United States
                Environmental Protection
                Agency
                  Office of Pollution Prevention
                  and Toxics
                  Washington, DC 20460
   May 1992

EPA/741/R-92/002
v>EPA
Total Cost Assessment:
Accelerating Industrial Pollution
Prevention through Innovative Project
Financial Analysis
               With Applications to the Pulp and Paper Industry

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                United States
                Environmental Protection
                Agency
                  Office of Pollution Prevention
                  and Toxics
                  Washington, DC 20460
   May 1992

EPA/741/R-92/002
vvEPA
Total Cost Assessment:
Accelerating Industrial Pollution
Prevention through  Innovative Project
Financial Analysis
               With Applications to the Pulp and Paper Industry

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                        ACKNOWLEDGEMENTS
This report was prepared by the Tellus Institute under a cooperative agreement
with the U.S. Environmental Protection Agency, Office of Pollution Prevention
and Toxics, Pollution Prevention  Division.  We  gratefully acknowledge the
guidance of Julie  Shannon, Project Manager, and Jerry Kotas, Director, over the
course of the study.

Environmental managers, production engineers, financial analysts, and other staff
from the case study firms were instrumental in providing data, documents, and
interviews that comprise the foundation for this study. Our analysis would not
have been possible without their willingness to devote substantial time and staff
resources to the project.  A special thanks to  those firms that agreed to
collaborate on  in-depth Phase II  studies of pending pollution  prevention
investments.

The Technical Advisory Group, whose members are listed in Appendix E, served
as advisors and reviewers of draft material. Their expertise was invaluable in
refining our conceptualization and  application of  the Total Cost Assessment
(TCA) method used in this research.

The New Jersey Department of Environmental Protection/Division of Science and
Research, and the Northeast Waste Management Officials' Association provided
financial support for concurrent TCA projects that  created many efficiencies in
conducting this research. Substantial portions of Sections 3 and 4 are excerpted
from these studies, and other sections were informed by their analyses and
findings. We also thank Ralph Smith, CPA of Larkin & Associates, who provided
a thorough accountant's review of the methods used in analyzing two pollution
prevention projects.

All opinions expressed in this report and any remaining errors or omissions are
the sole responsibility of the authors.

                                Allen  L. White, Monica Becker,
                                James Goldstein
                                Tellus Institute
                                 89 Broad Street, Boston. MA 02110
                                Tel: 617-426-5844.  Fax: 617-426-7692

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                                      EXECUTIVE SUMMARY

        In its February 1991 National Pollution Prevention Strategy, EPA set in motion a series of initiatives
  aimed at deepening and widening both government and private sector activities in pollution prevention
  Recognizing the inherent limitations of traditional "end-of-pipe" approaches, the Strategy called for joint
  agency-industry action to redirect resources toward elimination of pollutants instead of continued reliance
  on downstream, control-oriented approaches that, while effective in solving one pollution problem, often
  create others.  Without a transition from control to prevention measures, cross-media shifting of pollution
  among land, water and air will continue, and reduction of pollution from dispersed, non-point sources will
  remain extremely difficult to achieve.  .

        For many firms, EPA's call for accelerated prevention  served as  a reaffirmation of what they
  already knew and, to varying degrees, practiced-that in the medium and long-term, pollution prevention
  generally is more sensible than pollution control.    Early initiatives, beginning in the  1970's were
  motivated by a simple bottom-line consideration: continued expenditures on pollution control investments
  to handle steadily increasing waste volumes presented firms with the specter of an endless capital dram
  that  would  divert  resources from more  lucrative  opportunities in  R&D,  product development,
 manufacturing and marketing,

        By the mid  1980s, other forces were encouraging the shift to prevention-oriented strategies
 including liability under the federal Superfunri Act, public concerns with environmental degradation
 increasingly stringent pollution disclosure requirements, and widely publicized industrial accidents in both
 the U.S. and abroad.  As a result, firms have faced a rising tide of public demands for shifts to clean
 technologies and environmentally friendly products.

        Notwithstanding pressures from various quarters, and the noteworthy progress of a few, typically
 large firms, manufacturers have been slow to move away from traditional end-of-pipe strategies toward
 more prevention-oriented practices.  If, as many argue, pollution prevention pays, what accounts for this
 slow pace of change? If prevention investments are, in fact, in the self-interest of the firm, what accounts
 for the continuing reluctance to move aggressively toward a more preventative pollution management
 mode? And why, in  light of the publicized benefits of pollution prevention,  do firms, even large
 sophisticated ones, continue to be surprised when prevention-oriented projects produce advantages to the
 firm far beyond those expected of many conventional "must-do," compliance-driven capital investments?

       The explanation for this apparent contradiction seems to be two-fold:  (1) the organizational
 structure and behavior of firms inhibits pollution prevention projects from entering their decision-making
 process from the outset, thereby precluding these alternatives from consideration by the firm altogether
 and (2) economic/financial barriers linked to methods of capital allocation and budgeting once a pollution
 prevention project successfully enters the capital budgeting process and competes with other projects for
 limited capital resources.  A priori, it appears that both these factors, acting in concert, contribute to the
 sluggish pace of investment in industrial pollution prevention. The second factor, economic/financial
 barriers, with special  emphasis on the pulp and paper industry, is the focus of this study. Within a capital
 budgeting framework, we examine if, and to what extent, conventional methods of investment analysis act
 to impede pollution prevention projects in favor of end-of-pipe alternatives.  Two projects actively under
 consideration by firms in the pulp and paper sector,  serve to demonstrate how different definition,
measurement, and allocation of project costs/savings, longer time horizons, and the use of multiple
profitability indices may remove the biases inherent to conventional analytical methods.

       A major source of industrial pollution, the pulp and paper sector provides a useful context for
examining these alternative methods. Historically, environmental regulation of the industry has focused

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on reduction of BOD and TSS in water effluent, and particulates, sulfur dioxide and organic sulfur
compounds in air.  Reductions of these pollutants have been achieved principally through end-of-pipe
controls.  Nonetheless, pollution prevention is by no means a new concept to pulp and paper firms.  In-
plant recovery and reuse of pulping chemicals, for example, is an integral part of the kraft pulping process.
Other preventative measures include:  in-plant fiber and water recovery and reuse in the paper mill,
counter-current washing in the pulp mill, and dry wood debarking in the woodroom.  These technologies
have been widely implemented to reduce pollution generation and to reduce raw material and energy
costs. Current environmental regulation of toxic air and water pollutants, toxic constituents in miJl sludge,
and pulp mill effluent standards for foam, odor, and color are posing new challenges to pulp and paper
firms.   Meeting many  of these regulations  will require materials and process changes rather than
traditional end-of-pipe controls.  Dioxin reduction, for example, requires process changes targeted at
reducing dioxin formation, such as decreased use of chlorine in bleaching or oxygen delignification.

       In a compliance context, a mill's choice between an end-of-pipe or a prevention strategy will
depend heavily on the  comparative economics of these options. This is so even  in instances where
profitability is negative, that is,  when the firm expects a net loss on its investment. Unlike most end-of-
pipe technologies,  pollution prevention projects tend to reduce operating  costs  by reducing waste
generation, regulatory activities, and pollution related liabilities.  In addition, investments in pollution
prevention may increase revenue by improving product or corporate image. Including these indirect or
less tangible savings in the financial analysis of projects may enhance the estimated profitability of the
prevention strategy, and may be decisive in selecting a pollution prevention versus an end-of-pipe option.
It is at this decision point  that the  concepts and methods of Total  Cost Assessment (TCA) - the
comprehensive, long-term financial analysis of pollution prevention projects - can play a role in improving
the financial picture of a pollution prevention investment, and enhance its competitiveness with pollution
control projects. TCA techniques can also improve the projected financial performance of discretionary
pollution prevention projects,
thereby increasing their ability to compete for limited capital resources.

       To assess how TCA works in practice, we worked in close collaboration with the staff of two mills
to analyze the economics of two pollution prevention projects.  The first (Project 1) is a white water and
fiber reuse project at a coated fine paper mill.  This investment would permit fiber, filler, and water reuse
on two paper machines at all times, thereby conserving raw materials and reducing water use, wastewater
generation, and energy use for fresh and wastewater pumping and freshwater heating.  The second
(Project 2) is a conversion from solvent/heavy metal paper coating to aqueous/heavy metal-free coating
at a paper coating mill.  This investment would substantially reduce solvent and heavy-metal usage, VOC
emissions, and hazardous waste generation.   For both projects, we developed a "company analysis"
comprising costs typically used by the firms. We compared these to 'TCA analyses" of the same project,
in which a full accounting for less tangible, longer term, and indirect costs and savings was made.

       The comparative analyses for each project yield substantially different results. For Project 1, the
white water and fiber reuse investment, the net present value for this $1.7 million capital expenditure
shifts from -$0.6 million in the Company Analysis to $1.8 million using a TCA approach; the internal rate
of return (IRR) increased from 6% to 36%; and the simple payback of 11.4 years increased to 2.0 years.
Similarly impressive results are produced in Project 2, the aqueous conversion investment. NPV for this
$0.6 million capital expenditure shifts from $0.1  million to $0.2 million in the company versus TCA
analyses, respectively; IRR shifts from 16% to 27%; and simple payback drops from 5.3 to 3.0 years.

       Analysis of a limited sample of two projects does not suggest that, a priori, more comprehensive
treatment of project costs and savings necessarily yields higher performance for prevention investments.
Much depends on the original capital cost of the project, the completeness of the company analysis, and

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 the magnitude and timing of indirect and less tangible benefits.  And, surprisingly, TCA is equally likely
 to turn up  additional costs as additional  savings, potentially diminishing  the appeal of prevention
 investments. Moreover, the effort expended in preparing the TCA analysis, though partially attributable
 to startup costs of any new practice, is substantial enough to make even large firms wary of adopting such
 an approach for all projects competing for capital resources.

        The  limited number of cases examined here precludes generalizations about overall corporate
 receptivity to TCA approaches and  the degree to which pollution prevention will be accelerated by its
 adoption. Within the limitations of our study, however, it is clear that TCA can serve as valuable tool for
 translating discretionary judgements into concrete dollar values during the capital budgeting process.
 Insofar as pollution prevention projects produce less tangible and indirect costs and benefits, TCA equips
 managers to develop a more precise estimation of the real economic returns to such projects. Though
 TCA does not insure an attractive profitability level for prevention projects, the cost characteristics of such
 projects suggests that their financial performance in general will be enhanced by TCA. This is likely to
 be particularly true for industrial prevention projects that are materials and process-focused, that is, well
 upstream  in the production process.  Over the longer term, TCA can serve as a  substantial force in
 recasting the "must-do" and "inherent loser" image of environmental projects into a more positive, profit-
 adding and market-expanding image.

        Several approaches for promoting TCA in the context of EPA's pollution  prevention strategy
 emerge from this study. In general, it is clear that moving firms to modify their analytical procedures
 requires a belief that TCA will produce a clearer picture of the  profitability of prevention projects and
 thereby lead to enhanced business operations. Thus, the primary goal of a promotion program should
 be to convince firms that TCA  is not simply another regulatory mandate, but a vehicle for rationalizing
 their internal capital budgeting process.

        More concretely, EPA has already worked to promote TCA by developing the Pollution Prevention
 Benefits Manual, the Waste Minimization Opportunity Assessment Manual, and sponsoring the initial work
 on PRECOSIS, all of which contain discussions of TCA concepts and provide analytical tools. Further
 efforts to disseminate more widely these and other tools such as P2/B1NANCE, a tool developed for this
 study, will accelerate the advancement of the TCA concept.  Published  case studies which use a TCA
 approach to project financial analysis could be a valuable supplement to  past initiatives.

       At the state level, TCA may be built into pollution  prevention policies and programs in several
 ways. State technical assistance programs may offer TCA guidance and training as a complement to their
 technical services. States may provide TCA  training seminars, with specialized modules aimed at large
 versus small firms, or for firms in certain lines of business.  A number of  states have instituted
 requirements for industry to develop pollution prevention plans that must contain technical and economic
 feasibility assessments of specific prevention projects.  The New Jersey Pollution Prevention Act, for
 example, that explicitly requires that plans  include a comprehensive analysis of the costs associated with
 the use, generation, release or discharge of hazardous substances for current production processes and
 the savings realized by investments  in pollution prevention.  "Planning for Success Through Waste
 Reduction", the planning guidance document created by the Washington State Department of Ecology
 under the State's Hazardous Waste Reduction Act, instructs companies to evaluate the costs and benefits
 of selected waste reduction options over a  five year period and to describe the accounting systems used
 to track hazardous substance and waste management costs, which must include "liability, compliance, and
 oversight costs".  Requiring a  TCA approach in pollution prevention  planning may direct firms to
incorporate unconventional cost items and/or longer time horizons  to enhance the  competitiveness of
prevention investments. The long-term effectiveness of this  approach, however, is unproven and should

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be approached cautiously and with a strong emphasis on the compapny self-interest dimension alluded
to earlier.

       While rigid, prescriptive approaches are undesirable, some type of standard could facilitate the
implementation of emerging federal and state regulations requiring TCA in pollution prevention planning.
National standard guidelines,  perhaps under the  auspices of the American Society of Testing and
Materials (ASTM), could serve this objective.

       The limited sample size of firms in this study allows for only indicative findings that must be
corroborated by the analysis of additional firms. Existing TCA methods have been available for several
years, yet no systematic assessment of user experience among the several hundred purchasers of various
systems is available. This presents a potentially rich data base for further assessing the organizational and
economic issues in TCA adoption we uncovered in  this study.

       Quantifying the benefits of green technologies, green products and green corporate image remains
a major challenge.  Yet it is precisely these benefits  that are heard by corporate managers as reasons for
approving otherwise marginal projects.   Developing methodologies to quantify  these benefits and
incorporate them into project financial analysis is an unfinished task.

       Finally, what is financially optimal for the firm, of course, is not necessarily optimal from a social
cost standpoint.  In this sense, TCA is no substitute for lifecycle assessment (LCA), in which the choice
of a material input or the manufacture of a product is assessed for its full societal costs regardless of
whether they fall within or outside the purview of the firm.

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                                TABLE OF CONTENTS

EXECUTIVE SUMMARY	;	  1

1.     INTRODUCTION . . ,	   8
      Why Hasn't Prevention Taken Off?	  9
      Surviving the Capital Budgeting Process  	  10
      Research Design 	  11

2.     POLLUTION PREVENTION IN THE PULP AND PAPER INDUSTRY .	  14

3.     CONVENTIONAL VERSUS TOTAL COST ASSESSMENT	  17
      Capital Budgeting 	  17
      Analyzing Environmental Projects	  17
            Accounting for Environmental Costs 	  18
            The TCA Alternative	  20
      TCA METHODS 	  23
            The General Electric Method (GE)	  25
            Pollution Prevention Benefits Manual (EPA Method) 	  27
            Precosis 	  32
      Other  TCA Methods	  34
      Summary	  36

4.     TCA AT WORK: CASE STUDIES IN THE PULP AND
      PAPER INDUSTRY	  38
      Capital Budgeting and Environmental Projects	  38
      Current Versus TCA Project Analysis Practices: Qualitative Comparison	  40
            Development of the "Company Analyses" and TCAs  	  41
            Cost Inclusion 	  42
            Financial Indices  	  45
            Time Horizon	  46
      Company Versus TCA Project Financial Analysis Practices:
        Quantitative Comparisons  	  46
            Effect of Inclusion on Financial Indicators	  47
            Are All Costs Created Equal? 	  50
            The Impact of Previously Omitted Non-environmental Costs	  51
            Financial Indices  and Time Horizon	  51
      Perspectives on TCA	  52

5.     INCENTIVES AND BARRIERS TO POLLUTION PREVENTION AND
      ADOPTION OF TCA APPROACHES	  55
      Introduction	  55
      Coverage of Costs and Benefits	  56
      Time Horizon of Project Financial Analysis	  59
      Summary	  60

6.     LOOKING AHEAD:  TCA IN THE 1990S	  61

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APPENDICES:




A.     Case Studies



B.     Detailed Description of Three TCA Methods




C.     Bibliography



D.     Survey Questionnaire




E.     Technical Advisory Group




F.     Glossary of Financial Terms

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                                     LIST OF TABLES
Table 4.1     Overview of Cost Inclusion by Company and TCA for
             Projects 1, 2, and 3	 44
Table 4.2     Summary of Financial Data for Project 1 - White Water Rcycle	 47
Table 4.3     Summary of Financial Data for Project 2 - Aqueous/Heavy Metal
             Conversion Project	 48
Table 4.4     Summary of Costs for Project 2	 49
                                    LIST OF FIGURES

Figure 3.1    Schematic of General Electric Methodology	  25
Figure 3.2    Schematic of EPA Methodology	  28
Figure 33    Schematic of Precosis Methodology	  33

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 1.      INTRODUCTION

        In its February 1991 National Pollution Prevention Strategy1, EPA set in motion a series of initiatives
 aimed  at deepening and widening both  government and private  sector activities in pollution prevention.
 Recognizing the inherent limitations of traditional "end-of-pipe" approaches, the Strategy called for joint agency-
 industry  action to  redirect resources toward  elimination of pollutants, instead of continued reliance on
 downstream,  control-oriented approaches that, while effective in solving one pollution problem, have often
 created others. Without such a transition from control to prevention measures, cross-media shifting of pollution
 between land, water and air will continue, and reduction of pollution from  dispersed, non-point sources will
 remain extremely difficult to achieve.

        For many firms, EPA's call for accelerated prevention served as a reaffirmation of what they already
 knew and, to varying degrees, practiced-that in the medium and long-term, pollution prevention generally is
 more sensible than pollution  control.  As early as the late  1970s,  large firms such as 3M, Dow Chemical,
 Polaroid, and Merck established corporate-wide strategies to eliminate pollution through product redesign,
 materials substitution and process changes. Early initiatives, such as those undertaken by 3M, were motivated
 by  simple bottom-line considerations2:  continued expenditures on pollution control  investments to handle
 steadily increasing waste volumes presented firms with the specter of an endless capital drain that would divert
 resources from more lucrative investment opportunities in R&D, product development, manufacturing and
 marketing.

        By the mid 1980s, other forces were encouraging the shift to prevention-oriented strategies. Corporate
 concern with liability escalated with the  enactment of the federal Superfund Act, a law  that holds waste
 generators responsible for cleanup  costs  under its "strict,  joint and several" liability  standard.  Under this
 standard, even small contributions by a firm to a waste site might lead to large remediation costs, leaving those
 firms with "deep pockets" especially vulnerable to unpredictable court settlements potentially involving millions
 of dollars. Added to these liability issues were growing public concerns with environmental degradation, linked
 to both chronic pollution and highly publicized accidents in both the U.S. and abroad. Though it is difficult to
 precisely estimate the financial repercussions of such trends and events, corporations were faced with burgeoning
 public demand for higher standards of environmental responsibility from corporations and their products. Some
 public demands evolved  into  legislative action, particularly at the state level, to ban or severely  restrict
 environmentally unfriendly products and  to induce environmentally friendly technologies in manufacturing
processes.

       Perhaps the most powerful inducement to industrial pollution  prevention thus far has been the
publication of plant-specific toxic releases to air, land and water, under provisions of the Communiry-Right-To-
Know Act of 1986.3  For the first time, this law requires companies themselves to estimate and submit to EPA
 total releases, thereby allowing public scrutiny of the volume, type and location of toxic releases;. Since releases
include wastes placed in any medium, even entirely allowable shipments to land disposal sites and permitted air
emissions are subject to public scrutiny.  Though data weaknesses remain, the result is to give the public a
glimpse of a facility's pollution profile that has, not unexpectedly, added pressure to achieve net waste reductions
      1 56 CFR 7849. Februaiy 26,1991.

      2 Lois R, Ember, 'Strategies for Reducing Pollution at the Source Are Gaining Ground," Chemical and Engineering News (C&EN), July 8,1991,
   7-16.

      3 Section 313 of the Act requires manufacturers to report releases of over 300 chemicals. Approximately 28,000 facilities ware covered in the
   1989 data reporting, including those which use at least 10,000 pounds or manufacture at least 25,000 of any listed chemical. See US. EPA, The
   Toxics-Release Inventoty A National Perspective, 1987. Office of Toxic Substances. Washington D.C, U.S. Government Printing Office.


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  beyond those mandated by various federal and state regulations.  Due in part to this unprecedented level of
  d^closure and public scrutiny of firms' pollution performance, prevention is emerging as an integral component
  of responsible corporate environmental management.


  Why Hasn't Prevention Taken Off?

