Question

Kate, a real estate developer, is planning construction of a major office high rise in downtown Austin. Her architectural engineering firm suggests she install improved curtain wall with high efficiency windows and seals. Doing so will cost her an additional $3/sf of curtain wall and she expects to have 200,000 sf of exterior wall. If she does so, she will be able to install a smaller mechanical system that will be $400,000 less than the original planed system. The energy savings are difficult to model, but she expects to save about $50,000/year in today’s costs. Assume the study period is 20 years and there is no salvage value to the mechanical system. Part a) Draw the cash flow diagram for this investment. Be sure to label each item as current or constant dollars. Part b) Solve for the expected LCC for this alternative. Assume the real rate is 5% and nominal rate is 8%.

Answer 1

Part a:
Cash flow diagram is as follows:



Part b:

Year	Cash saved is cash inflow	Cash outflow	Net cash cost	Yearly LCC @ 5% Real rate	Yearly LCC @ 8% Nominal rate (Negative figure showing reverse cost)
0	400000	600000	200000	200000	200000
1	50000		-50000	-47619	-46296
2	50000		-50000	-45351	-42867
3	50000		-50000	-43192	-39692
4	50000		-50000	-41135	-36751
5	50000		-50000	-39176	-34029
6	50000		-50000	-37311	-31508
7	50000		-50000	-35534	-29175
8	50000		-50000	-33842	-27013
9	50000		-50000	-32230	-25012
10	50000		-50000	-30696	-23160
11	50000		-50000	-29234	-21444
12	50000		-50000	-27842	-19856
13	50000		-50000	-26516	-18385
14	50000		-50000	-25253	-17023
15	50000		-50000	-24051	-15762
16	50000		-50000	-22906	-14595
17	50000		-50000	-21815	-13513
18	50000		-50000	-20776	-12512
19	50000		-50000	-19787	-11586
20	50000		-50000	-18844	-10727
				-423111	-290907

Real rate or nominal rate, in both the cases, aggregate LCC is coming a negative value, hence favorable for Kate. Cost, when negative, is good only. Hence this proposal for installing curtain wall is beneficial and should be taken up.