CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

TABLE OF CONTENTS

8.1 INTRODUCTION ........................................................................................................... 8-1

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis ................ 8-1

8.1.2 Overview of Life-Cycle Cost and Payback Period Analysis Inputs .................... 8-2

8.1.3 Use of Whole-Building Simulations in LCC and PBP Analysis ......................... 8-5

8.2 LIFE-CYCLE COST ANALYSIS INPUTS .................................................................... 8-6

8.2.1 Total Installed Cost Inputs ................................................................................... 8-6

8.2.1.1 Manufacturer Costs .................................................................................... 8-7

8.2.1.2 Markups ...................................................................................................... 8-7

8.2.1.3 Total Customer Price .................................................................................. 8-9

8.2.1.4 Future Equipment Prices .......................................................................... 8-10

8.2.1.5 Installation Cost ........................................................................................ 8-11

8.2.1.6 Total Installed Cost .................................................................................. 8-15

8.2.2 Operating Cost Inputs ........................................................................................ 8-15

8.2.2.1 Annual Energy Use Savings ..................................................................... 8-16

8.2.2.2 Energy Prices ............................................................................................ 8-16

8.2.2.3 Energy Price Trends ................................................................................. 8-17

8.2.2.4 Repair Cost ............................................................................................... 8-19

8.2.2.5 Maintenance Cost ..................................................................................... 8-19

8.2.2.6 Lifetime .................................................................................................... 8-20

8.2.2.7 Discount Rates .......................................................................................... 8-21

8.2.2.8 Compliance Date of Standard .................................................................. 8-24

8.2.2.9 Base Case Distribution of Efficiency Levels ........................................... 8-24

8.3 PAYBACK PERIOD INPUTS ...................................................................................... 8-25

8.4 LCC AND PBP RESULTS ............................................................................................ 8-26

8.4.1 Small Air-Cooled Commercial Unitary Air Conditioners ................................. 8-26

8.4.2 Large Air-Cooled Commercial Unitary Air Conditioners ................................. 8-29

8.4.3 Very Large Air-Cooled Commercial Unitary Air Conditioners ........................ 8-32

8.4.4 Rebuttable Payback Periods ............................................................................... 8-35

REFERENCES .......................................................................................................................... 8-36

LIST OF TABLES

Table 8.1.1 Summary of Inputs and Key Assumptions Used in the LCC and PBP 

Analysis.......................................................................................................... 8-4

Table 8.2.1 Manufacturer Production Cost for CUAC by Efficiency Level ($2013) ...... 8-7

Table 8.2.2 Manufacturer Shipping Cost for CUAC by Efficiency Level ($2013) ......... 8-7

Table 8.2.3 Summary of Average Markups ...................................................................... 8-8

Table 8.2.4 Summary of National Account Markups ....................................................... 8-8

Table 8.2.5 Overall Markup for CUAC by Equipment Class ........................................... 8-9

Table 8.2.6 Average Customer Price for CUAC (2013$) ............................................... 8-10

Table 8.2.7 Installation Costs for Baseline CUACs........................................................ 8-12

8-i 
Table 8.2.8 National Average Installation Cost for CUACs........................................... 8-13

Table 8.2.9 Installation Cost Indices by State (National Value = 100.0) ....................... 8-14

Table 8.2.10 Installation Cost Indices by Region (National Value = 100.0) .................... 8-14

Table 8.2.11 Average Total Installed Cost for CUACs (2013$) ...................................... 8-15

Table 8.2.12 Average and marginal tariff-based prices by region (2012 dollars) ............ 8-17

Table 8.2.13 Commercial Electricity Prices (2013 cents/kWh) ........................................ 8-18

Table 8.2.14 Annualized Maintenance Costs for CUACs ................................................ 8-20

Table 8.2.15 Risk free rate and equity risk premium, 2011-2013 .................................... 8-23

Table 8.2.16 Weighted Average Cost of Capital for Sectors that Purchase CUAC ......... 8-24

Table 8.2.17 Base Case Efficiency Market Shares in 2019 for CUACs ........................... 8-25

Table 8.4.1 Small Air-Cooled Commercial Unitary Air Conditioners: Life-Cycle 

Cost and Payback Period Results ................................................................. 8-27

Table 8.4.2 Large Air-Cooled Commercial Unitary Air Conditioners: Life-Cycle 

Cost and Payback Period Results ................................................................. 8-30

Table 8.4.3 Very Large Air-Cooled Commercial Unitary Air Conditioners: LifeCycle Cost and Payback Period Results ...................................................... 8-33

Table 8.4.4 Rebuttable-Presumption Payback Periods (years) for Small, Large, and 

Very Large Air-Cooled Commercial Unitary Air Conditioners .................. 8-35

LIST OF FIGURES

Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP ................. 8-4

Figure 8.2.1 Historical Nominal and Deflated Producer Price Indexes for Unitary 

Air Conditioners Except Heat Pumps .......................................................... 8-11

Figure 8.2.2 AEO2013 electricity price projections by region (2013$) ........................... 8-19

Figure 8.4.1 Range of Life-Cycle Cost Savings for Small Air-Cooled Commercial 

Unitary Air Conditioners ............................................................................. 8-28

Figure 8.4.2 Range of Payback Periods for Small Air-Cooled Commercial Unitary 

Air Conditioners........................................................................................... 8-29

Figure 8.4.3 Range of Life-Cycle Cost Savings for Large Air-Cooled Commercial 

Unitary Air Conditioners ............................................................................. 8-31

Figure 8.4.4 Range of Payback Periods for Large Air-Cooled Commercial Unitary 

Air Conditioners........................................................................................... 8-32

Figure 8.4.5 Range of Life-Cycle Cost Savings for Very Large Air-Cooled 

Commercial Unitary Air Conditioners......................................................... 8-34

Figure 8.4.6 Range of Payback Periods for Very Large Air-Cooled Commercial 

Unitary Air Conditioners ............................................................................. 8-35

8-ii
CHAPTER 8. LIFE-CYCLE COST AND PAYBACK PERIOD ANALYSIS

8.1 INTRODUCTION

The effect of amended standards on individual customers usually includes a reduction in 

operating cost and an increase in purchase cost. This chapter describes two metrics used in the 

analysis to determine the economic impact of standards on individual commercial customers. 

• Life-cycle cost (LCC) is the total customer cost over the life of an appliance or product, 

including purchase costs and operating costs (which in turn include maintenance, repair, 

and energy costs). Future operating costs are discounted to the time of purchase and 

summed over the lifetime of the appliance or product. 

• Payback period (PBP) measures the amount of time it takes customers to recover the 

assumed higher purchase price of more energy-efficient products through reduced 

operating costs.

The U.S. Department of Energy (DOE) conducted the LCC and PBP analysis using a 

spreadsheet model developed in Microsoft Excel. When combined with Crystal Ball (a 

commercially available software program), the LCC and PBP model generates a Monte Carlo 

simulation to perform the analysis by incorporating uncertainty and variability considerations in 

certain of the key parameters as discussed further in section 8.1.1. 

Inputs to the LCC and PBP analysis of CUACs are discussed in sections 8.2 and 8.3

respectively. Results for each metric are presented in section 8.4. Key variables and calculations 

are presented for each metric. The calculations discussed here were performed with a series of 

Microsoft Excelspreadsheets that are accessible over the Internet 

(http://www1.eere.energy.gov/buildings/appliance_standards/buildings/appliance_standards/prod

uct.aspx/productid/77). 

8.1.1 General Approach for Life-Cycle Cost and Payback Period Analysis 

In recognition of the fact that each building using CUACs is unique, variability and 

uncertainty are analyzed by performing the LCC and PBP calculations detailed here for a 

representative sample of individual commercial buildings. The results are expressed as the 

number of buildings experiencing economic impacts of different magnitudes. The LCC and PBP 

model was developed using Microsoft Excel spreadsheets combined with Crystal Ball. The LCC 

and PBP analysis explicitly model both the uncertainty and the variability in the model’s inputs 

using Monte Carlo simulation and probability distributions (see appendix 8-B). 

The LCC analysis used the estimated energy use for each CUAC unit as described in the 

energy use analysis in chapter 7. Energy use of CUACs is sensitive to climate and therefore

varies by location within the United States. Aside from energy use, other important factors 

influencing the LCC and PBP analysis include energy prices, installation costs, equipment 

distribution markups, and sales taxes. The LCC spreadsheets explicitly modeled both the 

uncertainty and the variability in the model’s inputs. 