        Despite impressive progress in adopting pollution prevention practices among many large firms the vast
  majority of American manufacturers have been slow to move away from traditional end-of-pipe strategies If
  as many argue, pollution prevention pays, what accounts for this slow pace of change?  If prevention investments
  are,  in fact, in the self-interest of the firm, what accounts for the continuing reluctance to aggressively move
  toward a more preventative practice in implementing pollution management choices?  Why  from a purely
  business standpoint, are firms seemingly slow to adopt potentially profitable material, process and product
  innovations that respond to these economic forces?  And why, in light of the publicized benefits of pollution
 prevention, do firms, even large sophisticated ones, continue to be surprised when prevention-oriented projects
 produce advantages to the firm far beyond those expected of many conventional "must-do," compliance-driven
 capital investments?                                                                     *

       The explanation  for this apparent contradiction seems to be two-fold: (1) the organizational structure
 and behavior of firms that inhibits pollution prevention projects from entering their decision-making process
 from the outset, thereby  precluding these  alternatives from consideration by the firm altogether- and (2)
 economic/financial barriers linked to methods of capital allocation and budgeting once a pollution prevention
 project successfully enters the capital budgeting process and competes with other projects for limited capital
 resources.                                                                                       v

       Organizational structure, to which we devote  only passing attention in this study, includes issues such
 as the status of environmental management and managers in the firm, and the flow of information among
 decision-makers. Impediments to pollution prevention may arise when top management fails to send a strong
 message that  prevention should be the preferred option; when environmental managers lack the authority
 and/or resources to effectively press preventive thinking into research and development, design, production and
 marketing units; when salary and promotion incentives fail to incorporate environmental criteria- or when
 deficiencies in information flow and pollution tracking lead to missed opportunities for pollution prevention4
 Such  organizational obstacles may block financially promising prevention investments from entering the firm's
 capital allocation process at the outset, thereby eliminating any prospect for gaining approval for such an
 investment. These barriers are complex and vary from company to company, and warrant much further
 exploration than we present in this study.

       The second explanation for inaction on promising pollution prevention investments is tied to a set of
 external and internal economic conditions. A key external condition, for example, is the firm's access to and
 the cost of, capital A proposed project that is financed by debt, regardless of its rate of return to the firm will
languish if lenders and investors perceive unacceptably high levels of risk in the firm as a whole or in the specific
project for which financing is sought. Internal economic conditions are reflected in hurdle rates (thresholds of
acceptable profitability) that a project must surpass in order to successfully compete with other investment
alternatives within and outside the environmental arena. Such rates vary widely among firms, depending in part
on whether a firm is inclined to "flexible-budgeting" with decentralized decision-making and fixed rates of return
   31(2)
                                   "Pl0aCtive En^ronmental Management Avoiding the Toxic Trap," Sloan Management Review

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or, alternatively, to "capital rationing" where projects compete relative to one another rather than against a
prescribed hurdle rate5.


Surviving the Capital Budgeting Process

       As projects enter the capital allocation process, managers are called upon to develop costs and benefits
of the proposed investment. How firms approach project analysis varies widely, ranging from simple back-of-the-
envelope estimates of profitability for an initial screening to  more elaborate  and complex estimates using
multiple indicators of profitability.  A firm acting in its best interest should, of course, account for all internal
costs, leaving aside all those external costs that do not affect a project's financial profile. While external costs
are no less real than internal costs in the sense that they use valued assets like clean air and clean water, their
omission from project evaluation follows logically from standard business practices that account only for costs
that accrue to buyers and sellers of goods and services, to debtors and creditors, and to the owners of the firm
itself.6

       The approach a firm uses to compile and analyze project costs and benefits is a critical determinant of
how the project is ranked vis-a-vis competing project investment options.  When, for example, costs are omitted
because  they are not identified, scoped or accurately estimated, the  project analysis provides a misleading or
incomplete picture of financial performance. Similarly, when revenues or avoided costs from an .investment are
missed owing to definitional shortcomings or to the selection of financial indicators insensitive to long-term
benefits, managers again  may fail to place a project in  its appropriate place among all those competing  for
capital resources. While all types of projects may fall prey to incomplete analysis, pollution prevention projects,
which yield  savings through  reduced waste management and compliance costs and avoided liability, are
particularly vulnerable.

       During the last decade, many of the more obvious, discretionary waste reduction projects have been
funded, having been able to stand on their own without modification of conventional project evaluation and cost
accounting techniques.  Such  is the case, for example, with chemical firms, where escalating costs of off-site
disposal  have led to on-site solvent recovery processes,  and with pulp mills, where high chemical costs have
induced  on-site recovery of spent pulping chemicals.  Both are cost-effective and proven technologies. Even
using a less than comprehensive set of costs and benefits, investments such as these may easily surpass internal
hurdle rates and proceed  to implementation.

       The next tier of pollution prevention projects, however, has not been so successful.  In this class projects
are more focused on upstream changes to manufacturing processes, requiring materials substitution and process
redesign that by nature are more complex, costly and of higher risk to the firm.  To meet the firm's hurdle rate
or to compete with end-of-pipe projects targeted at the same compliance objective, analysis of these prevention
projects  may require inclusion of indirect or hidden  regulatory and liability costs as well as the use of a longer
time horizon  for  calculating profitability.   An accounting  approach  that  fails to capture these more
comprehensive costs and  benefits will also fail to place prevention investments on a "level playing field" with
other competing investments whose returns are adequately covered using existing  analytical approaches.
      5 Ross, Marc 1986. 'Capital Budgeting Practices of Twelve Large Manufacturers," Financial Management, Winter, 15-22.

      6 Rubenstein, Daniel Blake, October 1990. "Let Love Keep You Warm When Accounting For Environmental Obligations", Unpublished paper,
   Office of Auditor General, Government of Canada. In contrast to Total Cost Assessment which concerns only private or internal costs and benefits,
   Lirccycle Analysis (LCA) refers to all costs and benefits-both private and societal-associated with a production process or product


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        We cannot a priori predict that all or most prevention-oriented projects will succeed if modified cost
 accounting procedures are adopted.  We can, however, say that such projects are typically characterized by a
 stream of benefits that are more varied and accrue over a longer time horizon than conventional financial
 evaluation methods usually allow.  At the same time, we know that firms of all sizes routinely omit costs of
 existing environmental management practices from their project analyses, thereby biasing their decision-making
 against prevention-oriented alternatives.

        In sum,  our focus  in this study is  on  the  financial/economic issues  that underlie  the seeming
 inconsistency between prevention project profitability and the slow pace of implementing such projects. Thus,
 our concern  is with these interrelated  questions:  How do firms currently conduct environmental project
 analysis? Are prevention projects able to compete effectively using existing methods? For, those that cannot,
 would a more comprehensive analytical approach make a difference?  If so, are such differences marginal or
 substantial?  Through the examination and application of Total Cost Assessment (TCA) - the comprehensive,
 long-term financial analysis of pollution prevention projects  - we have begun  to answer these and other
 questions related to the role of financial analysis in pollution prevention decision-making.  This report presents
 the results of this research, with case study applications to the pulp and  paper industry. Although the pulp and
 paper is our focus, our findings are applicable to other industrial sectors.


 Research Design

       Exploration of our research questions involved compilation and analysis of both primary and secondary
 data. Our goal was to bridge the gap between TCA concepts and TCA practices by examining the availability
 and strengths of existing methods, comparing these methods with extant project financial analysis in the pulp
 and paper industry, and alternative improvements necessary to accelerate TCA in that sector. Our methodology
 relied on case studies of four firms, with two providing material for an in-depth look at current financial analysis
 practices versus TCA alternatives.

       We stress at the outset the exploratory nature of this research, owing to the limited sample size. With
 this limited sample size, we may only tentatively answer questions regarding current practices and receptivity
 to TCA within the pulp and paper sector.7

       Details of our research  design are as follows:

 Task 1.   Conduct  literature review.  This review covered three principal areas:   (1)  the economic and
 organizational aspects of industrial pollution prevention; (2) the role and methods of cost accounting in industry;
 (3) project evaluation methods currently available that fall under the broad rubric of TCA as defined herein.

 Task 2. Select and secure access  to case study firms. We contacted 14 pulp and paper coating mills, seeking
 a cross-section of integrated and coating operations.  Our  contacts were drawn from recommendations by the
 University Maine - Orono, the Northeast Waste Management Officials'  Association (NEWMOA), Lockwood-
 Post's Pulp and Paper Directory, and personal contacts.   Ultimately, four agreed to participate in the study, of
which two collaborate on in-depth studies of pollution prevention projects that already had been subject to some
level of technical and financial analysis:

       1.      Non-integrated coated fine paper mill
      A larger and more diverse sample is the subject of the companion report entitled: Alternative MeOiods for the Financial Analysis of Industrial
   Pollution Prevention Investments, Draft Report. Prepared by Tellus Institute for the New Jersey Department of Environmental Protection, Division
   of Science and Research, September 1991.


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       2.     Paper coating mill
       3.     Integrated bleached kraft, market pulp and tissue mill
       4.     Non-integrated, specialty paper mUl

       Firms who agreed to meet with the research team received a Project Summary, TCA Overview, and a
two-part questionnaire (Appendix D).  Part I of the survey questionnaire, Company Profile, focused on general
management, product lines and manufacturing processes; generation of air, water and solid pollutants; pollution
control costs and  their allocation within  the  firm; and pollution reduction initiatives.   Part n of the
questionnaire, Financial Analysis  of Environmental Projects, focused on current project financial analysis
methods, and receptivity to the TCA alternative. Included in this set of open-ended questions were several
dealing with organizational issues, that is, the way the firm decides how to allocate capital and the way such
decisions might favor or  disfavor pollution prevention versus control strategies.   We  asked that Part I be
completed before our first visit, whereas Part II would form the basis for discussion during the meeting. The
decision  to pursue in-depth project analysis was deferred pending the outcome of the first interview.

Task 3. Conduct First Round of Interviews.  Interviews were conducted during February-May, 1991. Per our
request, a mix of senior company representatives participated, ranging from environmental engineering and/or
compliance specialists to financial,  production and R&D staff. At the conclusion of the Phase I interviews, two
firms were selected for Phase II, in-depth TCA project analyses.

Task 4.  Conduct In-Depth Project Analyses. Two facilities agreed to  collaborate on  in-depth studies, one
involved  in paper coating and the  second in production of coated fine papers.  In both  cases,  key individuals
within the environmental affairs/compliance area emerged as advocates of the project. Both saw the research
project as an opportunity to advance a pending pollution prevention project, while our goals were to:

       1.     Gain in-depth knowledge of the procedures used by several firms to evaluate prevention projects;

       2.     Evaluate the quantitative impact of a TCA approach on the financial  view of a project, as
              currently conducted by the firm;

       3.     Evaluate the availability of relevant data and the effort required to conduct a TCA;

       4.     Conduct a TCA analysis based on a hybrid approach to allow comparisons between company and
              TCA outcomes.

       As we discussed options for in-depth analyses, these criteria emerged:

       1.     The firm's decision to accept or reject the project is pending, or the project has been rejected.
              By choosing such projects, it was our goal to either provide additional information to decision-
              makers on a project currently under evaluation, or to re-examine (and potentially resurrect),
              using a TCA approach, a project rejected for reasons of unsatisfactory profitability.

       2.     Major project technical issues have been resolved.  Since our focus is on the financial aspects
              of the project, we did not want to select a project with significant outstanding technical questions
              that might undermine the development of a credible financial analysis.

       3.     The firm has completed at  least  a preliminary project financial analysis.  Since one of our
              objectives for the in-depth studies was to compare a TCA to a financial analysis as typically
              constructed by the firm, our goal was to select projects that had already been analyzed.
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        4.      The firm is interested in the prevention project and committed to the preparation of an in-depth
               analysis.  Knowing that the studies would  require many site visits,  phone calls, and data
               collection and review, we sought firms that were, enthusiastic about the project and participating
               in our study.                                                                r     r   &

        In  the case of in-depth studies, we initiated an iterative process comprising data needs definition,
 compilation, manipulation and review.  This was the most labor-intensive phase of our research though specific
 project requirements varied according to technological and operational complexity of the proposed investment
 and the degree to which analysis already had been performed.  Developing the TCA required many data
 requests and discussions, even when the firm had invested substantially in project financial analysis  In addition
 as data compilation proceeded, the contributions of a wider range of company personnel were drawn into the
 process than had been the case with the original analysis. These developments were not unexpected given the
 nature of TCA; as the net of costs and savings is cast more widely, the "reach" of the project extends into more
 and more areas of the firm's operations.  In the case of the paper coater, this process tended to raise cross-
 departmental issues concerning the potential operational and cost implications of the project

 Task 5. Assess Incentives/Barriers to Adoption of TCA in the Context of Pollution Prevention. Our objective
 in this task was to perform a preliminary assessment of barriers/incentives to TCA adoption from a regulatory
 perspective, and to assess how such barriers and incentives relate to the pulp and  paper sector in particular
 For this assessment, we explored three broad types of incentives/barrier to the adoption of TCA in advancing
 pollution prevention: (1) financial»i.e., grants, loan guarantees, state-issued loans, interest subsidies tax credits
 and accelerated depreciation; (2) regulatory-e.g, requirements imposed by the Securities and Exchange
 Commission; and (3) organizational-including both management and internal accounting systems that influence
 how capital allocation decisions are made.

       The remainder of this report is organized as follows. Section 2 discusses pollution prevention in the pulp
 and paper industry to provide context on the cases we subsequently analyze.  Section 3 reviews and compares
conventional and TCA  methods of project financial analysis, and  then  reviews  the  major TCA  methods
developed thus far. Section 4 presents a summary of TCA analyses of two cases developed in collaboration with
firms currently considering pollution prevention projects. Section 5 overviews the  barriers and  incentives to
adoption of TCA.  In conclusion, Section 6 presents directions for future policy development and research
                                                13

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2.     POLLUTION PREVENTION IN THE PULP AND PAPER INDUSTRY

       The pulp and paper industry is one of the world's oldest and largest industries.  Pulp and paper
technology was developed largely in the nineteenth century, and since that time, technical advances have
been dominated by engineering process improvements, as opposed to radical innovations  in  basic
technology.

       In the United States, the industry includes some 265 domestic firms and 640 plants engaged in
pulping, paper and board making, coating, and converting.  In 1989, among all US. industries,  the pulp
and paper industry ranked tenth in value of shipments at $120 billion,  and employed approximately
160,000 people.8  It is a major component of our domestic economy.

       The pulp and paper industry is also a significant source of industrial pollutants discharged to air,
water, and land.  Historically, environmental regulation of the industry has focused on reduction of BOD
and TSS' in water effluent, and air emissions of particulates, sulfur dioxide and organic sulfur compounds.
Spurred by technology-based effluent standards, major reductions in emissions of these pollutants have
been achieved using  primarily  capital-intensive,  end-of-pipe  control technologies such as  primary
clarification and biological wastewater treatment  for control of water pollutants, and scrubbers and
electrostatic precipitators for air pollutants.  While these technologies reduce the flow of pollution into
either water or air, they do so principally by shifting the pollutants from one medium to another.

       Though pulp and paper mills have relied heavily on end-of-pipe technologies, pollution prevention
is by no means  a new concept.  In-plant  recovery and reuse of pulping chemicals, for example, is an
integral part of the kraft pulping process. Other examples include: in-plant fiber and water recovery and
reuse in the paper mill,  counter-current washing in  the pulp  mill, and dry wood debarking in the
woodroom. These technologies have been widely implemented to reduce pollution generation and to
reduce raw material and energy costs.

       During the past ten years, environmental regulation of  pulp and paper manufacturing has
expanded to include toxic air and water pollutants, and toxic constituents in mill sludge. In 1984, the
industry received its first toxic effluent standards, when Best Available Technology (BAT) limitations were
set for pentachlorophenol, trichlorophenol and zinc. In 1987, EPA's National Dioxin Study found evidence
of a pattern of dioxin concentrations in stream bottom sediment and fish downstream of pulp mill waste
outfalls.  This discovery has led to strong pressure on the industry to reduce emissions of dioxin, and
ultimately is likely to lead to dioxin effluent standards and restrictions on the land application of sludge
from chlorine or chlorine-derivative pulp bleaching.  According to the Toxics Release Inventory (TRI)
data of 1988, the industry ranked fourth among U.S. industries in total discharges of TRJ pollutants to
air, water, and land. The industry ranked first in TRI emissions of chloroform (70% of total), and second
in toluene emissions (13% of total).  Under the  new Clean Air Act, Maximum  Achievable Control
Technology (MACT) limits for chloroform must be promulgated for the industry by June 1994.10
   8 Schilling, Hank. "EPA's Pollution Prevention Activity for the Pulp and Paper Industry." Conference Proceedings for "Reducing the Use of
Toxic Chemicals in Pulp and Paper Manufacturing", March 1991, Durham, New Hampshire.

   * BOD, biological oxygen demand, is a measure of organic pollution in a water. It represents the oxygen depletion potential of a wastewater
stream. TSS, total suspended solids, is a measure of the entire amount of suspended solids in a wastewater stream.
   10 Schilling, Hank, 1991. Op.cit.

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        Added to this list is a movement by state environmental agencies to tighten pulp mill effluent
 standards for foam, odor, and color,"  pollutants that are  both difficult and costly to remove.12  In
 addition, new permits issued under the Clean Water Act and the new Clean Air Act will contain more
 stringent emissions limitations for conventional water pollutants (e.g., BOD and TSS), and criteria air
 pollutants (e.g., SOx, NOx, and particulates).

        Finally, the solid waste crisis and renewed public interest in resource conservation has brought to
 bear increased pressure on the paper industry to use  more  recycled paper in its products.  Numerous
 federal, state, and local laws and purchasing policies exist, and many more are proposed, which require
 recycled content in paper products. If the federal bill "Resource Conservation and Recovery Act (RCRA)
 Amendment  of  1991"  (also referred  to as the Baucus Bill)  is passed,  minimum recovery rates for
 newsprint-52%, corrugated paper products-66%, mixed paper grades-20%, and high-grade de-inking-50%,
 and pulp substitutes-100% would be  required, placing additional pressure  on the industry to utilize
 recycled paper.13

        Regulatory and public pressures  in the coming decade will continue to pose a challenge for the
 industry, particularly because the kinds of changes that are necessary to meet these demands tend to be
 complex, costly,  and dependant largely on materials substitution  and process redesign rather  than
 traditional end-of-pipe controls. The industry already has taken some steps to reduce, for example, dioxin
 generation. As documented in a June 1991 report, EPA found 64 out of 104 mills surveyed have or are
 planning to implement process changes that are targeted at reducing dioxin formation. These include:
 increased chlorine dioxide substitution for chlorine, increased use of peroxide, and oxygen delignification.
 According to  the report, mean concentrations of dioxin (2,3,7,8-TCDD) in treated effluent were reduced
 by 50% between late 1988 and 1989.  Preliminary data from  1990 effluent samples indicates  that dioxin
 emissions have declined further.14

        If we  consider two general contexts within which companies implement pollution prevention~a
 compliance context (either existing or anticipated regulations) and a discretionary context (motivated by
 efficiency or market gains), it appears that pollution prevention efforts in the pulp and paper industry will
 fall primarily in a compliance framework within the next few years. This seems likely for several reasons.
 First, the significant number of new and tightened regulations affecting the industry will require significant
 resources-both direct capital and human (i.e., engineering, legal, etc.) resources-to implement "must-do"
 compliance projects. Second, the industry is coming off a record-setting period of capital spending for
 new and upgraded equipment, and analysts expect a sharp drop in discretionary spending for the next few
 years15.  Finally, like many sectors, the industry is experiencing an economic down-turn that is expected
 to reduce capital spending. These trends point to a likely reduction in discretionary capital spending in
 the industry for the next few years.  While the financial benefits of product image and market-expanding
     Maine, for example, passed legislation in 1990 requiring pulp and paper mills to reduce color, odor, and foam emissions.

   12 According to one mill in Maine, pulp mills in the State will have to spend an estimated S210 million in capital investment to meet the State's
new requirements.

   13 Under this proposed legislation, these standards would not be enforced if 40% of all paper generated in 1995 were recovered for recycling.

   14 U.S. Environmental Protection Agency, June 1991. "1990 National Census of Pulp, Paper, and Paperboard Manufacturing Facilities,
Preliminary Summary Report of Questionnaire Responses for Mills Which Bleach Chemical Pulps," prepared by Radian Corporation.

   15 Capital spending by the pulp and paper industry in 1989 reached an estimated S15.1 billion, up from 34.6 percent from 1988, the largest gain
registered by any U.S. manufacturing industry. U. S. Department of Commerce, January 1990. 1990 U.S. Industrial Outlook, Prospects for Over 350
Manufacturing and Service Industries. Washington, D.C.


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 investments in, for example chlorine-free bleaching and heavy metal/solvent-reduced coatings, should not
 be dismissed, we do not expect that these incentives will be a prime motivation for investment in pollution
 prevention within the next few years.

        If compliance is going to be the major force driving environmental investments in the industry, and
 if policy-makers seek to promote pollution prevention rather than end-of-pipe control, then the regulatory
 process is the logical vehicle for encouraging or mandating prevention investments. This could mean
 developing technology-based standards grounded in pollution prevention techniques,16 educating state and
 federal permitting authorities to understand and promote prevention approaches in mill permitting, and
 providing direct or  indirect incentives (see Section 5) for mills to  choose prevention in developing
 compliance strategies and choosing among technology options.

        Regardless of how options evolve, a mills choice between an end-of-pipe or a prevention strategy
 in order to meet a regulatory standard will depend heavily on comparitative economics of these options.
 This is so even in instances where profitability is negative, that is, when the firm expects a net loss on its
 investment. Even under these conditions, the inclusion of certain indirect or  less tangible costs and
 benefits may make the difference in selecting a pollution prevention versus an end-of-pipe option. It is
 at this decision point that the concepts and methods of Total Cost Assessment (TCA) can play a role in
 improving the financial picture of a pollution prevention investment, and enhance its competitiveness with
 pollution control projects.  We  now turn to a  discussion of the concepts and  methods  of TCA to
 demonstrate how this may occur.
     EPA plans to base new effluent standards and guidelines, scheduled for promulgation in October 1995, on low- or no-cWorinc technologies
to 'force" pollution prevention by mills (from text of presentation by Hank Schilling, NEWMOA conference).

