Life Cycle Cost Analysis. Selection of Heating Equipment. By Henry Manczyk, CPE, CEM

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1 Life Cycle Cost Aalysis Selectio of Heatig Equipmet By Hery Maczyk, CE, CEM

2 Life Cycle Cost Aalysis Selectio of Heatig Equipmet By Hery Maczyk, CE, CEM Maczyk Eergy Cosultig May 2003 Whe selectig equipmet to reovate or upgrade facilities, replace obsolete or ureliable equipmet, etc., oe of the factors oe must cosider is the ecoomics of the alteratives available to accomplish this. A low-priced system or piece of equipmet, for example, might appear iitially attractive, but might be excessively costly to operate over its lifetime or its useful life might be uusually short, makig the item of less ecoomic value tha other alteratives i the log term. The techique of Life Cycle Cost Aalysis allows oe to move beyod the simple acquisitio cost of a piece of equipmet to evaluatig its log term ecoomic impact o the facility for which it is proposed. The factors oe cosiders i Life Cycle Cost Aalysis iclude the iitial purchase price of the system or piece of equipmet; estimated useful life; operatig ad maiteace costs; eergy costs adjusted by eergy efficiecy factors; ad salvage value of the equipmet at the ed of its useful life. Operatig ad maiteace costs are typically discouted to obtai the et preset value of the cost stream. The followig table compares the life cycle cost aalyses of four HVAC systems that might be istalled i a residece or a small commercial facility to replace existig equipmet. Each has a 15-year estimated useful life. A uiform 3% discout rate is applied to the cost stream of each to calculate the et preset value of the aual eergy ad maiteace costs. The aual eergy cost show, based o atural gas cost of $6/MMBtu ad $0.075/kwh, has bee adjusted for equipmet efficiecy. The detailed calculatios for each system follow the table. I the examples chose, it is clear that iitial purchase price aloe is ot a sufficiet basis for determiig the real cost of the alteratives. The uit that is least expesive to istall turs out to be the most costly to ow ad operate. The uit with the highest istallatio cost is i fact the most ecoomic system over the 15-year period. Oly by performig the life cycle cost aalysis of each alterative, however, ca oe determie this. While Life Cycle Cost Aalysis is a valuable tool i assessig the ecoomics of a equipmet selectio, it is oly oe of may assessmets the eergy professioal must make. Oe must also cosider the system ower s ability to afford to ivest i a particular piece of equipmet; the impact of eergy program icetives; price fluctuatios of differet eergy sources; etc.

3 OF ALTERNATIVE TYES OF NEW HEATING SYSTEMS Case Number New Gas Furace New High Efficiecy Heat ump with Heat ump with Item With a Add-O Gas Furace With Auxiliary Gas Auxiliary Electric Air Coditioer Add-O Air Coditioer Backup Backup Life of Equipmet 15 Years 15 Years 15 Years 15 Years Iitial Cost of Equipmet $10,733 $11,183 $10,153 $9,983 Aual Eergy Cost $1,191 $928 $1,366 $1,468 Aual Maiteace Cost $60 $60 $150 $120 Heatig Efficiecy (AFUE) 68.9% 91.4% 68.9% 100.0% Discout Rate 3% 3% 3% 3% Salvage Value $30 $30 $50 $50 Life Cycle Cost $25,648 $22,958 $28,219 $28,909 Best Selectio

4 Case Number: 1 (SW: 15, 3%): ) reset Worth of a Uiform Series Compoud Amout 1 (UW: 15, 3%): reset worth A Amout i Iterest Rate: 3% Number of Iterest eriods: 15 SW reset Worth Factor UW Uiform Series Compoud Amout Factor Equipmet Cost $10,733 Eergy Cost: $1,191 x : $14,218 Maiteace Cost: $60 x : $716 Salvage Cost: $30 x : $-19 Total Life Cycle Cost : $25,648

5 Case Number: 2 (SW: 15, 3%): ) reset Worth of a Uiform Series Compoud Amout 1 (UW: 15, 3%): reset worth A Amout i Iterest Rate: 3% Number of Iterest eriods: 15 SW reset Worth Factor UW Uiform Series Compoud Amout Factor Equipmet Cost $11,183 Eergy Cost: $928 x : $11,078 Maiteace Cost: $60 x : $716 Salvage Cost: $30 x : $-19 Total Life Cycle Cost : $22,958

6 Case Number: 3 (SW: 15, 3%): ) reset Worth of a Uiform Series Compoud Amout 1 (UW: 15, 3%): reset worth A Amout i Iterest Rate: 3% Number of Iterest eriods: 15 SW reset Worth Factor UW Uiform Series Compoud Amout Factor Equipmet Cost $10,153 Eergy Cost: $1,366 x : $16,307 Maiteace Cost: $150 x : $1,791 Salvage Cost: $50 x : $-32 Total Life Cycle Cost : $28,219

7 Case Number: 4 (SW: 15, 3%): ) reset Worth of a Uiform Series Compoud Amout 1 (UW: 15, 3%): reset worth A Amout i Iterest Rate: 3% Number of Iterest eriods: 15 SW reset Worth Factor UW Uiform Series Compoud Amout Factor Equipmet Cost $9,983 Eergy Cost: $1,468 x : $17,525 Maiteace Cost: $120 x : $1,433 Salvage Cost: $50 x : $-32 Total Life Cycle Cost : $28,909

CAPITAL PROJECT SCREENING AND SELECTION

CAPITAL PROJECT SCREENING AND SELECTION CAPITAL PROJECT SCREEIG AD SELECTIO Before studyig the three measures of ivestmet attractiveess, we will review a simple method that is commoly used to scree capital ivestmets. Oe of the primary cocers