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Heating and Air Conditioning I. Principles of Heating, Ventilating and Air Conditioning R.H. Howell, H.J. Sauer, and W.J. Coad ASHRAE, 2005. basic textbook/reference material For ME 421 John P. Renie Adjunct Professor – Spring 2009. Chapter 10 – Life-Cycle Costs. General Concepts.

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Heating and air conditioning i

Heating and Air Conditioning I

Principles of Heating, Ventilating and Air Conditioning

R.H. Howell, H.J. Sauer, and W.J. Coad

ASHRAE, 2005

basic textbook/reference material

For ME 421

John P. Renie

Adjunct Professor – Spring 2009


Chapter 10 life cycle costs
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • Properly engineered HVAC system must also be economical

      • Compromise between performance and economic merit

      • Selection due to

        • User’s needs

        • Designer’s experience

        • Local building codes

        • First costs

        • Most efficiency use of source energy

      • Any of these may affect the choice – among choices given same results – system with the lowest-life cycle cost – not necessarily the lowest first-cost

    • Overall cost may be divided into two main categories

      • Owning costs

      • Operating costs


Chapter 10 life cycle costs1
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • Overall cost may be divided into two main categories

      • Owning costs

      • Operating costs

      • See Tables 10-1 and 10-2

      • Also Chapter 36 of the ASHRAE Handbook – HVAC Applications


Chapter 10 life cycle costs2
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • See Table 10-1 – Owning and Operating Cost Data Summary


Chapter 10 life cycle costs3
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • See Table 10-1 – Owning and Operating Cost Data Summary


Chapter 10 life cycle costs4
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • See Table 10-1 – Owning and Operating Cost Data Summary


Chapter 10 life cycle costs5
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • See Table 10-2 – Initial Cost Checklist


Chapter 10 life cycle costs6
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • See Table 10-2 – Initial Cost Checklist


Chapter 10 life cycle costs7
Chapter 10 – Life-Cycle Costs

  • General Concepts.

    • Life-cycle costs consider expenses that are experienced over an extended period.

    • Economic procedures project long-term costs so that comparisons can be made between systems with different initial and operating costs.

    • Must include all cost factors – initial costs, service life, interest, energy costs, operating expenses, and cost escalation

    • Life-cycle cost techniques

      • Present worth

      • Uniform annual owning and operating costs

      • Rate of return

      • Rate of return of investment

      • Benefit cost analysis

      • Years to pay back

      • Cash flow – more sophisticated analysis – need of investors/owners


Chapter 10 life cycle costs8
Chapter 10 – Life-Cycle Costs

  • Owning Costs.

    • Expressed as annual costs that are distributed over an extended period or as an equivalent total value – present worth (includes initial costs, salvage value, property taxes, rents, and insurance.)

    • Initial Costs

      • Included construction costs of the system – cost of design, administration, and raise capital

      • Interest – money has a true value because it most be borrowed, obtained from investors, or diverted (cost of borrowed capital, cost of capital, or discount rate)

      • Time period – used by owners and engineers to analyze the system – defined in the following manner

        • Depreciation period – allocated first cost over the estimated useful life (IRS: straight-line, accelerated procedures such as declining balance or sum of the years. )

        • Amortization period – time over which periodic payments of monies are made to discharge a debt


Chapter 10 life cycle costs9
Chapter 10 – Life-Cycle Costs

  • Owning Costs.

    • Initial Costs

      • Service life – time value that reflects the expected life of the specific component (not useful life or the depreciation period used for IRS)

        • High life is variable – depends on maintenance, environment, technical advancements of new equipment, and personal opinions

        • Service life can be used to set amortization period or help is decisions of preventive maintenance

        • See Table 10-3 for Estimates of Service Lives of Various Components

      • Capital recovery factor (CRF)

      • Calculated from the established interest rate and the amortization period n that determines the uniform annual cost needed to repay a debt or initial cost.

      • See Table 10-4 ($1,000 at 8 percent for 20 years – CFR = 0.10185, or $101.85 per year


Chapter 10 life cycle costs10
Chapter 10 – Life-Cycle Costs

  • Owning Costs.

    • Initial Costs (Amortization Table)




Chapter 10 life cycle costs13
Chapter 10 – Life-Cycle Costs

  • Owning Costs.

    • Initial Costs

      • Present worth – initial cash required (or present worth) is the current value of monies to be spent over the selected amortization period – money needed today for initial investment and all future expenditures.

      • Present worth factor, uniform annual series (PWuas) – given in tables and is used to calculate the present worth when given a uniform annual cost.

        • PW = Annual costs x PWuas (or 1/CFR)

      • Series compounded amount factor, uniform annual series (SCAF) – used to determine a future sum of money when a uniform annual payment is made.

        • Actual sum = Annual costs x SCAF

        • 1/SCAF is the sinking fund factor (SFF)

        • Annual costs= Actual sum at end x SFF


Chapter 10 life cycle costs14
Chapter 10 – Life-Cycle Costs

  • Owning Costs.

    • Present worth factor, single payment (PWFsp) – used to calculate the present worth of a future one-time payment

    • Actual cost times this number gives the present worth of a one-time cost, such as an overhaul or equipment replacement.

    • Reciprocal is referred to as the compound amount factor, single payment.


Chapter 10 life cycle costs15
Chapter 10 – Life-Cycle Costs

  • Owning Costs.

    • Property Tax

      • Included as an owning tax and is a percentage of the market value of the buildings

      • Engineer needs to assess whether appreciation or depreciate of property values will occur.