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 3.     CAPITAL BUDGETING:  THE CONTEXT  FOR FINANCIAL ANALYSIS OF POLLUTION
        PREVENTION INVESTMENTS

        All manufacturing firms, whether large or small, face the task of determining how to allocate
 scarce capital resources to competing projects.  Whether financed internally with capital reserves or
 current cash flow, or externally with equity or debt, most pollution prevention projects are subject to some
 type of profitability analysis used to assess their competitiveness vis a vis other competing projects and/or
 a prescribed hurdle rate established  by the firm.  In the next few sections, we describe the capital
 budgeting  process, and specific  issues  concerning the evaluation of environmental projects and
 environmental costs.  These sections set the stage for a discussion of Total Cost Assessment (TCA), an
 new approach to financial analysis of pollution prevention projects, and several TCA methods.


 Capital Budgeting

        Capital budgeting is the process of analyzing alternative investments  and deciding whether they
 will be included  in the firm's  investment budget. Capital budgets provide information on planned and
 approved expenditures of fixed assets, and often extend over five to ten or more years into the future.
 Thus, the capital budget is strategic in nature, identifying the financial resources available and required,
 and assisting in the corporate planning process. Small, privately held firms generally budget in an informal
 manner, focusing on short-term operations and profitability.  This reflects the need for small businesses
 with little  capital to recoup their investments quickly, as well as the absence  of in-house expertise to
 develop more sophisticated financial analyses. At the other extreme, large, publicly-owned corporations
 employ formalized procedures, requiring involvement of several departments  within a company. Where
 investments are large, the demand by top management and lenders for a rigorous analysis of costs and
 risks necessitates more sophisticated methods for determining profitability.

        Capital budgeting decisions are based  on a combination  of financial analysis of proposed
 investments and  subjective judgement, reflecting experience, current corporate and market conditions,
 instincts and vision. These two types of information-the concrete and quantitative plus the instinctive and
 qualitative-guide the allocation of capital resources during the budgetary process. Depending on the
 sophistication and resources of the firm and the nature of the project itself, such decisions range from
 complex, multi-year technical and financial evaluations to quick decisions based on "back-of-the-envelope"
 calculations of costs and returns.


 Analyzing Environmental Projects

        What are the special  features  of environmental  projects that defy conventional cost analysis
 procedures and  the  utilization of various financial indicators  of project  performance?   When
 "environmental costs and savings" (e.g., waste management, regulatory compliance, future liability costs)
 are introduced into project analysis, certain limitations in traditional methods  immediately surface.  The
 source of these limitations lies to a large degree in the uncertainties of environmental costs themselves,
 namely: What are they?  How large are they? When will they occur?

       For all of these questions, the degree of uncertainty can be high and stems from two conditions:
 (1) the complexity of assessing risks associated with the use, transport and  exposure to  hazardous
substances;  and (2) the rapidly changing regulations  and shifts in judicial decisions that define and
continually alter costs.  These two conditions combine to create a high degree  of uncertainty and flux to
which traditional  project financial analyses have not fully adjusted.
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        Consider, for example, the case of solvents, one of the most common families of chemicals used
 in a wide array of manufacturing operations ranging from electronics to paper coating, metal plating and
 Pharmaceuticals.  Prior to the environmental laws of the 1970s, companies freely chose among solvents
 best suited to their needs. The versatility and effectiveness of solvents brought about rapid growth in their
 industrial use and in solvent wastes, leading inevitably to an elevated profile among both regulators and
 the public. Beginning in the  mid-1970s, as their human health and environmental risks became better
 documented, both virgin and waste solvents have become targets of federal and state  regulation. In a
 period of little more than  a decade, these  materials  were  transformed  from  a  favorite among
 manufacturers to a priority target for reduction. At this juncture, firms in many industrial sectors are
 aggressively seeking technologies to substitute non-solvent materials in processes where solvents previously
 represented a critical ingredient.

        The experience with solvents exemplifies the rapid change in industry's use of hazardous materials
 and the volatility in defining the cost implications of their use.  Prior to the regulatory  flurry of the 1970s,
 solvents were treated as a material input, the same as any  other input connected  with an industrial
 process.   During the same  period, waste  solvents  typically were  shipped  off-site  for  disposal  or
 reclamation.  Costs were recorded as operational, usually in the overhead category along with a multitude
 of other waste management activities.

        Today, however, the picture has changed dramatically. Depending on the location  of the firm,
 solvent use and waste generation expose the firm to a plethora of regulatory requirements  and judicial
 rulings including:  RCRA reporting; the air toxics provisions of the amended Clean Air Act;  state Toxics
 Use Reduction (TUR) laws; the federal Toxics Release Inventory (TRI) reports; potential claims for
 health damages due to environmental exposures or cleanup of hazardous waste sites;  and worker claims
 tied to occupational exposures.  To these may be added pressures for firms to participate in voluntary
 programs such as EPA's 33/50 Project (formerly Industrial Toxics Project).


       Accounting for Environmental Costs

       Linked to each of the regulations listed above is a set of potential costs. Some are straightforward,
 though not necessarily routinely articulated by managers; for example, monitoring, training and preparing
 manifest forms for the off-site shipment of waste under RCRA requirements. Others, however, fall into
 the category of contingent costs, those which  may materialize if certain events occur:  exceeding a
 permitted  emissions limit; an off-site spill during transport of waste; a leak in  a lined and permitted
 hazardous waste landfill; disposal of wastes  at an  unpermitted site; or an acute event leading to  an
 environmental release in an abutting neighborhood. All these  events are probabilistic in nature, and are
 dependent upon a range of circumstances over which the firm exercises various levels of control.  From
 a cost accounting standpoint, this probabilistic feature is critical and stretches the capacity of traditional
 cost accounting methods to incorporate them into project evaluation.

       From an external reporting standpoint, dealing with contingent costs of the above type is not new
 to corporate managers. Guidelines are in place, though their interpretation remains fluid. Basting FASB
 standards (FAS #5, 1975) require inclusion of contingencies in the balance sheet or  income statement
 when a firm experiences a probable loss or impairment of assets17. To date, application of this rule has
 been reserved for major losses associated with acute, one-time events. The trend in recent court rulings
   17
     Todd, Rebecca, 1989. 'Accounting and the Environment: Patching the Information Fabric,* presented at the Waste Reduction: Research
Needs in Applied Social Sciences Workshop, National Research Council, Committee on Opportunties in Applied Environmental Research and
Development, Annapolis, Maryland, May, 1989.

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is to require firms to include in their financial reporting recurrent or longer-term environmental damages
without an acute or sudden event.

       Reinforcing this requirement are SEC standards (explored in greater depth in Section 5) that
require disclosure of all  effects that are  "material" to the firms' capital expenditures, earnings and
competitive position18.  These include future expenditures on  environmental controls, as well as any
actual or contemplated governmental proceeding, that has or may effect the financial health of the firm.
Certain additional guidelines are in place, namely:   (1) that the proceeding is primarily focused on
damages involving monetary sanctions  or  capital expenditures representing more than  10 percent of
current assets; and, (2) if the government is a party the proceeding may result in sanctions in excess of
$100,000.

       The net effect of these accounting and disclosure requirements is substantial discretion, and risk,
to the firm in estimating contingency costs.  Too little disclosure may result in violation of FASB or SEC
requirements; too much may result in creating liabilities where none existed before. The latter, in turn,
may have the ironic effect of breaching  the fiduciary responsibility of the firm to its stockholders.

       The mandate to disclose certain liability costs in external reporting  has direct implications for
project analysis.  By ignoring such costs in analyzing projects, management incurs the risk of misallocation
of scarce capital resources by shifting investment dollars toward projects that continue to generate future
liability.  In so doing, one of the key distinctive benefits of pollution prevention projects—their capacity
to root out liability at its source—is omitted from project financial evaluation.  A pattern of such omission
presents the risks of unanticipated losses, which may undermine the financial condition of the firm and,
in the process, its ability to raise capital for future investments from investors and lenders.

       The uncertainty associated with estimating liability costs is also characteristic of many benefits of
pollution prevention investments related to market performance of the firm.  Investments that create
advantages to the firm through enhanced corporate or product image are no less real than cost reduction
advantages of lower  waste disposal costs.  Thus, paper products made without chlorine bleaching and
coated papers made without solvents or heavy metals may translate into measurable, though uncertain,
market advantages.  In these instances,  environmental projects  no longer fit conveniently into a profit-
sustaining or cost-reducing category, but take on the attributes of market-expanding projects that are
traditionally the favored targets for capital  investment.
  18 Wallach, Paul G., 1988. "The SEC and Corporate Environmental Responsibilities," Haznua World, November, 1988.

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 The TCA Alternative

        The TCA approach, as defined in this study, consists of four elements:  expanded cost inventories,
 time horizon, and use of long-term financial indicators in project analysis and proper  allocation of
 environmental costs  to processes or product lines within the company's cost accounting system.  Each
 element is discussed  in turn.


 Expanded Cost Inventory.  While conventional cost analysis practices generally include only the capital
 costs directly associated with the investment, plus obvious operational costs and savings such as waste
 disposal and  labor, TCA considers a broader range, including certain probabilistic costs and savings.
 These include four cost categories:
 1) Direct Costs:
               capital expenditures
               •  buildings
               •  equipment
               •  utility connections
               •  equipment installation
               •  project engineering

               operation and maintenance expenses/revenues
                  raw materials
                  labor
                  waste disposal
                  utilities: energy, water, sewerage
                  value of recovered  material

2)  Indirect or Hidden Costs:

        •      compliance costs
               •  permitting
               •  reporting
               •  monitoring
               •  manifesting
        •      insurance
        •      on-site waste management
        •      operation of on-site pollution control equipment

       These costs are considered hidden in the sense that they are either allocated to overhead rather
than their source (production process or product), or are altogether omitted from the project financial
analysis.

3)  Liability Costs:

       •     penalties and fines
       •     personal injury and property damage
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         Liability costs originate from two principal sources:  penalties and fines for non-compliance; and
 legal claims, awards, settlements for remedial action, personal injury and property damage due to routine
 or accidental hazardous releases under CERCLA".

         A pollution prevention project by definition reduces or eliminates potential liability costs by
 reducing or eliminating the source of the hazard from the production process. Two of the methods
 described in the following section provide a procedure for estimating these potential costs and the year
 in which they will  occur, and recommend their incorporation into financial calculations.  In this way,
 liability is treated  in the same way as the more conventional capital and operating costs.  However'
 liability costs are by nature difficult to estimate and equally difficult to locate at a point in the lifecycle
 of a project.  By including estimates of future liability directly into a financial evaluation, the analyst
 introduces considerable uncertainty that top management may be unaccustomed, or unwilling, to accept
 as part of a project justification.

        Firms currently use several alternative approaches to considering liability costs in project analysis.
 For example, in the narrative accompanying a profitability calculation, a firm may include  a calculated
 estimate of liability reduction, cite a penalty or settlement that may be avoided (based on a claim against
 a similar company  using a similar process), or qualitatively indicate without  attaching dollar value the
 reduced liability risk  associated with the pollution prevention project. Alternatively, some firms have
 chosen to loosen the financial performance requirements (e.g., raising the required payback period from
 3 to 4 years, or lowering the required internal rate of return from 15 to  10 percent) of the project to
 account for liability reductions.20

        For publicly traded  companies, liability estimation is controversial because the Securities and
 Exchange Commission requires firms to report liabilities to stockholders and accrue assets to cover these
 future costs.  Also, a liability estimate  may be damaging to a firm if it is made public in  a legal
 proceeding.  For all  these reasons, if firms  consider liability costs in project  analysis, they normally
 exercise substantial caution in assigning a quantitative estimate of liability to a specific investment.

 4)  Less Tangible Benefits:

        • increased revenue from enhanced product quality
        • increased revenue from enhanced company and product image
        • reduced health maintenance costs from improved  employee health
        • increased productivity from improved employee relations

       A pollution  prevention project may deliver substantial benefits from an improved product and
company image or from improved employee health. These benefits, like liability, are difficult to predict
and estimate.   A TCA  analyst may  find a  qualitative  analysis  more  appropriate  and saleable to
management.


Expanded Time Horizon.  In addition to a more comprehensive cost inventory, a second feature of a TCA
evaluation is its longer time horizon, usually five or more years, because certain costs and savings from
   19
     Comprehensive Emergency Response Compensation and Liability Act of 1980 (also called Superfund) which holds companies financially
responsible for environmental damage caused by previous waste disposal and management practices.
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 pollution prevention take many years to materialize.  Conventional project cost analysis, on the other
 hand, often confines costs and savings to a 3-5 year time period.  Retaining the typical 3-5 year horizon
 in project financial analysis will lose track of the very cost and benefits that TCA is designed to capture.
 For this reason, an extended time horizon is integral to the effective application of TCA. The willingness
 of firms to extend the time horizon varies with their size, structure, capital availability and competition
 from alternative investments.
 Long-term Financial Indicators. To consistently provide corporate decision-makers with accurate and
 comparable project financial assessments for capital budgeting, the project assessment tools must meet
 at least two criteria:  1)  they must consider all cash flows (positive and negative) over the life of the
 project; and 2) they must consider the time value of money (i.e. it must appropriately discount future cash
 flows. The Net Present Value (NPV), Internal Rate of Return, and Profitability Indicator (PI) methods
 meet both these criteria. Where projects are competing against each other for limited resources the NPV
 method is preferred because there are certain conditions under which the IRR or PI methods fail to
 identify the most advantageous project.21   The payback method, commonly used by small companies,
 does not meet either of these criteria. NPV, IRR, PI, and payback are introduced here in their simplest
 fashion.

       Net Present Value (NPV):  Under the NPV method, the present value of each cash flow, both
       inflows and outflows, is calculated, and discounted at the project's cost of capital. The sum of the
       discounted cash flows is the project's NPV.  A positive NPV means a project is worth pursuing;
       a negative NPV indicates it should be rejected. If the availability of capital is constrained (as it
       usually is) or several projects are competing with one another, other things being equal, the project
       or combination of projects with the highest positive NPV should be chosen.  The NPV method,
       particularly as applied to long-term projects with significant cash flows in later years,  is very
       sensitive to the level of the discount rate.  Thus, for a project with most of its cash flows in the
       early years, its NPV will not be lowered much by increasing the discount rate. On the other hand,
       the NPV of a project whose cash flows come later will be substantially lowered, rendering the
       project a  much less attractive investment opportunity.

       Internal Rate of Return  (IRR):  The IRR method calculates the discount rate that equates the
       present value of a project's expected cash  inflows to the present value of the project's expected
       costs.  Thus, the basic formula to calculate the IRR is the same as that for the NPV; for the IRR,
       the NPV is set to zero and the discount rate is calculated; for the NPV, the discount rate is known
       and the NPV is calculated. A project is worth pursuing when the calculated IRR is greater than
       the cost of capital to finance the project. Where several projects are vying for limited resources,
       all else being equal, the project with the highest IRR should be pursued.


       Profitability Index (PI):  The profitability index is also known as the benefit/cost ratio. The PI
       is simply the present value of benefits (cash inflows) divided by the present value of costs (cash
       outflows), and shows the relative profitability of a project or present value benefits per dollar of
       costs.  Projects with profitability indices greater than 1.0 should be pursued, and the higher the
       PI, the more attractive the project.
   21 Specifically, if two projects either differ in size (i.e. dollar value), or have different time patterns of cash flows, the NPV analysis of the
projects could be in conflict with the IRR analysis. Though NPV, in theory, is the preferred approach, many corporate decision-makers are more
familiar with and prefer the IRR (and to some extent the PI) method.

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        Payback: Payback is the simplest of the techniques for evaluating capital project investments. It
        provides a "quick-and-dirty" or "back-of-the-envelope" appraisal.  While the payback calculation
        may suffice for a preliminary assessment, it should not be relied upon as the sole method for
        project evaluation. The payback period is the expected number of years required to recover the
        original project investment. The payback period can be calculated before or after taxes, and serves
        as a type of "breakeven" calculation in that if cash flows come in at the  expected rate until the
        payback year, then the project will break even from a dollar standpoint.  However, the regular
        payback does not account for the cost of capital, meaning that the cost of the debt and equity used
        in the investment is not reflected in the cash flows or the calculation.22  Another major drawback
        of the payback method is that it does not take account of cash flows beyond the payback year.
        The payback period does, however, provide an estimate of how long funds will be tied up in a
        project and is therefore often used as an indicator of project liquidity.


 Cost Allocation. A firm's cost accounting system is used to track and allocate production costs to a
 product or process line, principally for budgeting (i.e. operational budgeting) and pricing. When costs for
 waste management, regulatory compliance, and pollution control are properly allocated to processes or
 product lines, the cost accounting system provides a rich source of data for TCA.

        For purposes of investment analysis, the ideal cost accounting system has two primary features.
 First, the system should allocate all costs to the processes that are responsible for their creation. This is
 a perennial challenge to financial officers and cost accountants who decide on the placement of costs into
 either overhead or product or process accounts.  Waste disposal costs, for example, are often placed in
 overhead accounts,  while a process or product allocation would assign such costs based on some activity
 or component of the manufacturing process.

        Second,  it is not enough to simply allocate costs to  appropriate processes.  Costs should be
 allocated in a manner that is reflective of the way in that costs are actually incurred.  For example, waste
 disposal costs in some companies are allocated across operating centers-administrative, research and
 development, and manufacturing-on the basis of floor space rather than on the quantity and type of waste
 generated by  each.  This impedes  a rigorous estimation of the  financial benefits of reduced waste
 generation.  Thus, effective cost accounting is critical to directing management attention to the sources
 of waste generation and the benefits of changing current waste management practices.


 TCA METHODS

       Several TCA methods have been developed to facilitate the comprehensive analysis of pollution
 prevention investments.  These methods are illustrated here as alternative approaches to structuring
 project analyses that meet several, but not all, of the foregoing methodological objectives. None of the -
 three methods have achieved widespread acceptance in the business community, despite their availability
 for  as long as four years.  This attests to a number of barriers to corporate acceptance, ranging from
 excessive complexity, intensive data demands, regulatory impediments, to management inertia. Some of
 these are  examined in this section, while others are treated in the Section 5 case studies and Section 6
 assessments of TCA barriers and incentives.
     A variant of the regular payback is the discounted payback period in which the expected cash Hows are discounted by the project's cost of
capital.


                                              23

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       What features should a TCA method have to make it useful and useable to businesses?  Since
TCA methods have not yet received widespread application, no definitive assessment is possible, however,
our research into the budgeting and project analysis methods of a range of firms in the Northeast, has
revealed three highly desirable features.

       First, a desirable system is one that encourages and helps the user to include a complete set of
costs and savings, yet provides the flexibility to tailor the level of the analysis to the needs of the firm,
project type, and size.

       Second,  the  simpler the  method, and  the less time  it takes to  learn and use,  the  better.
Environmental managers, project  engineers and others responsible for financial analysis of pollution
prevention projects usually have little extra time to learn or use complicated tools.  Many, even in large
firms, do not have a  sophisticated understanding of computers  or financial terminology. A system that
requires only rudimentary computer skills and basic knowledge of financial language and calculations will
find greatest receptivity.

       Finally, to allow users maximum flexibility to conduct the analysis manually or with the use of a
computer, the availability of both paper worksheets and software is desirable.  While computerized tools
clearly introduce flexibility and speed, they should not stand in the way of adoption by those who prefer
less automated methods of project evaluation.

       Several TCA approaches  have been developed to facilitate analysis of pollution prevention
investments.  Three of the most prominent among these are:

       •     Financial Analysis  of Waste Management Alternatives, developed by
             General Electric Corporation ("GE Method");

       •     Pollution  Prevention   Benefits  Manual,  developed  for  the  U.S.
             Environmental Protection Agency ("EPA Method");

       •     PRECOSIS, developed by George Beetle Company.

