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Whole-life cost is a term that is used to describe the total or cumulative cost of something in the possession of a company or individual, which is calculated based on the lifespan of such an asset. In this sense, the whole-life cost serves as a means of estimating or projecting the possible present and future costs that will accrue to the acquirement or ownership of something as opposed to just an estimation of the calculation of its present value. Form the foregoing, it can be deduced that a whole-life cost estimation is a necessary aspect or factor in any decision to make a purchase or for an investor to make certain types of investments that may require other kinds of input over the life of the investment.
The importance of this type of estimate stems from the observation that the expenses made toward the acquisition of certain investments do not end with the lump sum payment that is made at the moment of purchase. Other considerations must be factored into the equation in order to decide if the long-run analysis of the investment will show that it will be profitable. An example of a whole-life cost analysis can be seen in a situation where a coffee shop owner decides to purchase the store area in which the coffee shop is located. On the face of it, this purchase would be considered a good investment; however, the application of whole-life cost to the transaction will reveal whether the purchase of the coffee shop is actually a good investment.
By applying whole-life cost to the purchase of the coffee shop, other considerations besides the initial money that the proprietor of the coffee shop paid will be used to check the profitability of the investment in the coffee shop. One factor that will be checked as part of the whole-life cost estimate is any type of improvements that the investor must make to the building to bring it up to a certain standard, the various types of maintenance procedures that will be necessarily performed over the years, and the cost for necessities like electricity and any applicable taxes that will be required. Apart from the financial calculations, other factors that may be included in the whole-life cost analysis include the cost of the investment to the environment or any cost that it may have on the social life in that area.
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