The Life Profitability Method (LPM): A financial approach to engineering decisions

• A financial approach to engineering decision is proposed.
• Financial measures capable of capturing the future costs and revenues are introduced.
• An example is presented to illustrate the implementation of the framework.
• A comparison is shown between the results from the proposed formulation and existing ones.

The Life Cycle Cost Analysis (LCCA) is often used to guide engineering decisions to incorporate the costs of an asset during its entire service life in the decision making-process. However, researchers have found that decision-makers’ preferences, i.e. design choices, are often different from those suggested by the current LCC Analysis. To explain these discrepancies researches introduced human risk aversion formulations that are based on individual perceptions. This paper argues that the current LCC analyses are incomplete and they only provide a partial representation of the economic consequences valuable to decision makers. The paper proposes the Life Profitability Method (LPM), which introduces additional financial measures capable of capturing the future costs and revenues including a non-zero growth rate, insurance protection, and profitability ratios not accounted for in the LCCA. The LPM allows for optimal decisions based on more complete financial information.