PRJM6001 Project Cost Management Assignment 2: Life Cycle Costing

This report presents a comprehensive life cycle costing (LCC) and net present value (NPV) analysis for the purchase of a Hyundai Elantra in Singapore. It compares two financing options: taking a loan from a financial institution and using own funds. The report details the costs associated with car ownership, including the base price, Certificate of Entitlement (COE), road tax, insurance, and maintenance. Assumptions are clearly stated, such as the interest rate on the loan and the depreciation rate of the car. The NPV is calculated over a five-year period to determine the profitability of each option. The analysis concludes that, based on the assumptions and data used, taking a loan from a car financing institute is the more financially advisable option. The report includes references to sources used for cost data and interest rates, providing a well-supported financial assessment.

PRJM6001 PROJECT COST MANAGEMENT
ASSIGNMENT NO 2: LIFE CYCLE COSTING
Name of University
Student’s Name
Dated:
Word Count:

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
Table of Contents
Executive summary..................................................................................................................................3
Introduction................................................................................................................................................3
Assumptions..............................................................................................................................................3
List of costs................................................................................................................................................4
Sources for all items.................................................................................................................................5
Treatment of car resale............................................................................................................................6
Use of NPV process.................................................................................................................................7
Discount rate.............................................................................................................................................7
Conclusion.................................................................................................................................................8
References................................................................................................................................................8
2 | P a g e

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
Executive summary
NPV (Net present value) is the amount which can be obtained by subtracting the incomes or
benefits from the product or project and the outflow for the project or product maintenance and
its purchase cost. Product life cycle cost is the amount associated with the product for lifetime.
When the NPV is distributed along the time line it can generate the data which can be used to
calculate the NPV over the period of product’s life cycle. In current case, the NPV has been
distributed to 5 years only for the sake of easiness in understanding the calculation.
Introduction
Life cycle costing (LCC) is the cost associate with a project or product over the life of its use1.
Net present value (NPV) is the estimation of some speculation over the timeframe. NPV gives
data with respect to the estimation of cash after some time, so it is also called ‘time value of
money’. In current case, we shall discuss the LCC & NPV for buying options (financing / own
cash) available for a new car.
In this report we shall understand the above discussed factors using the buying options of a new
car. The buying options which shall be evaluated are the ‘loan from a reputable car financing
institution’ and the ‘Using own funds’ and shall see which option is more profitable or advisable.
All the required assumptions as per the ground conditions and the latest available information
are used to calculate the same. The spreadsheet attached with the report shall show the
calculation in detailed.
Assumptions
I selected the car Hyundai Elantra (1591 CC) for my family and own use at 81,9992 Singapore
Dollar (SGD) as base rate. The total value of the car shall be shown in the spreadsheet where
all other cost heads are calculated to derive at the total cost of car.
There are two options of getting the finance for buying car:
1 (DOE 2017)
2 (sgCarMart 2017)
3 | P a g e

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
Option 1: using loan from reputable financial institution that provides for car, like Standard
Chartered Bank which provides the lowest rate of interest at around 2.68%3. In this case the
down payment is required to be done for obtaining the balance amount as loan from financial
institution. So let the down payment be 50,000 SGD and the balance shall be taken from bank
as loan.
Option 2: the second portion is using the own finance and spend the money already available.
The total cost which is required to be spent to buy the car shall be done in spreadsheet.
The maintenance cost for the car is zero for the first year due to the policy of the company to
provide free maintenance for year 1 and after that the maintenance is required to be done at
own cost only and company shall not bear any cost, all the labor and material cost shall be
bared by the buyer.
List of costs
In this section, we shall discuss regarding the expected expenditures which we are required to
do for purchasing a new car in Singapore. The probable head of the cost of a car are4 shown
below:
Base rate of the car: the rate which is actually being charged by the company and the
cost which adds to the balance sheet of Hyundai to calculate the profit and loss sheet at
the end of each cycle. The base rate as provided in the official website of a dealer for the
Hyundai Elantra was 81,999 SGD.
Certificate of Entitlement (COE): it is the cost of getting a license to drive the car on road
for around 10 years period. It has some range of cost; the cost depends on the volume
of engine or engine capacity and the horse power of the engine. For the selected car,
the value is around SGD 36,000 (generally it is considered in the car rate, but in this
case we shall show it as head to add more items)
Road Tax: the tax given to the government for the maintenance of the roads is fixed for
10 years of tenure from the date car is purchased. The fixed rate of road tax is 7440
SGD.
3 (Catapult Ventures Pte 2017)
4 (Woodpecker Asia Tech PTE 2017)
4 | P a g e

