IS AUTOMATICALLY GENERATED! Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Discount Factor 1.00 0.97 0.94 0.92 0.89 0.86 0.84 0.81 0.79 0.77 0.74 0.72 0.70 0.68 0.66 0.64 0.62 0.61 0.59 0.57 0.55 0.54 0.52 0.51 0.49 0.48 Option 1 asset costs Capital cost -1000 Replacement cycle 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 Replacement cost 0 0 0 0 0 0 0 0 0 0 -500 0 0 0 0 0 0 0 0 0 -500 0 0 0 0 0 Disposal 0 0 0 0 0 0 0 0 0 0 -100 0 0 0 0 0 0 0 0 0 -100 0 0 0 0 0 linear depreciation 0 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 Residual value 1000 950 900 850 800 750 700 650 600 550 1000 950 900 850 800 750 700 650 600 550 1000 950 900 850 800 750 running costs Annual annual fixed costs -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 -20 On -peak electric tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Off -peak electric tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other electric tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Gas tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other fuel tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 water costs 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 CASHFLOW -1000 -20 -20 -20 -20 -20 -20 -20 -20 -20 -620 -20 -20 -20 -20 -20 -20 -20 -20 -20 -620 -20 -20 -20 -20 730 Cumulative Cashflow -1000 -1020 -1040 -1060 -1081 -1101 -1121 -1141 -1161 -1181 -1802 -1822 -1842 -1862 -1882 -1903 -1923 -1943 -1963 -1984 -2604 -2624 -2644 -2665 -2685 -1955 Discounted Cashflow -1000 -20 -19 -18 -18 -17 -17 -16 -16 -15 -461 -15 -14 -14 -13 -13 -13 -12 -12 -12 -343 -11 -11 -10 -10 349 Cumulative NPV -1000 -1020 -1039 -1057 -1075 -1092 -1109 -1126 -1142 -1157 -1618 -1633 -1647 -1661 -1674 -1687 -1700 -1712 -1724 -1736 -2079 -2090 -2100 -2111 -2121 -1772 Total Energy use in kWh 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 CO2 emissions in kg 2 4 7 9 11 13 16 18 20 22 25 27 29 31 34 36 38 40 43 45 47 49 52 54 56 Total Water use 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 1050 1100 1150 1200 1250 Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Discount Factor 1.00 0.97 0.94 0.92 0.89 0.86 0.84 0.81 0.79 0.77 0.74 0.72 0.70 0.68 0.66 0.64 0.62 0.61 0.59 0.57 0.55 0.54 0.52 0.51 0.49 0.48 Option 2 asset costs Capital cost -600 Replacement cycle 0 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 0 1 0 Replacement cost 0 0 0 -200 0 0 -200 0 0 -200 0 0 -200 0 0 -200 0 0 -200 0 0 -200 0 0 -200 0 Disposal 0 0 0 -150 0 0 -150 0 0 -150 0 0 -150 0 0 -150 0 0 -150 0 0 -150 0 0 -150 0 linear depreciation 0 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 -67 Residual value 600 533 467 600 533 467 600 533 467 600 533 467 600 533 467 600 533 467 600 533 467 600 533 467 600 533 running costs Annual fixed costs -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -20 On -peak electric tariff -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 Off -peak electric tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -1 -1 -1 -1 Other electric tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Gas tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other fuel tariff 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 water costs 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 CASHFLOW -600 -6 -6 -356 -6 -6 -356 -6 -6 -356 -6 -6 -356 -6 -6 -356 -6 -6 -357 -7 -7 -357 -7 -7 -357 510 Cumulative Cashflow -600 -606 -611 -967 -973 -979 -1335 -1341 -1347 -1703 -1709 -1715 -2071 -2078 -2084 -2440 -2447 -2453 -2810 -2816 -2823 -3180 -3186 -3193 -3550 -3040 Discounted Cashflow -600 -6 -5 -326 -5 -5 -298 -5 -5 -273 -5 -4 -250 -4 -4 -229 -4 -4 -209 -4 -4 -192 -4 -3 -176 244 Cumulative NPV -600 -606 -611 -937 -942 -947 -1245 -1250 -1254 -1527 -1532 -1536 -1786 -1790 -1795 -2023 -2027 -2031 -2241 -2244 -2248 -2440 -2443 -2447 -2623 -2379 Total Energy use in kWh 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 950 1000 1050 1100 1150 1200 1250 CO2 emissions in kg 22 45 67 90 112 134 157 179 202 224 246 269 291 314 336 358 381 403 426 448 470 493 515 538 560 Total Water use in litres 45 90 135 180 225 270 315 360 405 450 495 540 585 630 675 720 765 810 855 900 945 990 1035 1080 1125 This page shows various cashflows and the cumulative NPV on a year to year basis. The different options are listed beneath each other. Ensure you have an appropriate 'zoom' setting to view this page.The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Discount Factor 1.00 0.97 0.94 0.92 0.89 0.86 0.84 0.81 0.79 0.77 0.74 0.72 0.70 0.68 0.66 0.64 0.62 0.61 0.59 0.57 0.55 0.54 0.52 0.51 0.49 0.48 Option 3 asset costs Capital cost -1500 Replacement cycle 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 Replacement cost 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -600 0 0 0 0 0 0 0 0 0 0 Disposal 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -100 0 0 0 0 0 0 0 0 0 0 linear depreciation 0 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 -40 Residual value 1500 1460 1420 1380 1340 1300 1260 1220 1180 1140 1100 1060 1020 980 940 1500 1460 1420 1380 1340 1300 1260 1220 1180 1140 1100 running costs Annual fixed costs -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 On -peak electric tariff -10 -10 -11 -11 -11 -11 -12 -12 -12 -13 -13 -13 -14 -14 -14 -15 -15 -15 -16 -16 -17 -17 -17 -18 -18 Off -peak electric tariff -3 -3 -3 -3 -3 -3 -3 -4 -4 -4 -4 -4 -4 -4 -4 -4 -5 -5 -5 -5 -5 -5 -5 -5 -6 Other electric tariff -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2 -2 Gas tariff -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 Other fuel tariff -2 -2 -2 -2 -2 -2 -2 -2 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -3 -4 -4 -4 -4 -4 -4 water costs 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 CASHFLOW -1500 -22 -22 -23 -23 -24 -24 -25 -25 -26 -26 -27 -27 -28 -28 -729 -30 -30 -31 -32 -32 -33 -34 -34 -35 1064 Cumulative Cashflow -1500 -1522 -1544 -1567 -1591 -1614 -1639 -1663 -1689 -1714 -1741 -1767 -1795 -1823 -1851 -2580 -2610 -2640 -2671 -2703 -2735 -2768 -2802 -2836 -2871 -1807 Discounted Cashflow -1500 -21 -21 -21 -21 -21 -20 -20 -20 -20 -20 -19 -19 -19 -19 -468 -19 -18 -18 -18 -18 -18 -18 -17 -17 508 Cumulative NPV -1500 -1521 -1542 -1563 -1584 -1605 -1625 -1645 -1665 -1685 -1704 -1724 -1743 -1762 -1781 -2249 -2267 -2285 -2304 -2322 -2339 -2357 -2375 -2392 -2410 -1901 Total Energy use in kWh 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 8500 9000 9500 10000 10500 11000 11500 12000 12500 CO2 emissions in kg 224 448 672 896 1120 1344 1568 1792 2016 2240 2464 2688 2912 3136 3360 3584 3808 4032 4256 4480 4704 4928 5152 5376 5600 Total Water use 55 110 165 220 275 330 385 440 495 550 605 660 715 770 825 880 935 990 1045 1100 1155 1210 1265 1320 1375 The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool European Communities. The European Commission is not responsible for any use that may be made of the information contained thereinThe DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool COMPARISON OF OPTIONS -3000 -2500 -2000 -1500 -1000 -5000 0 5 10 15 20 25 years Cumulative NPV [e.g.base case] [e.g.frequent replacements] [expensive option]The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained therein ENERGY USE 0 2000 4000 6000 8000 10000 12000 140000 2 4 6 8 10 12 14 16 18 20 22 24 Energy Use in kWh Option 1 Option 2 Option 3 WATER USE 0 200 400 600 800 1000 1200 1400 16000 2 4 6 8 10 12 14 16 18 20 22 24 Water Use in m3 Option 1 Option 2 Option 3 CO2 EMISSIONS 0 1000 2000 3000 4000 5000 60000 2 4 6 8 10 12 14 16 18 20 22 24 tonnes of CO2 Option 1 Option 2 Option 3The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool Reference This worksheet contains the data used within the tool -it should NOT BE MODIFIED. Price escalators -UK examples On -peak electric tariff price escalator 2.57 % increase per annum www.dti.gov.uk/energy/consumers/fuel_poverty/trends_price.pdf Off -peak electric tariff price escalator 2.57 % increase per annum www.dti.gov.uk/energy/consumers/fuel_poverty/trends_price.pdf Other electric tariff price escalator 2.57 % increase per annum www.dti.gov.uk/energy/consumers/fuel_poverty/trends_price.pdf Gas price escalator 0.29 % increase per annum www.dti.gov.uk/energy/consumers/fuel_poverty/trends_price.pdf Other fossil fuel price escalator 3 % increase per annum Currencies: select currency €$DKR EKR KKĉ NKR £SEK SFR SK ZŁ Z£ The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained thereinThe DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis ToolThe DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool How many units? Watt rating (kW) hours of use per year energy used by one unit per year total of energy used by all units per year 'on' mode 0.012 kW 1114 h 13.368 kWh 133.68 kWh 'stand-by' mode 0 kW 0 h 0 kWh 0 kWh 'sleep'-mode 0 kW 0 h 0 kWh 0 kWh Total energy used 13.368 kWh 133.68 kWh The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained therein type of equipment: Energy Consumption Calculator 10 This tool allows the calculation of energy used per year of any piece of equipment that you have wattage and typical hours of use for. You can find typical hours of use for certain items on the DEEP Audit Tool SASEATO. PLEASE NOTE: This calculation model is only useful if you know at what wattage the item runs -this may not be the 'Watt' rating given. For an Example a boiler would hardly ever run to its full load. It modulates according to heat demand. So using the 'Watt' rating would result in a higher figure than the actual consumption. If you are able to guess at what average wattage the appliance runs, you can still use this tool to get an indication of energy consumption.The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool authors. It does not necessarily Commission is not responsible for any The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool Glossary of Terms Capital Cost This is the total initial cost of an investment including installation or labour costs needed to complete a project or obtain a product and bring it to operable status. These are non-recurrent set-up cost and different from subsequent recurring running costs. Cash Flow A revenue or expense stream that changes a cash account over a given period. Cash in-flows usually arise from one of three activities -financing, operations or investing -though they also occur as a result of donations or gifts in the case of personal finance. Cash out-flows result from expenses or investments. Cash flows can also be defined as a record of something that has happened in the past, such as the sale of a particular item