By Robert M. Nordlund, PE, RS
Association Reserves, Inc.
I recently conducted a site inspection at a property with a large air conditioning chiller unit on the roof. The property was about 15 years old, and the chiller was original. A replacement chiller of this type should cost about $50,000 (installed) and last about 20 years. So this component was approaching the time it should require total replacement.
I was escorted up to the roof by the building engineer. When I asked how the chiller had been performing and if any repairs had been made, he expressed disappointment in telling me the Association had replaced the compressor (one of the main chiller mechanisms) earlier that year for about $25,000. I agreed with his disappointment. So… why were we both disappointed?
The first reason for our disappointment was the knowledge that $25,000 was far too much money to invest in such an old asset. But how do you actually decide what’s “too much”? It’s simple math: Calculate the “Remaining Value” of the asset, and avoid spending any more than that amount in repairing it. In other words, it is unwise to spend more repairing a component than it is currently worth!
To calculate the “Remaining Value” of an asset, divide the Current Replacement Cost by the Useful Life (UL), then multiply by the Remaining Useful Life (RUL), like this:
In this case, with a Current Replacement Cost of $50,000, a UL of 20 yrs, and a RUL of 5 years, the “Remaining Value” of the item was $12,500. So spending any more than $12,500 to repair the chiller would arguably be a poor decision. Spending $25,000 was very unwise!
Let me graphically demonstrate the declining Remaining Value ($) value of the chiller over time as shown below:
The chiller’s “Remaining Value” is indicated by the red line. When new (i.e., RUL = 20 years), the chiller was worth $50,000. At 20 years old (i.e., RUL = 0 years), its Remaining Value drops to $0. The blue bar, indicating $25,000 of repair work at the point in time when the RUL was 5 years, is clearly above the chiller’s $12,500 Remaining Value.
The second reason for our disappointment is that today’s major machinery is much more energy efficient than machines constructed 10, 15, or 20 years ago. This means that most new heaters, boilers, and chillers will cost much less to operate than the units they replace. Failing to replace one of these old “gas guzzlers” means the Association faces continued repair bills and high energy costs.
Unfortunately in this case, the Association overspent on the repair, and lost an opportunity to reduce electric power consumption. Yes, the compressor on the chiller failed earlier than anyone had expected. But rather than make a wise decision to install a completely new $50,000 chiller and benefit from a substantially lower power bill, the Association invested $25,000 to repair an old chiller that probably won’t last very much longer.
My prediction is that the Association will still need to replace the chiller in a few years (for about $50,000), and when they do, the old one will unfortunately have a near new compressor in it.
The bottom line: With some simple math, you can make wise decisions about when to repair and when to replace reserve components!