Building economics

and socialogy

Assignment-3

Done by sumayya
(17091AA051)
1. Life Cycle Costing in Construction
• life cycle costing analysis that enables efficient decision-making
that is mutually beneficial for both builders and investors, and
makes your savings to investment ratio positively over perform.

• Life cycle costing analysis (LCCA or LCC for short) is the most

accurate way to increase your building’s project savings by
comparing different design alternatives.
• As opposed to more commonly used ROI-based
calculations, LCC is conducted based on long-term costs and
savings, keeping in mind the fact that they are interconnected.
• The “life cycle” part means that LCC assesses all costs that occur
over the building’s lifetime including construction costs,
maintaining, operating, and end-of-life related costs.
•  To be more specific, the lifespan of a building consists of five
main stages: concept planning, design, construction, operations,
and replacement or disposal.
• LCC is a process that consists of three key steps:
1 In a clear, structured cost analysis you can easily see what
cost sources influence your total cost of ownership the most.
 2 When the major expenditure sources are clear, you can
quickly identify hotspots for improvement in your baseline design
and test different solutions for the existing objectives.
3 Knowing your alternatives, you can compare their
benefits and accordingly relocate the costs to gain maximum value
out of your project.

• LCC allows you to find the most optimal costing solution for
your building project, to compare between design alternative,
and to choose the one that will boost your project’s value.
What are the advantages and disadvantages of life cycle costing?

• There is, perhaps, not a disadvantage, but an issue that some

people see in the LCC approach.
• It has been noted that LCC focuses exclusively on cost reduction
and has no regard for the environmental impact of a building
eco-friendly materials can sometimes be more expensive.
However, as technology keeps evolving, new, more ecological
materials can prove to be cost-efficient solutions when adopting
life cycle perspective.
• Modern, eco-friendly materials and techniques are created to
appeal to architects and investors alike especially when looking
at a building’s whole life cycle.

What are the main benefits of performing life cycle costing

analysis?
 
• Best long-term value
Your project costs might drop or remain the same, but you will
know that your building project has the highest possible value. You
can fix flaws and imperfections of the original design, while
positively influencing your bottom line. And that means better
durability, higher quality, less maintenance, less risks, and lower
operational spending with the same amount of investment.
• Easy Green Building certification credits
LCC credits are included in many Green Building certification
schemes, and in some LCC is a mandatory credit. Achieving credits
is getting more and more complicated with each certification
version released, and LCC can be an easy way to get a few extra
points.
• Reliable planning
LCC helps your team to control the project throughout all its stages.
It is an excellent planning tool that covers long spans of time. With
properly conducted LCC you can effectively avoid surprises, dodge
financial risks, and relax while patiently waiting for the next
renovation works knowing how much they will cost you
beforehand.

Case study: Depository building for museum

• The project aims to build a new depository, which will allow
relocation of all exhibits from the existing non-compliant
repositories to new spaces with appropriate conditions. More
than 150,000 exhibits of national and international importance
will be saved, with reserves for the next 50 years, on an area of
4600 m2.
 • T
h
e

proposed feasibility study demonstrated the economic

sustainability of the construction project. An important part of
the feasibility study was life cycle costing.
• The minimum, maximum and average levels of life cycle cost
have been calculated (final recapitulation of the LCC is shown in
Table 2).
• Construction cost is taken from the author’s database that
includes prices of reference depository buildings.
• Operational costs are estimated on the base of reference
depository buildings. Rates of replacements and maintenance are
given by studies on the reference buildings.
• The result of the study was a recommendation to initiate the
preparation of a construction project and integrate the proposed
investment plan in the budget of the Ministry of Culture of the
Czech Republic. At present (i.e. March 2018), the conceptual
development stage is already in progress.

Conclusions
• Life cycle costing should be performed as part of feasibility
studies to find the most cost efficient solution, as part of all
design stages.
• The optimization potential in the early design phases is
significant and also cheap.
2. What Is the Time Value of Money (TVM)?
• The time value of money (TVM) is the concept that money you
have now is worth more than the identical sum in the future due
to its potential earning capacity.
• This core principle of finance holds that provided money can
earn interest, any amount of money is worth more the sooner it is
received. TVM is also sometimes referred to as present

discounted value.

• Time value of money is based on the idea that people would

rather have money today than in the future.
• Given that money can earn compound interest, it is more
valuable in the present rather than the future.
• The formula for computing time value of money considers the
payment now, the future value, the interest rate, and the time
frame.
• The number of compounding periods during each time frame is
an important determinant in the time value of money formula as
well.
• Time Value of Money Formula
• Depending on the exact situation in question, the time value of
money formula may change slightly.
• For example, in the case of annuity or perpetuity payments, the
generalised formula has additional or less factors.
• But in general, the most fundamental TVM formula takes into
account the following variables:
• FV = Future value of money
• PV = Present value of money
• i = interest rate
• n = number of compounding periods per year
• t = number of years

• Based on these variables, the formula for TVM is:

• FV = PV x [ 1 + (i / n) ] (n x t)

3.What Is Present Value – PV?

• Present value (PV) is the current value of a future sum of money
or stream of cash flows given a specified rate of return.
• Future cash flows are discounted at the discount rate, and the
higher the discount rate, the lower the present value of the future
cash flows.
• Determining the appropriate discount rate is the key to properly
valuing future cash flows, whether they be earnings or
obligations.
• Present value is the concept that states an amount of money
today is worth more than that same amount in the future. In
other words, money received in the future is not worth as much
as an equal amount received today.
• Money not spent today could be expected to lose value in the
future by some implied annual rate, which could be inflation or
the rate of return if the money was invested.
• Calculating present value involves making an assumption that a
rate of return could be earned on the funds over the time period.
• the formula:
• PV = FV / (1 + r)n
• In this formula,
• PV equals how much he needs to have today, or present value
• r equals the interest rate he'll earn
• n equals the number of periods before he needs the money, and
• FV equals how much he will need in the future, or future value.

4.What Is Inflation?

• It is the rise in the general level of prices where a unit of currency

effectively buys less than it did in prior periods.
• Often expressed as a percentage, inflation thus indicates a
decrease in the purchasing power of a nation’s currency.
• Inflation is the rate at which the general level of prices for goods
and services is rising and, consequently, the purchasing power of
currency is falling.
• Inflation is classified into three types: Demand-Pull inflation,
Cost-Push inflation, and Built-In inflation.
• Most commonly used inflation indexes are the Consumer Price
Index (CPI) and the Wholesale Price Index (WPI).
• Inflation can be viewed positively or negatively depending on
the individual viewpoint and rate of change.
• Those with tangible assets, like property or stocked
commodities, may like to see some inflation as that raises the
value of their assets.
• People holding cash may not like inflation, as it erodes the value
of their cash holdings.

• The Formula for Measuring Inflation

• PV = present value
• i = Inflation
• n = number of years