Life-cycle cost
Northrop Grumman is making a new long range bomber for the Air Force. Development costs are $2 billion in 2016, and $3 billion in each of the years 2017 through 2030. In 2031, a ten year production run commences, with 10 aircraft produced per year at $1 billion apiece. In the year after production completes, operation and maintenance commences. Operation and maintenance lasts for 40 years, at $40 million per year per aircraft.
a) Gen. Wrench knows nothing about cash flow discounting, and so she treats $1 tomorrow the same as $1 today. What does she think the total life cycle cost is? What percent is development? production? O & M?
b) You have taken engineering economy, and you know the Air Force real discount rate is 7%. What is the present value of the life cycle costs? What percent is development? production? O & M?