## LCCA Basics

Life-cycle cost analysis (LCCA) is a method of estimating the total cost of a system over its entire life-cycle from cradle to grave.

"LCCA is an analysis technique that builds on the well-founded principles of economic analysis to evaluate the over-all-long-term economic efficiency between competing alternative investment options. It does not address equity issues. It incorporates initial and discounted future agency, user, and other relevant costs over the life of alternative investments. It attempts to identify the best value (the lowest long-term cost that satisfies the performance objective being sought) for investment expenditures."

FHWA-SA-98-079

#### Life-Cycle Perspective

When deciding on a project design, there are various alternatives that engineers are confronted with. These alternatives can vary in design, material, and expected life span. It is not enough to just consider costs of these alternatives at initial construction, but rather, the total costs over the entire life of the transportation infrastructure investment must be considered. This includes the maintenance, rehabilitation, and use of the transportation infrastructure over its life cycle as well as its salvage value at end-of-life. These items exist beneath the "tip of the iceberg."

#### Time Value of Money

The inflation of money spent over time must also be factored into any cost analysis. In ProLCCA, this time value of money is taken into consideration using present value, which converts the life-cycle costs to a single payment at one point in time. Present value uses a discount rate to apply the monetary inflation over time.

#### Conducting an LCCA

LCCA is a vital decision-making tool that can account for both initial as well as discounted future costs of an infrastructure system. Using ProLCCA ensures that this multi-step process is followed:
1. Establish design alternatives
2. Determine activity timing
3. Estimate costs
4. Compute life-cycle costs
5. Analyze the result

#### Probabilistic Analysis

In LCCA, future costs will need to be evaluated many years into the future. In basic analyses, most likely or average costs are typically used to estimate the cost of activities in the future. This deterministic method does not take into account the variability in costs that are bound to occur and results in a single value for the calculated life-cycle cost.

A probabilistic analysis is able to consider input variability by defining distributions for the cost of project activities and considering a range of likely values. Thus, the life-cycle cost computed will not be a single value but rather a range of likely values. Users will be able to assess the risks of project alternatives (e.g., there is a 87% probability that Alternative 1 will have a smaller life-cycle cost than Alternative 2) to make more informed decisions.