Do you have a break-even algorithm for capital improvements that save money?

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• posted on September 27, 2013, 6:23 pm
What do you use for your general algorithm for capital improvements that save money (such as solar energy & buying your own tanks)? - solar - wood-fired heating - owning your own propane tanks etc.
For example, in another thread, I found out the propane company changed their prices such that the break-even point between buying my own propane tank versus renting it changed.
For example, for a 500 gallon tank, they charge \$95/year and for a 1,000 gallon tank, they charge \$120/year.
If both tanks cost \$1,000 to own (there really is no maintenance to speak of for these things), then the break-even point is 10-1/2 years for the small tank, and 8-1/3 years for the bigger tank.
My general algorithm is roughly that anything around 5 years is a no brainer, and anything under about 10 years is a worthwhile deal (since I plan in dying in this house).
But, anything that has a payback of 15 to 20 years may not be a good deal, since I'm not gonna live much longer than that.
What's your payback algorithm for capital improvements such as solar energy (which costs about \$50K but which starts saving money on day one, especially at high-tier rates of 50 cents per kWh).
Is it 5 years? 10? 20?

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<%-name%>
• posted on September 27, 2013, 6:38 pm
...snip...

An algorithm isn't a number, it's a step by step procedure.

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<%-name%>
• posted on September 27, 2013, 6:51 pm
On Fri, 27 Sep 2013 18:38:29 +0000, DerbyDad03 wrote:

OK. That's what I wanted, even if *mine* boils down to a break-even point.
But what's important isn't *my* algorithm, but yours.

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<%-name%>
• posted on September 27, 2013, 7:06 pm

You are not making any sense.
What's your payback algorithm for capital improvements...is it 5 years? 10? 20?
What are you really looking for? A number, like you asked for, or the specific steps that one would go through to find a break even point for a capital improvement, i.e. an algorithm?

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<%-name%>
• posted on September 27, 2013, 7:42 pm
On 9/27/2013 11:23 AM, Alex Gunderson wrote:

there are intangibles as well as a \$ cost. for instance, one might want to go solar 'for the good of the planet', and what is that cost or savings to that person comes into play. there's also other inducements: not having to pay for a resource, or rebates, for example, that might expire.
it might also be what the opportunity loss of investments costs you. an example, a few years ago, i put in a solar array. payback time was 4.5 years, which gave me almost a 20% roi. no brainer, as a safe investment was earning far less.

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<%-name%>
• posted on September 27, 2013, 7:59 pm
On Friday, September 27, 2013 3:42:20 PM UTC-4, chaniarts wrote:

Excellent point. The Return On Investment is 1 divided by the years it take s to pay back the original investment. If you have enough available to pay cash, you'd consider in investing in anything paying more than what you cou ld get by investing the money, which is around 1% these days. If you're pay ing off a big credit card debt at 18%, you'd be better off paying off the c redit card unless your investment pays back a lot more. And if you have to borrow to make the improvement, you'd deduct the annual interest costs of t he loan from the return to compute your payback.
I work in financial analysis at a hospital and our management likes capital investments to pay back in two years, i.e., a 50% ROI. Not always possible , but that's sort of the benchmark. Of course, they have dozens of requests each week and have to decide which they can afford.

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<%-name%>
• posted on September 27, 2013, 10:06 pm
On Fri, 27 Sep 2013 12:59:56 -0700, Pavel314 wrote:

THIS is the kind of real-world example that I was looking for!
I'm surprised the payback is so short though.
I would have considered 5 years as a no brainer.
In your case above, 5 years would be too long and you're rent instead.

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<%-name%>
• posted on September 27, 2013, 7:48 pm
On Fri, 27 Sep 2013 18:23:53 +0000 (UTC), Alex Gunderson

It is fairly easy to do on something like a propane tank if you ignore the possibility of maintenance but when it is something like Solar, you are just guessing since the panels degrade, electric rates fluctuate and maintenance is a wild card. One good hail storm or hurricane might simply wipe you out. Collectors are getting cheap enough to make it attractive now tho. I think the simpler the system the better. One that usually does have a fairly quick payback is heating water, either for domestic use or pool/spa heating. Heating my spa with solar got me whole in a couple years or less. It is hard to compare since I did not heat it all the time and now it stays hot virtually for free.
Generally speaking things like renovations beyond cleaning and painting seldom make economic sense. You do it for you.

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<%-name%>
• posted on September 27, 2013, 10:10 pm
On Fri, 27 Sep 2013 15:48:46 -0400, snipped-for-privacy@aol.com wrote:

Yep. Some things might be exceptions. Insulation and the like. I replaced all my old windows with thermopanes. Pretty sure the ROI was good, because I got it done cheap and it made a big difference in heating/cooling costs. Not to mention maintenance costs. But I mainly did it for me. Didn't have to paint the old ones, and the new ones look much better to me and my wife.