8-1 
As mentioned previously, DOE generated LCC and PBP results as probability 

distributions using a simulation based on Monte Carlo analysis methods, in which certain key 

inputs to the analysis consist of probability distributions rather than single-point values. 

Therefore, the outcomes of the Monte Carlo analysis can also be expressed as probability 

distributions. As a result, the Monte Carlo analysis produces a range of LCC and PBP results. A 

distinct advantage of this type of approach is that DOE can identify the percentage of customers 

achieving LCC savings or attaining certain PBP values due to an increased efficiency level, in 

addition to the average LCC savings or average PBP for that efficiency level.

The LCC and PBP results are displayed as distributions of impacts compared to a base 

case. The base case efficiency level is for 2019 and is defined as a mix of CUAC efficiency 

levels reflecting the expected distribution of efficiency levels by equipment class. 

8.1.2 Overview of Life-Cycle Cost and Payback Period Analysis Inputs

The LCC is the total customer cost over the life of the equipment, including purchase 

price (including retail markups, sales taxes, and installation costs) and operating cost (including 

repair costs, maintenance costs, and energy cost). Future operating costs are discounted to the 

time of purchase and summed over the lifetime of the equipment. The PBP is the increase in 

purchase cost of a higher efficiency unit divided by the change in annual operating cost of the 

unit. It represents the number of years that it will take the customer to recover the increased 

purchase cost through decreased operating costs. In the calculation of PBP, future costs are not 

discounted. 

Inputs to the LCC and PBP analysis are categorized as: (1) inputs for establishing the 

purchase cost, otherwise known as the total installed cost; and (2) inputs for calculating the 

operating cost (i.e., energy, maintenance, and repair costs).

The primary inputs for establishing the total installed cost are:

• Baseline manufacturer selling price: The baseline manufacturer selling price (MSP) is 

the price charged by the manufacturer to a wholesaler for equipment meeting existing 

minimum efficiency (or baseline) standards. The MSP includes a markup that converts 

the cost of production (i.e., the manufacturer cost) to a MSP. 

• Standard-level manufacturer selling price increase: The standard-level MSP is the 

incremental change in MSP associated with producing equipment at each of the higher 

standard levels. 

• Markups and sales tax: Markups and sales tax are the wholesaler and contractor margins 

and state and local retail sales taxes associated with converting the MSP to a customer 

price. 

• Installation cost: Installation cost is the cost to the customer of installing the equipment. 

The installation cost represents all costs required to install the equipment but does not 

include the marked-up customer equipment price. The installation cost includes labor, 

overhead, and any miscellaneous materials and parts. 

The primary inputs for calculating the operating cost are:

8-2 
• Equipment energy consumption and power demand: The equipment energy 

consumption is the site energy use associated with providing space conditioning to the 

building. The power demand is the maximum power requirement of the equipment (more 

commonly known as the peak demand) for a specific period of time. Typically, electric 

utilities measure the peak demand for each month. DOE calculated both the energy 

consumption and peak demand based on hourly whole-building simulations.

• Electricity Prices: Average and marginal electricity prices for commercial buildings are 

determined using a tariff-based analysis. The average electricity price is used to estimate 

operating costs for the baseline, and marginal prices are used to value the operating cost 

savings at higher efficiency levels. 

• Electricity price trends: The Energy Information Administration’s (EIA’s) Annual 

Energy Outlook 2013 (AEO 2013)

1

 is used to project electricity prices into the future. 

• Maintenance costs: The labor and material costs associated with maintaining the 

operation of the equipment. 

• Repair costs: The labor and material costs associated with repairing or replacing 

components that have failed. 

• Lifetime: The age at which the CUAC equipment is retired from service.

• Discount rate: The rate at which future costs and savings are discounted to establish their 

present value.

Figure 8.1.1 graphically depicts the relationships between the installed cost and operating 

cost inputs for the calculation of the LCC and PBP. 

8-3 
Figure 8.1.1 Flow Diagram of Inputs for the Determination of LCC and PBP 

Table 8.1.1 provides descriptions of the various inputs to the calculation of the LCC and 

PBP. As noted earlier, most of the inputs are characterized by probability distributions that 

capture variability in the input variables. 

Table 8.1.1 Summary of Inputs and Key Assumptions Used in the LCC and PBP 

Analysis 

Inputs Description

Affecting Installed Costs

Equipment Price

Derived MSP for CUAC equipment at different input capacities (from the 

engineering analysis) and multiplied by wholesaler markups and contractor 

markups plus sales tax (from markups analysis). Used the probability 

distribution for the different markups to describe their variability. 

Installation Cost

Includes installation labor derived from RS Means Online.

2 Overhead and 

materials costs and profits are assumed to be included in the contractor’s 

markup. Thus, the total installed cost equals the customer equipment price 

(manufacturer cost multiplied by the various markups plus sales tax) plus the 

installation cost. 

Affecting Operating Costs

Annual Energy Use See chapter 7. 

Energy Efficiency

The integrated energy efficiency ratio (IEER) is the efficiency descriptor for 

CUAC. Whole-building simulations are used to determine the annual energy 

consumption associated with a particular standard level.

Electricity Prices

Costs were calculated for generalized buildings from summer and winter 

marginal and average electricity prices using tariff data and CBECS 1992 and 

1995 monthly electricity consumption and demand. Prices were escalated by the 

AEO 2013 forecasts to update tariff prices to 2013 and to estimate future 

Manufacturer Selling 

Price (Base)

Manufacturer Selling 

Price (Standard i=1...n)

Wholesaler/Distributor

Markup

Contractor Markups

Sales Tax

Installation Costs

Equipment Prices

Total Installed 

Cost (Std i – Base)

Electricity Consumption

Electricity Prices

Annual Energy Costs

Annual Maintenance 

Costs

Repair Costs

Annual Operating 

Cost (Std i –-Base)

Discount Rate

Lifetimes

Payback 

Period

Lifecycle 

Cost

Lifetime 

Operating Cost 

(Std I – Base)

8-4 
Inputs Description

electricity prices. Escalation was performed at the census division level.

Maintenance Cost

The cost associated with maintaining the operation of the equipment (e.g., 

cleaning heat exchanger coils). Annual maintenance cost does not change as a 

function of MSP.

Repair Cost Not included in the LCC.

Affecting Present Value of Annual Operating Cost Savings

Equipment Lifetime

Adjusted the probability distributions developed for the 2004 ANOPR based on 

the ASHRAE service life database, resulting in higher mean and median 

lifetimes.

Discount Rate

Mean real discount rates ranging from 3.74 percent to 5.57 percent for various 

classes of commercial customers, calculated using financial data from 

Damodaran Online. Probability distributions are used for the discount rates.

Compliance Date 2019 (3 years after expected publication of the final rule)

All of the inputs depicted in Figure 8.1.1 and summarized in Table 8.1.1 are discussed in 

sections 8.2 and 8.3. 

8.1.3 Use of Whole-Building Simulations in LCC and PBP Analysis

As detailed in Chapter 7, the energy use for current analysis was derived from whole 

building simulations performed for the 2004 CUAC standard. The whole-building simulation

analysis generates building energy consumption data for each hour of a typical meteorological 

year. For each of the 1,033 records in the building sample, the hourly building energy 

consumption is separated into the air-conditioning energy consumption (i.e., the consumption 

due to the compressor and condenser fan), the supply or ventilation fan energy consumption, and 

the energy consumption due to all other electric end uses in the building. Because the supply fan 

is integral to the CUAC equipment, energy consumption for ventilation, even during periods 

where mechanical cooling is not required, is included as part of the total air-conditioning energy 

consumption. 

Because the simulation data reflects the building stock in 1995 that uses air-cooled 

CUAC equipment, DOE developed a “generalized building sample” to represent the current 

installation conditions and distribution of total floor space for the equipment covered in this 

rulemaking. This part involved making adjustments to update the building simulation data to 

reflect the building stock that uses air-cooled CUAC equipment in 2011. Conceptually, the main 

difference between the “generalized building sample” (GBS) and the sample of specific 

commercial buildings compiled in CBECS is that the GBS aggregates all building floor space 

associated with a particular set of building characteristics into a single category. The building 

characteristics addressed in the GBS included: region, building activity, building size, and 

vintage. The combination of 10 regions, 7 building types, 3 sizes and 3 vintages leads to a set of 

630 independent categories in the GBS. DOE developed a separate GBS for the each of the 

representative cooling capacity sizes (7.5-ton, 15-ton, and 30-ton) addressed in the LCC and PBP 

analysis. 

