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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 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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