       Each of these methods contain some, but not all, of the  features we have described.  None have
achieved widespread  acceptance in the business community, despite their availability for as long as four
years.  This attests to a number of barriers to corporate acceptance, ranging from excessive complexity,
intensive data demands, regulatory impediments, to management inertia.  Nonetheless, they serve a
valuable illustrations  of progress to date and as points of reference for formulating additional methods
for use in the industrial community.  More detailed review appears in Appendix B. To round out our
assessment, we also briefly describe two additional approaches:

       •     The Economic Feasibility section and Worksheets for Economic Evaluation
             in the U.S. EPA, Waste Minimization Opportunity Assessment Manual;

       •     Part of Waste Advantage, Inc.'s report titled, Industrial Waste Prevention,
             Guide to Developing an Effective Waste Minimization Program.
                                              24

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 The General Electric Method (GE)
 Prepared for:

 Prepared by:
 Publication date:
 Contents:
General Electric, Corporate Environmental Programs
Richard W. MacLean, Manager
General Electric and ICF Incorporated
1987;
Workbook, Worksheets and Financial Calculation Software developed with Lotus
1-2-3, version 2.01.
 Description.  The GE workbook and software are tools for identifying and ranking waste minimization
 investment options.23 The user quantifies direct costs (out-of-pocket cash costs routinely associated with
 waste management and disposal) and future liability costs (including potential environmental liabilities
 for remedial action costs, and related costs for personal injury and property damage) of a current waste
 management practice versus one or several alternative waste minimization  options.  To evaluate the
 profitability of waste minimization investments the user follows three steps outlined in Figure 3.1.
 •A  ft,    W°ri*°ok employs a system of waste-flow diagrams and detailed checklists to help the user
 identify (Step 1) and estimate (Step 2) the direct capital and operating costs (Step 2) associated with
 generation and on- and off-site management of waste streams targeted for reduction. A procedure is
 presented for estimating the magnitude and timing of future liability costs associated with current and
 alternative waste management practices (also in Step 2).  These estimates are based on the type and
 location of treatment, storage and disposal facilities (TSDF) utilized, and the quantity and nature of the
was e generated The user first develops a score for the TSDF based on the technology it employs and
the location of the facility (i.e. surrounding population density, proximity to water supply/etc.). This score
« then used to adjust-up or down-a per-ton cost estimate for corrective actions and claims developed
for a base-case, generic hazardous waste landfill.  Included in  this estimate are the costs of  surface
sealing, fluid removal and treatment, personal injury, real property claims, economic losses and natural
resource damage claims.
                                         FIGURE 3-1

                   SCHEMATIC OF GENERAL ELECTRIC METHODOLOGY
        Step 1:
  Describe current waste
 generation, management
  and disposal practices,
  and an alternative
  project designed to
    minimize waste
                Step 2:

          Estimate capital, operating
             and future liability
           costs for  the current
          and alternative practices
       Step  3:
Enter all costs into the
  spreadsheet and
    calculate  key
  financial indices
 of the investment
  23


                                             25

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       The GE workbook provides step-by-step instructions for entering both direct and future liability
cost data and relevant financial parameters into the financial software package or paper worksheets
provided in the workbook (Step 3).  The software calculates streams of after-tax incremental cash flow
of the investment, the net present value (NPV) for the current and alternative practice, and the following
financial indicators: a) break-even point, b) return on investment (ROI), and c) discounted cash flow rate
of return.  The workbook offers recommendations  for using the financial indices to identify and rank
waste minimization projects.

Data Requirements.  To quantify direct costs of the waste minimization investment, the user needs the
following cost data:

       1.     estimated capital cost of the waste minimization alternative(s);
       2.     operating costs for current waste generation, management, and disposal activities that will
              be affected by the waste minimization project, including labor, input chemicals, and energy;
              and
       3.     estimated operating costs for the waste generation, management arid disposal activities
              under the alternative practice(s).

To estimate future liability costs and the expected year in which a claim may occur, the user must have
the following:

       1.     Information on treatment, storage and disposal facilities (TSDF)
              a.  type of TSDF,
              b.  population density in surrounding communities,
              c.  proximity to water supply,
              d.  history of leaks.

       2.     Waste stream information:
              a.  quantity of waste sent to TSDF, and
              b.  hazardous constituents of the waste.

The information listed in item  1 should be available from either the TSDF used by the firm or from a
state TSDF permitting office.

       For the financial analysis of the waste minimization investment(s), the user must decide on an
inflation rate, discount rate, investment tax credit rate (if applicable), federal tax rate, and depreciation
schedule appropriate to  the company.  This information  is generally available from the company
Accountant, Financial Officer, or Comptroller.

Assessment.  According to  GE, approximately 170 industries, consulting firms, government agencies,
educational institutions, and other organizations have obtained the workbook and software.  Of the 170,
approximately 130 are manufacturing industries.  No systematic follow-up of these purchasers has been
conducted.

       Within General Electric the model has not been used exactly as conceived, but has been applied
to support budgetary analysis of waste management and, more recently, as a communication tool to move
management  in the direction of waste minimization practices.

       The GE system is flexible in that it can serve two principal categories of users.  First, a user who
is beginning to develop  a strategy for waste  minimization and is seeking guidance on relevant activities
                                               26

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  and costs for a TCA would benefit from working through the entire system as summarized in Steps 1-3
  above.  By developing the schematic diagrams and utilizing the check lists provided in the workbook, the
  user is guided in the identification of relevant waste streams and management activities that should be
  considered in the cost analysis.

        Second, a user familiar with the full range of activities and costs that should be considered in a
  TCA may skip Steps 1 and 2, and proceed directly to the financial analysis procedure (Step 3).  In this
  way, s/he can expedite the analysis of a specific project by taking only the time necessary to enter the
  relevant cost items in the worksheets, and examine the financial indices.

        The GE financial software is programmed in Lotus, a software package familiar to many people,
  including  small business managers.   The system is simple in  its  design  and is  user-friendly in its
  application.

        If a user does not wish to include future liability costs for reasons cited earlier, the software can
 be used to analyze direct costs only. The future liability calculation procedure in the GE workbook can
 serve as a useful qualitative procedure for assessing, without costing, future liability.  It takes the user
 through a number of additive steps designed to evaluate various key considerations in analyzing this cost
 component. The process could help the firm qualitatively analyze the risk of a current practice and the
 effect of a waste minimization alternative.

        Because the focus of the workbook is on waste minimization for the purpose of reducing disposal
 costs  and  long-term liability,  the GE method does not encourage a  more comprehensive pollution
 prevention approach involving materials substitution and process change. Nor does the Workbook provide
 guidance for the estimation of indirect and less tangible costs and  benefits. However, a user can include
 these items in the evaluation performed with the GE financial analysis  software.
 Pollution Prevention Benefits Manual24 (EPA Method)
 Prepared for:

 Prepared by:
 Printing date:
 Contents:
Office  of Solid  Waste/Office of
Environmental Protection Agency,
ICF Incorporated
October 1990
Manual and Worksheets
Policy,  Planning  and  Evaluation,  U.S.
Description.  The EPA Manual is designed to assist in the cost comparison of one or more pollution
prevention (PP) alternatives to a current industrial practice.  The method sets up a hierarchy of costs as
follows:

       Tier 0 - Usual Costs:         e.g. equipment, labor, and materials
       Tier 1 - Hidden Costs:       e.g. compliance, and permits
       Tier 2 - Liability Costs:       e.g. penalties/fines and future liabilities
       Tier 3 - Less Tangible Costs:  e.g. consumer responses and employee relations
     The Manual has not been officially published, however copies can be obtained by contacting the EPA, Office of Pollution Prevention
Washington D.C 20460.                                                                                '


                                               27

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The hierarchy progresses from the most conventional and certain costs in Tier 0 to the most difficult to
estimate and least certain costs in Tier 3. At each tier, the user first analyzes all costs associated with the
current and alternative PP project, and  then calculates key financial indicators of the economic viability
of the PP project.  Figure 3.2 illustrates the sequential nature of the method. Financial (calculations for
each tier are added a tier at a time, until the result concludes that the PP alternative meets the investment
criteria (i.e. hurdle rate) of the firm, or  all tiers (0 through 3) have been completed.  For example, if the
results of the Tier 0 financial calculation indicate that the alternative strategy meets the firm's investment
criteria, the user may choose not to continue to include Tier 1-3 costs. If, however, the result falls short
of the investment criteria, then the user may proceed to calculate and add the Tier 1 results to the Tier
0 results, and so on.  Even if the Tier 0 or 1 calculation meets the criteria of the firm, a user may want
to proceed to estimate Tier 2 and 3 costs to fully analyze the financial implications of the alternative
practice.

                                         FIGURE 3-2

                            SCHEMATIC OF  EPA METHODOLOGY
                                           Tier 0

                                         Usual Costs
                        Tier 5

                     Less Tangible
                        Costs
Financial
Protocol
                                                                Tier 1
Hidden Costs
                                            Tier 2

                                           Liability
                                            Costs
                                              28

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       The Manual provides a Regulatory Status Questionnaire, a summary of relevant regulatory programs
and cost equations to assist the user in estimating Tier 1 regulatory costs for several compliance activities,
including labeling, notification, recordkeeping,  and monitoring.  The Manual contains numerous cost
equations for the estimation of the potential future liability costs such as:  ground water removal and
treatment, surface sealing, personal injury, and natural resource damage. In addition, the manual provides
guidance for calculating three financial indicators:  annualized savings, internal rate of return, and net
present value. The manual does not come with software, however it does contain worksheets that aid in
organizing and presenting results from the cost calculations.

Data Requirements.  The following is a summary of the data requirements for each Tier included in the
manual.  While  this list is exhaustive, one should keep in  mind that a) not all Tiers are necessary to
analyze all projects, and b) not all costs within each Tier need to be quantified if data are not available.

       TierO: Usual Costs

       •      Depreciable Capital Costs
                 equipment
                 materials
                 utility connections
                 site preparation
                 installation
                 engineering and procurement

              Expenses
                 start-up costs
                 permitting costs
                 salvage value
                 training costs
                 initial chemicals
                 working capital
                 disposal costs
                 raw material costs
                 utilities costs
                 catalysts and chemicals
                 operating and materials (O&M) labor costs
                 operating and materials supplies costs
                 insurance costs

       •       Operating Revenues
              •   from sale of primary products
              •   from sale of marketable by-products

       Tier 1: Hidden Costs

       •      Facility's regulatory  status under RCRA, CERCLA,  SARA Title IE, Clean Air Act,
             OSHA, and relevant State regulatory programs

       •      Technology-forcing regulatory requirements and the costs associated with them
                                              29

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              Cost components for regulatory activities such as loaded wage rates, frequency of activity,
              and time required to complete activity, for the following regulatory activities:
                 notification
                 reporting
                 monitoring/testing
                 recordkeeping
                 planning/studies/modeling
                 training
                 inspections
                 manifesting
                 labeling
                 preparedness/protective equipment (maintenance)
                 closure/post closure assurance
                 medical surveillance
                 insurance and special taxes

       Tier 2: Liability Costs

       The Manual provides cost equations to assist in the calculation of the following future liability
costs:
         Soil and waste removal and treatment
         Ground-water removal and treatment
         Surface sealing
         Personal injury
         Economic loss
         Real property damage, and
         Natural resource damage.

Each equation consists of several variables, for which the Manual provides suggested values. To illustrate,
the equation for real property damage stemming from a hazardous material storage tank or disposal
facility is:
                                              30

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               Cost = a x b x c  (in thousands of dollars), where:

               a =    property devaluation factor
                      0.15 to 0.30

               b =    land value ($000/acre)

               c =    area of the off-site plume
                      [0.33 D2 + (D x W) - 0.5 W^/4047

               Where

               D =    distance to nearest drinking water well (meters)
                      150 m to 3200 m

               W -   width of ground-water plume at facility boundary (meters)

               Storage Tanks:  W = 3 to 100 meters

               Disposal Facilities:  W = 500 to 700 meters

A similar equation and set of suggested variable values is provided to predict the expected year in which
liabilities may be incurred. While the Manual provides a range of suggested values, the user must either
choose from the range or use values based on actual information about a facility, the hydrogeologic
characteristics of the facility site, distance to nearest drinking water well, and so forth. Since more than
one company may be liable for a particular claim, the user must estimate his or her company's share of
the potential liability costs.

       Tier 3:  Intangible Costs

       The user supplies relevant information to estimate less tangible benefits of pollution prevention
resulting from  enhanced  consumer acceptance, employee/union relations, and corporate image. The
Manual recommends using the judgement of the analyst and provides some guidance on how to identify
and estimate these benefits.

Assessment.  Approximately 600 manuals have been distributed, but no systematic follow-up has been
conducted to evaluate the user experience. ICF has also distributed the Manual, primarily to consulting
firms.

       The EPA Manual incorporates a wide array of costs-usual, hidden regulatory, liability, and less
tangible-which both prompts the user  to consider a full range of costs and encourages quantitative
analysis. The multi-tiered structure of this system facilitates step-by-step analysis that starts with the most
certain and defensible usual costs and, only if necessary,  ends with the  less certain, more subtle costs.
Therefore, if the investment can be justified on the basis of usual costs, the user does not have to estimate
the latter that may generate skepticism within management.

       The method provides equations and default values for a number of key costs, which are generally
difficult for users to estimate or calculate in the absence of such guidance.  Specifically,  assistance is
provided for the calculation of compliance costs, liabilities resulting from penalties and fines, and liabilities
                                               31

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associated with remediation, injury and property damage.  In addition, the method provides useful
summaries of  relevant federal  acts and regulations that assist the user in determining compliance
requirements and costs.

       The EPA system has no software.  Given that some of the equations for calculating costs and
financial indices involve long algorithms, a user may have difficulty utilizing these equations without aid
from accompanying software. In addition, in the absence of software, users may have difficulty performing
screening or scenario  analyses to evaluate a number of different alternatives,  or to experiment with
variations on certain alternatives.
PRECOSIS

Prepared for:

Prepared by:
Publication date:
Contents:
U.S. Environmental Protection Agency, Center  for Environmental Research
Information, Cincinnati, Ohio
George Beetle, George Beetle Company
1989
Manual and Software
       PRECOSIS was designed to support the financial analysis of waste reduction projects.25  The
software is a menu-driven program consisting of ten data input tables and two output reports containing
financial calculations.  The programs can be used on any IBM-compatible microcomputer having 512
kilobytes or more of base memory.

       Cost data are grouped into three categories:

       •     resource effects - costs of labor, material, and facilities;
       •     revenue or value effects - changes in  output quantity and  quality, and
              secondary products/services; and
       •     waste management effects - includes  storage,  handling, disposal,  compliance,
              insurance, and litigation.

       The financial assessment of alternative waste reduction strategies is conducted in four steps, as
illustrated in Figure 33. First, data describing the baseline (or current) process are entered (Step 1). The
user enters cost data for labor, materials, facilities, and waste management in unit cost format (e.g. cost
per ton of a feedstock material, or cost per gallon for waste disposal), and then specifies the number of
units needed for the current process (e.g. pounds of feedstock used per year or number of gallons of waste
disposed per year).  Revenue data are handled in a similar  fashion.  Using  these costs and several
financial parameters entered by the user, the system calculates the total cost of the current system.

       To calculate costs associated with the alternative process, the user must enter an expected increase
or decrease (called "effects") in  the number of units  of resources used, waste  generated, and product
produced as a result of the process change (Step 2). For example, if 500 units of waste is generated by
the current system, and 50 units by the alternative system, then the expected decrease in the units of waste
is 450.

       The software calculates net present value, estimated payback years, internal return on investment,
and numerous other financial indicators to evaluate the profitability of the alternative process (Step 3).
     This system can also be used to evaluate other types of pollution prevention projects.

                                              32

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 The user can repeat Steps 2 and 3 to compare financial differences among alternative waste minimization
 strategies (Step 4). Up to five alternatives can be compared.

                                           FIGURE 3-3

                          SCHEMATIC OF PRECOSIS METHODOLOGY
       Step  1
     Enter data describing
      the baseline plant
        or process
Step 2:
Enter effects data
for the alternative
strategy

Step 3:
• Run financial
calculations
S
                                                                            tep  4:
                                                                       Repeat Steps  2 and
                                                                         3 for additional
                                                                       alternative strategies
 Data Requirements.  A PRECOSIS user is asked for the following information:

 1) Labor resources:  •     average hourly labor rates
                            •     associated fringe benefits by labor class
                            •     number of units of each  class .of  labor  for  the current  and
                                   alternative processes

 2) Materials:               •     physical units of measurement
                            •     typical rates of use for the current process and expected change in
                                   use for the alternative strategy
                            •     average delivered costs of materials

                            •     equipment and  building sizes or capacities, average service  life,
                                   typical salvage value
                            •     typical rates of use for the current process and expected change in
                                   use for the alternative strategy

                            current production rates for primary and secondary products and expected
                            changes in production rates for the  alternative strategy
                            •      current revenue rates for products and expected changes for the
                                   alternative strategy

                            •     waste  stream volumes and  expected changes  for the alternative
                                  strategy
                            •     waste management costs, including waste monitoring and reporting,
                                  and expected changes for the alternative strategy
                            •     insurance for workers and third parties and  expected changes for
                                  the alternative strategy

Assessment.   Approximately 1,000 copies of an older version  of the software  (uncompiled  and more
difficult to use than the current version) were distributed at EPA Waste Minimization workshops in 1989.
Since May 1990 approximately 100 licenses for the updated version  have been sold.  No systematic follow-
3)  Facilities:
4) Revenues:
5) Waste Management:
                                              33

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  up research has been conducted with firms that received the software at the workshop or those that
  recently purchased the updated version. We interviewed four company representatives who had attended
  the 1989 Waste Minimization Workshop.26  None of the four company representatives have used the
  system subsequent to the workshop.

        PRECOSIS facilitates analysis of both a) the economic feasibility of waste minimization projects,
  and b) the financial differences among waste minimization alternatives. The method is designed to allow
  side-by-side analysis of the incremental cost effects of up to 5 alternative projects.

        The unit cost method simplifies the estimation of incremental cost effects based on units of raw
  material and energy used, and quantity  of waste generated.  It also is well suited to cost sensitivity
  analysis. For example, once the user has entered in sufficient data concerning the current practice, s/he
  can easily evaluate the financial effect of reducing an additional unit of waste or raw material, or calculate
  the effect of changes in waste disposal costs, insurance costs, or the price paid for recovered metals.
  However, a possible drawback of this sophisticated modelling approach is that PRECOSIS may appear
  too dissimilar as compared to conventional project financial analyses to which businesses are accustomed.
 The system may be better suited to financial scenario analysis of waste minimization options, particularly
 for larger firms with extensive resources committed to evaluating waste minimization opportunities.

       The PRECOSIS user likely will need a significant amount of time to learn the method, and to
 understand the way it is structured. This may be a stumbling block for potential users, particularly those
 with little or no computer experience. Most of the calculations are not explained in the User's Manual,
 nor would the typical user be able to examine formulas in the software. Companies may not be willing
 to base important investment decisions on the output of a complex model that is not verifiable.


 Other TCA Methods

       In additional to GE, EPA and PRECOSIS, two additional cost analysis tools are available for
 industry and technical assistance providers. The first is a series of worksheets contained in the U.S. EPA's
 Waste Minimization Opportunity Assessment ManuaL21 This cost analysis framework consists of a series
 of data collection sheets and a profitability worksheet for calculating several financial indicators.

 The data collection sheets contain the following entries:

       1.      Capital costs, including
               a. purchased process equipment,
               b. materials,
               c, utility connections,
               d. site preparation,
               e. estimated installation,
               f. engineering and procurement,
               g. start-up,
   ^ __
     The companies are: a 400 employee metal working shop; a 350 employee plastics manufacturer, a 500 employee fiberglass building panel
manufacturer; and a 1,400 employee manufacturer of electronic devices.

   27  US. Environmental Protection Agency, Hazardous Waste Engineering Research Laboratory,  1988.  Waste Minimization Opportunity
Assessment Manual (EPA/625/7-88/003). Cincinnati, OH.


                                                34

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               h.  training,
               i. permitting,
               j. initial catalysts and chemicals,
               k.  working capital, and
               1. equipment salvage value.

        2.      Incremental operating costs and revenue, including
               a.  waste disposal,
               b.  raw material consumption,
               c.  ancillary catalysts and chemicals,
               d.  labor costs,
               e.  maintenance and supplies, and
               f. insurance and liability,
               g.  incremental revenues from increased/decreased production,
               h.  incremental revenues from marketable by-products.

        The profitability worksheet assists the user in calculating:

               a.  cash flows of the investment,
               b.  payback period,
               c. annual cash flow,
               d.  present value cash flow, and
               e.  net present value.

        This cost analysis tool is rather simple-yet comprehensive, and does not come with computer
software.

        The second is a method developed by Waste Advantage, Inc. as part of their report titled Industrial
Waste Prevention, Guide to Developing an Effective Waste Minimization Program.3* This method assists
the user in developing what is called a  "waste generation cost". The waste generation cost is the waste
disposal cost plus all costs associated with creating the waste.  A waste generation cost is developed for
each waste stream on a per year basis.

       The system categorizes these costs as follows:
       1.
       2.
       3.
       4.
       5.

       6.
Treatment, storage, and disposal facility costs,
Waste transportation costs,
Wasted raw material costs,
Labor costs,
Other costs, including compliance, consulting fees, drums, and public image,
and
Future waste disposal liability costs.
       For each of the six cost categories above, the method provides a detailed list of the cost-bearing
activities that should be included in the waste generation cost calculation.
  28
     Waste Advantage, Inc. 1988. Industrial Waste Prevention, Guide to Developing an Effective Waste Minimization Pro&am. Southfield, MI.


                                                35

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       The per-gallon waste generation cost is calculated by dividing the annual cost by the number of
gallons generated in a year.  The payback period of a waste minimization investment is:
   payback period =
capital investment
                      ($/gal waste generation cost) x (gallon/year reduced).
       The method includes one data collection sheet, a cost worksheet, and several useful sample
analyses.  The calculation of payback is illustrated in one of the examples.  No other financial indicators
are addressed.