8-5 
8.2 LIFE-CYCLE COST ANALYSIS INPUTS

Life-cycle cost is the total customer cost over the life of a piece of equipment, including 

purchase cost and operating costs (which are composed of energy costs, maintenance costs, and 

repair costs). Future operating costs are discounted to the time of purchase and summed over the 

lifetime of the equipment. Life-cycle cost is defined by the following equation: 

Where:

LCC = life-cycle cost ($),

 IC = total installed cost ($),

∑ = sum over the lifetime, from year 1 to year N, 

where N = lifetime of equipment (years),

OC = operating cost ($),

r = discount rate, and

t = year for which operating cost is being determined. 

DOE expresses all the costs in 2013$. Total installed cost, operating cost, lifetime, and 

discount rate are discussed in the following sections. In the LCC analysis, the year of equipment 

purchase is assumed to be 2019, the effective date of the energy conservation standards for 

CUAC. 

8.2.1 Total Installed Cost Inputs 

The total installed cost to the customer is defined by the following equation: 

Where:

EQP = equipment price ($) (i.e., customer price for the equipment only), and 

INST = installation cost ($) (i.e., the cost for labor and materials). 

The equipment price is based on the distribution channel through which the customer 

purchases the equipment. As discussed in chapter 6, DOE defined one major distribution channel 

for new units to describe how the equipment passes from the manufacturer to the customer: the 

manufacturer sells the equipment to a wholesaler or distributor, who sells to a mechanical 

contractor hired by a general contractor. The general contractor purchases and installs the 

equipment on behalf of the customer and adds its markup to the mechanical contractor’s price. 

Replacement equipment follows the same distribution channel, except that there is no general 

contractor. Instead, the mechanical contractor takes on the general contractor’s function. 

The remainder of this section provides information about the variables DOE used to 

calculate the total installed cost for CUAC. 

∑=

+= +

N

t

t

t ICLCC OC r

1

/( )1

IC EQP += INST

8-6 
8.2.1.1 Manufacturer Costs

DOE developed the manufacturer costs for CUAC as described in chapter 5, Engineering 

Analysis. The manufacturer costs at each efficiency level for the representative units in each 

equipment class are shown in Table 8.2.1. DOE also considered shipping costs from the 

manufacturer for these units, which are shown in Table 8.2.2. 

Table 8.2.1 Manufacturer Production Cost for CUAC by Efficiency Level ($2013) 

Eff.

Level

Small Commercial 

Packaged AC (AirCooled) - ≥65,000 

Btu/h and < 135,000 

Btu/h

Large Commercial 

Packaged AC (AirCooled) - ≥135,000 

Btu/h and < 240,000 

Btu/h

Very Large

Commercial Packaged 

AC (Air-Cooled) - 

≥240,000 Btu/h and < 

760,000 Btu/h

Total 

Cost

Incremental 

Cost

Total 

Cost

Incrementa

l Cost

Total 

Cost

Incremental 

Cost

0 $1,920 - $3,552 - $7,148 -

1 $2,036 $116 $3,971 $419 $7,690 $543

2 $2,504 $583 $4,345 $793 $8,444 $1,296

3 $2,709 $789 $4,789 $1,237 $8,982 $1,835

4 $3,197 $1,277 $5,106 $1,554 $9,901 $2,753

Table 8.2.2 Manufacturer Shipping Cost for CUAC by Efficiency Level ($2013) 

Eff.

Level

Small Commercial 

Packaged AC (AirCooled) - ≥65,000 

Btu/h and < 135,000 

Btu/h

Large Commercial 

Packaged AC (AirCooled) - ≥135,000 

Btu/h and < 240,000 

Btu/h

Very Large

Commercial Packaged 

AC (Air-Cooled) - 

≥240,000 Btu/h and < 

760,000 Btu/h

Total 

Cost

Incremental 

Cost

Total 

Cost

Incrementa

l Cost

Total 

Cost

Incremental 

Cost

0 $257 - $257 - $600 -

1 $257 $0 $257 $0 $600 $0

2 $257 $0 $450 $193 $600 $0

3 $257 $0 $450 $193 $600 $0

4 $360 $103 $450 $193 $1,044 $444

8.2.1.2 Markups 

For a given distribution channel, the overall markup is the value determined by 

multiplying all the associated markups and the applicable sales tax together to arrive at a single 

overall distribution chain markup value. The overall markup is multiplied times the baseline or 

8-7 
standard-compliant manufacturer cost to arrive at the price paid by the customer. Because there 

are baseline and incremental markups associated with the wholesaler and mechanical and general

contractors, the overall markup is also divided into a baseline markup (i.e., a markup used to 

convert the baseline manufacturer price into a customer price) and an incremental markup (i.e., a 

markup used to convert a standard-compliant manufacturer cost increase due to an efficiency 

increase into an incremental customer price). Markups can differ depending on whether the 

equipment is being purchased for a new construction installation or is being purchased to replace 

existing equipment. DOE developed the overall baseline markups and incremental markups for 

both new construction and replacement applications as a part of the markups analysis (chapter 6 

of the TSD).

Table 8.2.3 and Table 8.2.4 display baseline and incremental markups used to calculate 

customer price from manufacturer cost; Table 8.2.3 presents the values used for the distribution 

channels involving wholesalers and contractors, while Table 8.2.4 presents the values used for 

the national accounts distribution channels. Because the relative importance of new construction 

and replacements in total shipments varies among the equipment classes, the total markup varies 

as well (Table 8.2.5).

Table 8.2.3 Summary of Average Markups 

Baseline Markup Incremental Markup

Manufacturer 1.3 to 1.41 (see Table 6.6.1 in chapter 6)

Wholesaler 1.36 1.10 

Mechanical Contractor 

(new construction/replacement) 1.42/1.50 1.14/1.20 

General Contractor 

(new construction only) 1.31 1.19 

Sales Tax (replacement only) 1.07 1.07

 

Table 8.2.4 Summary of National Account Markups 

Market Baseline Markup Incremental Markup

New Construction 2.14 to 2.28 1.47 to 1.56

Replacement 1.92 to 2.04 1.42 to 1.50

8-8 
Table 8.2.5 Overall Markup for CUAC by Equipment Class 

Equipment Class Baseline Markup Incremental Markup

Small Commercial Packaged AC 

(Air-Cooled) - ≥65,000 Btu/h and < 

135,000 Btu/h

2.76 1.79 

Large Commercial Packaged AC 

(Air-Cooled) - ≥135,000 Btu/h and 

< 240,000 Btu/h

2.84 1.84 

Very Large Commercial Packaged 

AC (Air-Cooled) - ≥240,000 Btu/h 

and < 760,000 Btu/h

2.99 1.93 

8.2.1.3 Total Customer Price

DOE derived the customer equipment price for the efficiency levels above the baseline 

by taking the product of the baseline manufacturer cost and the baseline overall markup 

(including the sales tax) and adding to it the product of the incremental manufacturer cost and the 

incremental overall markup (including the sales tax). DOE followed the same process for 

shipping costs but in this case the manufacturer markup was not included in the overall markup. 

DOE then added the marked-up shipping cost to the customer equipment price. Markups and the 

sales tax all can take on a variety of values, depending on location, so the resulting total installed 

cost for a particular efficiency level is represented by a distribution of values. 

Table 8.2.6 presents the average customer equipment price for each CUAC equipment 

class at each efficiency level examined. 

