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Life-Cycle Costs

When purchasing a product, there are several considerations. One is the initial cost, which people tend to focus on, and the other is the operating cost over its useful life. Lighting decisions can be very misleading when only the initial cost is considered because it can use many times this first cost over its life. Life-cycle costing takes this into account and permits comparison of purchase decisions of this type including the time value of money. The time value of money concept is that a dollar today is worth more than a dollar some time in the future due to inflation.

The best way to understand life-cycle costing is to look at an example. Suppose you are shopping for a new water heater. One costs $50 dollars more than the other, but is better insulated and has a lower operating cost. Let's assume they can both last ten years. Compare the EnergyGuide label for each unit's annual operating costs. If one costs $25 more dollars per year to operate, that difference amounts to $250 over the 10 years. If we discount those savings back to today at today's inflation rates, it is worth about $200 today. Since that is much more than the purchase cost difference, an initial investment of $50 is worth it.