      • Incentives for energy conservation may be an important consideration in determining justifiable long-term investment

    • Insurance

      • Means by which a property owner can be reimbursed for a financial loss from property damage that requires repair or replacement

      • Financial recovery also from loss of income, rents, or profits resulting from the property damage

      • State-wide regulation (premium, liabilities, deductibles, etc.)

    • Salvage Value

      • Terminal value of the equipment at the end of the life or amortization period – often assumed to be zero


Chapter 10 life cycle costs16
Chapter 10 – Life-Cycle Costs

  • Operating Costs.

    • Energy

      • Utility costs require monthly calculation considering energy consumption and peak demands.

      • Most reliable are hourly procedures – each component as a function of weather, internal loads, building heat gains and losses and ventilation

      • Cost escalation – loss of purchasing power due to inflation

        • Real return = difference between interest and inflation (1 to 5%)

      • Present worth of an annual cost over a selected time period, n, using an interest of money, I, and a cost escalation, j, is the present worth escalation factor (PWEF) – when interest and fuel cost rises are not equal … use


Chapter 10 life cycle costs17
Chapter 10 – Life-Cycle Costs

  • Operating Costs.

    • Energy costs


Chapter 10 life cycle costs18
Chapter 10 – Life-Cycle Costs

  • Operating Costs.

    • Energy costs


Chapter 10 life cycle costs19
Chapter 10 – Life-Cycle Costs

  • Operating Costs.

    • Maintenance

      • Expenses for labor and material necessary to make repairs, as well as for cleaning, painting, inspection, testing, etc.

      • Usually operation engineer handles routine maintenance

      • Extraordinary repairs covered by maintenance divisions

      • Technique for estimating building HVAC maintenance cost for various equipment combinations (Dohrmann and Alereza – 1986)

      • Assume that the base HVAC system consists of fire-tube boilers for heating equipment, centrifugal chillers for cooling, variable-air-volume (VAV) distribution.

      • Costs are $0.3338 per square foot with adjustment from Table 10-5 to account for building age and various types of HVAC equipment.


Chapter 10 life cycle costs20
Chapter 10 – Life-Cycle Costs

  • Operating Costs.

    • Maintenance (Table 10-5)


Chapter 10 life cycle costs21
Chapter 10 – Life-Cycle Costs

  • Operating Costs.

    • Labor for Operations

      • System operators are often necessary due to scope of facility or local regulation

    • Water Costs

      • Heat can be rejected either through purchased water or cooling towers

      • Water conservation

      • Water Treatment

    • Income Tax

      • Can be considered as an operating cost

      • Tax rate is the marginal rate – next dollar

      • Allowances for depreciation and other deductions strongly influence investments by reducing life-cycle costs

      • Significant tax-credits should be included in life-cycle costs.


Chapter 10 life cycle costs22
Chapter 10 – Life-Cycle Costs

  • Life-Cycle Cost Techniques.

    • Present Worth

      • Most common technique – comparing the equivalent cash needed on hand to own and operate over an entire selected time. – single investment dollar amount.


Chapter 10 life cycle costs23
Chapter 10 – Life-Cycle Costs

  • Life-Cycle Cost Techniques.

    • Uniform Annual Owning and Operating Costs

      • Compares the cost of both investment and annual costs on an annual base –spread the costs of owning the building spread over the full amortization period

      • Consider the additional costs at some particular point in its life due to replacements or major overhauls.

    • Rate of Return

      • The average annual net benefit/original cost x 100.


Chapter 10 life cycle costs24
Chapter 10 – Life-Cycle Costs

  • Life-Cycle Cost Techniques.

    • Rate of Return

      • The average annual net benefit/original cost x 100.


Chapter 10 life cycle costs25
Chapter 10 – Life-Cycle Costs

  • Life-Cycle Cost Techniques.

    • Benefit/Cost Analysis

      • Comparative procedure that provides the engineer and owner the ratio of cost versus savings – after both have been converted to present worth.


Chapter 10 life cycle costs26
Chapter 10 – Life-Cycle Costs

  • Life-Cycle Cost Techniques.

    • Years to Payback

      • Similar to benefit cost analysis in that it does not look for system cost comparisons at a specific life – agreement between engineer and owner that YTP is reasonable and less than life expectancy

      • Years required for the present worth of the investment is equal to the savings.


Chapter 10 life cycle costs27
Chapter 10 – Life-Cycle Costs

  • Life-Cycle Cost Techniques.

    • Years to Payback


Chapter 10 life cycle costs28
Chapter 10 – Life-Cycle Costs

  • Life-Cycle Cost Techniques.

    • Cash Flow

      • A discounted cash flow approach provides the owner with a technique to incorporate variable annual outlays and taxes, with the amount and year of the cash income.

      • To account for interest and time, net cash flows are converted to single-payment present worths – the interest at which the summations of present worth of net cash flow is zero gives the rate of return.

      • If acceptable to the investor – proposal should be approved.

      • Another way would be to obtain an investment value at a given rate of return by adding the present worth of the net cash flows, but not including the investment costs.


Chapter 10 life cycle costs29
Chapter 10 – Life-Cycle Costs

  • Household Energy Use


Chapter 10 life cycle costs30
Chapter 10 – Life-Cycle Costs

  • Household Energy Use

    (from Energy and the Environment, 2nd Edition, Ristinen and Kraushaar, 2006, John Wiley)


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