Equipment Replacement Cost Calculations; There’s More to it than Simple Payback

This week, among other things, I have been looking at boiler replacement options in a heating hot water plant serving a portion of a high-rise hotel in Southern California.

Towers

The two existing boilers are approaching the end of the 25-30 year service life estimated by ASHRAE and other industry organizations for this type of equipment and maintenance costs are starting to sky-rocket while reliability is starting to slip.

South tower hot water boiler

The reliability issue is particularly critical for the facility as the boilers provide hot water that is used to generate domestic hot water via a heat exchanger system in addition to providing comfort heating and reheat. An equipment failure can quickly ripple out to major guest dissatisfaction issues in a significant portion of the 1,300 plus room facility.

As is the case with most facilities, the funding for a major equipment replacement of this type is something that must be requested in advance and can take several months if not years to get approved. In addition, facilities engineering groups are often left with no recourse for developing the budget other than to request quotes from contractors to simply replace the equipment with the current equivalent, a topic I mentioned previously in a series of posts on design review.

When using this approach, its important to remember that an equipment replacement project actually represents a unique opportunity to enhance efficiency or performance beyond what can be achieved by a direct, one for one replacement.

The uniqueness is related to the fact that you are about to expend a certain amount of money for an equipment purchase anyway. In many situations, this means that only cost premiums associated with increased efficiency and performance need to be justified by
the available savings.

For the Marina, the contractor established budget that was the basis for the funding simply provided equipment that met current California Title 24 energy code requirements. That in and of itself represented an improvement in efficiency in the range of 10-15% which translated to a simple payback of a little over 10 years. For most Owners, 10
years would not represent a very attractive simple payback. But there are a couple of things to be aware of in this particular instance.

End of Service Life

The existing equipment is near the end of its useful service life and must be replaced if the hotel is to continue to function as intended; i.e. keep the guests satisfied. It’s kind of like the tires on your car; at some point, they will wear out and you need to buy new ones.

Few if any people ask what the simple payback is on buying tires vs. not buying tires (hopefully avoiding a wreck when they blow out) and just riding on the rims and then the brake drums. Occasional tire replacements are simply a part of the cost of ownership if you have a car and want a comfortable ride and to avoid more costly repairs (or worse).

Similarly, for the hotel, running a high end resort type facility with our reliable domestic hot water and comfort is not an option, thus occasional replacements of aging equipment reaching the end of its useful service life should be anticipated and are a part of the cost of doing business.

Rated Service Life

The new equipment has a rated service life of 25-30years based on data from ASHRAE and other industry organizations. That means that the code driven improvement in boiler efficiency will pay for the project in a little over 10 years and then make money for the Owner via reduce operating costs for another 15 to 20 years compared to the current equipment.

Economics

Ten years is the simple payback for the boiler replacement based on energy savings and assumes that energy costs will not escalate in that time frame. Most folks would say that it is likely that the price of natural gas will go up in the next ten years, and if they are right, the efficiency savings will pay for the necessary equipment replacement in less than 10 years.

Maintenance Costs

The maintenance cost for the current boilers is starting to skyrocket. Replacing them will reduce the annual maintenance cost and thus improve the simple payback. In this case including the reduction in maintenance cost in the annual cost savings equation changes the simple payback from a little over 10 years to a little under 8 years, based on the current cost to maintain the existing boilers and historical data for the cost of maintaining the boilers proposed to replace them.

So, my point is that broadening your perspective to take more than energy costs into account can have a significant impact on the simple payback that you calculate for a project. In a general sense, this is what life cycle cost analysis is all about; i.e looking at all of the costs and benefits for a project over its entire projected life, including things like maintenance costs, the cost of money itself, and the effect of inflation on all of those things.

Performing a life cycle cost analysis can be a somewhat daunting task if you haven’t done it before. But, by embracing some of the concepts associated with a life cycle cost analysis and bringing them into your simple payback calculations, you can begin to move down that road and learn the way, all while improving the financial viability of your project at the same time.

In the next post, I’ll look at how the Facilities Engineering team at Marriott and I took another step down the path by considering what would happen if we went beyond the requirements of Title 24 and installed condensing boilers capable of efficiencies in excess of 90-95% under the right operating conditions.

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David Sellers
Senior Engineer – Facility Dynamics Engineering
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