8-9 
Table 8.2.6 Average Customer Price for CUAC (2013$) 

Equipment Class

Efficiency Level

Baseline 1 2 3 4

Small Commercial 

Packaged AC (AirCooled) - ≥65,000 

Btu/h and < 135,000 

Btu/h

$5,849 $6,056 $6,893 $7,261 $8,279 

Large Commercial 

Packaged AC (AirCooled) - ≥135,000 

Btu/h and < 240,000 

Btu/h

$10,643 $11,415 $12,373 $13,192 $13,777 

Very Large 

Commercial Packaged 

AC (Air-Cooled) - 

≥240,000 Btu/h and < 

760,000 Btu/h

$22,623 $23,673 $25,131 $26,172 $28,570 

8.2.1.4 Future Equipment Prices

DOE obtained historical PPI data for “unitary air-conditioners, except heat pumps” 

spanning the time period 1978-2013 from the Bureau of Labor Statistics’ (BLS).3 The PPI data 

reflect nominal prices, adjusted for product quality changes. An inflation-adjusted (deflated) 

price index was calculated by dividing the PPI series by the Gross Domestic Product Chained 

Price Index (see Figure 8.2.1).4

 

8-10 
Figure 8.2.1 Historical Nominal and Deflated Producer Price Indexes for Unitary Air 

Conditioners Except Heat Pumps 

From 1978 to 2004, the PPI index shows a long-term declining trend. Since then, the 

index has been flat. Because it is not evident that the historical declining trend will re-establish 

itself, DOE chose to apply a constant price trend (2013 levels) for the NOPR. Thus, projected 

prices for the LCC and PBP analysis are equal to the 2013 values for each efficiency level in 

each equipment class. For the NIA, DOE also analyzed the sensitivity of results to alternative 

price forecasts. 

8.2.1.5 Installation Cost 

The installation cost is the price to the customer of labor and materials (other than the 

actual equipment) needed to install CUAC equipment. DOE derived installation costs for 

commercial air conditioners from current RS Means data. RS Means provides estimates on the 

person-hours required to install CUAC equipment and the labor rates associated with the type of 

crew required to install the equipment. DOE calculated the installation cost by multiplying the 

number of person-hours by the corresponding labor rate. RS Means provides specific personhour and labor rate data for the installation of 7.5-ton, 15-ton, and 30-ton roof top air 

conditioners. DOE decided that data for 7.5-ton, 15-ton, and 30-ton rooftop air conditioners are 

representative of installation costs for the small, large, and very large air-conditioning equipment 

classes, respectively. 

Labor rates vary significantly among regions, and the RS Means data provide the 

necessary information to capture this regional variability. RS Means provides cost indices that 

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0

20

40

60

80

100

120

140

160

180

197819801982198419861988199019921994199619982000200220042006200820102012

Deflated PPI (2013=1)

Nominal PPI (1982=100)

Year

Nominal PPI: Unitary Air Conditioners Except Heat Pumps

Deflated PPI: Unitary Air Conditioners Except Heat Pumps

8-11 
reflect the labor rates for 656 cities in the United States. Several cities in all 50 states of the 

United States and the District of Columbia are identified in the RS Means data. DOE 

incorporated these cost indices into the analysis to vary the installation cost depending on the 

location of the CUAC customer.

Within a given capacity (equipment class), DOE chose to vary installation costs in direct 

proportion to the weight of the equipment. The weight of the equipment in each equipment class 

and efficiency level was determined through the engineering analysis.

Table 8.2.7 summarizes the nationally representative person-hours and labor rates 

associated with the installation of 7.5-ton, 15-ton, and 30-ton roof top air conditioners as 

presented in RS Means Online. Table 8.2.7 provides both bare installation costs (i.e., costs before 

overhead and profit (O&P)) and installation costs including O&P. DOE decided that the 7.5-ton, 

15-ton, and 30-ton installation costs that include O&P represent the installation costs for baseline 

efficient systems (i.e., 11.4 IEER for 7.5-ton systems, 11.2 IEER for 15-ton systems, and 10.1 

IEER for 30-ton systems).

Table 8.2.7 Installation Costs for Baseline CUACs

System Type*

Person

-hours

2013 Bare Costs Labor w/ O&P

Cost per 

Personhour

(2013$)

Total 

Labor 

Cost

(2013$)

Cost per 

Personhour

(2013$)

Total 

Labor 

Cost

(2013$)

7.5-ton cooling, 170 kBtu/h heating 32.258 $50.98 $1,645 $76.75 $2,476

15-ton cooling, 270 kBtu/h heating 42.032 $52.87 $2,222 $79.60 $3,346

30-ton cooling, 540 kBtu/h heating 68.376 $53.94 $3,688 $81.21 $5,553

*Description as in RS Means for roof top air conditioners with standard controls, curb, economizer, and a single-zone, electric 

cooling, gas heating unit.

Table 8.2.8 shows the national average total installation costs by equipment class and 

efficiency level. The total includes overhead and profit (O&P), which is calculated using labor 

markups from RS Means. For efficiency levels above the baseline, the installation costs vary in 

direct proportion to equipment weight. 

8-12 
Table 8.2.8 National Average Installation Cost for CUACs 

Equipment Class

Efficiency Level

0 1 2 3 4

Small 

Commercial 

Packaged AC 

(Air-Cooled) - 

≥65,000 Btu/h 

and < 135,000 

Btu/h

Weight 

(lbs) 732 786 960 970 1,231 

Install Cost 

(2013$) $2,476 $2,659 $3,248 $3,283 $4,166 

Large 

Commercial 

Packaged AC 

(Air-Cooled) - 

≥135,000 Btu/h 

and < 240,000 

Btu/h

Weight 

(lbs) 1,295 1,463 1,862 1,894 2,158 

Install Cost 

(2013$) $3,346 $3,779 $4,812 $4,893 $5,575 

Very Large 

Commercial 

Packaged AC 

(Air-Cooled) - 

≥240,000 Btu/h 

and < 760,000 

Btu/h

Weight 

(lbs) 3,808 4,212 4,869 4,905 5,620 

Install Cost 

(2013$) $5,553 $6,141 $7,099 $7,152 $8,194 

Table 8.2.9 summarizes the cost indices for installations in each of the 50 States of the 

U.S., plus the District of Columbia, used to vary the nationally representative installation costs in 

Table 8.2.8. To arrive at an average index for each state, DOE weighted the city indices in each 

state by their population. It used population estimates for the year 2010 from the U.S. Census 

Bureau to calculate a weighted-average index for each state. DOE then assigned each state to a 

census division (with Pacific divided into north and south), and calculated a weighted-average 

index for each region in the same manner (Table 8.2.10).

8-13 
Table 8.2.9 Installation Cost Indices by State (National Value = 100.0) 

State Index State Index State Index

Alabama 50.1 Kentucky 83.6 North Dakota 58.6

Alaska 107.4 Louisiana 62.5 Ohio 93.2

Arizona 79.5 Maine 75.9 Oklahoma 66.4

Arkansas 58.9 Maryland 83.8 Oregon 99.6

California 124.9 Massachusetts 120.6 Pennsylvania 116.4

Colorado 78.8 Michigan 101.4 Rhode Island 112.0

Connecticut 119.8 Minnesota 112.9 South Carolina 52.3

D.C 95.3 Mississippi 52.4 South Dakota 41.4

Delaware 119.5 Missouri 99.2 Tennessee 73.2

Florida 68.0 Montana 73.2 Texas 56.8

Georgia 68.9 Nebraska 80.5 Utah 70.8

Hawaii 112.9 Nevada 100.3 Vermont 75.1

Idaho 75.6 New Hampshire 83.0 Virginia 73.1

Illinois 130.6 New Jersey 126.5 Washington 107.2

Indiana 81.9 New Mexico 70.5 West Virginia 88.6

Iowa 80.5 New York 163.8 Wisconsin 97.7

Kansas 73.9 North Carolina 55.7 Wyoming 67.2

Table 8.2.10 Installation Cost Indices by Region (National Value = 100.0) 

Region Index

New England 110.3

Mid Atlantic 141.0

East North Central 104.3

West North Central 91.2

South Atlantic 68.7

East South Central 66.3

West South Central 58.7

Mountain 79.1

Pacific (North) 104.4

Pacific (South) 124.9

8-14 
8.2.1.6 Total Installed Cost 

The total installed cost is the sum of the equipment price and the installation cost. MSPs, 

markups, and sales taxes all can take on a variety of values, depending on location, so the 

resulting total installed cost for a particular efficiency level will not be a single-point value, but 

rather a distribution of values. Table 8.2.11 presents the average total installed cost for each 

equipment class at each efficiency level examined. 

