Case Study 23-1: The Math Before the Decision — Dave Kowalski's HVAC Replacement

Background

Dave Kowalski is facing an HVAC decision he hadn't planned on. His 2007 propane furnace — found to have a cracked heat exchanger during the fall inspection described in Chapter 22 — needs to be replaced immediately. He has heat now, from the new 96% AFUE propane furnace installed on an emergency basis. But the inspector's visit and the unexpected repair cost started a conversation Dave wants to finish: should he eventually replace propane with a heat pump entirely?

His new 96% AFUE propane furnace cost $3,800. The installer also quoted a cold-climate heat pump system as an alternative option: $6,500 installed, complete with a variable-speed air handler that would handle both heating and cooling (his existing central AC is also 15 years old). The heat pump option was on the table — he just didn't have time to think it through in an emergency situation.

Three months later, with the emergency pressure off, Dave does the math.

Establishing the Baseline

Dave pulls his propane delivery receipts for the past five years:

His old furnace was 80% AFUE. His new furnace is 96% AFUE. Even before considering a heat pump, the new furnace already saves money. Let's calculate how much.

Old furnace: 788 gallons × 80% efficiency = 631 gallons-equivalent of useful heat delivered. To deliver that same useful heat at 96% AFUE: 631 ÷ 0.96 = 657 gallons needed.

Wait — that's not right. Let me re-approach this correctly:

The correct comparison: - Old furnace burned 788 gallons to deliver X BTUs of heat. - New 96% furnace delivers the same X BTUs by burning: 788 × (0.80/0.96) = 656 gallons. - Annual savings in gallons: 788 - 656 = 132 gallons. - At $2.88/gallon (2025 price): 132 × $2.88 = $380/year savings from the new furnace vs. old furnace.

The $3,800 propane furnace pays back its efficiency premium vs. an 80% unit ($1,000 incremental cost) in 2.6 years. Good investment.

The Heat Pump Analysis

Now Dave compares his current situation (new 96% AFUE propane furnace) to the heat pump option he passed on.

His electricity rate from his most recent bill: $0.11/kWh — relatively low for Michigan, where a rural cooperative provides power from a mix of hydro and natural gas generation.

He researches the Mitsubishi Hyper-Heat system the contractor quoted. At his design temperature (Michigan, 0°F design condition), this unit maintains rated capacity with a COP of approximately 1.7. His seasonal average — weighted across all the hours in a Michigan heating season — he estimates at a COP of 2.3 (more moderate temperatures make up the bulk of heating hours; 0°F days are rare).

Heat pump operating cost comparison:

Step 1: How much heat does Dave's house need? Average annual propane for heating: 788 gallons × 91,500 BTU/gallon × 96% efficiency = approximately 69 million BTU/year of useful heat delivered.

Step 2: How much electricity for the heat pump to deliver 69 million BTU at COP 2.3? 69,000,000 BTU ÷ (2.3 × 3,412 BTU/kWh) = 8,797 kWh/year

Step 3: Annual cost at $0.11/kWh: 8,797 × $0.11 = **$968/year**

Current propane cost (new furnace): 656 gallons × $2.88 = **$1,890/year**

Annual savings of heat pump over propane: $1,890 - $968 = $922/year

Dave also needs to factor in cooling. His existing 15-year-old central AC (SEER 10, approximately SEER2 9.5) costs him roughly $280/year to operate. A new heat pump would also replace this. A new variable-speed heat pump in cooling mode would carry SEER2 ratings of 18–22, reducing his cooling cost to approximately $140–$160/year. Cooling savings: **$120–$140/year**.

Total annual savings (heat + cool): $922 + $130 = $1,052/year

The Capital Cost Comparison

Dave has already spent $3,800 on the new propane furnace. If he had chosen the heat pump instead, he would have spent $6,500. The differential — what he'd need to spend now to "upgrade" to a heat pump by also replacing the aging AC — is complicated by having already bought the furnace.

He considers two framings:

Framing 1: What should I have done in the emergency? At the time of the emergency, both options were available: - Propane furnace only: $3,800 (doesn't replace aging AC) - Heat pump system (heat + cool): $6,500 - Incremental cost of heat pump option: $2,700 - Annual savings: $1,052 - Payback: 2.6 years

This was an obvious choice in hindsight. Dave wishes he'd had time to do the math during the emergency.

Framing 2: What should I do now? He has a new propane furnace that is 3 months old. He still has a 15-year-old AC. Options: a) Keep the new furnace, replace only the AC when it fails (maybe 1–3 years): lose the heating savings; maintain current AC until replacement b) Replace the AC now with a mini-split or traditional AC (SEER2 18+): capture cooling savings now but not heating savings c) Replace everything now with a full heat pump system: spend $6,500 minus some credit for the new furnace (he may be able to sell or return the furnace — it's only 3 months old and the contractor might buy it back or apply it as a trade-in credit toward the heat pump install)

Dave calls the contractor who installed the propane furnace. After some negotiation, the contractor agrees to buy back the 3-month-old propane furnace for $2,800 (they can install it as a replacement in another customer's home). Dave's net cost to switch to the heat pump system: $6,500 - $2,800 = **$3,700**.

Annual savings: $1,052. Payback: 3.5 years.

Before incentives. With incentives: - IRA 25C credit (30% of $6,500, up to $2,000): $2,000 - Michigan utility rebate (heat pump): $750 - Total incentives: $2,750 - Net cost: $3,700 - $2,750 = $950 - Payback: 0.9 years

Dave calls the contractor back.

The Decision

Dave commits to the heat pump system. The deal is structured: the contractor buys back the propane furnace, applies it as a credit toward the heat pump installation, and installs the Mitsubishi Hyper-Heat variable-speed system — outdoor unit plus variable-speed air handler — with a 10-year parts warranty and 5-year labor warranty through the manufacturer.

Dave files for the IRA tax credit at tax time and enrolls in the utility rebate program (which requires an efficiency certification from the installer, which the contractor provides).

Net first-year financial result: - Propane fuel savings: ~$922 - Cooling savings: ~$130 - Tax credit: $2,000 (one-time) - Utility rebate: $750 (one-time) - Net cost paid: ~$950

First year effective return: ($922 + $130 + $2,000 + $750 - $950) = $2,852 return on a year with significant one-time incentives. Recurring annual benefit: $1,052 in lower energy bills.

Lessons

Run the numbers during the emergency if at all possible. Dave lost leverage by deciding under pressure. The two-minute phone call to ask "what would a heat pump cost as an alternative?" during the initial emergency visit could have saved weeks of back-and-forth and the logistics of returning a new furnace.

Incentives can flip the economics dramatically. The unaided math for a heat pump in Michigan at Dave's utility rates already showed a 3.5-year payback. With incentives, the payback was under a year. Incentive programs are worth researching before any HVAC purchase.

Low electricity rates don't mean gas always wins. Dave's rural electric cooperative charges $0.11/kWh — relatively cheap. But propane at $2.88/gallon is expensive per BTU. The heat pump's COP multiplier is large enough to overcome even modest electricity price disadvantages when propane is the baseline.

The best time to analyze alternatives is before the equipment fails. Dave got a second chance through the furnace buyback, but at a cost in time and logistics. Homeowners with aging HVAC equipment should run the replacement analysis before the emergency, not during it.