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Furnace Payback

Heating Equipment Life Cycle Costs
Air Conditioning Purchasing Tips

Don't ask me why they do it. I don't know! Furnaces seem to have a service life of 20 to 25 years, whereas air conditioning condensing units (that big box outside your house) seem to only last for half that amount. This wasn't such a big deal 25 years ago. Energy conservation was not a big concern. Fuel costs were moderately low. Well, times have changed.

Thousands of people will be pondering what to do this year. Their air conditioning unit will give up the ghost. The salesperson will tell them how they should switch out that older 75 percent efficient furnace. Heck, the new furnaces operate at 90 percent or better, the salesperson will say. In fact, the furnace I'm going to let you have operates at 95 percent efficiency! Fuel saving will be enormous. Happy days are here again! ..... I can hear it now.

The Illusion

Here in Cincinnati, we have a 5 month heating season, November 1 through March 31. Some years, it stretches a little each way on chilly mornings. The point is this. To determine whether it is a good idea to switch out a furnace, you need to see if it makes sound economic sense.

Sometimes furnace and air conditioning people lead you to believe that you can save big bucks by switching out a furnace and/or air-conditioner that is still working fine. The numbers don't always add up. You need to do some math.

Let's look at a heating calculation. The first thing to do is to calculate what it actually costs you to heat your home. Select two bills from your last year's records. One should be from the early fall and the other from the late spring. These bills will show what your base load is for your utilities. Base load simply means all other costs less heating and cooling costs. If you add the two bills together and divide by two you will get an averaged value.

Now, take your bills from last year when you know the furnace was running for any period whatsoever. Subtract the averaged base load amount from each bill. This will give you the extra each month you are paying to heat your house. This is not an exact science, as your electric bills will tend to be higher as you get deeper into the winter, less daylight you know.

If you total the overage for each month, you will arrive at your annual heating cost. Let's consider this number. For sake of discussion, let's assume it is $800.

The Real Savings

Remember our salesperson? He talked about enormous savings. Is it true? Not really. Your existing 10 -12 year old furnace is possibly operating at a 75 percent efficiency level. The new furnace will operate at 95 percent. This is a 20 percent difference. The actual savings is 21 percent because you divide the 20 percent by 95 percent.

How does that relate to our example? Well, let's do the simple math. $800 times 21 percent savings per year equals a whopping $168. This isn't bad, but what does it really mean? You have to look a little deeper to find the answer. Interest Income - Significant

So what happens if you don't switch and get the new furnace? Will you go bankrupt? Will the utility company stockholders love you? How are you going to pay for that new furnace? From your savings? I thought so.

If you buy the new furnace your income stream gets slightly interrupted. In other words you loose the earning capability of the money you just gave to that salesperson!

Let's assume the new furnace will cost $3,500 (a reasonable amount). If you put that money in a certificate of deposit now, it will generate approximately 5 percent per year. That is $175.00 before tax. Accckkkk! You will loose money (before tax) if you buy the furnace!

If you have any investment success whatsoever (stocks, mutual funds, etc.), you can actually make significantly more money by not buying the new furnace, Many people fail to perform this vital second step in the analysis.

Another common mistake is to fail to recognize the payback time. In other words, how many years does it take to pay off the new system? For this calculation, you need to consider the rising cost of fuel. Assuming a 2 percent per year inflation in fuel costs, you need to multiply your annual cost by 11.07 to arrive at the total cost for the next 10 years. In our example, our fuel costs over the next ten years would be $800 times 11.07 which equals $8,856.

Our savings, remember, was 21 percent. So, we should expect to save $8,856 times 21 percent or $1,859.76. Yikes!!!!! In ten years, we have barely paid for half the cost of the new furnace. Not to mention the fact that we haven't offset the extra money we still have in the bank plus the interest it generated. It doesn't appear that switching a furnace that still works at a higher level of efficiency really pays.


OK, so your furnace has 10 - 15 years of useful life. Does that mean you do nothing to save money? No. There may be some options available. For example, you may choose to install a flue damper. These devices automatically shut off the flue trapping residual heat left in the furnace after the burner shuts off. These help save money and energy.

What about replacing that old standing pilot light with a spark ignitor? This might pay for itself. If you have an oil furnace, you might think of installing a flame retention burner. This can sometimes improve the efficiency of your oil furnace by 10 - 15 percent.