product, or forecasted into the future, representing what a business or a person expects to take in and to spend. Discount rate This is the interest rate used in determining the present value of future cash flows. It is the interest rate used to discount or calculate future costs and benefits so as to arrive at their present values, e.g., 3% or 5%. This is also known as the opportunity cost of capital investment. Discount rates are usually based on government bonds or market interest rates for cost of capital whose maturity is about the same as the time period during which the intervention or program is being evaluated. For example, if one expects 1,000 EUR in one year's time: To determine the present value of this 1,000EUR (what it is worth to you today) one would need to discount it by a particular rate of interest (often the risk-free rate but not always). Assuming a discount rate of 10%, the 1,000 EUR in one year's time would be the equivalent of 909.09 EUR to you today (1000/[1.00 + 0.10]). Internal Rate Of Return – IRR Essentially, this is the return that a company would earn if it expanded or invested in itself, rather than investing that money elsewhere. Often used in capital budgeting, it's the interest rate that makes net present value of all cash flow equal zero. The Internal Rate of Return Method is an alternative capital budgeting method, which in most, but not all, cases results in the same decision as NPV -and real options methods, which attempt to value the managerial flexibilty that is assumed away in the NPV calculations. Linear Depreciation Life Cycle Cost Sometimes called a "cradle-to-grave analysis", or "Womb-to-Tomb". A life cycle cost analysis calculates the cost of a system or product over its entire life span. The analysis of a typical system could include costs for: Preliminary costs for planning,design and feasibility studies, initial capital cost, operation, maintenance, Cost of replacement, disposal or salvage. This cost analysis depends on values calculated from cost of spares, repair times, and component costs. A life cycle cost analysis is important for cost accounting purposes. In deciding to produce or purchase a product or service, a timetable of life cycle costs helps show what costs need to be allocated to a product so that an organization can recover its costs. It offers three important benefits: -All costs associated with a project/product become visible -It allows an analysis of business function interrelationships -Differences in early stage expenditure are highlighted, enabling managers to develop accurate predictions.The DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool The sole responsibility for the content of this publication lies with the authors. It does not necessarily reflect the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained therein. Linear Depreciation Linear depreciation diminishes the value of an asset by a fixed amount each period until the net value is zero. This is the simplest calculation, as you estimate a useful lifetime, and simply divide the cost equally across that lifetime. Example: You have bought a computer for1500 EUR and wish to depreciate it over a period of 5 years. Each year the amount of depreciation is 300 EUR, leading to the following calculations: Year 1: Depreciation 300, Remaining Value 1200 Year 2: Depreciation 300, Remaining Value 900 Year 3: Depreciation 300, Remaining Value 600 Year 4: Depreciation 300, Remaining Value 300 Year 5: Depreciation 300, Remaining Value 0 Net present value Net present value (or NPV) is a standard method in finance of capital budgeting – the planning of long-term investments. Using the NPV method a potential investment project should be undertaken if the present value of all cash inflows minus the present value of all cash outflows (which equals the net present value) is greater than zero. A key input into this process is the interest rate or “discount rate” which is used to discount future cash flows to their present values. If the discount rate is equal to the shareholder’s required rate of return, any NPV > 0 means that the required return has been exceeded, and the shareholders will expect an additional profit that has a present value equal to the NPV. In order to maximize shareholder wealth, one should undertake projects that have an NPV > 0, or if two projects are mutually exclusive, they should choose the one with the highest positive NPV. Residual value In accounting, residual value is another name for salvage value, the remaining value of an asset after it has been fully depreciated. Residual value is one of the constituents of a leasing calculus or operation. It describes the future value of a good in terms of percentage of depreciation of its initial value. Example: A car is sold at a list price of 20,000 EUR today. After a usage of 36 months and 50,000 miles its value is contractually defined as 50% or 10,000 EUR. The credited amount, on which the interest is applied, thus is 20,000 EUR present value minus 10,000 EUR future valueThe DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis ToolThe DEEP Toolkit. TOOL 2.a. Life Cycle Cost Analysis Tool necessarily reflect the opinion of the European Communities. The made of the information contained therein.