Case study activity: Life cycle costing

Example answer

To answer this question requires consideration of not only costs that will be incurred by the client,
but also the financial benefits that will arise including:
• generation of payment from the electricity company
• payment for exporting electricity savings in electricity bills.

Because you are being asked to establish a payback period and also to make comparisons at
five-yearly intervals, an annual approach to discounting is recommended. The following is one
possible approach in which the costs and benefits are considered separately, allowing figures to
be compared between the two tables.

The first table relates to expenditure which will comprise of:

• the initial cost
• annual maintenance
• replacement of the inverter
• replacement of whole system, which will be calculated on the basis of the initial cost
plus a 10% allowance for removing the existing system.

Solar
panels: Expenditure

Discount rate = 5%

Cumulative
discounted
Discount Annual Discounted
cost
Year factor cost annual cost
initial cost of installation £11,000

1 0.95238 £175 £167 £11,167

2 0.90703 £175 £159 £11,325

3 0.86384 £175 £151 £11,477
4 0.82270 £175 £144 £11,621

5 0.78353 £175 £137 £11,758

6 0.74622 £175 £131 £11,888

7 0.71068 £175 £124 £12,013

© University College of Estate Management 2017

 8 0.67684 £175 £118 £12,131

9 0.64461 £175 £113 £12,244

10 0.61391 £2,175 £1,335 £13,579

11 0.58468 £175 £102 £13,681

12 0.55684 £175 £97 £13,779

13 0.53032 £175 £93 £13,872

14 0.50507 £175 £88 £13,960

15 0.48102 £175 £84 £14,044

16 0.45811 £175 £80 £14,124

17 0.43630 £175 £76 £14,201

18 0.41552 £175 £73 £14,274

19 0.39573 £175 £69 £14,343

20 0.37689 £12,100 £4,560 £18,903

21 0.35894 £175 £63 £18,966

22 0.34185 £175 £60 £19,026

23 0.32557 £175 £57 £19,083

24 0.31007 £175 £54 £19,137

25 0.29530 £175 £52 £19,189

The second table calculates the financial benefits. Initial preliminary calculations are required to
establish the financial benefits, and these require to be undertaken for five-yearly intervals due to
the efficiency of the panels decreasing over time. The following provide a couple of examples: FIT
and savings
kWh/ Rate/ income/
Years 1 to 5 annum kWh saving
Generation 9000 £0.1303 £1,173

Export 50% 4500 £0.05 £215

Saving
electricity
purchase
required 80% 7200 £0.11 £792

Feb 2017
 TOTAL £2,179

kWh/ Rate/ income/

Years 6 to 10 annum kWh saving
Generation -
95% 8550 £0.1303 £1,114
Export 50% 4275 £0.05 £204

Saving
electricity 80% 6840 £0.11 £752
purchase required

TOTAL £2,070

Discounted Cumulative
Discount Annual annual discounted
Year factor saving saving saving

1 0.95238 £2,179 £2,076 £2,076

2 0.90703 £2,179 £1,977 £4,052

3 0.86384 £2,179 £1,883 £5,935

4 0.82270 £2,179 £1,793 £7,728

5 0.78353 £2,179 £1,708 £9,435

6 0.74622 £2,070 £1,545 £10,980

7 0.71068 £2,070 £1,471 £12,452

8 0.67684 £2,070 £1,401 £13,853

9 0.64461 £2,070 £1,335 £15,188

10 0.61391 £2,070 £1,271 £16,459

11 0.58468 £1,961 £1,147 £17,606

12 0.55684 £1,961 £1,092 £18,698

Feb 2017
 13 0.53032 £1,961 £1,040 £19,738

14 0.50507 £1,961 £991 £20,729

15 0.48102 £1,961 £943 £21,672

16 0.45811 £1,852 £849 £22,521

17 0.43630 £1,852 £808 £23,329

18 0.41552 £1,852 £770 £24,099

19 0.39573 £1,852 £733 £24,832

20 0.37689 £1,852 £698 £25,530

21 0.35894 £2,179 £782 £26,312

22 0.34185 £2,179 £745 £27,057

23 0.32557 £2,179 £710 £27,767

24 0.31007 £2,179 £676 £28,442

25 0.29530 £2,179 £644 £29,086

Other factors to be considered are:

The above makes a number of assumptions, for example: The rate of deterioration of the solar
panels is in five-yearly steps, whereas it is likely to be an annual deterioration.
• The amount of electricity that will be generated.
• A zero change in the cost of electricity over the period of analysis.
• The life of solar panels and inverter.
• The discount rate.
It would therefore be sensible to carry out sensitivity analysis to establish if any of these
assumptions have a direct impact on the outcome of the calculations.

Feb 2017