Talk to your heating contractor. See what options they recommend. Do the math. It is simple and only takes a few moments. You might be surprised by the figures.

A Quick Sample Calculation

OK, Ok, I'll show you how really simple it is to do one of these calculations. For your own situation, you need to just follow along. You will see just how simple it is to save money!

Late Spring Utility Bill
Early Fall Utility Bill

Total of both bills

Average Monthly Cost for Base Load utilities
(no heating or cooling costs)  ($180.00 divided by 2)
Total Sum of Utility Bills for Nov., Dec., Jan., Feb. & March $1,250.00

(minus) the Base Load for those 5 months (5 times $90.00)
Annual Heating Cost (actual cost to heat with existing furnace) $800.00
Projected Energy Savings with new furnace:

  • Existing Furnace is 75 percent efficient
  • New Furnace is 95 percent efficient
  • 20 percent difference
Actual Savings is 20 percent divided by 95 percent which equals 21 percent
Savings per year with New Furnace ($800 current cost times 21 percent) $168.00

You can take it from here. To finish the calculation, simply obtain a quote from the heating salesperson for the cost of the new furnace. Then find out what your local bank is paying for their CD's. Or, use the rate of return you have been averaging on your stocks, bonds, or mutual funds. Do you make more money in interest each year than what you will save? I thought so!

Tips on Purchasing a New Air Conditioner

Efficiency Ratings - Watch Out!

Air conditioners are not all created equal. Some perform much better than others. They are rated using a numeric system referred to as a SEER rating. The higher this number, the better the machine is at converting electricity to cooling. SEER ratings of 12 to 14 are not uncommon.

However, if your air conditioner fails and you replace it, the new unit may not deliver this promised efficiency. The SEER rating is calculated using specific inside matched coils and air velocity. It is very complicated. In order for you to achieve the high efficiency performance promised on the yellow sticker, you may have to make modifications inside your house. Discuss this possibility with your heating/cooling contractor. If this person looks puzzled or says "Huhhhh?" when you bring this issue up, I suggest you call another contractor immediately.

Extended Warranties - Be Careful!

Just about every manufacturer of air conditioners offer extended warranty programs on parts and labor. However, you must be careful. Often a third party company handles this 'insurance'. That's what extended warranties really are. If you make a claim, it is no different than any other insurance loss. A manufacturer who backs its own warranties may be a better choice. Look before you sign!

Sizing Air Conditioning Equipment

Did your last air conditioner not work too well? Don't blame it on low efficiency! It may not have been sized properly! A new unit sized the same will perform poorly no matter how efficient it is! I covered this topic extensively in Builder Bulletin 31. You may wish to send in for it if you don't already have it. Heat gain calculations are a must! Make your contractor perform these important calculations! It is not uncommon in new subdivisions for all the houses of a similar size to have the same sized air conditioner. Did you know this is possibly a mistake? The size of the air conditioner is a function of many thing, including but not limited to, the number of occupants, the compass direction the house faces, the number of windows, and types and quantity of interior lighting. If you have made changes in your windows and have new Low-E glass, your cooling requirements may even be less! All of these things need to be calculated. Computer programs do it very quickly. Ask for proof of these calculations before you sign the contract for the new unit. Remember, the first guy could have goofed. If they simply put in the same sized unit as you have, it could be wrong.

Projected Energy Savings Table

This table says it all in my book. I have already shown you how to determine your real annual heating costs. See where your costs plug into the table in the first column. The second column shows you the savings the HVAC sales person tells you that you will achieve should you switch from a 70 to a 95 percent efficient furnace. They quickly say that within X years you get a payoff and start saving money. Not so fast! What happens if gas rates go down? The payoff takes longer. Well, gas rates doubled in some areas this past winter. What happens if they are cut in half and drop down to where they were last year? The payoff time could double or triple OR extend beyond the life of the furnace!


Heating Costs
Savings Switching
from 70% to
a 95% Efficient
Gas Furnace
Annual Savings if
Gas Costs DROP
Annual Savings if
Gas Costs DROP
Annual Savings if
Gas Costs DROP
$1,200 $300 $270 $240 $210
$1,000 $250 $225 $200 $175
$800 $200 $190 $160 $140
$600 $150 $135 $120 $105
$400 $100 $90 $80 $70

Column B346


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