# Product Life-Cycle Costs and Payback Period Analysis

The effects of energy policies, such as conservation standards, on purchasers include a change in operating expense (usually decreased) of more efficient appliances or equipment and a change in purchase price (usually increased). The EES group analyzes the net effect on purchasers by calculating the LCC and PBP using engineering performance data, equipment prices, and the energy-use analysis data. Inputs to the LCC calculation include the cost to the purchaser of the installed equipment (purchase price plus installation cost), operating expenses (energy expenses and, if applicable, repair costs and maintenance costs), the lifetime of the equipment, and a discount rate.

The EES group conducts the LCC and PBP analysis by modeling both the uncertainty and variability in the inputs using Monte Carlo simulation and probability distributions. The Monte Carlo approach provides a significant advantage over other approaches (such as an approach using typical or average values to characterize inputs) by identifying the percentage of purchasers benefiting and burdened by a prospective standard.

The Monte Carlo simulation is implemented using Microsoft Excel spreadsheets and the Crystal Ball add-in program. Each Monte Carlo simulation would typically consist of 10,000 LCC and PBP calculations. Each calculation uses input values sampled from a probability distribution or defined as single point values. For example, probability distributions are used to characterize equipment lifetimes and discount rates, while point values characterize the other LCC inputs. The analysis results are presented as a distribution of LCC values and summary statistics such as average LCC, standard deviation, and so on. The variability in the energy use or annual energy consumption (AEC) is also handled in this manner.