Table 8.2.11 Average Total Installed Cost for CUACs (2013$) 

Equipment Class

Efficiency Level

0 1 2 3 4

Small Commercial 

Packaged AC (AirCooled) - ≥65,000 

Btu/h and < 135,000 

Btu/h

$8,156 $8,535 $9,923 $10,323 $12,166 

Large Commercial 

Packaged AC (AirCooled) - ≥135,000 

Btu/h and < 240,000 

Btu/h

$13,758 $14,935 $16,858 $17,753 $18,975 

Very Large 

Commercial 

Packaged AC (AirCooled) - ≥240,000 

Btu/h and < 760,000 

Btu/h

$27,785 $29,385 $31,738 $32,828 $36,200 

8.2.2 Operating Cost Inputs

DOE defined the operating cost by the following equation:

OC = EC+ MC

Where:

OC = operating cost ($), 

EC = energy cost associated with operating the equipment ($), and

MC = annual maintenance cost for maintaining equipment operation ($). 

The remainder of this section provides information about the variables that DOE used to 

calculate the operating cost for CUACs. The annual energy costs of the equipment are computed 

from energy consumption per unit for the baseline and standard-compliant cases (efficiency level 

2, 3, and so on), combined with the energy prices. Equipment lifetime, discount rate, and 

compliance date of the standard are required for determining the operating cost and for 

establishing the operating cost present value. 

8-15 
8.2.2.1 Annual Energy Use Savings 

For each equipment class, DOE calculated the annual energy use savings for each sample 

building at each efficiency level as described in chapter 7. 

8.2.2.2 Energy Prices

Tariff data were used to develop marginal and average prices for each member of the 

generalized building sample. The approach uses tariff data that have been processed into 

commercial building marginal and average electricity prices.5 Tariff data provide a means to 

calculate the monthly customer bill given the monthly electricity consumption (kWh) and peak 

demand (kW). The CBECS 1992 and CBECS 1995 commercial building surveys provide 

monthly baseline electricity consumption and demand for a large sample of buildings, 

approximately 5300 in total.67 These monthly values were used to (1) calculate monthly bills and 

(2) calculate monthly marginal consumption and demand prices. The average electricity price is 

defined as the total electricity bill divided by total electricity consumption. Two marginal prices 

are defined, one for electricity demand (in $/kW) and one for electricity consumption (in 

$/kWh). These marginal prices are calculated by applying a 5% decrement to the baseline 

demand or consumption and recalculating the electricity bill. 

This procedure provides an average electricity price, and marginal consumption and 

demand prices, for each building and for each month. The monthly variation was reduced to 

seasonal variation by taking a simple average of the monthly data for the summer months 

(defined as May through September) and for the winter months. The average and marginal prices 

for each building were converted to prices for the generalized building sample using a weighted 

average across all individual buildings with the appropriate region, vintage, building activity and 

building size. The prices defined in this way were converted to 2013 prices and 2013 dollars 

using scaling factors taken from the AEO as described in the next section.

The marginal consumption and demand prices for 2012 in 2012 dollars are shown in 

Table 8.2.12. The prices in Table 8.2.12 are somewhat higher than the EIA published national 

average prices. This is because the tariff-based prices are calculated for only those building 

which use the covered equipment, and weighted according to the CBECS building sample 

weights, which tends to give relatively higher weight to smaller buildings which have higher 

prices. The EIA data cover all commercial establishments.

8-16 
Table 8.2.12 Average and marginal tariff-based prices by region (2012 dollars) 

Region 

Average Electricity

Price ¢/kwh

Marginal Demand

Price $/kW

Marginal Consumption

Price ¢/kwh

annual summer winter annual summer winter annual summer winter

New England 14.91 15.56 14.22 12.14 13.96 10.85 9.64 9.75 9.47

Mid-Atlantic 15.27 15.92 14.59 12.69 13.77 11.87 9.27 9.58 9.00

ESC 12.36 12.59 12.00 12.54 13.25 12.00 6.28 6.36 6.18

WSC 7.80 8.30 7.41 5.55 6.33 4.98 5.53 5.86 5.28

South Atlantic 10.16 10.10 10.12 7.94 8.17 7.79 7.03 7.00 7.02

ESC 8.46 8.11 8.73 6.90 7.25 6.67 5.72 5.58 5.80

WSC 7.65 8.25 6.97 3.92 4.38 3.57 5.87 6.44 5.20

Mountain 10.35 10.35 10.25 7.87 8.04 7.72 7.12 7.12 7.11

Pacific – WA,OR 6.93 7.01 6.84 2.59 2.59 2.58 5.51 5.50 5.51

Pacific – CA 16.41 17.50 15.28 6.80 9.36 4.49 12.15 12.35 11.77

US Average 11.17 11.52 10.75 8.33 9.11 7.71 7.34 7.53 7.12

The average summer or winter electricity price multiplied by the baseline summer or 

winter electricity consumption for equipment of a given capacity defines the baseline LCC. For 

each efficiency level, the operating cost savings are calculated by multiplying the electricity 

consumption savings (relative to the baseline) times the marginal consumption price, and the 

electricity demand reduction by the marginal demand price. 

The consumer’s electricity bill is only affected by the electricity demand reduction that is 

coincident with the building’s monthly peak load. Air-conditioning loads are strongly, but not 

perfectly, peak-coincident. Diversity between the building peak and the air-conditioning peak 

was accounted for by multiplying the electricity demand reduction by a random factor drawn 

from a triangular distribution centered at 0.9 +/- 0.1. 

8.2.2.3 Energy Price Trends

The tariff-based prices were updated to 2013 using the commercial electricity price series 

published in the Energy Information Administration’s (EIA) Annual Energy Outlook (AEO) as 

an index. AEO prices for commercial electricity are presented by region in Table 8.2.13. The 

table also shows the scaling factor used to convert the tariff data year (2004) to current prices. 

The national average price increase in constant dollars since the tariff data year is 3.3%.

8-17 
Table 8.2.13 Commercial Electricity Prices (2013 cents/kWh)

Year

Region 2009 2010 2011 2012 Scaling Factor 

New England 16.50 15.86 15.12 14.50 1.033

Middle Atlantic 14.50 15.01 14.43 14.08 0.964

East North Central 9.97 10.06 10.01 10.16 1.086

West North Central 8.05 8.47 8.70 8.20 1.101

South Atlantic 10.41 10.01 10.01 9.57 1.105

East South Central 10.04 10.06 10.35 8.85 1.046

West South Central 9.68 9.46 9.04 7.66 0.772

Mountain 9.25 9.43 9.37 8.85 1.029

Pacific (North) 12.68 12.48 12.28 12.04 0.957

U.S. 10.99 10.93 10.75 10.21 1.033

Source: AEO 2009 - 2012

The AEO provides a scaling factor that is appropriate for average prices by sector. It is 

possible that marginal prices may increase at a different rate than average prices. To test for this 

possibility, the Typical Bills and Rates data published by the Edison Electric Institute (EEI) were 

examined in detail. These publications provide winter (January) and summer (July) customer 

bills for a sample of approximate 120 independently owned utilities in the U. S. for typical 

values of electricity consumption and demand. These typical consumption and demand values 

include two or three values of consumption for a single value of demand, so it is possible to 

estimate marginal consumption prices as the ratio of the difference in the bill divided by the 

difference in consumption. EEI data from 2007 to 2012 were used in this analysis. At the level of 

individual utilities there is significant variation, but on a national average basis there is no 

indication of a systematic difference between the rates of change of marginal vs. average prices.8

Regional and national averages were computed from the EEI utility-level using customer counts 

for each utility. The EEI data cannot be used to estimate a marginal demand price. Based on this 

analysis, DOE concluded that the same scaling factors may be applied to average and marginal 

prices. 

DOE projected future electricity prices using trends in average commercial electricity 

price from EIA's AEO 2013, as shown in Figure 8.2.2.

9 The chart shows constant dollar prices by 

region for the AEO forecast period, 2011 to 2040. The US average trend is shown as a heavy 

dashed line. DOE used AEO 2013 Reference Case scenariosa

 for the nine census divisions. DOE 

applied the projected energy price for each of the nine census divisions to each building in the 

sample based on the building’s location. 

a The reference case is a business-as-usual estimate, given known market, demographic, and technological trends. 