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<%-name%>
• posted on September 28, 2013, 12:05 am
On Fri, 27 Sep 2013 18:23:53 +0000 (UTC), Alex Gunderson

Forget it.

Forget it, unless you want the ambiance or backup heat. ...or need a constant source of painful exercise, I suppose.

If the "present value" of the "rent" exceeds the rent over your desired payback time, buy. If not, rent. You decide what interest rate and payback time is of interest to you.
http://www.investopedia.com/calculator/pvcal.aspx Enter your interest rate, the number of periods (months or years), and the total paid over that time (payment times periods) and the result is the current value of that money. For example, if you paid \$200 per year for five years (\$1000 total) at 6% interest, it would be the same as paying \$747.26 today.
If you want to go the other way: http://www.investopedia.com/calculator/fvcal.aspx Enter the current price of the gas tank, interest rate, and number of months, and this will tell you the payments over that time. If the payments are less than this, don't buy.

That's entirely your decision. Obviously, this can't be longer than you're likely to own the widget unless there will be a residual value that someone else will pay you for.

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<%-name%>
• posted on September 28, 2013, 2:33 am
On Fri, 27 Sep 2013 20:05:02 -0400, krw wrote:

This is pretty much what I use.
I'm guessing anything within the life of the thing or the life of how long you'll actually be living in that house is fair game.
For example, if you only plan on living at that house for, oh, say, 5 years, then it would seem to me that the payback has to be shorter (say, a year or two) for you to go for it.
Likewise, if you're planning on living there for 20 years, then you might go with a 10 year payback period for some things.

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<%-name%>
• posted on September 28, 2013, 3:08 am
On Sat, 28 Sep 2013 02:33:42 +0000 (UTC), Alex Gunderson

Remember maintenance and insurance costs, too. Some things like solar panels may or may not be covered under a normal homeowners policy (or may require additional coverage or a rider). One hail storm can ruin your whole day.

That's the real decision, once you get past "I wanna have it". ;-)

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<%-name%>
• posted on September 28, 2013, 12:23 am
On 9/27/2013 11:23 AM, Alex Gunderson wrote:

There ain't one. You do the math based on ALL the factors for each situation.
The wild card in everything is your ability to predict the future. In 1998, would you have predicted the current economic climate? If you have extra cash lying around, that may affect your decision.
People often fail to consider all the factors. If the company owns the tank, who pays for the required inspections? Does that limit your choice of vendors? Who is liable if it explodes?
Even if it looks favorable, there may be other better alternative uses for your cash than to invest in a tank.
If you can't decide, it probably doesn't need fixing.
Some decisions are trivial. If you have access to the "grid", there's only one way to make solar electricity pencil out. Get someone else to pay for it.
Diminishing returns on weatherization comes early. If you've got no insulation, you should get some. Otherwise, do the math carefully.
I know a guy who fell into the sweet spot of stimulus money. They paid \$14K to weatherize his house. Saves him money, but less than the interest on \$14K he would have borrowed to install it himself...assuming anybody would have loaned him \$14K...

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<%-name%>
• posted on September 28, 2013, 2:36 am
On Fri, 27 Sep 2013 17:23:31 -0700, mike wrote:

True. But some things are very predictable.
For example, how much will solar panels cost to put in is pretty predictable.
And, how much energy will they generate is also very predictable (since you're not the first person to do it, they have the tables).
The maintenance, I agree, might not be predictable, but, if everyone really made decisions that way, we'd all leave California the day before an earthquake, and then come back the next day.

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<%-name%>
• posted on September 28, 2013, 3:34 am
On Fri, 27 Sep 2013 17:23:31 -0700, mike wrote:

That's true.
For example, I just found out the "real" price for a 1000-gallon tank given that I'm in this propane-buyer's cooperative is listed here: http://www.southskyline.org/skyprop.html
A 1,000-gallon tank would cost \$1,600 to have delivered to my doorstep. Figure the concrete pad, trenching, conduit, risers, regulator & pigtail add another what? I don't know, maybe \$400 at DIY prices? That's \$2000.
So, my costs are \$2000 and the setup is inspected & good to go.
Currently my coop has a contract for wholesale + 56 cents: http://www.southskyline.org/spug.html
If I saved, say, 20 cents per gallon by being able to switch suppliers, it would take me 10,000 gallons to break even.
At 2,000 gallons of propane a year, that would be in about 5 years. Five years to break even seems like a decent deal, to me.

