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13 CHAPTER 4 Life-Cycle Cost Analysis 4.1 Overview at least 40 years is suggested. For rehabilitation projects, an analysis period of at least 30 years is suggested. Longer analy- LCCA is an integral part of the pavement-type selection sis periods may be warranted for long-life pavement designs, process. While pavement-type selection based solely on ini- and greater effort must be made to make reliable long-term tial costs allows for more to be accomplished with a specified forecasts. annual budget, it does not account for long-term costs paid by taxpayers and facility users. Considering the time value of money, the initial and future costs occurring at different points 4.2.2 Discount Rate in the life cycle of various alternatives should be compared to The discount rate represents the real value of money over determine their cost-effectiveness. In this manner, the LCCA time and is used to convert future costs to present-day costs. helps to evaluate the overall long-term economic efficiency of It is approximately the difference of the interest and inflation competing pavement alternatives and provides an economic rates. Historically discount rates are in the 3 to 5 percent basis for optimum strategy selection. range. However, it is proposed that the long-term real dis- The quality of LCCA results is only as good as the quality of count rate values provided in the latest edition of the Office the inputs. Therefore, all available, applicable, and reliable data of Management and Budget (OMB) Circular A-94, Appen- should be used in quantifying the many LCCA inputs, although dix C, which is updated annually (currently OMB 2010), should experience-based estimates can be used in this effort. be utilized. The LCCA procedure involves establishing the LCCA frame- work, estimating initial and future costs, computing life-cycle 4.2.3 Economic Analysis Technique costs, and analyzing/interpreting the results. Figure 8 presents a flow chart of this procedure. The NPV is suggested for pavement-type selection applica- tions. The suggested practice is to use constant or real dollars 4.2 Establish LCCA Framework and a real discount rate in NPV computations. This section discusses the fundamental economic indica- 4.2.4 LCCA Computation Approach tors required for establishing the LCCA model. Additional information on economic indicators can be obtained from There are two basic approaches for computing life-cycle the Federal Highway Administration's (FHWA) most current costs: deterministic and probabilistic. guidance on LCCA. In deterministic LCCA, a single value is selected for each input parameter (usually the value considered most likely to occur based on historical evidence or professional experi- 4.2.1 Analysis Period ence), and the selected values are used to compute a single The life-cycle analysis period must be sufficiently long to dis- projected life-cycle cost. No "real world" uncertainties or vari- tinguish any differences in the cost-effectiveness of pavement ations are considered in this approach. alternatives and long enough such that each alternative pave- The probabilistic approach takes into account the variabil- ment strategy includes at least one future major rehabilitation ity associated with the input parameters in LCCA. In this event. For new/reconstruction projects, an analysis period of approach, for a given pavement strategy, sample input values