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Life Cycle Cost Analysis Discount Rates and Inflation

by Thomas J. Wonsiewicz, Lane Enterprises, Inc, United States,



Document Type: Proceeding Paper

Part of: Pipeline Design and Installation

Abstract:

Life Cycle Cost Analysis techniques are useful for comparing alternatives that have differing cash flows over the expected life of a project. The selection of an appropriate discount rate and the method of dealing with inflation can have a significant influence on the outcome of the analysis. In general, approaches that place a relatively low value on the money being invested, tend to favor alternatives with larger initial costs and lower future costs. Conversely, approaches that place a higher value on money, favor alternatives with lower initial costs and higher future expenditures. This paper deals with the considerations that need to be made in selecting an appropriate discount rate. Opportunity costs, costs of capital, minimum attractive rates and costs borrowing concepts are discussed along with techniques for dealing with inflation.

Subject Headings: Construction costs | Life cycles | Project management | Pipelines | Benefit cost ratios | Financial management | Economic factors

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