Repair or Replace: The Chiller Decision
A 1980s, 180,000 SF office building runs a 20-year-old 400-ton chiller. Repairing it costs $95,000 for a compressor and controls rebuild and buys roughly three more years at 0.95 kW/ton. Replacement costs $430,000 for a 0.55 kW/ton machine with a 15-year life; a $32,000 utility rebate is available if the project is pre-approved. The building runs about 2,600 equivalent full-load hours a year at $0.12/kWh. The replacement reserve holds $510,000, but $180,000 is already committed to a lobby renovation. The owner uses an 8% cost of capital and plans to hold the asset seven more years. Last summer the chiller failed twice, once for six hours during a 98-degree week, and two tenants holding renewal options in 14 months have complained.
1. Compute the annual energy savings and the incremental payback. Then compare the two paths over the seven-year hold using present value, not just the repair price against the replacement price.
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Energy: 400 tons x 2,600 EFLH = 1,040,000 ton-hours. Old: 1,040,000 x 0.95 = 988,000 kWh. New: 1,040,000 x 0.55 = 572,000 kWh. Savings = 416,000 kWh x $0.12 = $49,920/yr.
Capital: net replacement cost = $430,000 - $32,000 rebate = $398,000. Incremental over repair = $398,000 - $95,000 = $303,000. Simple payback on the increment = $303,000 / $49,920 = about 6.1 years.
Seven-year PV comparison (8%):
- Replace now: $398,000 today.
- Repair now, replace in year 3: $95,000 today + $398,000 discounted three years ($398,000 / 1.2597 = $316,000) + three years of forgone savings ($49,920 x 2.577 = $128,600) = about $539,600.
Replacement is ahead by roughly $142,000 in present value inside the hold period, and the gap widens if the repaired machine fails early or if replacement cost inflates. The comparison is not $95K versus $430K; it is life-cycle cost. The key sensitivity is the assumed three-year life of the repair: if the repair reliably buys five years, the repair path narrows the gap and the decision becomes about reliability rather than dollars.
2. The reserve cannot cover the project. How do you fund it, and does the seven-year hold horizon argue against replacement?
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Available reserve = $510,000 - $180,000 committed = $330,000 against a $398,000 net need, leaving a $68,000 gap.
Options:
- Equipment loan: $68,000 at 8% over five years is roughly $16,500/yr of debt service, which is well under the $49,920/yr energy savings. The project self-funds.
- Operating cash plus phasing the lobby by six months.
- Repair now and fund a $35,000/yr reserve, which still leaves the building with a 23-year-old machine at sale.
Recommendation: replace now, funded by the reserve plus a short equipment loan. The hold horizon strengthens the case, not weakens it. At year seven the new machine has eight years of life and a buyer's engineer will value it positively; the repair path leaves an aging chiller that a buyer will price as an immediate capital need, and the owner will pay for that in the cap rate or in a price reduction larger than the $68,000 gap. Holding seven years means the owner captures the residual value, so the full 15-year life is not needed to justify the spend.
3. What non-financial factors would change the recommendation, and how do you document the decision for the owner?
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Factors that could flip the decision:
- The rebate requires pre-approval and a commissioning report; if the window is closing, the $32,000 disappears and payback stretches by roughly eight months.
- Lead time. A 400-ton machine may be 16-24 weeks out. If it cannot be installed before next June, a repair now is a bridge, not an alternative.
- Refrigerant and parts availability for the old machine; a compressor rebuild with obsolete controls is a single-point failure risk.
- Lease exposure: two renewal options in 14 months. A repeat summer outage is a leasing cost, not just a maintenance cost.
Documentation: a one-page life-cycle analysis with the assumptions stated (EFLH, rate, escalation, discount rate), three contractor quotes, the rebate pre-approval letter, the commissioning requirement, and a tenant communication plan for the outage window. Get written owner approval with the funding source and the decision rule spelled out: replace unless the repair bid comes in materially below $95,000 with a written five-year life expectation from the contractor.