What does life cycle costing measure in relation to equipment?

Life cycle costing is a comprehensive approach that evaluates the total economic worth of a piece of equipment throughout its entire lifespan. This method takes into account both initial investment costs, such as the purchase price, and ongoing operating expenses, which may include maintenance, utilities, and repair costs incurred during the equipment's operational life.

By measuring both the initial and operating costs over the expected life of the equipment, life cycle costing provides a clearer picture of the true financial impact of the asset. This approach is vital for making informed decisions about purchasing, maintaining, or replacing equipment, as it helps identify the overall cost-effectiveness and value of the investment beyond just the initial acquisition price.

Focusing solely on the initial purchase cost does not provide a complete financial analysis, as it ignores ongoing expenses that can inflate the overall cost significantly. Similarly, measuring only operating costs or depreciation would also fail to deliver a holistic view, as they both miss crucial aspects of the financial implications associated with ownership. Thus, life cycle costing encompasses both initial and operating costs, leading to a more thorough evaluation of an asset’s economic viability.