April 26, 2013

KBAM: Discounting

An important element of life cycle costing is discounting. I have come across this concept before but now I understand it in a greater depth. In essence, it ensures that all costs or benefits are compared in a meaningful way. The idea stems from the fact that real value of money changes due to interest rates and inflation.

One quote that often gets mentioned whenever someone brings up the topic of net present value is: "A dollar today is worth more than a dollar tomorrow". This is true since you can invest that money and earn interest. Moreover, inflation will lead to an increase in the price of an item, meaning that you will not be able to buy it with the same amount in the future. I know that this detail can often get overlooked by people, so I will make sure that I avoid this mistake when evaluating alternatives or identifying preferred choices in the future.

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  1. Luisa Rodriguez Qui?Ones

    Hi Hasan! I agree with you about the importance of life cycle cost management, it is a little bit difficult to understand given the strong focus on financial aspect. Anyway, I will add something to this topic, I think this kind of management is also relevant in the context of excellence. It takes into account the cost of assets all over their entire useful life, in this manner it can be linked to maintenance to achieve better results and to have a continuous improvement process. Control and monitoring also take part and bring value to excellent organizations. all those aspects bring sustainability and will help organizations to deal with what you mention about losing value while time goes on. So definitively things lose value, but there are also some ways to “control” or deal with this and can be used within a journey towards Excellence :)

    26 Apr 2013, 23:31

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