The building owner of Example 3.5 has three options to invest his money as briefly described below. (A) Replace the entire older boiler (including burner) with more efficient heating system. The old boiler/burner system has an efficiency of only 60 percent whereas a new boiler

Question

The building owner of Example 3.5 has three options to invest his money as briefly described below.
(A) Replace the entire older boiler (including burner) with more efficient heating system. The old boiler/burner system has an efficiency of only 60 percent whereas a new boiler/burner system has an efficiency of 85 percent. The cost of this replacement is $10,000.
(B) Replace only the burner of the old boiler. This action can increase the efficiency of the boiler/burner system to 66 percent. The cost of the burner replacement is $2,000.
(C) Do nothing and replace neither the boiler nor the burner.
Determine the best economical option for the building owner. Assume that the lifetime of the retrofit project is ten years and the discount rate is 5 percent. The boiler consumes 5,000 gallons per year at a cost of $1.20 per gallon. An annual maintenance fee of $150 is required for the boiler (independently of its age). Use the life-cycle cost analysis method to determine the best option.

Accepted Answer

The total cost of operating the boiler/burner system is considered for the three options. In this analysis, the salvage value of the boiler or burner is neglected. Therefore, the only annual cash flows (A) after the initial investment on a new boiler are the maintenance fee and the net savings due to higher boiler efficiency. To present the calculations for LCC analysis, it is recommended to present the results in a tabular format and proceed as shown below:

Option C	Option B	Option A	Cost Item
Initial Investment
0	2,000	10,000	(a) Replacement Cost ($)
Annual Operating Costs:
5,000	4,545	3,530	(b) Fuel Use (gallons)
6,0000	5,454	4,236	(c) Fuel Cost ($) [$1.2*(b)]
150	150	150	(d) Maintenance fee ($)
6,150	5,594	4,386	(e) Total Operating Cost ($) [(c) + (d)]
USPW factor
7.740	7.740	7.740	[d = 5%, N = 10, Eq. (3.22)]
Present Worth ($)
47,601	45,298	43,948	[(a) + USPW * (f)]

Therefore, the life-cycle cost for option A is the lowest. Thus, it is recommended for the building owner to replace the entire boiler/burner system.

This conclusion is different from that obtained by using the simple payback analysis [indeed, the payback period for option A, relative to the base case C, is SPB(A) = ($10,000)/($1,765) = 5.66 years; and for option B, SPB(B) = ($2,000)/ ($546) = 3.66 years].

Note that if the discount rate were d = 10 percent (which is unusually high for most markets), the USPW would be equal to USPW = 6.145 and the life-cycle cost for each option will be

LCC(A) = $36,952 LCC(B) = $36,375 LCC(C) = $37,791

Therefore, Option B will become the most effective economically and will be the recommended option to the building owner.

Question 3.6: The building owner of Example 3.5 has three options to inves...

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