8-18 

 
Figure 8.2.2 AEO2013 electricity price projections by region (2013$) 

 

8.2.2.4 Repair Cost

Repair costs are associated with repairing or replacing components that have failed. DOE 

assumed that any routine or minor repairs are included in the annualized maintenance costs. As a 

result, repair costs are not explicitly modeled in the LCC and PBP analysis. Instead, DOE 

incorporated a one-time cost for major repair (compressor replacement) as a primary input to the 

repair/replace customer choice model in the shipments analysis, which models the decision 

between repairing a broken unit and replacing it (see Chapter 9). In the repair/replace customer 

choice model, DOE used repair costs that vary in direct proportion with the price of the 

equipment. 

8.2.2.5 Maintenance Cost

The maintenance cost is the routine cost to the customer of maintaining equipment 

operation. DOE took annualized maintenance costs for CUACs from data in RS Means Online, 

which provides estimates on the person-hours, labor rates, and materials required to maintain 

CUAC equipment. RS Means specifies the following 11 actions that constitute required annual 

maintenance:

• Check with operating or area personnel for deficiencies.

• Check tensions, condition, and alignment of belts; adjust as necessary. 

• Lubricate shaft and motor bearings. 

• Replace air filters.

• Clean electrical wiring and connections; tighten loose connections. 

• Clean coils, evaporator drain pan, blowers, fan motors, and drain piping as required. 

• Perform operational check of unit; make adjustments on controls and other components 

as required.

• During operation of unit, check refrigerant pressure; add refrigerant as necessary.

• Check compressor oil level; add oil as required. 

8-19 
• Clean area around unit. 

• Fill out maintenance checklist and report deficiencies.

DOE calculated the annualized maintenance cost by multiplying the number of personhours by the corresponding labor rate and adding to it the associated materials costs. RS Means

provides specific cost data for the maintenance of rooftop air conditioners ranging in cooling 

capacity from 3 through 24 tons, as well as from 25 through 50 tons. DOE took the 3 through 24 

ton rooftop air conditioner data to be representative of maintenance costs both for the ≥65,000 

Btu/h to <135,000 Btu/h equipment class and the ≥135,000 Btu/h to <240,000 Btu/h equipment 

class. DOE took the 25 through 50 ton rooftop air conditioner data to be representative of 

maintenance costs for the ≥240,000 Btu/h to <2760,000 Btu/h equipment class. 

Because data were not available to indicate how maintenance costs vary with equipment 

efficiency, the Department decided to use costs that stay constant as equipment efficiency 

increases.

Table 8.2.14 summarizes the nationally representative annualized maintenance costs for 

3-ton through 24-ton and 25-ton through 50-ton air rooftop air conditioners as presented in RS 

Means Online. Table 8.2.14 provides both bare maintenance costs (i.e., costs before O&P) and 

maintenance costs including O&P. DOE uses maintenance costs including O&P in its analysis. 

Table 8.2.14 Annualized Maintenance Costs for CUACs

System Type

Annual 

Personhours

Bare Costs Labor and Materials w/O&P

Mat’l

($2013)

Cost 

per 

Person

-hour* 

($2013)

Annual 

Labor 

Cost

($2013)

Annual 

Total 

Cost

($2013)

Mat’l

($2013)

Cost 

per 

Person

-hour

($2013)

Annual 

Labor 

Cost

($2013)

Annual 

Total 

Cost

($2013)

Packaged unit, aircooled, 3-tons 

through 24-tons

2.402 $74 $56.7 $136.1 $210.1 $92.5 $85.3 $204.9 $297.4

Packaged unit, aircooled, 25-tons 

through 50-tons

3.254 $104 $56.7 $184.3 $288.3 $130.0 $85.3 $277.6 $407.6

*Labor rates from RS Means Online for steamfitter or pipefitter.

8.2.2.6 Lifetime

DOE defines lifetime as the age when equipment is retired from service. In previous 

CUAC rulemakings, DOE based the median lifetime of CUAC’s on data from the 1999 

ASHRAE HVAC Applications Handbook, which gives a median lifetime of 15 years for rooftop 

air conditioners. Because “survival function” more accurately represents equipment lifetime than 

a single-point value, DOE created a survival function for CUACs based on data for residential 

heat pump systems. 

The Weibull distribution is a probability distribution function commonly used to measure 

failure rates.4 Its form is similar to an exponential distribution, which would model a fixed 

8-20 
failure rate, except that it allows for a failure rate that changes over time in a particular fashion. 

The cumulative distribution takes the form:

for x > θ and P(x) = 1 for x ≤ θ, 

Where:

P(x) = probability that the appliance is still in use at age x, 

x = appliance age,

α = the scale parameter, which is the decay length in an exponential distribution, 

β = the shape parameter, which determines the way in which the failure rate changes 

in time, and

θ = the delay parameter, which allows for a delay before any failures occur.

For the ANOPR, DOE developed a Weibull distribution with an alpha of 4.00 and a beta 

of 16.44, resulting in a median value of 15 and a mean of 15.4 years. 

For this rulemaking, DOE reviewed an ASHRAE database and determined that the data 

support an increase in lifetime relative to what was used for the ANOPR. In the category 

"Packaged DX unit, rooftop" (which corresponds to CUAC), of the 215 units in service, the 

mean age is 15.6 years and the median is 16 years. The five units that had been replaced had a 

median age of 22 years. These data strongly suggest that the median lifetime of 15 years used in 

the ANOPR is too short. Based on calibration of the shipments model (see Chapter 9), DOE used 

an updated CUAC lifetime with a median of 18.7 years and a mean of 18.4 years. The Weibull 

parameters were 19.35 (alpha) and 10 (beta). DOE used the same lifetime distribution for each 

CUAC equipment class. DOE assumed that the lifetime of CUAC equipment is the same at 

different efficiency levels.

8.2.2.7 Discount Rates 

The discount rate is the rate at which future expenditures and savings are discounted to 

establish their present value.The cost of capital is commonly used to estimate the present value 

of cash flows to be derived from a typical company project or investment. Following financial 

theory, the finance cost of raising funds for expenditure can be interpreted as: (1) the financial 

cost of any debt incurred to maintain equipment, or (2) the opportunity cost of any equity used to 

maintain equipment. Similarly, the value of cost savings can be interpreted as: (1) the cost 

avoided by decreasing debt, or (2) the return earned from increasing equity holdings. Most 

companies use both debt and equity capital to fund investments, so their cost of capital is the 

weighted average of the cost to the firm of equity and debt financing.10 DOE defines the discount 

rate as the weighted average cost of capital (WACC), calculated as the weighted average of the 

cost of equity financing and the cost of debt financing, as estimated from financial data for 

publicly traded firms in the sectors that purchase commercial air conditioners.

Damodaran Online is a widely used source of information about company debt and 

equity financing for most types of firms, and was the primary source of data for this analysis.11

Companies included in the Damondaran Online database were assigned to the aggregate 

categories listed below:

e x

xP

β

α

θ 



 



 − −

)( =

8-21 
• Retail

• Property owners

• Medical services

• Industrial 

• Lodging

• Food Service 

• Offices

• Public 

DOE estimated the cost of equity using the capital asset pricing model (CAPM).12 The 

CAPM assumes that the cost of equity (ke) for a particular company is proportional to the 

systematic risk faced by that company, where high risk is associated with a high cost of equity 

and low risk is associated with a low cost of equity. The systematic risk facing a firm is 

determined by several variables: the risk coefficient of the firm (β), the expected return on riskfree assets (Rf), and the equity risk premium (ERP). The risk coefficient of the firm indicates the 

risk associated with that firm relative to the price variability in the stock market. The expected 

return on risk-free assets is defined by the yield on long-term government bonds. The ERP

represents the difference between the expected stock market return and the risk-free rate. The 

cost of equity financing is estimated using the following equation, where the variables are 

defined as above: 

e Rk f ( ) β ×+= ERP

Where:

 

ke = cost of equity, 

Rf = expected return on risk-free assets,

β = risk coefficient of the firm, and 

ERP = equity risk premium. 

Several parameters of the cost of capital equations can vary substantially over time, and 

therefore the estimates can vary with the time period over which data is selected and the 

technical details of the data averaging method. For guidance on the time period for selecting and 

averaging data for key parameters and the averaging method, DOE used Federal Reserve 

methodologies for calculating these parameters. In its use of the CAPM, the Federal Reserve 

uses a forty-year period for calculating discount rate averages, utilizes the gross domestic 

product price deflator for estimating inflation, and considers the best method for determining the 

risk free rate as one where “the time horizon of the investor is matched with the term of the riskfree security.”13 

By taking a forty-year geometric average of Federal Reserve data on annual nominal 

returns for 10-year Treasury bills, DOE found for this analysis the following risk free rates for 

2011-2013 (Table 8.2.15).5

 DOE also estimated the ERP by calculating the difference between 

risk free rate and stock market return for the same time period.14 

8-22 
Table 8.2.15 Risk free rate and equity risk premium, 2011-2013 

Year Risk free rate (%) ERP (%)

2011 6.61% 2.94%

2012 6.41% 3.99%

2013 6.24% 5.30%

The cost of debt financing (kd) is the interest rate paid on money borrowed by a company. 

