The first step in the LCA is to state the assumptions involved. Assumptions include the variable and fixed costs associated with the vehicles being compared. The assumptions used with WMUPD's LCA were fuel price, miles driven per year, maintenance costs, asset costs, escalation rates, asset discount rates and term. With each of these assumptions, a value is assigned, providing the numbers for the LCA formula.
The Office of Management and Budget revised Circular A-94 in 1992. The revised Circular specified certain discount rates to be updated annually when the interest rate and inflation assumptions used to prepare the Budget of the United States Government were changed. These discount rates are found in Appendix C of the revised Circular. The updated discount rates are shown below. The discount rates in Appendix C are to be used for cost-effectiveness analysis, including lease-purchase analysis, as specified in the revised Circular. They do not apply to regulatory analysis.
As important as LCA is to fleet management, do not rely entirely on LCA for vehicle selection. First, select vehicles that meet your needs in terms of space, performance, safety, ergonomics, and other jobsuitable, task-specific requirements. Use LCA to break the tie among all of the vehicles that meet your specs.
John Kemp is a Reuters market analyst. The views expressed are his own. Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?
In this article, the traditional cost-volume-profit (CVP) model is expanded to incorporate the cost of capital. Using the principles of activity-based costing, the opportunity cost of invested funds is traced to a product and is used to determine its operating income after taxes less the cost of capital or economic income each period. When a product's economic income over its useful life is discounted to when production will begin, it is equivalent to a product's net present value (NPV) (see Hartman, 2000; Shrieves and Wachowicz, 2001). The NPV equation, or model, developed in this manner is based on accounting, rather than cash flow, variables. Consequently, it provides a framework for performing CVP analysis. As demonstrated in the article, the CVP model incorporating the cost of capi...
Functional cost analysis is a relatively new cost management technique that overcomes the limitations of other techniques. This method incorporates a customer perspective into the cost analysis of a product or service. Consequently, managers better understand the functions of a product or service and the value customers place on each function. The internal and external focus of functional cost analysis provide a means of determining precisely where cost reductions are needed and can be used to stimulate ideas for their reduction. Also, functional cost analysis enables managers to identify proposed cost reductions that erode the value that customers place on a product and, thereby, avoid cost reductions that are counterproductive. Functional cost analysis is derived from value engineeri...
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