       If waste reduction is the focus of a pollution prevention project, this method can be used to
calculate a comprehensive unit cost for waste generation.  This unit cost can then be used to further
calculate the payback period for one or several waste reduction projects. The methods presented in the
Hazardous Waste Opportunity Assessment Manual and the Waste Advantage Guide are useful, simple
tools that can serve to assist in pollution prevention project cost data collection and profitability analysis.


Summary

       Time horizon, cost inventory, cost  allocation and choice of financial indicators comprise the four
dimensions of TCA. Our review of current methods reveals a strong emphasis thus far on the inventory
issue, with changes to time horizon, cost allocation, financial indicators viewed as linked outcomes to make
optimal use of a more comprehensive cost inventory. Insofar as management subscribes (to one or more
of these principles of TCA, the TCA process is likely to require managers from different units within the
firm to view environmental projects in ways to which they are not accustomed.  This in itself can be an
invaluable step toward better articulation  of the sources of pollution management costs, which typically
escapes standard engineering and cost accounting systems.

       Because the returns to pollution prevention investments are by nature longer term and more
dependent on indirect benefits to the  firm than conventional practices, a full picture of their financial
performance can be revealed through TCA-type analyses.  Potential  users have different needs and
constraints that will influence their receptivity to alternative methods. Offering a menu of TCA methods
is one way of responding to these differences.

       Our review of various methods  reveals a spectrum of TCA approaches, each different in concept,
data requirements, and user-friendliness. No single method meets the needs of all users. Moreover, the
limited adoption of all the methods points to barriers to implementation that exist in all industry sectors.

       Historically, there has been little a priori favoritism toward the prevention option. In retrospect,
cost analyses practices  have tended  to skew  investment  choices in the  direction  of end-of-pipe
technologies.   This  occurs  because  the preventative  technologies—materials substitution, product
reformulation, process modification—tend to require more complex changes in production systems, to yield
benefits in many indirect ways and over longer periods of time, and to include numerous contingency cost
savings in the spectrum of benefits that they create.29  In other words,  simplified cost analyses tend to
handicap preventative projects in favor of more conventional, short-term end-of-pipe options.
     White, Allen and Becker, Monica 1991. Total Cost Assessment: Catalyzing Corporate Self Interest In Pollution Prevention.* Paper
presented to the National Academy of Engineering Workshop: 'Engineering Our Way Out of the Dump,' Woods Hole, MA, July 1-3,1991.

                                               36

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       In recent years, conventional wisdom and, to a lesser degree, project analysis methods, have shown
 signs of adjusting to the new environmental reality. This new reality is reflected in a slow shift away from
 the presumption that every environmental investment is a net loser. The reasons for this shift are several,
 ranging from  the continued  price escalation at off-site waste management facilities  to  the growing
 consumer demand for clean processes and "green products." In particular, the idea that environmentally-
 friendly processes and products in and of themselves may enhance the market position of the firm has
 begun to move some managers beyond the narrow confines of the "must-do", minimalist and compliance-
 driven approach to pollution management, toward a broader vision of leveraging environmentalism into
 concrete economic payoffs.

       Like many other aspects of business management in the 1990s, rapidly changing environmental
 regulations and markets are likely to lead industry to reassess the presumption of environmental projects
 as economic losers.   The "must-do"  shows signs of giving way  to "prefer-to-do" in the  face  of this
 redefinition of the  role of environmentalism in product manufacturing and marketing.  Alternative
 methods of cost accounting may serve to accelerate these developments by providing a vehicle for
 capturing the benefits of environmental investments that would otherwise elude project financial analysis.

       Whether an environmental project originates in response to an external compliance mandate or
 to an internal, cost-savings measure, a more comprehensive analysis of costs and benefits equips managers
 to discriminate with greater precision between alternative technological solutions to the same compliance
 mandate.  Though the more expansive cost inventory and time horizon of TCA will not necessarily direct
 management to a prevention-oriented solution, it will place end-of-pipe and prevention options on an
 equal footing.   In the end, though financial indicators may remain negative,  TCA will more  clearly
 illuminate the relative returns to alternative options  more effectively than conventional accounting
procedures.

      With these propositions in mind, we turn now to a more detailed look at how TCA operates when
applied to two specific projects within the pulp and paper industry.
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4.
TCA AT WORK:  CASE STUDIES IN THE PULP AND PAPER INDUSTRY
       At this juncture, the concepts and methods of TCA are substantially more advanced than their
 application in the business community in general, and the pulp and paper industry specifically. Our review
 of three existing methods reinforces two general explanations offered earlier as to why firms have been
 slow to adopt TCA in project financial analyses.  The first of these is organizational, that is, how the
 internal structure of the firm facilitates or impedes the entry of pollution prevention projects into the
 capital budgeting process. When such  organizational barriers to entry are insurmountable, no form of
 economic analysis will matter.

       The second explanation, and the principal focus of this study, relates to how projects once in the
 capital budgeting process are financially analyzed and prioritized. Key issues here are cost coverage, time
 horizon, financial indices and hurdle rates, as well as management's treatment of qualitative issues before
 rendering a final decision to approve or reject a project.  Each firm  has its own recipe, a mix of
 quantitative and qualitative information that yields a final judgement on the merits of a proposed project.

       In this section, we bring together findings from our case studies to examine how the organizational
 and economic factors act and interact to affect a firm's receptivity to TCA concepts. We draw insights
 from both Phase I and Phase II case studies (Appendix A) to develop a composite picture of how capital
 budgeting is currently practiced in the  sample firms; how their project analysis methods compare with
 TCA from both a qualitative and quantitative perspective;  and how managers assess the value of and
 opportunities for introducing TCA into their project justification process.

       The heart of this assessment is a comparison of two  pending projects whose economics are
 analyzed and compared using company versus TCA methods.  To these two core cases we add material
 from the Phase I studies, and more general information gathered during our literature reviews. With few
 case studies, our findings can only be exploratory in nature, with more definitive conclusions possible only
with a larger sample size. Notwithstanding these limitations, our case studies provide a starting point for
 developing insights into TCA prospects in the pulp and paper industry.


 Capital Budgeting and Environmental Projects

       Capital budgeting in case study companies, the process by which firms identify and rank potential
capital projects, tends to be systematic in accordance with methods used by most large corporations.
Typically, multi-year capital investment plans are put in place to guide capital allocation decisions. In the
case of the specialty paper firm, such a plan was developed for environmental projects after staff reviewed
proposed regulations governing air, water, and storm water runoff. Because the industry will be subject
to a continuous stream of state and federal regulations governing effluent standards, criteria and toxic air
emissions, and restrictions on sludge disposal, such multi-year plans are an aid to rationalizing the
budgetary  process  in response  to  conditions  of substantial existing and  anticipated  regulatory
requirements.

       Pulp and paper mills  are large scale operations, and capital investments are by and large costly.
Projects we analyze below for a specialty paper mill and paper coating mill cost  $0.6 million and $1.7
million, respectively, investment levels not uncommon to the industry. For this reason, proposed budgets
are closely scrutinized by operations managers (e.g. pulp mill, and paper mill managers), mill management,
and corporate management.   For pollution prevention projects, this means  a high level of scrutiny at
numerous levels within the organization.
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        An environmental project's lifecycle normally begins with an initial needs identification by the
 environmental manager or staff engineer. In the specialty paper firm, an investment in excess of $5000
 requires a Capital Improvement  Form;  in the  remaining three cases an Appropriation  Request is
 completed, though no minimum level of investment was identified.  These standard forms present:  the
 need for the project; a description of the proposed technical approach; proposed process outline and
 schematics; and project cost estimate.  At the same time, they provide the basis for classifying projects
 as profit-sustaining (compliance), profit-adding (cost-reducing) and market-expansion categories. Unlike
 most smaller and medium-size firms, these pulp and paper mills view profit-adding projects  as the core
 of their budgeting process. This is an industry where basic technologies remain constant and product lines
 change infrequently.  Thus, competitiveness historically has been  linked to maximizing output using
 existing capital stock while, at the same time, minimizing costs through  timely,  targeted capital or
 operating practice improvements.

        Notwithstanding these historical patterns, one case study, the paper coating mill, demonstrates an
 incipient trend observed in our companion study for the State of New Jersey^-the gradual shift of
 environmental projects from the profit-sustaining category to the profit-adding and market expansion
 categories.  This is, most often, not an overt decision by management, but rather the result  of a subtle
 shift from viewing environmental projects as inherent losers (Le. yielding a negative IRR or NPV) to a
 more flexible vision of their potential as contributors to improving market position.  Environmental
 managers in the paper coating mill see this shift as a means of increasing a project's probability of
 approval.   In  this case, if an environmental project is determined to be profitable, the project is
 characterized as an "environmental, profit-adding project".  In the  integrated bleached kraft mill, if a
 proposed discretionary  environmental project is expected to be profitable, the project is  essentially
 reclassified as a "profit-adding project with environmental benefits" - no different than any  other non-
 environmental, profit-adding project with environmental benefits. In this scenario, a project conceived
 for  its  environmental merits  virtually loses  its identity as an environmental project in favor of a
 classification that is more likely to gain approval.

        In the pulp and paper case studies, approval criteria for pollution prevention projects, over and
 above conventional financial indicators, suggest an implicit valuation of downstream benefits that are not
 monetized in financial analyses.  This is reminiscent of other firms surveyed in the New Jersey study,
 where less tangible benefits of specific environmental projects were often mentioned in our  interviews,
 but  only qualitatively addressed in appropriations requests or not  addressed at  all.  Such  references
 included: projects undertaken "to  do the right thing" (electric utility and pharmaceutical company); to
 project  the correct image in a food-related business (refrigeration company); "to foster an environmentally
 friendly image" (pharmaceutical company); and "to stay out of the newspaper" (electric utility).

        Though, the notion that a pollution prevention project is market-expanding is rarely articulated,
 this  is effectively what such comments represent. This appears to be especially true for consumer product
 firms, and perhaps less so with firms  engaged in  intermediate production where consumer  tastes and
 credibility are less of an issue.  However, in our New Jersey research, even a refrigeration firm referred
 to the "food image" factor as a motivation for adopting clean manufacturing technologies.  Owing to
 differences in product line, we would expect greater willingness of pulp and paper companies producing
 brand name consumer goods to consider such benefits in their project analyses than would, for example,
 mills producing corrugated boxboard.
   30
     This study assessed TCA in 10 firms of varying size and product lines. See White, Allen, Monica Becker, James Goldstein, Alternative
Approaches to the Financial Evaluation of Industrial Pollution Prevention Investments. Draft Report. Prepared for the New Jersey Department of
Environmental Protection, Division of Science and Research, September 1991.

                                               39

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 Current Versus TCA Project Analysis Practices: Qualitative Comparison

       In the context of the capital budgeting process described above, how do the companies studied
 conduct project financial analyses, how do these practices compare to a TCA approach, and what effect
 does a "TCA style" analysis have on the estimated profitability of a pollution prevention investment? To
 answer these questions, we compare three aspects of current and TCA project analysis practices between
 the two Phase n mills: cost coverage,  financial indices,  and time  horizons.  This is done through the
 construction of a "Company Analysis" and a TCA Analysis for a project at each mill.  A brief description
 of the two projects follows. Appendix A contains detailed project descriptions and the results of the
 Company Analyses and TCAs.

       Project 1 - White Water and Fiber Reuse Project. Coated Fine Paper Mill

       Papermachine white water, a  mixture,  of water, residual fiber  and filler  (clay and calcium
       carbonate) drains out of the sheet of paper as it travels across  the paper machine. White water
       is typically captured by a white water collection system dedicated to one papermachine. Typically,
       some or all Whitewater is recycled back into the papermaking system to recapture water, fiber and
       filler. In some cases white water is passed through a saveall screening device to separate fiber and
       filler from water; fiber, filler and water are recycled back into the system. The saveall produces
       a clear stream of water that can be used in numerous papermachine operations.

       In this mill two paper machines, sharing a common white water system, produce a variety of paper
       grades made with acid, neutral, or alkaline sizing chemistry.31  Machine 1 has  a saveall system
       that filters fiber and filler prior to discharging water into the joint white water system.  The fiber,
       filler and water are all recycled back into the papermaking system.  However, when the machines
       are using different sizing chemistry, e.g. when Machine 1 is producing acid-size paper and Machine
       2 is producing alkaline-sized paper, the mixed Whitewater from both machines is not reusable, and
       must be sewered. Under these conditions, a large flow of potentially reusable water from both
       machines, and fiber and filler from Machine 2, is  lost to the sewer.

       The Water and Fiber Reuse project will permit fiber, filler and water reuse on both machines at
       all  times,  thereby  conserving  raw materials  and reducing  water consumption, wastewater
       generation, and energy use for fresh and wastewater pumping and freshwater heating. This project
       involves the installation of a second saveall to screen the white water from Machine 2 and the
       reconfiguration of the white water system to provide dedicated systems for each paper machine.
       Project 2  -
 Conversion  of  Solvent/Heavy  Metal
Metal-Free Coating. Paper Coating Mill
Paper  Coating  to AQueous/Heaw-
       Currenth/, the majority of colored, coated papers produced by  this Paper Coating Mill are
       produced in two steps.  First the paper is coated with a pigmented base coat, consisting of a
       variety of solvents, nitrocellulose, clay, calcium carbonate, and in approximately 50% of colored
       grades, a small amount of lead, chromium, and cadmium-based pigments.  The base-coated paper
       is run through a dryer where most of the solvent is driven off and the remaining materials set on
   31
     Sizing is added to pulp to reduce water absorbency in the final paper. The Ph (i.e. acidity or alkalinity) of the pulp must be adjusted
according to the type of paper desired and sizing used.
                                              40

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        the paper.  In the  second step, the paper  is again coated with a top coat of solvent and
        nitrocellulose. The paper is dried again and rolled onto a reel, and is ready to be converted into
        book covers, labels, menus and other applications. The vaporized solvent from the two dryers is
        collected and sent to a solvent recovery system.  VOCs from solvents are emitted from several
        points in the process, and hazardous waste containing solvent and heavy metals is generated in the
        solvent recovery process. The conversion project involves switching from a solvent/heavy-metal
        base coat to an aqueous/heavy-metal free formulation. This project would substantially reduce
        solvent and heavy-metal usage, VOC emissions, and hazardous waste generation. The conversion
        requires several capital projects:  coating mix room and coating machine modifications, a new
        coating drum shed heating system and waste water treatment system for wastewater from the
        aqueous coating process.

        The conversion will reduce costs related to waste management, solvent recovery, and regulatory
        compliance, will increase utility costs, and will have a mixed effect on raw material costs.

 In our discussion, we include findings from the Phase I mills that reported general  company practices
 without reference to a specific project.

        First, a brief description of the procedures used to develop the "Company  Analyses" and the
 "TCAs" is in order.


        Development of the "Company Analyses" and TCAs

        The development of the financial analyses was structured to allow comparison  between a TCA
 approach and that which has been previously used by the three Phase H firms to analyze the projects
 Two steps were necessary.

        First, we needed to develop a base line financial analysis for each project, which we term the
 "Company Analysis". The Company Analysis consists of only those costs that have been included in a
 firm's evaluation of either the complete project or components of the project thus far  analyzed by the
 firm.   The project descriptions  in Appendix A contain detailed descriptions of the content of each
 Company Analysis.

       Second, since the financial analyses undertaken by the firms come in numerous forms, it was
 necessary to convert disparate information into a uniform format to compare against a TCA. To do this,
 we used a spreadsheet system to collect and organize capital and operating cost data, to calculate cash
 flows and financial indices  and to perform sensitivity analyses of the case studies.32  For each project,
 detailed cost information and  results of financial calculations can be found in Appendix A, following their
 project descriptions.

       The comparison of the Company Analyses and the TCA solely on the basis of cost items included
 is relatively straightforward. We simply compare the capital, cash flow, and financial indicators derived
from the company analysis with those derived from the TCA (Appendix A).  This single dimension
comparison shows the impact of an expanded list of costs and benefits on  the financial indicators
calculated for the project.
       User's Manual for K/mMNCE: Pollution Prevention financialAnalysis and Cost Evaluation System. Tellus Institute, 1991.

                                              41

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       Next, to evaluate the effect of a longer time horizon and the choice of financial indices on the
financial performance of the project, we begin with the TCA analysis as a base case and proceed to extend
the years over which  return  accrues  and consider how more sensitive indicators (i.e. inclusive of
depreciation, taxes, inflation and discount rate) alter the financial outlook of the project. The results of
these evaluations are discussed below in the Quantitative Comparisons sub-section.
       Cost Inclusion

       While cost categories considered in a financial analysis will tend to differ according to the nature
of the project, we can infer from the Company Analyses the types of costs that the these firms typically
consider in project analysis.  Table 4.1 presents an overview of the costs estimated in the Company
Analyses and the TCA. The TCA column represents a complete set of known internal costs and revenues
affected by the project By comparing the Company Analysis column against the TCA column, a picture
of the firm's project costing approach emerges.

Direct and Indirect Costs. In the case of project 2, the Paper Coating firm omitted all non-disposal waste
management costs, utilities (energy, water and sewerage), solvent recovery, and regulatory compliance
costs from its analyses of the aqueous conversion project. The firm also omitted several costs associated
with the storage needs and shorter shelf life of aqueous coatings, namely a steam heating system for the
coating storage shed, lost raw material value, and the cost to dispose of spoiled coating.

       Had a full financial analysis of the white water/fiber reuse project been done by the mill prior to
this study, energy savings associated with  reduced fresh and wastewater  pumping and treatment and
freshwater heating would  have been omitted. These energy savings, which are included  in the TCA,
represent a substantial benefit of the project. Their omission in a traditional financial analysis would have
drastically underestimated the profitability of the investment.

Future Liability Costs.  In this study we have focused on two general forms of future liability costs:
liability from personal injury or property  damage (e.g., Superfund  liability stemming from a leaking
landfill), and penalties and fines for violation of environmental regulations.  Only the Bleached Kraft Mill
has attempted to include liability in their project analysis, but has done so in a limited way, only where
actuarial figures are reliable enough to warrant inclusion (e.g., in the evaluation of a new landfill project).
la the case of Project 2, the Paper Coating firm did not include an estimate of avoided future liability
costs owing to reduced hazardous waste disposal in their own financial analyses.  They did, however,
allude to this benefit in a qualitative way in their Appropriations Request: "...major reductions in levels
of fugitive emissions, and amounts  of solid hazardous waste going to landfill, is very positive from a
regulatory and community standpoint".  The  TCA developed for this project includes an estimate of
avoided future liability.  Since Project 1 does not involve hazardous materials or waste, neither the
Company Analysis nor the TCA contains a future liability estimate.

Less Tangible Benefits.  Less tangible benefits from pollution prevention investments, such as increased
revenue from enhanced product quality,  company  or  product image,  and reduced worker health
maintenance costs or productivity are certainly  the  most difficult to predict and  quantify.  Neither
Company Analyses nor TCAs contain estimates of less tangible benefits.  In the case of Project 2, the
coated paper product is sold domestically, on the basis of cost, visual appearance, and performance
durability, to book publishers and other intermediate product manufacturers. Although the company
expects some quality improvements using aqueous coating, it does not anticipate an increase in market
value.  Therefore,  it expects no increase in domestic  sales as a result of the  conversion to the
aqueous/heavy metal-free coating.  The company  hopes to improve its competitive advantage in the

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European market if the European Economic Community implements lead-free packaging standards (which
would apply to books) as expected. However, it would not speculate on the potential revenue effects
associated with increased European market share.

       The Coated/Fine Paper Mill does not expect an increase in market share or product value from
its white water/fiber reuse project. Both the mills included in Phase II are manufacturers of intermediate,
rather than consumer products and cannot directly market their products on the basis of environmental
performance in the way that a consumer products company like Procter and Gamble can and does.
                                           43

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Table 4.1.  Overview of Cost Inclusion by Company and TCA for Projects 1 and 2
X » Cost(s) Included
P ** Cost(s) PartMfy Included

Capital Costs

Purchased Equipment
Materials (e.g. Piping, Elec.)
Utility Systems
Site Preparation
Installation
Engineering/Contractor
Start-up/Training
Contingency
Permitting
Initial Chemicals
Working Capital
Salvage Value

Operating Costs
Direct Costs;3
Raw Materials/Supplies
Waste Disposal
Labor
Revenues - General
Revenues - By-products
Other:
        Transportation

Indirect Costs:4
Waste Management
        Hauling
        Storage
        Handling
        Waste-end Fees/Taxes
        Hauling Insurance
Utilities
        Energy
        Water
        Sewerage (POTW)
Pollution Control/Solvent Recovery
Regulatory Compliance
Insurance
Future Liability
                                       Project I1
                               Company      TCA
                               X
                               X
                               P
                               P
                               X
Notes;
1.
2.
3.