The cost of debt is estimated by adding a risk adjustment factor (Ra) to the risk-free rate. This 

risk adjustment factor depends on the variability of stock returns represented by standard 

deviations in stock prices. So for firm i, the cost of debt financing is: 

+= RRk aifdi

Where:

kd = cost of debt financing for firm, i, 

Rf = expected return on risk-free assets, and

Rai = risk adjustment factor to risk-free rate for firm, i. 

DOE estimates the WACC using the following equation: 

dee ×+×= wkwkWACC d

Where:

WACC = weighted average cost of capital,

we = proportion of equity financing, and 

wd = proportion of debt financing. 

By adjusting for the influence of inflation, DOE estimates the real weighted average cost 

of capital, or discount rate, for each company. DOE then aggregates the company real weighted 

average costs of capital to estimate the discount rate for each of the eight broader ownership 

types in the commercial air conditioner analysis. An overall average is estimated by weighting 

each ownership type’s discount rate by its estimated share of the commercial air conditioner 

market. These values are presented in Table 8.2.16. While WACC values for any category may 

trend higher or lower over substantial periods of time, these values represent a private sector cost 

of capital that is averaged over major business cycles. 

8-23 
Table 8.2.16 Weighted Average Cost of Capital for Sectors that Purchase CUAC

Sector Discount Rate Standard Deviation Market Share

Retail 4.93% 1.98% 17%

Property owners 5.15% 1.20% 21%

Medical services 4.73% 1.66% 7%

Industrial 5.17% 1.85% 5%

Lodging 5.57% 1.87% 4%

Food Service 4.67% 2.00% 5%

Offices 4.58% 2.05% 19%

Public 3.74% 1.43% 22%

Average Discount Rate: 4.66%

Source: Damodaran Online Data Page: Costs of Capital by Industry Sector, 2011,2012,2013. 

8.2.2.8 Compliance Date of Standard 

DOE calculated the LCC and PBP for all customers as if each would purchase a new 

piece of equipment in the year that compliance with amended standards is required. EPCA 

directs DOE to publish a final rule amending the standard for the equipment covered by this 

NOPR not later than 2 years after a notice of proposed rulemaking is issued. (42 U.S.C. 

6313(a)(6)(C) (iii)) At the time of preparation of the NOPR analysis, the expected issuance date 

was December 2013, leading to a final rule publication in December 2015. EPCA also states that 

amended standards prescribed under this subsection shall apply to products manufactured after a 

date that is the later of—(I) the date that is 3 years after publication of the final rule establishing 

a new standard; or (II) the date that is 6 years after the effective date of the current standard for a 

covered product. (42 U.S.C. 6313(a)(6)(C)(iv)) The date under clause (I), estimated to be 

December 2018, is later than the date under clause (II). For purposes of analysis, DOE used 2019 

as the first year of compliance with amended standards.

8.2.2.9 Base Case Distribution of Efficiency Levels

The only data available that show air-cooled commercial package air conditioning and 

heating equipment efficiency market shares are for 1999−2001. It is unlikely that these shares are 

representative of current market shares or shares expected in the near future. Therefore, DOE 

used the customer choice model in the shipments analysis to estimate efficiency market shares in 

the expected compliance year (assumed to be 2019, as discussed previously). DOE used the 

market share data (by EER) for 1999−2001 to develop the parameters of the customer choice 

model in the shipments analysis, as discussed in chapter 8. Using the parameters, the model 

estimates the shipments at each IEER level based on the installed cost and operating cost at each 

efficiency level. Table 8.2.17 presents the estimated base case efficiency market shares for each 

CUAC equipment class.

8-24 
Table 8.2.17 Base Case Efficiency Market Shares in 2019 for CUACs

Small Commercial Packaged 

AC (Air-Cooled) - ≥65,000 

Btu/h and < 135,000 Btu/h

Large Commercial 

Packaged AC (Air-Cooled) - 

≥135,000 Btu/h and < 

240,000 Btu/h

Very Large Commercial 

Packaged AC (Air-Cooled) - 

≥240,000 Btu/h and < 

760,000 Btu/h

IEER Market Share IEER Market Share IEER Market Share

11.4 61% 11.2 78% 10.1 63%

12.9 39% 12.2 20% 11.6 24%

14.0 0% 13.2 2% 12.5 7%

14.8 1% 14.2 0% 13.5 4%

19.9 0% 18.4 0% 15.5 1%

8.3 PAYBACK PERIOD INPUTS

The PBP is the amount of time it takes the customer to recover the assumed higher 

purchase cost of more energy-efficient equipment as a result of lower operating costs. 

Numerically, the PBP is the ratio of the increase in purchase cost (i.e., from a less efficient 

design to a more efficient design) to the decrease in first year annual operating expenditures. 

The equation for PBP is: 

PBP =∆IC/∆OC 

Eq. 8.1

Where:

PBP = payback period in years, 

∆ IC = difference in the total installed cost between the more efficient standard-level 

equipment (efficiency levels 2, 3, etc.) and the baseline efficiency equipment, 

and

∆OC = difference in first year annual operating costs.

Payback periods are expressed in years. Payback periods can be greater than the life of 

the equipment if the increased total installed cost of the more efficient equipment is not 

recovered fast enough in reduced operating costs. 

DOE also calculates a rebuttable PBP, which is the time it takes the customer to recover 

the assumed higher purchase cost of more energy-efficient equipment as a result of lower energy 

costs. Numerically, the rebuttable PBP is the ratio of the increase in purchase cost (i.e., from a 

less efficient design to a more efficient design) to the decrease in annual energy expenditures; 

that is, the difference in first year annual energy cost as calculated based on the DOE test 

procedure. The calculation excludes maintenance costs. 

8-25 
The data inputs to PBP are the total installed cost of the equipment to the customer for 

each efficiency level and the annual (first year) operating costs for each efficiency level. The 

inputs to the total installed cost are the equipment price and the installation cost. The inputs to 

the operating costs are the annual energy cost and the annual maintenance cost (or, in the case of 

rebuttable PBP, only the annual energy cost). The PBP uses the same inputs as the LCC analysis, 

except that electricity price trends and discount rates are not required. Since the PBP is a 

“simple” payback, the required electricity cost is only for the year in which a new efficient 

standard is to take effect—in this case, 2019. 

8.4 LCC AND PBP RESULTS 

As discussed previously, DOE’s approach for conducting the LCC and PBP analysis 

relied on developing samples of commercial buildings that use each of the equipment types. 

DOE used a Monte Carlo simulation technique to perform the LCC and PBP calculations on the 

buildings in the sample. For each set of sample buildings using the equipment in each equipment 

class, DOE calculated the average LCC and LCC savings and the median and average PBP for 

each of the efficiency levels. 

DOE calculated LCC savings and PBPs relative to the base case equipment that it 

assigned to the buildings. In some cases, DOE assigned base case equipment that is more 

efficient than the baseline and some of the efficiency levels. For that reason, in those cases the 

average LCC impacts are not equal to the difference between the LCC of a specific efficiency 

level and the LCC of the baseline equipment. DOE calculated the average LCC savings and the 

median PBP values by excluding the buildings that are not impacted by a standard at a given 

efficiency level. 

LCC and PBP calculations were performed 10,000 times on the sample of buildings 

established for each equipment class. Each LCC and PBP calculation was performed on a single 

building that was selected from the sample. The selection of a building was based on its sample 

weight (i.e., how representative a particular building is of other buildings in the distribution—

either regionally or nationally), as described in chapter 7 of the TSD. Each LCC and PBP 

calculation also sampled from the probability distributions that DOE developed to characterize 

many of the inputs to the analysis. 

Based on the Monte Carlo simulations that DOE performed, for each standard level, DOE 

calculated the share of buildings receiving a net LCC benefit, a net LCC cost, and no impact. 