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
COE and PARF Rebate: These returns are introduced by the government to have a
check on the environmental conditions and always motivate the owners to scrap the
vehicle within 10 years of time to get this rebate. We shall neglect this rate for the
calculation sake, as we don’t know the time of usage.
Auto Insurance: it is the insurance we do by transferring the risk to other third party. The
risks are like death, damage, injury, theft, fire and medical cost from any probable
accident. Even though the rate of car insurance depends on the present value of car and
accordingly the premium of the insurance also decreases. But without getting into the
reduced insurance factor, we are considering a fixed 13,000 SGD expenditure for the
insurance once for next 10 years.
Total on road cost: the new car Hyundai Elantra can be bought by incurring all above
costs as discussed. Generally all the cost of the car on road can be calculated by adding
up all the heads ‘the base rate’, ‘COE’ and ‘Insurance’. The value obtained by adding the
above items is 138,439 SGD.
Total Car Loan Value: this head shall be applicable in case of the loan and not used in
case the total finance arrangement is done by own. The bank considered for the case is
Standard Chartered Bank with rate of interest 2.68%. The loan amount depends on the
amount of down payment we can do by using own fund. The more we do the down
payment the less will be the interest amount. So, in this case we considered the down
payment is done for 50,000 SGD.
Maintenance Cost: the maintenance cost is expected to be 1000 SGD from the 2nd year
on wards, the policy of Hyundai is providing free maintenance for the 1st year.
Sources for all items
The sources from where few of the cost back-ups are developed as follows:
The cost of loan from the Standard Chartered Bank @ 2.68%
5 | P a g e

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
The rate of the car (Hyundai Elantra) is obtained for the below source:
Now the, discount rate of the banks at Singapore is:
6 | P a g e

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
Treatment of car resale
The resale value of the car depends on the depreciation rate of car applicable in the country.
The depreciation rate can be calculated as5:
‘Annual Depreciation = (Total Cost of Hyundai Elantra – Sale Value of Hyundai Elantra) /
Number of Years in Service’
The resale value of a car in Singapore mainly depends on the make of the car, engine capacity
of the car, type of vehicle, COE and the registration cost6. So the resale value of the car shall
also take in to consideration the depreciation rate.
The depreciation rate per year = (138439 SGD – 0) / 10 = 13844 SGD
After considering the factors affecting it, the resale value of Hyundai Elantra after 5 years shall
be 1,38,439 SGD – 5x13,844 = 69,219 SGD
Use of NPV process
The NPV (Net Present Value) is the distinction of the present estimation of the item or the thing
which can get its inflow (or create income by offering it) and the present estimation of surge
(considering every one of the things like support cost).
5 (ValuePenguin 2017)
6 (Teh 2014)
7 | P a g e

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
The positive value of the NPV shows that the project or the product can be profitable and the
negative value or the reducing value trend between the inflow and outflow means that the
project is either totally on loss or it has tendency to go to loss.
The basic calculation in the worksheet is based on the above NPV method.
Discount rate
It is the percentage of rate the central bank or the regulatory bank charges form all the banks
which lend money to the loan taker. This charge is regulated by the central bank. The rate of
discount in Singapore for taking any loan is 1.17%7. In current report also we shall use the data
obtained.
So, let the discount rate of the calculation shall be used as 1.17%
Conclusion
By considering all the above data and assumptions to buy Hyundai Elantra using the payment
option of one is using the loan from bank and the other is by own funds, it can be concluded that
the NPV obtained for the product life cycle is positive in both the cases. In both the cases the
NPV obtained is positive, that means buying a car in Singapore is always profitable (cost of
diesel, petrol, average running kilometers are not considered for the calculation). But when we
compared between the two options ‘by taking loan from bank’ and the other ‘using own funds’,
we found that the NPV of ‘using own fund’ is generating less positive figure than the ‘by taking
loan from bank’. The NPV for ‘using own fund’ is 327,258 SGD and the NPV of ‘by taking loan
from bank’ is 404,251 SGD. So, to buy Hyundai Elantra, taking loan from car financing institute
is always advisable.
References
7 (IndexMundi 2016)
8 | P a g e

PRJM6001 PROJECT COST MANAGEMENT ASSIGNMENT NO 2: LIFE CYCLE COSTING
Catapult Ventures Pte. "Get The Best Car Loans Interest Rates for 2017 Now! ."
http://www.moneysmart.sg. 2017. http://www.moneysmart.sg/car-loan (accessed September
11, 2017).
DOE. "LIFE-CYCLE COST ESTIMATE." www.directives.doe.gov. 2017.
https://www.directives.doe.gov/directives-documents/400-series/0430.1-EGuide-1-Chp23/
@@images/file (accessed September 11, 2017).
IndexMundi. "Singapore Central bank discount rate." http://www.indexmundi.com. 2016.
http://www.indexmundi.com/singapore/central_bank_discount_rate.html (accessed September
11, 2017).
Jan, Irfanullah. "Net Present Value (NPV)." AccountingExplained.com. 2013.
http://accountingexplained.com/managerial/capital-budgeting/npv (accessed September 11,
2017).
sgCarMart. "Hyundai Pricelist From Komoco Motors." http://www.sgcarmart.com. 2017.
http://www.sgcarmart.com/new_cars/newcars_AD_pricelist.php?DID=14 (accessed September
11, 2017).
Teh, Joe. "Singapore, use this calculator to check how much your car is worth." TechieLobang. May 22,
2014. https://techielobang.com/blog/2014/05/22/singapore-use-this-calculator-to-check-how-
much-your-car-is-worth/ (accessed September 11, 2017).
ValuePenguin. "Understanding How Car Value Depreciation Works in Singapore." www.valuepenguin.sg.
2017. https://www.valuepenguin.sg/understanding-car-value-depreciation-singapore (accessed
September 11, 2017).
Woodpecker Asia Tech PTE. "How much does a car really cost in Singapore?" www.gobear.com. 2017.
https://www.gobear.com/sg/blog/how-much-does-a-car-really-cost-in-singapore (accessed
September 11, 2017).
9 | P a g e