Whole-life cost is the total expense of owning an asset over its entire life, from purchase to disposal, as driven by financial analysis. It is also known as the life-cycle cost, the lifetime cost, “cradle to grave,” or “womb to tomb.” Whole-life cost includes purchase and installation, design and building costs, operating costs, maintenance, associated financing costs, depreciation, and disposal costs.
Whole-life cost also takes into account certain costs that are usually overlooked, such as those related to environmental and social impact factors. In the example of constructing a nuclear power station, it is possible to calculate the environmental impact of making the concrete containment and the water required for copper refinement, in addition to other components.
Whereas a number of options may be portrayed as “good” for the environment, a whole-life cost analysis allows a determination of whether or not one solution carries a lower or higher environmental cost than another.
Key Takeaways
- Whole-life cost is the total expense of owning an asset over its entire life, from purchase to disposal.
- Whole-life cost includes purchase and installation, design and building costs, operating costs, maintenance, associated financing costs, depreciation, and disposal costs.
- Whole-life cost also takes into account certain costs that are usually overlooked, such as those related to environmental and social impact factors.
- Typically, the focus is on the up-front capital costs of creation or acquisition, and many organizations fail to take into account the longer-term costs of an asset.
Understanding Whole-Life Cost Analysis
Whole-life cost analysis is often applied when evaluating different options for investing in new assets and for analyses that attempt to minimize whole-life cost over the lifetime of an asset. It may also be used to decide between two different projects or to make acquisition decisions.
When comparing investment decisions, a financial analyst must look at all potential future costs, not just acquisition expenses. Typically, the focus is on the up-front capital costs of creation or acquisition, and many organizations fail to take into account the longer-term costs of an asset. Without considering whole-life costs, it’s possible that an asset’s return will likely be overestimated. While an asset may have low development costs, its purchase may lead to high maintenance or customer service costs in the future.
While most short-term costs—and even depreciation—can be readily measured or estimated, long-term costs are more difficult to estimate. In addition, factors such as environmental or social impact cannot be easily quantified. Nevertheless, whole-life costing may provide a more accurate picture of the true cost of an asset than most other methods.
The value of determining whole-life cost can be demonstrated when considering the purchase of a large piece of equipment for a factory. Consider for example a machine that attaches nylon flock to foam rubber pads used in the construction of painting tools. Beyond the initial cost of purchasing and installing the flocking machine, it will have any number of components requiring periodic maintenance and replacement. Such a machine may also present environmental hazards when cleaned or require complex disassembly in order to be disposed of. The whole-life cost analysis of this equipment purchase will be critical in estimating the long-term financial benefit of its purchase and use.
Related Terms: total cost of ownership, financial analysis, life-cycle assessment, depreciation, asset management.
