¶ … determinant of the overall profitability of a company. In many instances both labor and product costs comprise a vast majority of a company's expense. Many companies in an effort to mitigate the effects of rising costs have outsourced much of their labor or input costs to other countries. Asian countries in particular have been used extensively for their low cost labor. Through use of cheaper material and labor companies have been able to report higher profits and higher revenues. In fact, corporate profits as a percentage of GDP are currently at an historic high of 10%. This suggests that many companies have used many cost cutting initiatives to help lower costs while revenue growth remains stagnant or low. An important component of cost reductions are life cycle cost analysis (henceforth referred to as LCCA). LCCA is often used as a tool to help determine the most cost effective manner in which to purchase, own and operate an item. Its fundamental premise is grounded in the Net Present Value methodology with some changes to the overall concept. LCCA however is critical for the financial success of both business and not-for-profit institutions in American and developed world. It allows for a systematic approach to appropriately judging the cost of capital for projects, irrespective of the industry
To begin, what aspect that is critical in the LCCA analysis is scoping. Scoping helps investors determine what cost...
There are complications that apply with the scope as it relates to LCCA. For example, if the scope becomes too large the tool may become impractical to use and of limited ability to help in decision-making. This often stifles creativity, innovation and capital planning. However if the scope is too small, then the results may be skewed by the choice of the factors considered such that the output becomes unreliable. This can create problems overall with the investment decision, if it is based on information that is not reliable. Therefore LCCA can be very difficult to assess.
Although difficult to assess this process is very important in regards to valuing capital projects. For one, it takes into account all costs associated with acquiring an asset. This is particular important and useful when comparing projects against one another. In addition, LCCA can be used to help determine cost savings between projects. Costs, as mentioned earlier, are a key determinate to the profitability of a firm. LCCA is therefore used to help determine the overall costs of a project alternative. These cost are often related to both operating and non-operating costs. These include fuel costs, initial purchase costs, residual values, finance charges and non-monetary benefits. When the LCCA method is used, these cost are often increased by a standard amount. This amount is usually comprised of…
