Probabilistic risk-based LC NPV Model

Abstract

Life cycle analysis (LCA) and Life cycle costing analysis (LCCA) as a means of choosing between alternatives of building or infrastructural solutions have meanwhile become an integral part in the project phases of major investment decisions. Most current LCA models are inadequate, and do not provide investors with a sufficient basis for making risk-based decisions. The LC NPV model developed at the Institute for Construction Engineering and Management of ETH Zurich is based on the economic minimum principle in pure consideration of expenditure or on the maximum principle in consideration of income and expenditure. The LC NPV model has clear system boundary conditions in terms of both content and time in line with system theory. Furthermore the utilization life cycle of the construction components/elements for repair and renewal was considered by life cycle curves. The uncertainty of future developments of payment flows, price increase and yielding of interest rates is incorporated into the model by probabilistic distribution. The LC NPV model therefore improves the decision-making basis for investors and property developers and, given a competent interpretation of the results, represents a powerful decision-making tool. © 2008 Taylor & Francis Group.