Introduction to Life Cycle Cost (LCC)
Life Cycle Cost (LCC) is a financial calculation that we use to assess the total cost of a product or system over its lifetime.
An LCC calculation is a good tool to identify any savings potential that exists with low operating and maintenance costs.
For fans and fan systems, it is particularly relevant as initial purchase costs often only make up a fraction of the total costs.
By considering LCC, companies can make more informed decisions that reduce total costs and increase profitability over time. Today, it is increasingly common for organizations to calculate costs over the product’s total life, instead of just the purchase price.
LCC calculations can be performed in many different ways and include many different parameters.
The focus of an LCC calculation is solely on financial costs. In cases where the environmental impact is to be calculated, an environmental life cycle analysis (LCA) is used instead.
An LCC calculation focuses primarily on the financial costs that directly burden the organization. While an environmental LCA includes the environmental impact from production-to-disposal.
Fans and LCC
Fans are used for many different purposes: ventilation, cooling of processes or premises, flue gas transport, transport of process gases to or from a process, etc.
Often these are taken for granted and not paid much attention except during inspection rounds.
Investigations carried out by the Swedish Energy Agency show that the operating cost of a fan system can be up to 10 times higher than the purchase price.
Therefore, there are extremely large opportunities to influence a fan’s total life cycle cost by choosing the right fan at the time of purchase.
It is also at the time of purchase that the greatest opportunity to influence future electricity consumption exists, something that is more relevant than ever.
Therefore, with this article in the Fan Hub, we want to highlight the importance of looking further than just the purchase price of the fan.
Working with LCC
It is often difficult to predict exactly which expenses will arise due to energy and maintenance needs. And these will certainly also vary over the years.
Therefore, we use a simplified version that assumes that the costs of electrical energy and maintenance are the same each year. And that we define the change in future costs as a factor.
The factor is called the present value factor (or PV for short) and is a financial term used to convert future costs or revenues into their present value. This makes it possible to fairly compare costs and revenues that occur at different times.
When performing a LCC calculation, the goal is to understand the total costs of owning or using a product over time. To do this, one must take into account that money has a time value. One Euro today is worth more than one Euro ten years from now. Partly because of inflation and partly because we can invest the money we have today to generate returns over time. This is where the zero sum factor comes into play.
For LCC calculations we use the following formula:
LCCTot = Purchase price + LCCEnergy + LCCMaintenance
were
LCCEnergy = Annual energy cost × Zero sum factor
LCCMaintenance = Annual maintenance cost × Zero sum factor
The formulas themselves are relatively clear, but below follows a brief definition of the included parts.
| Purchase price | Is exactly what the word describes, the initial costs of buying a fan or fan system. Including purchase price and installation. |
| Annual energy cost | Detta inkluderar energiförbrukning, som kan variera avsevärt mellan olika modeller och teknologier. Energikostnaden är ofta den största delen av LCC för en industrifläkt. |
| Annual maintenance cost | Costs for regular maintenance, spare parts, and potential repairs. Examples of maintenance costs for fans are usually the replacement of motor bearings, bushings, any drive belts and costs for time required for annual service reviews. |
| Present value factor | The PV-factor is a factor according to the discussion above and based on the calculation interest rate (rK) and number of years (n) and is defined as follows: PV – factor = (1 –(1+0,01*rk)-n)/(0,01*rK) The present value factor is used to recalculate future costs and revenues to their present value. This makes it possible to compare costs incurred at different times during a product’s life cycle. |
Changes in the present value factor
The present value factor changes depending on the interest rate and the number of years in the future. A higher interest rate or longer time horizon reduces the present value of future costs or income. This means that at a higher interest rate or a longer time in the future, future costs are valued lower in present value terms.
Example of an LCC calculation
Now that we know what an LCC calculation is, it is now also time to use it in an example below.
Say we are to buy an axial fan for our industry with a capacity of 25 m3/s and a pressure increase of 1000 Pa.
At our request, we have received two quotations:
Quote 1:
An axial fan with an efficiency of 82.7% and shaft power of 41.7 kW.
No spare parts are needed apart from new motor bearings acc. motor supplier’s recommendations.
Purchase price: SEK 500,000
Quote 2:
An axial fan with an efficiency of 70.5% and shaft power of 48.9 kW.
No spare parts are needed apart from new motor bearings acc. motor supplier’s recommendations.
Purchase price: SEK 250,000
This fan is important for our production which needs process air continuously all year round, therefore we calculate that the fans have an operating time of 8765 hours per year.
We make the assessment that both suppliers’ fans have a technical lifespan of 20 years, and that the service effort is comparable.
The next step is to calculate the present value factor where we assume a calculation interest rate of 4 %, this gives:
(1 –(1+0,01*4)–20)/(0,01*4) = 13,59
We also calculate the annual energy cost, were we assume an electricity price of SEK 1/kWh.
