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Two types of heating systems are considered to provide heat for a 35,000 ft2 office building. Cost data for each system is given below. Regardless of the system chosen electricity to run the system will cost $0.06 per kWh. Considering a 12% interest rate, which system would be most economical considering the lifecycle costs?

Option 1: Heat Pump this system costs $194,000 to purchase and install and is expected to last 15 years. It has no salvage value at the end of its useful life. It will require 145,000 kWh in electricity to operate the system each year. Annual O&M (Operating and maintenance) costs are estimated to be $3,860. Further you anticipate that you will need to replace the compressor on this system every 10 years for a cost of $2,500 for each replacement.

Option 2: Geothermal this more expensive system costs $256,500 to purchase and install and is expected to last 15 years. It has no salvage value at the end of its useful life. Although it will require far less electricity than the heat pump to operate: just 25,590 kWh per year, the annual O&M costs are similar at $3,650. No additional costs or replacements will be required with this system.