Last month, I shared my analysis on my considerations for taking advantage of the Energy Tax Credit and getting 30% off the cost of a new Central Air Unit since our house if 15 years old and we’ll eventually need one anyway. Well, there are various ways to look at large purchases like this, ranging from breakeven to “savings” to Net Present Value (NPV). NPV is my favorite method and I’ve outlined the results below.
After obtaining quotes on various models from the most reputable and widely used service in our area, I figured this one would be a no-brainer. Verbally, we were bouncing around concepts about variable frequency drives, efficiency ratings and all kinds of other engineer-jargon. I figured this thing would pay for itself within a few years and be well worth the up front investment since our current unit will die eventually anyway. However, upon reviewing the actual annual savings calculation estimates, it’s not entirely clear to me that we should jump on this tax credit opportunity and buy new equipment at this time.
The units, specs and pricing I had in mind were the following:
- 95% Gas Furnace & Performance 2-Stage A/C
- Installation of 95 percent efficient, natural gas hot air heater with 3-stage gas valve and variable speed blower
- Installation of 48,000 Btu, 17-seer, air conditioner at 4 tons with 2-stage compressor and infinity thermostat
- Installation of 48,000 BTU encased a-coil, which will be mounted directly on top of new gas heater
- Note: A rebate of $1,600.00 is available after installation (Utility and Mfg)
- PRICE $9,985.00
– With the $1500 Tax Credit and $1600 in rebates, and no taxes required, final price would have been: $6,885
Now, this is a new furnace and air unit and the pricing was comparable to or better than other local services but these guys had the best recommendation. So, I don’t question whether this was a good “deal”, but I do have doubts as to whether it’s an appropriate expenditure for our situation.
Once he came back with estimated savings, I just wasn’t that impressed:
- My annual savings were estimated to be a mere $329. On an annual base of about $2500 between gas and electric, that’s only 13% savings. I figured some nifty new unit would be saving me 20-30% with all this high efficiency and new technology.
- Using a discount rate of 6% and a 10 year model (see NPV link earlier to see how easily model in excel), this purchase was still NPV NEGATIVE to the tune of $4000. Now, that assumes our current unit lasts that long, but too complex to model probabilities of replacement in a hypothetical future.
Here are some other considerations:
- Moving or Staying? We’re not entirely sure we’re staying in this house forever – or even more than the next year or two. While the house is fine if we did stay, there’s another area we’ve considered for varying reasons from family proximity to school district. So, we’ve toyed with the prospect of moving for years, but never pulled the trigger. That being said, if the new unit was going to bring substantial savings annually and might make for a decent selling point as well, it may have made more sense.
- Opportunity Cost – Aside from the assumption I used in the NPV model of reasonably earning say, 5-6% long term with money invested in more aggressive assets, if we DO decide to move, that money would be put to much better use in being able to afford the home we want as opposed to losing a substantial amount upon resale. For instance, when you put in a new kitchen, the claim is, you’ll recoup say, 80% of that investment at sale. A new deck might be 50% and a pool is debatable (check out those comments!). Surely, a new Central Air unit doesn’t rank high on the scale of recouped investments. It’s probably up there with a roof or new windows – high cost house maintenance items that just aren’t viewed as that “sexy” at resale. Back to that opportunity cost – so if we did decide to move and our dream home was 7-8K outside our budget after I just put in this new unit, I’d be kicking myself.
- Pay Now or Pay Later – Contrary to my current direction though, is the notion that our current unit will die eventually. If it dies right after these tax incentives and manufacturer incentives evaporate, well then, I’ll feel badly. If it holds out another couple years, or especially if we move while it’s intact, great. I do have to contend with the notion that it may die next year though and in retrospect, I may have missed a decent deal.
- Are Prices Artificial? – Any time the government intervenes with artificial incentives, free market pricing goes out the window and subsidized pricing comes into play. We just saw it with the homeowner tax credit expiring and subsequent reduction of home sale prices in May (glad you didn’t rush to buy that house now?). Well, I question whether installation services and manufacturers are able to jack their pricing now because their units and installations are “in demand” and subsidized by the government, but say, next year, with no artificial incentives, the prices will just naturally come back down anyway. In many ways, these various government stimulus projects are just a money grab for particular industries and this may be no different. I just don’t have years of pricing data and trends to back up this suspicion so for now, it’s speculative. But I do question whether I’d really pay full pricing in 2011.
Decision: At this time I don’t intend on moving forward with the purchase. We have the money. And I’m all about making positive NPV investments and improvements to either our home or personal finances. But even with these seemingly enticing incentives, the purchase just doesn’t seem justified at this time.
Anyone Out There in the Same Boat?
If you enjoyed this post, you can get free updates through RSS Feed or via Email whenever a new post is published. Rest assured that you can unsubscribe at any time via the automated system and your information will not be sold, archived or utilized for any other "nefarious" purposes.