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<%-name%>
• posted on September 28, 2013, 10:42 am
On 9/27/2013 8:34 PM, Alex Gunderson wrote:

I missed the part where you took the cost of money into account. You can borrow the \$2000 and pay interest. You can take it out of savings and lose interest. Or you can take it out of savings and use it to pay off higher interest loans instead of buying a tank. The cost of money is the lowest interest rate to borrow it or the highest rate you're paying on current loans minus what it's earning now...whichever is greater. That can really skew your analysis.
And if you already have a tank, you can just buy it from the current owner...or pay to have it decommissioned and hauled away so you can replace the current system.

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<%-name%>
• posted on October 1, 2013, 3:12 am

My mother had this discussion with her bridge group (3 other women) about 45 years ago, about comparing the cost of renting versus buying. She told me they just couldn't understand where the cost of money came into the picture. My mother did.

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<%-name%>
• posted on October 1, 2013, 3:29 am
On Mon, 30 Sep 2013 23:12:32 -0400, bubba wrote:

Heh heh. I think actually these kinds of basic misconceptions are why we're not able to instantly come to a concerted agreement on the legal status of propane tanks sold with the house.
For example, I just found out why the bulk of the confusion is in the definition of REAL property versus PERSONAL property.
In California, it's pretty clear propane tanks are taxed as REAL PROPERTY, e.g., http://www.calproptax.com/1proprty.html
In other states, propane tanks are considered PERSONAL PROPERTY. For example, in NJ: http://www.lawrenceyerkes.com/html/rmx-article-real-vs-personal-property.htm
We find that the propane industry argues vehemently that they feel propane tanks, in California, should NOT be classified as REAL PROPERTY: http://www.boe.ca.gov/proptaxes/pdf/ip99052.pdf "Industry, the Western Propane Gas Association, disagrees with staff's recommendation. Industry believes butane and propane tanks should be classified as personal property." [versus historically being classified as "improvements" by the state]
Yet, clearly, California classifies (and taxes) above-ground propane tanks as REAL PROPERTY (same paper as above). Also, we find a huge amount of the confusion on the status of propane tanks is directly related to the fact that they are UNIQUE.
Even the industry argues they are unique - and that they should be treated as an entity upon themselves, for a variety of reasons, as explained here: http://www.boe.ca.gov/proptaxes/pdf/ip99051.pdf
So, in summary, a HUGE amount of the confusion here is that California treats above-ground propane tanks as REAL PROPERTY and that all examples that are *not* about propane tanks fail to adequately explain the unique treatment of propane tanks in California.

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<%-name%>
• posted on October 1, 2013, 4:15 am
Alex:
I don't know about the USA, but here in Canada, all cylinders designed to store gas under pressure have to be pressure certified every 5 years.
This is the primary reason that most companies that use compressed gasses in their business prefer to buy the gas but simply pay a damage deposit on the cylinder so that ownership of the cylinder stays with the company supplying the compressed gas. That's cuz whomever owns the cylinder is responsible for paying to have it pressure certified periodically.
I make my own beer, and I use beer gas in a cast steel cylinder to drive it out of a spigot on my beer fridge. That's how I know about the pressure certification requirement.
So, as regards the cylinder itself, be sure you have all the numbers before you start doing the math. Maybe contact your propane utility and find out if there are any costs associated with ownership of the equipment you rent.
Diy'ers don't really figure out the pay out time on a project. Your example where you figure that if you're only going to live in a house for 10 years, you want the projects you do to pay out in less time than that really doesn't work in real life. For example, suppose you needed to put new shingles on your roof. The labor involved in installing more expensive 30 year shingles is no different than the labor involved in installing much less expensive 15 year shingles. So, who would say I'm going to work my butt off installing these cheap shingles and then have to do it all again in 15 years, whereas if I paid 50 percent more for the shingles, I won't have to do it again for 30 years? It just makes economic horse sense to pay more for the materials if the labor costs are the same regardless of what kind of quality you install.
Similarily, when it comes to installing carpet, who's going to install the cheapest rubber backed carpet they can find because they don't plan to live in the house for more than another 5 years? That would be a BAD economic decision because any prospective purchaser of the house would lower their offer by the cost to replace the carpet. Installing a good quality carpet up front costs more, but it also doesn't diminish the value of the house when it comes time to sell.
So, this DIY business doesn't lend itself well to payout times and rates of return.
--
nestork

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<%-name%>
• posted on October 1, 2013, 7:48 pm
On Tue, 1 Oct 2013 06:15:26 +0200, nestork

Propane is a little different than compressed gas. LP (the 'L' stands for LIQUID) is only under 200PSI, not the 3,000+ PSI used for gasses. It makes a huge difference. That's the reason LP is preferred over CNG.

At probably 3000PSI.
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