Set a common basis before adding money
Compare the same installed length, gate scope, groundworks and required performance. Use one currency, one price date and consistent tax treatment. Include access equipment, temporary segregation and disposal where they are needed for the maintenance task.
The following example is hypothetical, in constant pounds, excluding VAT, over ten years. Both options are assumed to satisfy the same project requirements. The 3% real discount rate is an illustration selected for the calculation, not a recommended business rate or a forecast of inflation.
| Cash flow | Option A | Option B | Timing |
|---|---|---|---|
| Initial installed cost | £20,000 | £24,000 | Today |
| Routine maintenance | £600 | £300 | End of each year, 1–10 |
| Planned repair | £4,000 | £1,500 | End of year 6 |
| Residual value credit | £1,000 | £1,500 | End of year 10 |
Residual value is an assumed remaining economic value, not a guaranteed scrap payment. Do not combine a resale value and a scrap credit for the same material.
Calculate the undiscounted totals first
Option A: 20,000 + (10 × 600) + 4,000 − 1,000 = £29,000.
Option B: 24,000 + (10 × 300) + 1,500 − 1,500 = £27,000.
This simple check catches missing cash flows, but it treats an expense today and an expense in year ten as equivalent. For a present-value comparison, account for their timing.
Discount each future amount
For a cash flow C at the end of year t, use PV = C / (1 + r)^t, where r is the discount rate. Apply a negative sign to the residual credit. The NIST lifecycle costing formula reference sets out present-value calculations for one-time and recurring amounts.
Add the initial cost to the discounted maintenance, repair and credit:
- A = 20,000 + Σ[600 / 1.03^t, t = 1…10] + 4,000 / 1.03^6 − 1,000 / 1.03^10 = £27,723.96.
- B = 24,000 + Σ[300 / 1.03^t, t = 1…10] + 1,500 / 1.03^6 − 1,500 / 1.03^10 = £26,699.15.
Under these assumptions, B costs £1,024.82 less in present-value terms, despite costing £4,000 more initially. Keep unrounded values in the calculation and round the displayed totals only at the end.
Find the assumption that could reverse the choice
If A’s annual maintenance falls from £600 to £400, its annual saving is £200. Across ten years at 3%, that saving has a present value of about £1,706.04. A would then cost about £26,017.92, below B. Maintenance evidence therefore matters more than the initial result suggests.
Check another scenario in which the planned repair occurs earlier, or site access requires a separate hire charge. Do not assign a probability merely to create a precise expected cost. Show a base case and clearly defined alternatives when reliable failure data are unavailable.
Turn the calculation into a procurement decision
Ask the maintenance team to verify the task frequency and access assumptions. Ask the supplier to identify replaceable parts and the scope of any stated warranty. Keep costs of optional upgrades outside the common base comparison.
The preferred option is the one that meets the required function with the more defensible overall cost. If the apparent saving depends on unsupported lifespan claims, resolve those claims before using the spreadsheet to award the order. Service-life claim checks explain which conditions belong beside the headline number.