Quote 1:
8765h * 41,7kW * 1 SEK = 365 500 SEK/yearLCCEnergy = 365 500kr × 13,59 = SEK 4 967 145
Quote 2:
8765h * 48,9kW * 1 SEK = 428 608 SEK/yearLCCEnergy = 428 608kr × 13,59 = SEK 5 804 782
Plus annual maintenance cost:
Where we assume for the sake of simplicity that it is the same spare parts and the same time required for both quotations.
We will need to change 2 engine bearings every 5 years at a cost (today) of SEK 5000/pc and it takes 2 h per bearing, with an internal service cost of SEK 500/h. And that every year we need to spend 2 hours on a general review of the fan with access to consumables for SEK 1000.
This gives us the following costs per year:
Labor costs = (2h (annual general maintenance) + (2*2)h/5 (bearing replacement every 5 years)) * 500 SEK = SEK 1400
Spare part costs = 1000 SEK (consumables) + (2*5000kr)/5 (bearing replacement every 5 years)) = SEK 3000
LCCMaintenance = (1400+3000)*13,59 = SEK 59 796
Which gives:
Quote 1:
LCCTot = 500 000 SEK + 4 967 145 SEK + 59 796 SEK = SEK 5 526 941
Quote 2:
LCCTot = 250 000 SEK + 5 804 782 SEK + 59 796 SEK = SEK 6 114 578
This shows that by choosing the cheaper offer, we pay SEK 587,637 extra over 20 years in today’s money value.
“Further calculations show that already after 5 years, we have saved SEK 30,831 by choosing the twice as expensive fan with higher efficiency.”
Case study from reality
Examples in all their glory but cases from reality are always more interesting.
We have a road tunnel with 40 jet fans in western Sweden and will evaluate 2 fan suppliers.
The project required a technical lifespan of 20 years as well as an otherwise consistent specification for fan design.
We take the liberty of simplifying somewhat and assume that the service needs and service costs for both suppliers are identical.
What becomes interesting is then the purchase costs and the electrical energy requirement that the fans require to supply the specified thrust in the tunnel.
Supplier 1: 45,90 kW per fan
Supplier 2 2: 53,14 kW per fan
The fans in the tunnel run when needed, with 8 that run more or less 24/7.
We assume that the other fans run a total of 6 hours per day, mainly during the morning and afternoon rush hours.
This gives a total number of hours in operating time per year:
8*(24*365)+32*(6*365) = 140 160 h per year.
Just as in the example above, we assume an interest rate of 4 % and an electricity price of SEK 1/kWh.
Supplier 1:
LCCEnergy = (45,9 kW*140 160h*1SEK)*13,59 = SEK 87 429 144
Supplier 2:
LCCEnergy = (53,14 kW*140 160h*1SEK)*13,59 = SEK 101 219 711
Which means that the life cycle cost of energy for supplier 2 will be more than SEK 13.7 million more expensive over 20 years in today’s money value.
Together with the formula LCCTot = Purchase price + LCCEnergy, this means that supplier 1 has the potential to be the wiser choice even at a much higher purchase price.
A choice of supplier 1 also results in a reduced power requirement for the tunnel ventilation by over 1,000,000 kWh per year. Which is something that we do not factor into our calculation, but which is an important part of an environmental LCA.
Summary
Focusing solely on the purchase price when investing in industrial fans can be misleading and lead to higher costs in the long run. Life cycle cost analysis (LCC) offers a more comprehensive picture by including all costs from purchase to disposal, including operation and maintenance. By evaluating the total cost over the life of the product, companies can make more informed and financially sustainable decisions.
This insight is crucial in a time where both economic and environmental sustainability requirements are becoming increasingly strict. We therefore encourage organizations to integrate LCC into their decision-making process, not only to identify potential savings but also to contribute to more sustainable business practices. Choosing products based on their LCC can help reduce both financial and environmental footprints over time.
In conclusion, it is through a careful LCC analysis that companies can discover the true cost of their investments. Ignoring LCC can result in missed opportunities for savings and improved efficiency. Therefore, it is crucial for companies of the future to fully embrace the LCC concept, to not only protect their financial interests but also contribute to a more sustainable world.
In addition, it is often quite easy to do a quick simplified LCC calculation on two or more comparable quotes with assumptions that service and installation efforts are somewhat comparable. For such an evaluation only the purchase price and electricity consumption govern the simplified calculation and can give a better overall picture than the purchase price alone.
Conclusion
Understanding and applying Life Cycle Costing (LCC) is not only an investment in your organization’s financial future, but also a step towards a more sustainable business model. We at FläktComp urge all organizations to work with LCC in connection with purchases.
Integrating LCC into your decision-making processes can seem overwhelming at first. But the results speak for themselves: lower total costs over time and often a reduced environmental footprint.
If you are interested in learning more about LCC, we recommend a visit to the Swedish Procurement Authority’s website.
We at FläktComp are here to support you in this process. Contact us today and we will help you produce an LCC calculation according to your conditions.