4.
X
X
X
X
X
                                              X
                                              X
                                              X
                                              X
                                              X
                                              X
                                              X
                                              X
                                              X

                                              X
                       Project 22
                Company       TCA
X
X
X
X
X
X

X
                                                              X
               P

               X
X
X
X
X
X
X
               X
               X
               X
               X
White water/fiber reuse project
Solvent/heavy-metal to aqueous/heavy metal-free coating conversion
We use the term "direct costs" here to mean costs that are typically allocated to a product or process line (i.e.
not charged to an overhead account) and are typically included in project financial analysis.
We use the term "indirect costs" her to mean cost that are typically charged to an overhead account and
typically not included in project financial analysis.
                                                    44

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       A reduction in solvent use at the Paper Coating firm will certainly reduce worker exposure to
fugitive solvent emissions, and the elimination of nitrocellulose from the coating mixture will reduce
flammability and explosivity hazards. While reduced solvent exposure may result in a lower incidence of
worker illness over the long-term, and the elimination of nitrocellulose may result in fewer worker injuries,
we had neither the information nor the resources to estimate the potential impact of these benefits on
either the company's health care costs or long-term worker productivity. In this case, this issue was dealt
with qualitatively in  a section  of an  Appropriations  Request, developed  by the company,  called
"Safety/Health Impact of Converting from Solvent to Aqueous Coating".  The section listed specific
project benefits that will improve safety and industrial hygiene, such as:

          "Reduce risk of fire in chemical storage, mixing and coating areas."

          "Minimize  employee  physical  activity  and  fire risk when  loosening  and  removing
          nitrocellulose from drums."

          "Minimize employee exposure to organic vapors reducing health risks  and need for IH
          monitoring and record keeping."

          "Minimize odor complaints in Mill and the administration building when retained solvents
          are released during converting or solvents are  used to cle-n converting equipment."

         Although many company representatives have said that project benefits are more persuasive
  if they are monetized and included in the project financial analysis, as suggested in Section 3, when
  costs are difficult or impossible to monetize a qualitative approach may be more credible to
  management.

  Discovery of previously omitted non-environmental costs.  In developing the TCAs for the two
  projects analyzed, we endeavored to add to the Company Analyses any capital or operating costs
  or savings that could be attributed to the project and reasonably estimated.  While our focus was
  on environmental costs typically omitted  from project  analyses, the process of developing a more
  comprehensive list of costs (or "casting the cost net wider") unearthed other, "non-environmental"
  costs that were not considered by the company..  In the case of Project 2, all previous analyses of
  the aqueous/heavy-metal free conversion had omitted  the costs of heating system installation, the
  energy needed to prevent the aqueous coating from freezing, and the additional energy needed to
  dry aqueous versus solvent-based coating.   While the latter  cost was acknowledged by several
  production engineers and  managers  in meetings  with Tellus, it  had never been estimated nor
  included in previous analyses.  While probably not surprising to anyone involved in project analysis,
  the TCA of project 2 lead to a general finding that non-environmental direct and indirect costs may
  also be left out of project analyses.

         Financial Indices

         Financial indicators are used as a critical, though not exclusive, ingredient in analyzing
  pollution prevention projects. Firms typically use such indicators as guideposts rather than decisive
  elements in judging the merits of a proposed project.  Their application tends to be flexible, that
  is, subject to substantial management discretion as proposals move through the formal or informal
  budgeting process and compete against one another for scarce capital

        For the relatively large companies included in this study, payback (or the slightly more
  sophisticated ROI) is typically used as a first screen. If a project passes a prescribed hurdle rate,

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a more in-depth analysis that computes NPV and/or IRR is common. The Paper Coating Company
uses ROI to screen proposed projects before subjecting  them to more in-depth NPV and IRR
analyses.  The Fine/Coated Mill uses payback in a similar fashion.  This practice provides the
project proponent with an informal estimate of expected performance prior to investment of staff
resources (and personal capital) in advocating a proposal.  Once this milestone is passed, the
proposal typically moves into a divisional or sectoral review where more complex calculations are
developed to capture the longer-term costs/savings.

       In none of these cases is the hurdle rate inflexibly applied. Instead, there are perceptions
associated with each project that are defined by the project's place in the strategic thinking of top
management and the degree  to which outside pressures from customers,  regulators, or the
community are applied.  In the case of the Coated Fine Paper Mill, the professed hurdle rate for
projects is a 2 year payback. However, certain production-oriented projects have been implemented
without  surpassing this rate;  primarily  because there was  a general  perception among
decision-makers that these projects were needed to maintain productivity.  On the other  hand,
discretionary environmental projects are more rigidly measured against the company's hurdle rate.
This seems to be a result of an impression of environmental projects within  the company as
necessary but not profitable.

       Time Horizon

       Time horizon, of course, is closely tied to financial indicators. By their nature, simple
payback and ROI calculations are not capable of capturing long-term costs/savings; a particularly
severe shortcoming in the case of liability estimation where benefits may materialize 10 years or
more into a project's lifecycle. NPV and IRR, on the other hand, can account for costs and savings
they occur in future years. Their use is typically associated with large firms and large investments
whose market and budgeting horizons are expansive, and who are able to wait many years for a
stream of benefits to materialize.

       In preparing the TCA for the Paper Coating Mill managers, they indicated that a time
horizon of 10 years is typical for major investments. The need for extending this figure to 15 years,
to capture the liability avoidance benefits, became evident in preparing the TCA analysis.  In the
case of the Fine/Coated Paper Mill, once a discretionary project, such as the white water/fiber
reuse system, passes an informal payback screening, it is subjected to a 10 year discounted cashflow
analysis. Since the TCA for this project did not involve any costs (e.g.  future liability costs) that
would be incurred in out years, the time horizon is less critical to capturing the full financial impact
of the  project.  In any case, the linkage between financial indicator, time horizon, and cost inclusion
is essential to promoting and practicing TCA  in pollution prevention project analysis.


Company Versus TCA Project Financial Analysis Practices:  Quantitative Comparisons

       Full evaluation of a TCA approach on a project financial analysis requires inclusion of direct
costs, indirect costs, liability costs, and less tangible benefits, may require evaluation of project costs
and savings over a long time horizon; and use of profitability measures that reflect the long-term
profitability of the project. In the following sections we discuss how these components of the TCA
approach affect the financial analyses of pending projects under consideration by the Fine/Coated
Paper  Mill, and Paper Coating Mill.
                                            46

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       Effect of Cost Inclusion on Financial Indicators

       As shown in Table 4.2, the inclusion, in the Project 1 TCA, of savings associated with
freshwater pumping, treatment, and heating, and waste water pumping dramatically increased the
annual savings and financial indicators above the Company Analysis base case. These savings, which
would typically not be included in the mill's calculation of profitability, bring the project in line with
the mill's 2 year payback rule-of-thumb.  By excluding these savings in the Company Analysis,  the
project looks highly "unprofitable" - negative NPV and IRR of 6% (years 1-15).

       For Project 2, the inclusion of previously omitted costs for waste management, regulatory
compliance, future liability and other "non-environmental"  costs in the TCA resulted in a  net
improvement in project cash flows and financial indicators as compared to the Company Analyses.
Table 4.3 summarizes these results.
Table 42. Summary of Financial Data for Project 1 - White Water and Fiber Reuse Project
       Total Capital Costs

       Annual Savings (BIT)*

       Financial Indicators
       Net Present Value - Years 1-10
       Net Present Value - Years 1-15
       Internal Rate of Return - Years 1-10
       Internal Rate of Return - Years 1-15
       Simple Payback (years)
  Company Analysis

  $1,743,820

  $  116,245
($ 702,855)
($ 587,346)
      0%
      6%
   11.4
TCA

$1,743,820

$  658,415
$1,242,536
$1,808,384
   36%
   36%
   2.0
       * Annual operating cash flow before interest and taxes
                                          47

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Table 43. Summary of Financial Data for Project 2 - Aqueous/Heavy Metal Conversion Project
       Total Capital Costs

       Annual Savings (BIT)*

       Financial Indicator
       .,— ,._..._____                t

       Net Present Value - Years 1-10
       Net Present Value - Years 1-15
       Internal Rate of Return - Years 1-10
       Internal Rate of Return - Years 1-15
       Simple Payback (years)
Company Analysis

$623,809

$118,112
($98,829)
 $13,932
   12%
   16%
  5.3
$232,817
$428,040
  24%
  27%
 3.0
        Annual operating cash flow before interest and taxes
       Table 4.4 illustrates the relative effect of each category of operating cost on net annual costs
for the Project 2 Company Analysis and TCA.  The data show that for this project, savings in waste
management and  solvent recovery, which were omitted from the Company Analysis, have the
greatest effect on annual savings for the project. Whereas certain capital costs, raw materials, and
utilities, which were unaccounted for in the Company Analysis but included in the TCA, reduce the
annual savings under the TCA scenario. Within the waste management category, savings are spread
across all phases of waste management — from transport, to storage, to waste-end fees and disposal,
and waste handling within the firm itself. The $122371 difference occurs because only disposal fees
are included in the Company Analysis, while other essential and costly phases of waste management
appear only in the TCA.
                                           48

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 Table 4.4. Summary of Costs for Project 2
                                   Company
                                   Analysis
                            TCA
              Difference
 Capital Costs
       $623,809
$653,809
($30,000)
 Net Operating Savings^Costs):1

 a) Raw Material
   (Spoiled Coating)
 b) Waste Management
 c) Utilities
 d) Labor
 e) Other
 f) Regulatory Compliance
 g) Future Liability
        $18,112

       $121,500
        ($5,000)
        ($8,000)
        ($3,500)2
        ($5,000)
Total  $118,112

          0
($27,488)     ($45,600)
$243,871
($87,029)
 ($8,000)
 $84,5203
 $11,000

$216,874

 $35,000
 1. Before interest and taxes
 2. Filters for wastewater ultrafiltration
 3. Filters for wastewater ultrafiltration and solvent recovery
 4. Not included in Annual Savings
$122,371
($82,029)
    0
$88,020
$16,000

$98,762

$35,000
Future Liability Costs. A savings of $35,000 in avoided liability costs appears in Project 2.  In
computing this figure, we used a component of the GE TCA method  described in Section 3.
Recalling one key variable in this method, i.e. adjustment of the liability cost estimate according to
type of TSDF used, causes all waste destined for incineration to be heavily advantaged from a cost
reduction standpoint under  the assumption that incinerated waste is unlikely  to result  in
downstream remedial action costs.  Since the Paper Coating firm incinerates its waste, the modest
savings that appears in this project analysis flows from this assumption as well as the diluting effect
of discounting future savings (liability exposure is assumed to occur in year 13). The net effect is
to yield only a modest difference in 10 versus 15-year IRR for  the TCA.

       The GE liability estimation procedures assume  that incineration operates as a powerful
safety net, preventing future damages against the firm.   Underlying this premise are several
assumptions: failure of an incinerator facility will leave the owner, not the waste generator, liable
hazardous waste will continue more or less unimpaired, as historically has been the case. While the
first of these assumptions appears to be fairly sound (though regulations are always subject to
change), the remaining ones are more tenuous. Capacity shortfall, the continuing discovery of new
waste sites, and interstate barriers are entirely plausible, if not already actual conditions, facing any
waste generator during the next  decade in view of recent waste market conditions, ongoing site
                                            49

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investigations, and court rulings that have upheld taxes and surcharges on waste imports.. Assuming
this to be the case, inclusion of some measure of uncertainty into the liability avoidance calculation
would alter the outcome and may lead to a more substantial savings from any proposed pollution
prevention investment in which off-site waste disposal is a current cost.

Less Tangible Benefits.  Less tangible benefits were not included  in either of the TCA project
analyses.  We earlier defined these as benefits such as gains in market share owing to enhanced
corporate or product image, increased worker productivity owing to a safer workplace and similar
long-term payoffs reasonably ascribed to pollution prevention investments. These may stand on
their own, or be tied to other  more  concrete benefits such as liability avoidance.  In this case,
"staying out of the newspaper," to quote one case company, may be one measurable gain from such
an investment.

       To demonstrate the sensitivity of the financial indicators to these benefits, we have created
a hypothetical scenario using Project 2.  In the preceding section we saw that the removal of lead
from the paper coatings may increase the company's share of the European market.  Assume that
this share will net the company an extra $0.5 or $1  million dollars in profit (i.e. revenue minus cost
to make the additional product) each year, starting in the fourth year after the investment. If we
add this profit to the TCA financial calculation, the annual cash flow for the project increases from
$216,874/year to $716,874/year for a  $0.5 million/year profit increase, and $l,216,874/year for a
$1 million increase.  This yields an increase in IRR (years 1-15) from 29% for the TCA base case
to 46% and 57%, respectively, a significant gain by most any company standard.  Even introducing
uncertainty into  this analysis by cutting expected profits in half  would produce a substantial
incremental increase in IRR for the firm.
       Are All Costs Created Equal?

       By reducing waste, fewer drums need to be handled, labeled, and stored, and fewer manifests
must be prepared.and managed.  While these cost savings can be estimated, they only become real
if, in the case labor, the payroll will be reduced or a worker will spend time doing productive work
instead of managing waste.  In the case of waste storage, estimated cost reductions only become real
by reducing the number of drums stored if the company can either put that storage space into
productive use, reduce space heating and lighting costs, or reduce it's rental costs on rented storage
space. In other words, there is an "opportunity cost" associated with waste management activities.

       In contrast to waste disposal costs, which  are often visibly reduced when waste generation
is reduced, estimated labor, waste storage, and other similar cost reductions may or may not be
realized "on the books" of the company. This issue has clear implications for TCA. Many waste
management and regulatory compliance costs are labor-based costs.  This is particularly  the case
for small projects where a majority of savings added by a TCA are labor-related (disposal related
costs excepted), or in the case of a small company where labor costs are a  function of what the
company can bear rather than the real workload.  In these circumstances, TCA is likely be less
persuasive than for a project with a majority of savings in disposal, raw material and energy cost
reductions.
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         The Impact of Previously Omitted Non-Environmental Costs

         In the discussion of qualitative effects of TCA above, we mentioned that the process of
  expanding the list of environmental costs may actually turn up previously omitted non-environmental
  costs.  The effect of such costs on the project's financial performance depends upon whether the
  item represents a cost or a  savings for the project.  In the case of Projects 1 and  2, these
  non-environmental costs tended to increase the total cost of the project by adding to capital and
  operating costs.33

         For example, capital cost (a direct cost) for the Project 2 TCA was  5% higher than the
  Company Analysis.  The cost for additional steam that will be needed to dry the aqueous coated
  paper has a negative effect on the annual savings for the project.  Thus,  for these two projects the
  firms underestimated the costs, as well as the savings, for the project. Although the net effect is
  still positive,  i.e. the TCA produces a more favorable financial bottom-line, these additional costs
  reduce  the overall positive impact of the benefits.

         While this finding is probably not a surprise to those who prepare project analyses,  it is
 important to point out that the TCA process may actually reveal additional  costs as well as savings for
 the project. If the financial impact from the addition of regulatory compliance or waste management
 activities is marginal, they may be negated  by the addition of one or two previously  omitted
 non-environmental costs.
        Financial Indices and Time Horizon

        To examine the effect of the choice of financial indicators and time horizon, we create two
 functional categories of indices:  discounted cash flow methods that consider a stream of future cash
 flows for the investment (e.g. NPV and IRR), and those that do not (e.g. simple payback period and
 ROI).                                                        \effjp


        By extending the time horizon of the investment analysis to 10 or more years, the effect of
 long-term costs or savings can  be analyzed.  Discounted cash flow methods are  well suited  to
 long-term investment analysis since they consider the time value of money, and can easily include
 tax, depreciation, and inflation  effects.  On the other hand, payback period and ROI typically
 consider only the average annual or net annual cash  flow and capital costs  for the investment,
 thereby overlooking costs or savings that may be realized in out-years.

        While business experts recommend the use of discounted cash flow measures and reasonably
 long time horizons for investment analysis, the quantitative impact of these techniques  in a TCA
 context  depends upon whether the analysis includes  costs or savings in years after the initial
 investment.  If long-term costs are included in the analysis, an extended time horizon and use  of
 discounted cash flow indicators  are essential. In the case of Project 2, for example, if the time
 horizon was not longer than 13 years,  the liability estimate would not have been incorporated into
 the financial indicators.
33
  While it is impossible to generalize, this phenomenon may reflect a predictable lack of complete knowledge of the costs for a project.
                                            51

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        If long-term costs are not included in the analysis the importance of a long time horizon and
 use of discounted cash flow indicators is diminished. In the case of Project 1, since all costs and
 savings of the investment start accruing in the first year of the investment, time horizon and choice
 of indicators are not critical.

        Even if a 10 or 15 year time horizon is chosen, and discounted cash flow indicators used,
 the outcome of the financial analysis will be greatly influenced by the magnitude of future costs
 (relative to first year costs), the year in which future costs accrue, and the discount rate used in the
 analysis. If the magnitude of future costs is small relative to first year costs, then despite the use
 of a long time horizon and NPV or IRR, the effect of these long term costs on financial indices will
 be small. As we noted earlier, the inclusion of an avoided liability cost of $35,000 in the Project 2
 TCA increases the IRR by only 0.5%. Even if the future cost is high, by discounting the cost to
 present year dollars the impact of this future cost is diluted by discounting.

       In a case study performed for New Jersey, though the estimate for future liability  cost was
 $4,615,000 (1991 dollars), the effect on IRR was marginal-only a 3% gain over the Company
 Analysis. By performing sensitivity analyses on the TCA for this project, we were able to test the
 effect on financial indicators of the timing of future costs and choice of discount rate.  If liability
 costs were predicted to materialize in year 5 rather than year  10, the IRR for the TCA would be
 44% rather than 40%. And if a discount rate of 10% rather than 12% is used, the NPV would be
 $13,619,000 rather than $11,514,000.

       If a firm accepts in principle the idea of including liability in its financial analysis, prudence
 would suggest the execution of this type of sensitivity analysis in order to establish reasonable ranges
 of savings from a pollution prevention investment.  This task made more necessary by the many
 uncertainties in waste management conditions, and by the assumptions built into the GE and other
 liability estimation methodologies. Of course, this is one reason why firms have been reluctant to
 either quantify liability or include such savings items in their financial analyses. A firm willing to
 quantify, but stopping short of incorporation of a figure into a project financial analysis,  will still
 have taken a step in the direction of prudence.


 Perspectives on TCA

       A comparison of financial indicators for the company versus TCA analysis for  our two
 sample projects demonstrates a substantial improvement in estimated profitability for the TCA.
 Using a mix of extended time horizon, a more expansive cost and savings inventory, and more
precise allocation of raw material use and waste management costs to specific processes, TCA
produced impressive advantages in this small sample of pollution prevention projects.

       Are these advantages enough to move managers to adopt TCA methods? Is accelerating
adoption of TCA to foster pollution prevention investments merely a matter of demonstrating these
financial gains?  What role do organizational issues play in this process?

       In general, our research of pulp and paper firms revealed an interest in the  concepts and
methods of TCA; stemming primarily from a belief held by many company representatives that TCA
offers the opportunity  to translate  heretofore subjective information regarding pollution prevention
benefits into the language that top management understands and will respond to.  However,  relative
to firms  included in the New Jersey study, we noted somewhat less enthusiasm (with the sole
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    exception of the Paper Coating Mill) and less of a sense of relevance of TCA among the mill
    representatives (primarily environmental) interviewed.

          In the case of the Fine Coated Paper Mill, the environmental engineer's interest in TCA is
    based on a desire to justify proactive, discretionary, environmental projects that  currently receive
    little attention and interest from management. As the primary advocate for environmental projects
    at the mill, he views TCA methods as tools that can help him demonstrate the benefits of a project,
    instead of relying solely on an engineer or financial analyst that does not have the  same motivation.

          Environmental managers at the  Paper Coating Mill believe that a complete story of the
    financial benefits of environmental projects is not being told under the company's current system
    of project evaluation. They see TCA as  a way to improve both their general understanding of the
    full financial implications,;and the status, of such projects.

          Representatives of the Integrated Bleached Kraft Mill view TCA as a way of refining project
    financial analyses of regulatory compliance investments where more than one technology option is
    available to meet a regulatory requirement. They do not, however, make the connection between
    pollution prevention projects and less tangible benefits  (e.g.  increased revenue from improved
    product or company image)  because in their view public knowledge of a  pollution prevention
    program, as in the case of dioxin reduction, generally intensifies rather than diminishes public
    demand for further reductions.

          Environmental Management at the Specialty Paper Mill is interested in estimating potential
    future liability, primarily to apply such a  methodology to evaluate waste management and disposal
    options.  They  are  convinced of the merit of better allocation of environmental costs  (e.g.
   compliance fees, fines, and penalties) to  operation areas~an important step toward understanding
    the full costs of polluting activities and toward a TCA approach.

          Contrasting our findings in this study to those in the New Jersey study, we found that the
   theme of future liability wias not as pronounced in the pulp and paper case study mills compared
   to New Jersey firms.   At virtually all of the  New Jersey  firms (e.g.  an electric  utility, an
   electroplater, a metal fabricator,  and technology/chemical and pharmaceutical firm) we heard
   consistent mention of liability and liability avoidance as a powerful force in reducing or eliminating
   waste generation and disposal, and in many of these firms the continued tension between the
   realties of liability and the omission of quantitative estimates of liability avoidance benefits in
   project financial analysis was a strong selling point for TCA.  This is not surprising given the nature
   of the wastes generated-solvents and  heavy metals—and  liabilities  incurred—costly Super-fund
   settlements-at many of these New Jersey plants.  This is in contrast to the uncommon occurrence
   of similar liability costs in the pulp and paper industry.34 For this reason, it is possible that a TCA
   approach has less appeal to this industry than in the industries represented in the New Jersey study.

