Tianamen Square, The Berlin Wall, Ollie North, The Exxon Valdez and the World Series Earth Quake.
1989 was quite a year, wasn’t it?
You know my feelings about the music of the 80′s (click here for details). The Hot 100 for ’89 gives us hits from Paula Abdul, Milli Vanilli and The New Kids on the Block.
But if you like music and history, Billy Joel had a top 10 hit in ’89 with this waltz through the decades…
Apparently every high school kid in the past 15 years has had to do some sort of U.S. History project on that tune. Billy packed 50 years of headlines into a 4 minute song. Pretty impressive.
It was back in 1989, when fuel oil was less than 70 cents a gallon, that a homeowner asked me what kind of a “payback” he could expect with a new, modern boiler compared to his 25-year-old-but-still-working existing boiler.
Didn’t stop me from trying, though (see second item, previous paragraph). His mid-‘60’s vintage boiler (with a tankless coil for his DHW) was humming along with a combustion efficiency of about 81%, while the new model we were discussing had an AFUE of 85%. Now, I knew enough about math to know that the difference wasn’t 4%, but 4 percentage points. Percentagewise, the difference in efficiency was much greater.
“So you’re telling me if I spend $5,000 on this new boiler, I’ll save about 5% on my fuel bill? “ he asked.
“Uhhhh, yeah.” Quick, intelligent comebacks have always been my specialty.
“I spend about $1,500.00 a year on fuel oil (this was 1989, which should tell you something). So I’ll save about $75.00 a year.”
“Uhhhh, yeah.” When a line works for me, I stick with it.
“So, in roughly 67 years, I’ll make up that five grand. “ He didn’t look happy. Or impressed. “Wouldn’t I do better putting my money in a passbook account?” (This was a long time ago – they were still paying 5% on a savings account!)
I left thinking here was a guy who simply didn’t get it. Didn’t he know he was getting one of those slick new German boilers they show on TV? All that technology, fancy-schmancy controls, a really cool wiring harness? He didn’t want all that?
What a doofus!
Years later I learned that while my answers touched new ground in the world of stupid, the question he asked was in no way valid.
Boilers don’t pay anyone back. They aren’t ATM’s. Money doesn’t spew out of the relief valves, and the utility or the oil company is never going to write you a check.
And the fuel the pig eats, as a rule, gets more expensive every year.
But what would happen if we put the pig on a diet?
“Payback? What payback?”
People still talk “Payback,” when discussing heating equipment these days, as well as the even more vague “Return On Investment.” With fuel oil, LP and natural gas prices being what they are, that’s pretty understandable.
But buying a new boiler isn’t like investing in the stock market. You need a boiler to keep warm and clean. It’s not a matter of having one or not having one. Investing in stocks, on the other hand, is a way to increase your net worth by (hopefully) making money! You can potentially reap a big reward. Or you could lose everything. That’s what they mean by “risk-reward.”
So if a person wants to think about buying a new, improved boiler as an investment, maybe they should compare it to other investments.
For instance, they could take $5,000.00 and hide it in the mattress. Or stick it in a coffee can. There’s little to no reward, of course. The money isn’t going to grow. But there is risk – you could lose it. It could get stolen. And then there’s inflation that will eat away at the buying power of that money.
That’s what they call negative return.
Savings accounts, checking accounts and CD’s have very little risk thanks to FDIC, but you may only get a maximum 3% return. Government bonds, treasury bills and savings bonds also have very low risk, as well as very little reward.
Stocks and bonds offer greater potential returns, but you have brokerage fees to worry about. And the stock market has also been known to be, shall we say, unpredictable? Oh, and don’t forget if your investment goes down the toilet you still have to pay the broker.
And how long will it take for your $5,000.00 to turn into, say, $8,000.00? Will that extra $3,000.00 affect or improve your life? Are there any guarantees?
What is the risk in buying a new boiler? Well, aside from making sure the person putting it in knows what he’s doing, there’s very little risk. But is there a reward?
The customer mentioned earlier had a 25-year-old boiler with a tankless coil for his domestic hot water. He spent roughly $1,500.00 on fuel oil the previous year (at $0.69 per gallon- this was 1989) – using nearly 2,200 gallons of oil – and spending on average $125.00 per month for oil.
Now, a new boiler with an indirect hot water tank would certainly have saved more than 5% in fuel annually, but in 1989 I didn’t know that. Just for giggles, let’s say it would have saved him 10% annually (very conservative), while delivering a heck of a lot more hot water than he had before.
The first year savings would have been $150.00. If fuel oil stayed the same price every year, by 2010 he would have saved over $3,000.00. But we all know fuel oil hasn’t been 69 cents a gallon for a while. Right now (2010), it’s about $2.80 per gallon, roughly 400% higher than 1989.
To keep the math simple, let’s average a 10 cent per gallon per year increase in fuel prices going back to 1989 (that will get you from $0.69/gallon in 1989 to $2.80/gallon we pay now – I know there were bigger jumps and smaller jumps, let’s just average it out).
So the first year he would have saved approximately $150.00. The next year he would have saved approximately $174.00. The year after that $196.00, the year after that $218.00, and so on, with each year’s increase representing a 10 cent per gallon hike in the price of fuel oil. The annual savings comes from multiplying the new price of oil times the 220 gallons of oil (10% reduction – new boiler vs. old boiler) saved each year.
At the end of 20 years he would have saved a total of $7,800.00 in fuel. I’m no financial wiz, but that looks like a $5,000.00 investment in the new boiler put $2,800.00 worth of after-tax money into someone’s pocket.
Is that a good investment?
And somewhere you’ll have to add to the equation reduced maintenance costs associated with the new boiler compared to the old one, plus the possibility that, say, in 1999 the old boiler might finally give up the ghost. The cost of replacing the boiler in 1999 would no doubt have been a tad higher it would have been in 1989. Not only that, he would have missed out on nearly $3,000.00 worth of fuel savings in that decade.
Not that the 90’s were particularly memorable.
And let’s not even bring up the fact that for the first time since Beatlemania the family could do the laundry, wash the dishes and take a couple of showers all at the same time.
Or the fact that at some point during the 90’s, if the guy wanted to sell his home, he would be selling a home with a new boiler as opposed to one that was Johnson administration vintage.
Now I know fuel oil didn’t jump 10 cents a gallon in price every year, but it did get from $0.69 per gallon in 1989 to where it stands right now. Some years, like the winter of ’05, were crazy, others not so much. But the best we can do is average it out, and present the numbers as fairly as we can.
So ultimately, when it comes down to answering your customers’ questions about “payback” and “return on investment,” remember these things:
- A boiler isn’t a stock, bond or a mutual fund. It’s a pig. It eats fuel and poops heat.
- Pig food gets more expensive every year, so we want to put the pig on a diet.
- A stock, bond, mutual fund or a passbook account doesn’t keep the house warm or make the water hot. A boiler does. And you have to have one.
- When showing a customer what they can save, factor in the percentage of savings over the long-term and the expected increases in fuel prices.
- And don’t forget to factor in the cost of not updating the heating equipment. Add maintenance costs and eventual replacement costs on top of the actual fuel savings.
- And finally, when your customer asks about “payback” or “Return on Investment,” he’s really asking the following:“I’m going to have to replace this boiler eventually anyway. What’s the benefit to me in doing it now as opposed to waiting until the thing dies?”
Now that’s a question worth answering!
And maybe the best song of 1989? How ’bout this anthem from one of my all-time favorite Canadians…
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