DOE considered a building to receive no impact at a given standard level if DOE assigned it base 

case equipment whose efficiency is the same as, or is more than, the efficiency level. 

8.4.1 Small Air-Cooled Commercial Unitary Air Conditioners

Table 8.4.1 summarizes the LCC and PBP results for small air-cooled CUAC. 

8-26 
Table 8.4.1 Small Air-Cooled Commercial Unitary Air Conditioners: Life-Cycle Cost 

and Payback Period Results

Trial Standard Level 1 2 3 4

Efficiency Level 1 2 3 4

IEER 12.9 14.0 14.8 19.9

Total Installed Cost $8,535 $9,923 $10,323 $12,166

Average Lifetime Operating Cost* $19,223 $17,993 $13,0735 $9,959

Average Lifecycle Cost $27,759 $27,916 $24,058 $22,125

Mean LCC Savings $1,094 $937 $4,779 $6,711

Customers with LCC Increase (Cost) (%) 0% 27% 0% 0%

Customers with LCC Decrease (Benefit) (%) 61% 72% 99% 100%

Customers with No Change in LCC (%) 39% 1% 0% 0%

Median PBP (Years) 2.0 8.0 3.9 4.7

* Discounted

Figure 8.4.1 shows the range of LCC savings by efficiency level for small air-cooled 

CUAC. For each efficiency level, the top and the bottom of the box in a figure indicate the 75th

and 25th percentiles, respectively. The bar in the middle of the box indicates the median: under 

that efficiency level, 50 percent of the households have LCC savings that exceed that value. The 

“whiskers” at the bottom and the top of the box indicate the 5th and 95th percentiles. The small 

box shows the average LCC savings for each efficiency level. 

8-27 
Figure 8.4.1 Range of Life-Cycle Cost Savings for Small Air-Cooled Commercial Unitary 

Air Conditioners

Figure 8.4.2 summarizes the range of PBPs for all efficiency levels for small air-cooled 

CUAC. 

-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

Level 1 Level 2 Level 3 Level 4

LCC Savings (2013$)

Efficiency Level

7.5 Ton Range of LCC Savings

Average; Median; Box 25%-75%; Whisker 5%-95% 

median

average

8-28 
Figure 8.4.2 Range of Payback Periods for Small Air-Cooled Commercial Unitary Air 

Conditioners

8.4.2 Large Air-Cooled Commercial Unitary Air Conditioners

Table 8.4.2 summarizes the LCC and PBP results for large air-cooled CUAC.

0

5

10

15

20

25

Level 1 Level 2 Level 3 Level 4

Years

Efficiency Level

7.5 Ton Range of PBP Values

Average; Median; Box 25%-75%; Whisker 5%-95% 

median

average

8-29 
Table 8.4.2 Large Air-Cooled Commercial Unitary Air Conditioners: Life-Cycle Cost 

and Payback Period Results

Trial Standard Level 1 2 3 4

Efficiency Level 1 2 3 4

IEER 12.2 13.2 14.2 18.4

Total Installed Cost $14,935 $16,858 $17,753 $18,975 

Average Lifetime Operating Cost $32,143 $29,021 $26,866 $21,599 

Average Lifecycle Cost $47,078 $45,880 $44,619 $40,575 

Mean LCC Savings $1,038 $2,214 $3,469 $7,508 

Customers with LCC Increase (Cost) (%)* 3% 8% 6% 2%

Customers with LCC Decrease (Benefit) (%)* 74% 90% 93% 98%

Customers with No Change in LCC (%)* 22% 2% 0% 0%

Median PBP (Years) 6.0 7.2 6.6 5.1

* Discounted

Figure 8.4.3 shows the range of LCC savings for all efficiency levels for large air-cooled

CUAC. For each efficiency level, the top and the bottom of the box in a figure indicate the 75th

and 25th percentiles, respectively. The bar in the middle of the box indicates the median: under 

that efficiency level, 50 percent of the households have LCC savings that exceed that value. The 

“whiskers” at the bottom and the top of the box indicate the 5th and 95th percentiles. The small 

box shows the average LCC savings for each efficiency level. 

8-30 
Figure 8.4.3 Range of Life-Cycle Cost Savings for Large Air-Cooled Commercial Unitary 

Air Conditioners

Figure 8.4.4 shows the range of PBPs for all efficiency levels for large air-cooled CUAC. 

-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Level 1 Level 2 Level 3 Level 4

LCC Savings (2013$)

Efficiency Level

15 Ton Range of LCC Savings

Average; Median; Box 25%-75%; Whisker 5%-95% 

median

average

8-31 
Figure 8.4.4 Range of Payback Periods for Large Air-Cooled Commercial Unitary Air 

Conditioners

8.4.3 Very Large Air-Cooled Commercial Unitary Air Conditioners

Table 8.4.3 summarizes the LCC and PBP results for very large air-cooled CUAC. 

0

2

4

6

8

10

12

14

16

Level 1 Level 2 Level 3 Level 4

Years

Efficiency Level

15 Ton Range of PBP Values

Average; Median; Box 25%-75%; Whisker 5%-95% 

median

average

8-32 
Table 8.4.3 Very Large Air-Cooled Commercial Unitary Air Conditioners: Life-Cycle 

Cost and Payback Period Results 

Trial Standard Level 1 2 3 4

Efficiency Level 1 2 3 4

IEER 11.6 12.5 13.5 15.5

Total Installed Cost $29,385 $31,738 $32,828 $36,200 

Average Lifetime Operating Cost* $69,369 $66,221 $52,762 $45,975 

Average Lifecycle Cost $98,754 $97,960 $85,590 $82,175 

Mean LCC Savings ($) $4,103 $4,801 $16,477 $19,842 

Customers with LCC Increase (Cost) (%) 2% 12% 3% 5%

Customers with LCC Decrease (Benefit) (%) 62% 76% 92% 94%

Customers with No Change in LCC (%) 36% 13% 6% 1%

Median PBP (Years) 2.6 5.5 2.5 3.5

* Discounted

Figure 8.4.5 shows the range of LCC savings for all efficiency levels for very large aircooled CUAC. For each efficiency level, the top and the bottom of the box in a figure indicate 

the 75th and 25th percentiles, respectively. The bar in the middle of the box indicates the median: 

under that efficiency level, 50 percent of the households have LCC savings that exceed that 

value. The “whiskers” at the bottom and the top of the box indicate the 5th and 95th percentiles. 

The small box shows the average LCC savings for each efficiency level. 

8-33 
Figure 8.4.5 Range of Life-Cycle Cost Savings for Very Large Air-Cooled Commercial 

Unitary Air Conditioners

 

Figure 8.4.6 shows the range of PBPs for all efficiency levels for very large air-cooled 

CUAC. 

-10000

0

10000

20000

30000

40000

50000

Level 1 Level 2 Level 3 Level 4

LCC Savings (2013$)

Efficiency Level

30 Ton Range of LCC Savings

Average; Median; Box 25%-75%; Whisker 5%-95% 

median

average

8-34 
Figure 8.4.6 Range of Payback Periods for Very Large Air-Cooled Commercial Unitary 

Air Conditioners

8.4.4 Rebuttable Payback Periods

Table 8.4.4 shows the rebuttable-presumption PBPs for the considered TSLs. The 

rebuttable presumption is fulfilled in those cases where the PBP is three years or less. 

Table 8.4.4 Rebuttable-Presumption Payback Periods (years) for Small, Large, and Very 

Large Air-Cooled Commercial Unitary Air Conditioners

Trial Standard Level 1 2 3 4

Efficiency Level 1 2 3 4

Small Commercial Packaged Air Conditioners – ≥65,000 

Btu/h and <135,000 Btu/h Cooling Capacity

2.2 8.0 3.9 4.7

Large Commercial Packaged Air Conditioners – ≥135,000 

Btu/h and <240,000 Btu/h Cooling Capacity

6.0 7.2 6.6 5.1

Very Large Commercial Packaged Air Conditioners –

≥240,000 Btu/h and <760,000 Btu/h Cooling Capacity

2.6 5.5 2.5 3.5

0

5

10

15

20

25

Level 1 Level 2 Level 3 Level 4

Years

Efficiency Level

30 Ton Range of PBP Values

Average; Median; Box 25%-75%; Whisker 5%-95% 

median

average

8-35 
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