         In addition, we found fewer discretionary environmental initiatives in the pulp and paper
   mills studied compared to the array of New Jersey firms; and far fewer pollution  prevention
   investments. In general, mill representatives offered fewer project examples of any kind for which
   a TCA approach could be beneficially applied.
  34
    While the use of solvents and heavy metal-based pigments at the Paper Coating Mill makes this firm similar to many firms included in the
New Jersey study, their concern for liability is focused more on worker health and safety than on Superfund-type liabilities.


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       Several barriers to TCA adoption were cited by case study mills.  The Paper Coating mill
listed the following: difficulty in changing the practices of the company as a whole when the need
for more and better environmental investments is not uniformly understood; difficulty in modifying
the project justification  procedures to include less-obvious  environmental costs; difficulty in
obtaining the necessary technical and cost data for a TCA; and extra time involved in preparing a
more thorough TCA project analysis. One Environmental Manager stated at the conclusion of the
in-depth project analysis, that he could only justify the time necessary to develop a TCA for projects
with a capital cost of $2 million or more.

       With respect to the TCA methods reviewed in this study, the environmental staff at the Fine
Coated Paper Mill and the Specialty Mill emphasized that they lack the necessary time to learn and
apply these methods.

       While these findings provide insight into the views on TCA of four mills, it is not possible
to definitively predict whether these or other mills will adopt either portions of, or the full TCA
approach to project financial analysis. Given the current regulatory demands on this industry, its
end-of-pipe orientation, and resource and organizational barriers cited above, it seems unlikely that
pulp and paper mills acting on their own will actively seek to implement TCA.

       In Section 5 we highlight several government incentive programs which may encourage mills
to adopt a TCA approach; and state laws which may require these companies to adopt certain
aspects of TCA.
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 5.      INCENTIVES AND BARRIERS TO POLLUTION PREVENTION AND ADOPTION OF TCA
        APPROACHES
 Introduction

        To this point, we have focused primarily on the internal workings of industrial firms—accounting
 practices, approaches to project financial analysis and decision-making, management structure—and how
 such factors relate to the implementation of TCA approaches.  The literature indicates, and our findings
 confirm, that effective pollution  prevention programs require institutional change, a shift in the way
 companies think about and cany out their business.  While regulatory requirements play an important
 role, the most effective way of changing corporate behavior is to convince industry that such a change is
 in a company's own best interest.  It is in this context that incentives and barriers to TCA are most
 fruitfully addressed.  In this section we turn our focus toward external factors, primarily government
 initiatives, and  their relationship to  corporate  behavior concerning pollution prevention  practices in
 general and TCA in particular. We are specifically interested in how government incentives and barriers
 contribute to the institutional change described above.

        To  date  incentive  programs  have  focused primarily  on encouraging various pollution
 prevention/source reduction activities.  Though most of the incentives and barriers discussed below do
 not address TCA explicitly, they nevertheless may influence how firms approach project financial analysis
 and three distinguishing features  of TCA:  cost coverage, time horizon, and financial indicators used in
 the analysis. In addition, as the usefulness of TCA methods become better understood, it may become
 much more common for incentive programs to be directly linked to TCA implementation. For example,
 eligibility criteria for state loans, grants, and preferential tax treatment could include a requirement that
 firms seeking state assistance for  pollution prevention projects utilize TCA methods in project analysis.
 Such a requirement would familiarize industry with a TCA approach and encourage the inclusion of a
 broader range of costs and benefits, longer time horizons, and the use of more appropriate financial
 indicators in project analysis.

        Several types of economic and regulatory measures have been or are currently being used at the
 state level to encourage pollution prevention. Economic incentives can be positive (e.g., loans, grants, tax
 credits) or negative (e.g., fees or taxes on generators).  For the purposes of this report, we do not include
 broad state public information/education efforts, generic technical  assistance and training, or facilitation
 of programs such as waste exchanges.

        Many incentive programs were developed in the context of recent legislative initiatives. In the past
 two  years  about  a  dozen  states have adopted pollution prevention legislation  (including Illinois,
 Massachusetts, Minnesota,  Oregon,  and most recently New Jersey).  While much of this new legislation
 is promising, the specific incentive programs and other initiatives  are generally too new to assess their
 effectiveness.

       At the same time, several kinds of barriers-regulatory, economic, and institutional —may impede
 the progress of pollution prevention programs in general and TCA implementation by industry in
particular.   Institutional issues relating to corporate structure and decision-making procedures were
 discussed in previous sections of  this report; here the focus is largely on  external  barriers related to
government intervention.
                                               55

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        The following section reviews how various incentives and barriers relate to the first two of these
 TCA attributes.  The discussion of the various initiatives draws heavily from the various state pollution
 prevention/source reduction programs around the country.


 Coverage of Costs and Benefits

        There are two major incentive approaches that encourage firms to be more inclusive in their
 approach to project analysis. One is to impose regulations that directly require a broader approach to
 project financial analysis in companies' reports on their pollution prevention efforts. The other approach
 is to provide technical assistance on  TCA methods and their advantages.

        A number of states have instituted requirements for industry to regularly plan for and/or regularly
 report on their pollution prevention activities.  Under New Jersey's Pollution Prevention Act, certain
 industries will be required to develop five-year pollution prevention plans and  to submit annual plan
 updates reporting on progress toward meeting the plans' goals.  Similarly, Minnesota's Toxic Pollution
 Prevention Act requires those industries that must report release of toxic chemicals under the federal
 Emergency Planning and Right to Know Act to develop pollution prevention plans and to submit annual
 progress reports.  Moreover, the New Jersey legislation requires that pollution prevention plans include
 a "comprehensive financial analysis of the costs associated with the use, generation, release, or discharge
 of hazardous substances that occur as a result of current production processes at the industrial facility
 including the costs of generation of non product output, the savings realized by investments in pollution
 prevention and the more efficient use of raw materials, the cost of the treatment and disposal of
 hazardous waste, and the cost of liability insurance." Though this is clearly an attempt to move firms
 towards the adoption of TCA-type methods, New Jersey is the only state reviewed in this study that has
 such a provision in its legislation, and, given the newness of the regulation, there is no evidence by which
 to judge its effectiveness.

        Other than a direct regulatory requirement to employ TCA methods, there are few incentive
 options available to expand the costs  considered in project financial analysis. Technical assistance is one
 incentive program used in several states' pollution prevention programs that could also apply directly to
 TCA.  Though existing technical assistance programs generally have not explicitly addressed TCA issues,
 these programs could be modified to incorporate direct assistance with TCA methods to complement the
 overall technical assistance programs. Alternatively, use of a TCA approach or training on such methods
 could be  required in  order to receive other technical  assistance  in  the pollution prevention  area.
 Examples of existing technical assistance programs can be found in New Jersey, Connecticut, Minnesota,
 Illinois and several other states.   The Minnesota Toxic  Pollution Prevention Act of 1990  includes a
provision  for a technical research and assistance program, including on-site  consultations, to identify
alternative methods that may be applied to pollution prevention and to provide assistance for planning.
The New Jersey Technical Assistance Program (NJ TAP)  also focuses on encouraging specific pollution
prevention activities, and staff from the New Jersey TAP have worked closely  with the Project Team in
the current project, and are receptive to TCA methods. The New Jersey Pollution Prevention Act calls
for an  annual allocation of $500,000 from the Pollution Prevention Fund for the Hazardous Substances
Management Research Center at the NJ Institute of Technology to fund NJ TAP activities.35

       There are, however, several important barriers that must be overcome in order to expand cost and
benefit coverage and to make TCA adoption more likely.  For example,  certain accounting regulations
     This may provide an opportunity to expand the program to include assistance with implementation of TCA methods.

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  serve as barriers to the adoption of TCA methods. The Securities and Exchange Commission (SEC)
  requires publicly held companies to report fully and accurately any information that is "material" with
  respect to the company's business and financial position.36 This applies to all information, including
  environmental claims and contingent liabilities.37                                          '

        The SEC regulations contain three basic requirements for disclosure of environmental information
  SEC Form 10K incorporates by reference Regulation S-K, which lists "items" that must be included in the
  annual 10K Report filed with the SEC.  These "items" relate to environmental disclosure provisions Item
  101(c)(xii) requires  disclosure of the  material effects that compliance  with federal, state and local
  environmental protection regulations may have on a corporation's or subsidiary's capital expenditures
  earnings,  or competitive position.  This item  does  not differ from  the  more general disclosure
 requirements and is not particularly controversial; however, its application is not always straightforward
 While companies generally  include estimates of capital expenses in their annual reports they do not
 always develop and  report  estimates for future  years, even if these expenses  are  anticipated to be
 materially higher.                                                                     r

        The SEC has also indicated that companies should disclose potential  indirect costs  such as
 restrictions on operations or other competitive disadvantages caused by compliance with environmental
 regulations.  The costs of  future remedial activities, such as those associated  with  clean-up of a
 contaminated site, must be disclosed if material.

        Item 103 of Regulation S-K requires a company to disclose any litigation "incidental to the business
 that is pending or known to be contemplated by government authorities," including administrative or
 judicial procedures related to environmental protection statutes or regulations, if  it  meets any of the
 following three tests:  1) the proceeding is material to the business or financial condition of the company
 2) the proceeding is one primarily for damages, or involving a monetary sanction or  capital expenditure'
 and the amount involved is more than ten percent of the assets of the company and its subsidiaries- or
 3) it is a government proceeding and will result in sanctions of more than SlOO^OO.38

       The final disclosure requirement  of the SEC  involves the  financial statements and  the
 management and discussion  analysis" which must be included in all Form 10-Ks filed with the SEC  The
 preparation of these statements must follow generally accepted accounting principles (GAAP) and must
 include disclosure of unasserted (Le. potential) loss contingencies if they exceed the materiality threshold
 Thus, this  report must include discussion of material events and uncertainties that  would affect  the
 company's future operating results or financial condition. All of these disclosures  must be made in a
 specific (Le. with dollar amounts) and timely manner.

       Several practical issues arise in the process of preparing financial statements and their subsequent
auditing by an independent accountant.  First, should a company disclose an unasserted and potentially
unknown liability involving an environmental problem?  Second, what questions should an auditor ask
regarding contingent environmental liabilities not disclosed by the company? And third  the company
  36
    The SEC defines 'material" as any information a reasonable investor would likely deem important in determining whether to buy or sell the
company's securities.

  37

G. Wallach,
              World, November 1988.
                                                      ^SECandCorporateEn^ronmentalResponsibUities.-Pau,
  38
    Ibid.
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(usually outside counsel) must decide how to respond  to  the  auditor's requests for information on
potential liabilities, including those related to unassorted environmental claims.39

       There is potential conflict between the SEC disclosure requirements and a company's fiduciary
responsibilities to its shareholders.  For example, if a company discloses an as-yet unknown and contingent
environmental liability to the SEC, it runs the risk of exposing itself to new liability, which may violate
its fiduciary responsibilities to shareholders.

       As discussed previously, one  of the ways in which TCA methods  differ from traditional project
financial analysis approaches is their explicit calculation and inclusion of potential liability costs.  SEC
disclosure requirements and the potential for incurring new liability simply because of such disclosure,
therefore appear to be a significant barrier to the full adoption and implementation of TCA methods.

       There are other regulatory barriers to expanding the costs  considered in project financial analysis.
The end-of-pipe regulatory approach itself can be considered such a barrier.  Not only does it focus vast
resources, including expensive capital equipment, on pollution control rather than on product, process,
or raw material changes,40 but it is also a barrier to TCA methods that require an integrated and  more
comprehensive cost analysis. Because current regulations are by and large media-specific (e.g., Clean Air
Act, Clean Water Act, Resource Conservation and Recovery Act) and often result in shifting pollution
from one environmental medium to another (e.g., air to land), project financial analyses associated with
meeting such regulations may not consider the full range of costs and benefits (i.e. those relating to  other
media) associated with a project. Such analyses often occur in attempts to meet a regulatory limit in the
least (direct) cost manner.

       On the other hand, regulatory approaches stressing pollution prevention tend to foster  more
comprehensive analysis of processes and products  and their associated costs,  and thus  are  more
compatible with TCA financial assessment methods.  U.S. EPA's
Pollution Prevention Strategy articulates the Agency's shift  toward a new hierarchy of environmental
management options, with pollution prevention as the first step in the hierarchy followed by responsible
recycling, treatment, and finally disposal. The Pollution Prevention Act of 1990 formalizes this heirarchy
and indicates a broad-based shift toward  prevention in regulatory development and in non-regulatory
programs.  This should result in industry taking a more comprehensive look at the production processes
and products, and ultimately encourage adoption of TCA methods, including more comprehensive project
financial analyses.

       States have taken the initiative in translating this policy shift into specific regulatory changes.
Several states, including New Jersey, have begun to move in the direction of facility-wide regulation. For
example, New Jersey's Pollution Prevention Act calls for the Department of Environmental Protection
to issue facility-wide permits, first  to a  limited  number of facilities,  then on a widespread  basis.
Minnesota's Pollution Control Agency has issued a limited  number  of coordinated permits and  is
considering expanding its multi-media permitting and enforcement  program.  Again, such a regulatory
approach should foster TCA approaches  in general,  and more  inclusive project financial analyses in
particular.
     Ibid,
     Minnesota Office oC Waste, 1991, Report on Barriers to Pollution Prevention.
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  Time Horizon of Project Financial Analysis

        A second important feature of a TCA approach is the extension of the time horizon for project
  analysis from the typical 2-5 year analysis to 10 or more years. One pollution prevention incentive used
  in several states is a  loan  program for pollution prevention  projects, usually focused on capital
  investments.  Depending on the structure of the loan program, it may also act as an incentive, albeit an
  indirect one, for adopting TCA methods. That is,  if a loan program allows a payback period that extends
  for 10 to 20 years, beyond the normal time frame for many conventional project financial analyses, it may
  move project analysis approaches to include longer time frames, more in line with TCA methods.' There
  are many examples  of  state  loan programs  for pollution prevention projects.  The recently enacted
  Pollution Prevention Act in New Jersey calls for  an annual allocation of $2 million from the Pollution
  Prevention Fund to provide low interest loans and loan guarantees to owners or operators of industries
  to study or implement pollution prevention activities. Other states with grant or loan programs include
  Minnesota and New York.

        Similarly, tax incentives and credits for pollution prevention projects may serve as an incentive for
 using longer time horizons for project analysis.   In a recent survey of hazardous waste generators in
 Minnesota/1 tax credits were cited as the most effective motivation for waste reduction.  Under Oregon's
 Pollution Control Facility Tax Relief Program, a facility that aims to prevent, control, or reduce pollution
 is  eligible to apply  for  a certificate from  the state's Department of Environmental  Quality. If the
 certificate is approved, personal income tax, corporate excise tax, or property tax exemptions may be
 applicable.  Tax credits can total up to 50% of the project's total value, at a rate of up to 5%  per year
 over ten  years.  As with other incentive programs, a more  direct inducement to  adoption of a  TCA
 approach would be provided if eligibility for tax incentives and credits require a TCA analysis of the
 project.

       Finally, programs that share the costs for capital investments encourage firms to take  a longer
 term perspective in project financial analyses.  In such a program, funds are provided directly to industry
 by the state in order to defray the cost of waste reduction investments, and to overcome the disincentive
 to industry posed by initial capital costs.  This approach is similar to the third party split-savings system
 now well established in the field of energy conservation.42  Programs could be structured whereby a  state
 establishes a system to review and fund proposed pollution prevention projects. The program would fund
 all up-front costs (for audit and engineering advice, or even for capital equipment) for selected projects,
 and would be paid back over time from a share of the savings.

       This type of program puts industry in a minimal risk position.  Structured and managed properly,
 the majority of state funds provided  to industry would be repaid over time (perhaps 10 - 20 years) and
 could be reused as a revolving fund. A state could require repayment of more than the initial state outlay
 (perhaps  125-150%), still out of savings over time, without negating the incentive to industry.  Such a
 program would be especially appealing to smaller companies lacking access to significant capital resources.
 It may allow companies of all sizes to take source reduction steps they might otherwise consider too risky
 to be justified under their normal investment criteria. The link to TCA adoption could be formalized and
 strengthened by including such  an analysis as a  requirement for participating in  the shared savings
 program.  While this approach has proven to be quite effective in energy conservation, according to a  1986
   41 ibid.
     Under these energy conservation schemes, a vendor of energy conservation services or equipment receives as payment part of the enerev
cost savings resulting from the conservation investment.                                         *• *    i          &


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report by the Environmental Defense Fund,"3 no state had at that time adopted this approach for source
reduction of hazardous wastes, nor are we aware of any such programs having since been established.


Summary

       As with pollution prevention in general, government programs can play an important role in
fostering adoption of TCA approaches. While straightforward regulatory requirements may be useful in
moving firms towards TCA implementation, it is important to recognize that TCA implementation
generally implies institutional change on the part of industry (as well as government regulators). Thus,
regulatory mandates will be most effective in combination with other incentives that recognize the need
for and help foster institutional change. These incentive programs can focus directly on TCA training and
information dissemination through a technical assistance program, or they can be indirect, tieing various
other incentives (e.g., loans, grants, or tax credits) to use of a TCA approach.

       While the provision of additional incentives is necessary to foster adoption of TCA, there remain
formidable regulatory barriers that hinder widespread implementation.  In general,  overcoming a
longstanding regulatory  focus on narrow end-of pipe approaches, and  the  corporate environmental
management programs that developed in response to this regulatory structure, is the most significant
barrier. More specifically, overcoming the regulatory impediments to monetizing long-term liability is
among the most difficult barriers to address. Bringing these barriers to  the attention of industry and
federal and state policymakers is an important first step in developing strategies to overcome such
obstacles.

       There is an important  link among the key attributes of TCA: cost inclusion, time horizon, and
choice of financial indicator. Some of the major cost items often left out of conventional project analysis-
environmental externalities and liabilities-may not be incurred for several years, beyond the time frame
of such analyses. Incorporating such costs virtually requires a longer time horizon for the analysis.  Also,
appropriately quantifying these costs requires more  than a simple pay-back calculation. Future costs,
especially those that may be  speculative, must be  appropriately  discounted.  This requires a  more
sophisticated financial indicator for project analysis, as called for in a TCA approach.
   43 Approaches to Source Reduction: Practical Guidelines from Existing Policies and Programs, Environmental Defense Fund, 1986.

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 6.
LOOKING AHEAD: TCA IN THE 1990s
        In the next decade, the readiness of firms to shift toward a TCA approach in analyzing pollution
 prevention projects will depend on a combination of organizational and  economic variables.  From an
 organizational perspective, these include: the strength and persistence of directives from top management
 that stress a prevention ethic; the placement, responsibilities and authority assigned to environmental
 managers; and the financial rewards to managers for achieving prevention goals.  These are examples of
 organizational conditions that will have a direct bearing on the receptivity and conduciveness to TCA
 approaches in the firm.  These are best viewed as "door-openers" that can either facilitate or impair
 managers' willingness to take risks in expanding the traditional range of costs and benefits in advocating
 prevention investments.

        In addition to these organizational variables, a range of economic variables come into play.  Some
 of these are external to the firm, while others are a reflection of established business practices. These
 include, for example:  the degree to which competition directs attention to new product development
 versus cost-cutting in existing product manufacturing,  and thereby prompts consideration of potential
 market-related, long-term benefits of prevention investments; the frequency of technological change in the
 firm that presents opportunities to consider long-term and indirect costs and benefits of new capital
 investments;  and the degree to which customer demand (intermediate or final) for environmentally-
 friendly products prompts managers to quantify expected increases in market share as one benefit of
 prevention investments.

       Taken together, these organizational and economic variables act jointly to influence the firm's
 disposition toward innovation in both its choice of pollution management strategies and its approach to
 project analysis.  Where conditions are right, the firm is more likely to explore the prevention option and
 be predisposed to innovate in the way it analyzes projects.  Where conditions are not right, the tendency
 will be business-as-usual, retaining the traditional orientation to end-of-pipe approaches as  well  as
 analytical approaches that fail to incorporate the full range of costs and savings of prevention options.
 Under unfavorable conditions a prevention project faces a double hurdle: it is both unlikely to enter the
 capital budgeting process to begin with and, even if it does, is unlikely to achieve the hurdle rate necessary
 to win approval

       How is the pulp and paper industry likely to fare in this context?  What forces drive pulp and
 paper firms toward prevention?   And what role might TCA  play  in promoting such prevention
 investments?

       The industry's position as a major force in the national economy and fourth largest source of
 industrial pollutants speak to the need for concerted policies and programs to move pulp and paper firms
 beyond existing end-of-pipe technologies.  Since mounting regulatory  programs will place compliance
 projects at the top of the industry's agenda, and since these programs come in the wake of record capital
 expenditures for  new and upgraded equipment, efforts to promote prevention should be designed to
 elevate prevention over end-of-pipe options within a regulatory compliance context.

       Beyond compliance, formidable obstacles may stand in the way of prevention initiatives in the pulp
and paper industry. The reasons for  this are several.  The pulp and paper industry has not been
characterized by  major technological breakthroughs in either process or products relative to other
technology-driven industries.  Since process lines (i.e. pulping systems and paper machines) are large,
costly and operate around-the-clock, process changes and materials substitution are highly disruptive to
manufacturing operations. Process stability and product consistency are critical to sustained operations.
Thus, upstream changes in processes historically have been approached with great caution.

