B. Kemps MSc


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Life Cycle Costing: an effective asset management tool
“Applying LCC contributes to more cost-effective management control of the production facilities of small and medium enterprises (SMEs)”

July 2012
Scientific Supervisor: Peter Van Gestel MSc
Expert Supervisor    : Niek van Nunen MSc

This master’s thesis seeks to develop and accept the following hypothesis: applying LCC analysis results in more cost-effective management control of production facilities of Small & Medium Enterprises (SME).

Research on the sub questions has demonstrated that there is a difference in Life Cycle Costing and Life Cycle Cost Analysis. Life cycle costing takes into account all costs of an asset throughout its intended lifespan, resulting in a total cost of ownership calculation. Life Cycle Cost Analysis can be described as a cost-comparing method of possible alternatives, using the Life Cycle Costing approach. Because LCC analysis compares alternatives, only the differences between the alternatives translated into costs will have to be compared.

In relation to the purchasing process of assets, Veteka, the pilot company, can be seen as the user of the installations. In order to provide evidence relevant to the hypothesis, four case studies are described. The purpose is to compare alternatives for each case by means of an LCC analysis method. Because in each case the purpose is to compare different alternatives, it is not necessary to implement a complete life cycle costing model that would result in a total cost of ownership of the different alternatives.
The model has been developed in Excel and it incorporates a discount and escalation rate and calculates the present worth difference between two or more alternatives. The model makes it possible to calculate discount rate, escalation rate, sensitivity, and uncertainty, resulting in the present worth difference of two alternatives at the same time. With the @Risk program it is possible to generate graphs to visualize both the impact of the different input parameters and the likelihood of an outcome to be positive or negative.

The results of the different cases dealt with provide sufficient evidence for the hypothesis to be accepted. Conducting an LCC analysis creates transparency among the different cost drivers. Through LCC analysis, the management can gather a lot of information on the financial consequences of different alternatives. Creating transparency about the different relevant costs results in the fact that more balanced choices can and will be made. To refine the uncertainty and sensitivity in the different costs it is strongly recommended that further investigation is carried out into reliability, availability and maintainability.

Although this type of analysis helps the purchasing process of installations, it does not indicate the total expected revenues over the intended life span. For this, an analysis which takes into account all costs and profits should be conducted. The result is a net present value difference. Currently, at Veteka, the pilot company, the data needed to conduct this type of analysis are insufficient. When further investigation is carried out into discount and escalation rates, and maintainability, availability and reliability, this broader type of analysis will be useful for making proper cost calculations. 

De Thesis kunt u hier bekijken (EN).

De Thesis presentatie kan hier bekeken worden (EN).

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