This presentation describes the analysis of the costs of increased energy efficiency for residential water heaters. Here, we focus on the cost and efficiency data for electric and gas-fired water heaters. This data formed the basis of the Technical Support Document for the Department of Energy's (DOE) Final Rule on Water Heaters. The engineering analysis uses computer simulation models to investigate the efficiency improvements due to design options and combinations thereof. The analysis covers four polyurethane foam insulation types based on non-ozone-depleting substances as blowing agents - HFC-245fa, HCFC-134a, penthane and water-blown. Average manufacturer, distributor, and installer costs are used to calculate the costs of different water heater designs. Consumer operating expenses are calculated based on the modeled energy consumption and U.S. average energy prices. With this information, design options are rank-ordered according to cumulative payback period. Subsequent steps of the standards rulemaking process such as the Life Cycle Cost analysis and National Energy Savings analysis used these results.