Your Home’s Heating System: Part One, Calculating the Cost and ROI of Replacement

• barrieabalard
• December 3rd, 2009

It’s likely that the most expensive—and essential—item to replace in your home is your heating system. Today, next week, and possibly one more week, I’ll explore the topic and provide you with links for further digging. This week we will learn about costs for replacing natural gas systems, and next week we’ll take up oil systems. Both fuels provide heat for the majority of homeowners in the USA.

If your heating bills are higher than they used to be, or you’re paying to repair your system more than once a season, or if your system is over 20 years old and fairly inefficient at burning fuel, it might be time to take a hard look at replacing it. I have read that the cost of replacing the average gas furnace is approximately three thousand dollars. Of course, the cost goes up if you are replacing an entire HVAC system, or if you decide to install the most energy-efficient system on the market. The estimate we received said that a low-end replacement with 80% AFUE (more on that in a moment) would be four to five thousand dollars for our HVAC system. A mid-level system with 90% AFUE would cost seven to eight thousand, and the most energy-efficient gas-powered HVAC available, at 95% efficiency, would come in at about eleven thousand dollars. My estimate might be higher than yours, however, because we live in an expensive and highly-taxed state, which drives up business costs and, therefore, the prices businesses have to charge to remain profitable.

Let’s dig into the numbers to figure out how quickly you can recover the cost of installing a new system. We’ll calculate your annual energy savings from a new heating system (we're not covering HVAC replacement in this post) using the table below. First, though, an explanation of AFUE, or Annual Fuel Utilization Efficiency. It represents how well (efficiently) the fuel is turned into energy (heat). The higher the number, the more efficient the system, meaning saved energy dollars for you.

Dollar Savings per $100 of Annual Fuel Cost

AFUE of Existing System	AFUE of New System
	75%	80%	85%	90%	95%
50%	$33	$37	$41	$44	$47
55%	26	31	35	38	42
60%	20	25	29	33	37
65%	13	18	23	27	32
70%	6	12	17	22	26
75%		6	11	16	21
80%			5	11	16
85%				5	11

Source: American Council for an Energy Efficient Economy. Viewed at Bankrate.com

Your local heating/HVAC people can examine your system and tell you how efficiently it uses gas. As a general rule of thumb, if your system is over twenty years old, the AFUE number is at most 75%, and probably is lower. As a general rule of thumb, if your system is over twenty years old, the AFUE number is at most 75%, and is probably lower.

Suppose your current system has an AFUE of 60%, like ours. You’d like to know how much you’d save on bills if you bought a 90% efficiency system. The table displays the answer as $33, in other words, you’d save $33 per $100 of annual fuel cost. If you’re spending $1500 a winter just on heat (entirely likely in the Northeast), then your savings would be 15 times $33, or $495, saving almost a third the first year. Let’s say replacing your gas heater with a 90% model would cost you $5000 total out of pocket (we are talking heating only, not the entire HVAC system). It would take a little more than ten years for the system to pay for itself (5000 divided by 495 equals 10.10). The average gas heating system lasts at least twenty years, and often thirty or more, so the system would pay for itself before the end of the heater’s likely useful life, plus you’d have lower heating bills for the life of the system after the ten-year payback period.

If you wish, you can calculate your ROI (return on investment) for the first year. In this case, you’d take the fuel savings and divide it by the cost of the new system. In other words, 495 divided by 5000 equals 0.099, representing a return on your investment at approximately 9.9% for the first year. That’s not too shabby. (Of course, if you pay cash, you’d have to deduct the cost of making money with that cash had you not spent it. These days, a twelve month CD pays less than 2%, leaving you with a 7.9% ROI. If you pay with credit, then your ROI will be lower because of finance charges.)

What did we do? We decided to keep using our old 60% AFUE system, mostly because it still runs very well, and we don’t want to lay out a large chunk of cash on anything right now. But if we were planning to live in this house more than a year or two more, we would have spent the money for a 90% system.

Links for further information:

Steps to Take Before Investing in a New Furnace http://www.bankrate.com/dls/news/advice/20060217b1.asp

Furnaces (Gas) and Boilers (Oil), from the U.S. Department of Energy Site. A lot of excellent technical info here for those who want all the details about fuel efficiency. http://www.energysavers.gov/your_home/space_heating_cooling/index.cfm/mytopic=12530

Tickers: AFUE, calculating payback time for new heating system, calculating ROI for first year's costs, energy efficency for gas heaters, gas heating system replacement costs, making an informed financial decision, personal finance

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