Planned Replacement or Major Renovation - Effective Building Maintenance: Protection of Capital Assets - page 58

Thus,
x = 100,000 [(1+.09) 8/ {1.05 [(1.05) 8 -1]/1.05} = $19,872
Budgeting $19,872 for investment at the beginning of each year at a
5% annual interest rate will, at the end of 8 years, yield the $199,256 re-
quired to replace the roof. In this example, then, a total investment of only
$158,976 is required to offset a $199,256 expenditure—a savings of 20%!
With longer investment periods, the savings can be as much as 50-60%.
To simplify computations, the numerator of the relationship above
is called the “Future Cost Factor,” while the denominator is called the
“Future Value Factor.” Tables 2-3 and 2-4 at the end of this chapter pro-
vide a broad range of interest rates and periods for use and, thus, this
computation can be reduced to the following:
x = y[ Future Cost Factor (from Table 2-3)/Future Value Factor
(from Table 2-4)]
In the example above, the Future Cost Factor is 1.993, while the Fu-
ture Value Factor is 10.027 These two values yield the following:
x = 100,000 x 1.993/10.027 = $19,872
The common alternative to funded depreciation is to do nothing
about a component that will ultimately fail until the failure has oc-
curred, or soon will. Under this condition, if funds are not readily avail-
able for replacement or renovation, the only alternative is to borrow. In
ourexamplefromabove,borrowing$199,256topayfortheroofreplacement,
withloantermsof6%annualinterestratefor10years,wouldresultinatotal
costof$265,117(principalplusloaninterest)—over$100,000morethanthe
fundeddepreciationoption!
Funded depreciation is always the lowest cost approach to fund-
ing adequate replacement/renovation maintenance.
LIFE CYCLE COST ANALYSIS AT
REPLACEMENT/RENOVATION TIME
When building components require replacement or major reno-
vation, the opportunity presents itself to re-think original design deci-