What is Whole-Life Cost
Whole-life cost is the total expense of owning an asset over its entire life, from purchase to disposal, as determined by financial analysis. It is also known as a "life-cycle" cost, which 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.
BREAKING DOWN Whole-Life Cost
When comparing investment decisions, a financial analyst must look at all potential future costs, not just acquisition expenses, or an asset’s return will likely be overestimated. While most short-term costs and even depreciation can be readily measured or estimated, long-term costs are more difficult to estimate, and 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.
Costs Extend Over an Asset's Useful Life
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.