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       Amidst all these constraints, the role of TCA becomes especially pivotal in assisting prevention
projects to survive the capital budgeting process while reducing the tendency of management to seek
quick-fixes to cope with intense compliance pressures.  If properly applied, TCA provides a vehicle for
incorporating into project analysis certain long-term, less tangible benefits of prevention that, if absent,
will lead management to choose conventional end-of-pipe options. By adopting the costing procedures,
financial indicators  and time horizons  of TCA, the  built-in biases against  prevention strategies
characteristic of conventional project analysis methods will be minimized.

       In reviewing existing TCA methods, interviewing a cross-section of firms, and applying a TCA
approach to two specific projects in the pulp and paper industry, several key conclusions emerge:

       1.      Bringing TCA to corporate capital budgeting is both an  organizational as well as an
              analytical issue.  TCA approaches prompt new ways  of  defining project boundaries,
              collecting data, and assessing technology options.  These often require management to
              consider linkages across processes, across departments within a plant and, in some cases,
              across plants within the  company.  The effect of  this may extend well beyond the
              immediate project under consideration.

       2.      TCA is a vehicle for translating management discretion in choosing among capital
              investment options into useable financial inputs. Each firm operates with a set of formal
              or informal indicators to determine the financial merits of a project. These guidelines are
              routinely interpreted and bent to accommodate less measurable, tangible and quantifiable
              costs and savings of an investment. In the context of a prevention investment, an effective
              TCA method provides a means of  translating such judgements into quantitative inputs
              understandable to top management.

       3.      No single TCA method is appropriate to all firms. Existing TCA methods tend to be data
              intensive and  over complicated, even for relatively  large sophisticated organizations.
              Simplifying such methods, however, runs the risk of depriving the analysis of the hidden
              and long-term costs and savings that lie at the heart of TCA.  Firms need options that
              balance ease of operation with adequate depth of analysis,  and that allow projects to be
              readily screened before proceeding to an  in-depth analysis. TCA methods that achieve
              these objectives will be most acceptable to industry.

       4.      TCA does not ensure that pollution prevention projects  will be chosen as the most
              advantageous management strategy.  No  a priori judgement of this type can be made
              without a thorough financial analysis of all options. In fact, TCA is as likely to uncover
              new  costs associated with  a prevention  investment  as it is  to  identify new  savings.
              Nevertheless, TCA creates  a "level playing" field such that prevention and end-of-pipe
              project investments may be compared on equal footing.   Ultimately, project financial
              performance depends on a complex mix of project technology and economics.

       5.      As traditional classification of environmental projects gives way to a more forward-looking
              approach, firms are likely to be increasingly receptive to TCA. The movement toward
              dean technologies and "green" products will present further rationale for adoption of TCA
              methods.  As pollution prevention projects increasingly shed their image as inherent
              financial losers, firms may seek to systematically incorporate their benefits into the capital
              budgeting process.  TCA offers a vehicle for achieving this.
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        6.      Government actions to encourage TCA may be either direct or indirect, intentional or
               unintentional.   Numerous  government programs under the  heading of  pollution
               prevention, waste reduction and waste minimization influence TCA adoption  either by
               mandate or by incentive/disincentive.  In  its most direct form, TCA may be simply
               mandated as part of pollution prevention planning requirements, though such an  approach
               by no means ensures rigorous application of the methods. Indirectly, state grant and loan
               programs may affect TCA adoption if these programs set project priorities in favor of
               prevention-oriented projects.  Insofar as such programs also induce consideration of a
               longer time horizon and inclusion of indirect costs and savings, TCA adoption will be
               accelerated. Both direct and indirect approaches have their merits; the two working in
               tandem is optimal.


        Firms adopting TCA in their project analysis methods act in their self-interest. Through more
 rigorous project costing and financial analysis, pollution prevention projects may  be more accurately
 compared to end-of-pipe alternatives, and to other capital projects competing for a firm's limited capital
 resources.  There are many possible vehicles for promoting TCA in industry.  As a general rule, an
 effective promotion strategy will emphasize the value of TCA implementation to the company. If firms
 are convinced that TCA is first and foremost a vehicle for rationalizing the capital budgeting process to
 the long-term advantage of the firm, adoption of TCA approaches are likely to quickly attract the support
 of both environmental and non-environmental managers.

       At the federal level, EPA has worked  to promote TCA by developing the Pollution Prevention
 Benefits Manual, the Waste Minimization Opportunity Assessment Manual, and sponsoring the initial work
 on Precosis, all of which contain discussions of TCA concepts and provide analytical tools. Further efforts
 to disseminate, more widely, these tools and to develop brief guidance pamphlets would help advance
 TCA concepts.  Published pollution prevention case studies, which use a TCA approach to  financial
 analysis, could be a powerful sales tool for TCA.

       At the state level, TCA can be built into pollution prevention policies and programs in several
 ways. State technical assistance programs can offer TCA guidance and training as a complement to their
 technical services.  States may provide TCA training seminars, with specialized modules aimed at large
 versus small firms, or for firms in certain lines of business.  A number of states have instituted
 requirements for industry to regularly develop pollution prevention plans that must contain technical and
 economic feasibility assessments of specific prevention projects. New Jersey's Pollution Prevention Act,
 for example, explicitly requires that plans include a comprehensive analysis of the costs associated with
 the use, generation, release or discharge of hazardous substances for current production processes and
 the savings realized by investments of pollution prevention. Planning for Success Through Waste Reduction,
 the planning guidance document created by the Washington State Department of Ecology under the
 State's Hazardous Waste Reduction Act, instructs companies to evaluate the costs and benefits of selected
waste reduction options over a five year period, and to describe the accounting systems used to track
 hazardous substance and waste management costs, that must include "liability, compliance, and oversight
 costs". Requiring a TCA approach in pollution prevention planning may lead companies to recognize the
benefits of comprehensive financial analysis, and ultimately to investments in pollution prevention. The
long-term effectiveness of a mandatory approach, however, is unproven and should be approached
cautiously and with strong emphasis on the self-interest benefits alluded to earlier.

       While we would oppose rigid, prescriptive approaches, some type of standard could facilitate the
implementation of emerging federal and state regulations requiring TCA in pollution prevention planning.
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National standard guidelines, perhaps under the auspices of the American Society of Testing and
Materials (ASTM), could serve this objective.

       The limited sample size of firms in this study allows for only indicative findings that must be
corroborated by analysis of additional firms. Existing TCA methods have been available for a few years,
yet no systematic assessment of user experience among the several hundred purchasers of various systems
is available.  This presents a potentially rich data base for further assessing the organizational and
economic issues in TCA adoption we uncovered in the present study.  Organizational,  economic and
regulatory issues specific to certain sectors and industry types-pharmaceutical and chemicals, intermediate
versus final consumer product manufacturers, and single versus multiplant  operations-are promising
avenues for future study.

       Quantifying the benefits of green technologies, green products and green corporate image remains
a major challenge.  Yet it is precisely these benefits that are heard among corporate managers as reasons
for approving otherwise marginal projects.  Developing methodologies to quantify these benefits and
incorporate them into project financial analysis is an unfinished task.

       Finally, what is financially optimal for the firm, of course, is not necessarily optimal from a social
cost standpoint.  In this sense, TCA is no substitute  for lifecycle cost assessment (LCA), in which the
choice of a material input or the manufacture of a product is assessed for its full societal costs regardless
of whether they fall within or outside the economic purview of the firm.
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 APPENDIX A




CASE STUDIES
    65

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                                       APPENDIX A-l

                                 COATED FINE PAPER MILL
Company Background

       This specialty paper mill is part of a larger corporation of pulp, paper, and coating mills. The
mill is not integrated, i.e. does not manufacture pulp.  Most of the pulp used by the mill is purchased,
via pipeline, from a neighboring bleached kraft mill.  The mill supplements this pulp with a small
amount of purchased market pulp. The mill produces approximately 190 tons per year of a variety of
uncoated, and on-machine and off-machine coated papers, carbonizing, book and release base paper.
The coating used is a latex (i.e. non-solvent) formulation containing clay, styrene butadiene, starch,
and polymers.


Environmental Management

       The mill first created an environmental department in 1988. The department consists of one
engineer who reports to mill's Operations Manager. This engineer manages environmental and safety
compliance and projects at the site, including oversight of the mill's only two permitted sources of
pollutants-fuel oil burners and starch mixing tanks.  To eliminate exposure to employees and the
surrounding community, the engineer successfully persuaded mill management to replace the chlorine
gas-based fresh water purification system with one using sodium hypochlorite. Although sodium
hypochlorite still poses some handling risk to employees, it is safer than chlorine.

       The mill produces a significant quantity of broke (i.e. unsalable paper product) that it cannot
reuse. This problem is typical of specialty paper mills that produce many different grades, and
frequently change from one grade to another on the same paper machine.  The mill recycles 75% of
this broke at other paper and paperboard mills and landfills the remainder.

       Since it does not have its own wastewater treatment facility, wastewater from the mill is
pumped to the neighboring mill for treatment. This wastewater constitutes between 10 and 12% of
the neighboring mill's wastewater flow.  In the per ton flow, TSS and BOD for the subject mill is
reportedly higher than the industry average. The neighboring mill has asked the subject mill to reduce
wastewater flow, although no such  measures have been put into effect to date.

       Wastewater treatment price was negotiated between the mill and the neighboring mill in 1977,
and is based on the following formula:


       finished tons produced x no. gallons discharged x cost factor = treatment charge


The treatment charge is not based on TSS or BOD so the subject mill has no direct economic
incentive to  reduce TSS and BOD  in its wastewater.  The contract between the mills establishes a
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ceiling for wastewater flow, BOD and TSS from the mill.  Currently, the mill is meeting its flow limit,
but is substantially exceeding its contract limits on BOD and TSS. In 1992, the neighboring mill will
be required to significantly reduce its effluent BOD load and has, in turn, required the mill to reduce
the BOD content of its wastewater prior to pumping it to the treatment plant. The subject mill is
currently exploring BOD reduction options.

       The treatment contract will be renegotiated in 1993, but it is not clear whether, or how, the
terms will be changed.  However, the environmental engineer speculated that the charge rate formula
might be changed to include a BOD or TSS variable, and that the overall cost could increase.


Capital Budgeting and Project Analysis

       A proposed project moves through three steps prior to implementation.  First, a feasibility
study is conducted to assess the technical aspects of the problem  and the proposed solution.  Second,
a cost justification or Capital Appropriations Request (AR) is prepared for the project. The AR
contains a detailed economic analysis of the project costs and savings; a narrative describing the need
for, and benefits of, the project; and a financial spreadsheet printout containing a discounted cash flow
analysis of the project for a 10-year period. The spreadsheet reports several financial indicators,
including ROI, ROAE (return on assets employed),'IRR,  NPV and payback.  The mill uses payback as
a screening device for project profitability, and loosely applies a 2 year hurdle rate to discretionary,
profit-adding projects. The AR form has a standard format for investment cost estimates with the
following categories:

       1. Direct costs:

              site preparation
              site improvements
              civil/structural/architectural
              process equipment
              support services
              spare parts

       2.     Indirect costs:

              permits/licenses
             AR preparation
              engineering
              process simulation/trials
              training
              project management
              construction management
              start-up costs
              tax
              escalation
              contingency

There is, however, no standard format for estimation of project benefits. Benefits quantified in  the
AR vary from project to project, but future liability and other intangible costs are not monetized.
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       Finally, once the AR is approved by management, the third step-an engineering design-is
prepared and the project is implemented.


Perspectives on TCA

       The environmental engineer, the likely champion of environmental projects within the mill,
finds it difficult to justify economically projects that are not required by regulation.  While he is
interested in the TCA approach, he does not feel that it is possible to develop a credible estimate of
future liability for use in a financial analysis. He cited a specific project in which he proposed to
construct a containment system around the truck unloading area. Such as system would prevent
spilled chemicals from running into the nearby river in the event of an accident. While he would have
liked to estimate the avoided liability cost associated with this project, he felt that it was not possible
to develop a defensible estimate.1


Project Background

       Papermachine white water, a mixture of water and residual fiber and filler (clay and calcium
carbonate) that drains out of the sheet of paper as it travels across the paper machine, is typically
captured by a white water collection system dedicated to one papermachine.  Typically, some or all
white water is recycled back into the papermaking system to recapture water, fiber and filler. In some
cases white water is passed through a  saveall screening device to separate fiber and filler from water;
fiber;  filler and water are then recycled back into the system. The saveall produces a clear stream of
water that can be used in numerous papermachine operations.

       In this mill, two paper machines, sharing a common white water system, produce a variety of
paper grades made with either acid, neutral, or alkaline sizing chemistry.2   Machine 1 has a saveall
system that filters fiber and filler prior to discharging into the joint white water system. This material
is recycled back into the papermaking system.  When the  machines are using different sizing
chemistry, e.g. when Machine 1 is producing acid-size paper and Machine 2 is producing alkaline-sized
paper, the mixed white water from both machines is not reusable, and must be sewered. Under these
conditions, a large flow of potentially reusable water from both machines, and fiber and filler from
Machine 2,,-  lost to the sewer.

       Prompted primarily by the lack of spare water effluent pumping capacity and a desire to better
understand the rather complex,  old white water piping system, the mill commissioned a study titled
"White Water Recycle Feasibility Study" in 1988. The study, completed in August of 1989, had several
objectives: "...to review the design and operation of the mill and recommend changes that would help
reduce peak effluent flows, reduce BOD in the effluent and reduce total fresh water intake on a mill
wide scale11.  The resulting report contained detailed engineering drawings of the fresh water, white
water, and paper machine systems and two recommendations for process modifications.
        This project has not been implemented.
      2 Sizing is added to pulp to reduce water absorbency in the final paper. The Ph (Le. acidity or
   alkalinity) of the pulp must be adjusted according to the type of paper desired and dang used.
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Project Description

       The first recommendation (called Phase I) made in the feasibility study is to install a second
saveall to handle the white water from Machine 2.  Because the white water systems under this
scenario would remain separate for Machines 1 and 2, this phase would allow recovery of fiber from
white water, but only permit recovery of clarified white water if the grades being produced on the
machines are compatible. Otherwise, the water would have to be sewered.

       Under Phase II, the white water systems would be split, so that each machine would have a
dedicated system. In combination with Phase I, Phase II would permit fiber, filler and water reuse on
both machines, at all times.  This phase would require installation of a new pump, piping, and
controls. Available pulping and stock storage capacity could be used to pulp separately for each
machine.
Project Financial Analysis

       The feasibility study contains a capital estimate for Phases I and n. No other financial analysis
of the project has been conducted by the mill. The capital estimate is 1,145,300 (1989 dollars), and is
considered to be +/- 25% accurate. The estimate includes: purchased equipment (including saveall,
stock chest, clear white water chest and associated equipment); process control instrumentation;
electrical controls and lighting; a new building for the saveall; piping; installation (in-house and
contracted labor); engineering; and contingency.


Company and TCA Analyses

       At the request of the mill, we have focused our analysis on the combined Phases I and II. This
option is most interesting to the mill because it maximizes water, fiber, and filler recovery; and
reduction in BOD and solids in wastewater.

       The Company Analysis consists of the 1989 capital estimate (adjusted for inflation and
escalated by 12.5%3), and only those operating costs and savings that the company typically includes
in project financial analyses for projects of this type. These are:

              a.     raw material - fiber and filler;
              b.     energy and chemical use for new equipment;
              c.     wastewater treatment fees; and
              d.     changes in labor costs.

The TCA contains these and other operating costs and savings that were developed in the course of
this study.  On the benefit side, the TCA includes the following:

       a.     An average reduction in fiber and filler loss of 1,200 tons/year, for a savings of
              $429,200/year;
        As suggested by the null, capital costs were escalated by 1Z5% to adjust the feasibility study estimate
   which was +/- 25%.

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       b.     A reduction in fresh water usage of 1 million gal/day, and a commensurate reduction
              in cost for fresh water treatment and pumping, for a savings of approximately
              $112,420/year;
       c.     A reduction in energy use for fresh water heating amounting to a. savings of
              approximately $377,250; and
       d.     A reduction in wastewater generation of approximately 1 million gal/day, for a savings
              of approximately $52,500/year in wastewater pumping and $68,OQO/year in wastewater
              treatment fees.
Annual operating costs are expected to increase in the following areas:

       a.     Chemical flocculating agents used in the saveall to promote solids/water separation will
              cost approximately $275,000/year;
       b.     Electric costs for new equipment operation will increase operating costs by
              approximately $102,870/year; and
       c.     An increase in labor cost of approximately $3,120/year is expected for operation of new
              equipment.

       The project does not affect wastestreams that require on-site management or disposal, nor
does it affect any regulatory compliance activities at the site, therefore the financial analysis does not
include costs for these activities. In addition, we do not expect any impacts on revenue since neither
product quality nor production rates will be improved, nor does the mill expect to visibly enhance its
product or company image.  Finally, we do not expect any tangible impact on avoided future liability
for this project.

       Table A-l.l summarizes the cost categories addressed in the Company Analysis and the TCA
for this project, and Table A-1.2 reports the results  of the financial analysis.
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Table A-l.l  Comparison of Cost Items in Company and TCA Cost Analyses

X = Coa(s) Included
P = Cost(s) Partially Included                                 Comi
Capital Costs
        Purchased Equipment
        Materials (e.g., Piping, Elec.)
        Utility Systems
        Site Preparation
        Installation (labor)
        Engineering/Contractor
        Contingency
Operating Costs
        Direct Costs:*
                 Raw Materials/Supplies
                 Labor
        Indirect Costs:*
                 Utilities:
                         Energy
                         Water
                         Sewerage (POTW)
    X
    X
    X
    X
    X
    X
    X
    P
    X
                    TCA
X
X
X
X
X
X
X
X
X
                    X
                    X
                    X
                 We use the term 'direct costs" to mean costs that are typically allocated to a product or process line (i.e. not charged to
                 an overhead account) and are typically included in project financial analysis. "Indirect costs" here mean costs that are
                 typically charged to an overhead account and typically not included in project financial analysis.
        Table A-1.2. Summary of Financial Data for the White Water and Fiber Reuse Project4
        Total Capital Costs

        Annual Savings (BIT)*

        Financial Indicators.
        Net Present Value - Years 1-10
        Net Present Value - Years 1-15
        Internal Rate of Return - Years 1-10
        Internal Rate of Return - Years 1-15
        Simple Payback (years)

        * Annual operating cash flow before interest and taxes
   Company Analysis

   $1,743,820

   $
($  702£S5)
($  587346)
   0%
   6%
   11.4
                 TCA

                 $1,743,820

                 $  658,415
                 $1,242336
                 $1,808,384
                 36%
                 36%
                 2.0
        The improvement shown in annual savings and financial indicators for the TCA stems from the
inclusion of energy savings in the TCA, but not in the Company Analysis. Specifically, reduced energy
consumption for pumping and treating fresh and wastewater, and freshwater heating are included only
in the TCA.  These savings, which would typically not be included in the mill's calculation of
profitability, bring the project in line with the mill's 2 year payback rule-of-thumb.  By excluding these
savings in the Company Analysis, the project looks highly "unprofitable".
         This table contains preliminary results, subject to change upon receipt of complete cost data.

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       Some uncertainty exists in the wastewater treatment cost estimate. As discussed above, the
subject mill will be renewing its contract with the neighboring mill in 1992, and it is possible that
treatment fees will increase. To test the sensitivity of the project analysis to these potential changes,
we recalculated the TCA twice, doubling and tripling the wastewater treatment costs. In both cases,
the financial indicators changed slightly: 40% IRR (years 1-10) and 1.8 payback for double the cost,
and 44% (years 1-10) IRR and 1.7 payback for triple the treatment cost.  While we do not see a
dramatic change in projected profitability, a tripling of wastewater treatment costs, may make this
project somewhat more competitive with other projects competing for capital in a particular budget
year.  This may be especially true if the firm applied its rule-of-thumb, 2 year payback criteria as a
screening test for the project.

       Detailed reports of the Company Analysis, TCA, and associated cost calculation
documentation follows.
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            APPENDIX A-l
     COATED FINE PAPER COMPANY
       Project 1 - Company Analysis

WHITE WATER AND FIBER REUSE PROJECT
                73

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Project: Whitewater/Fiber Reuse Project CAPITAL COSTS
Capital Costs Cost Totals
Purehzsed Equipment
Equipment - Phase 1 $330,853
Equipment - Phase li $15,132



Sales tax
Price for Initial Spare Parts S345.985
Materials
Piping $183.690
Electrical $67,721
Instruments $68,465
Structural $54,946
insulation/Pipinq $374,822
Utility Connections and New Utility Systems
Electricity
Steam
Coolinq Water
Process Water
Refrigeration
Fuel (Gas or Oil)
Plant Air
Inert Gas $0
Site Preparation
Demolition. Clearing, etc. $0
Installation
Vendor
Contractor $397.148
In-house Staff $397,148
Engineering/Contractor (In-house & Outside)
Planning
Engineering $166.946
Procurement
Consultants $44,100 $211,046

Ref.





























page 1
Date: 11/4/91
Notes:
Saveall and associated pumps and tanks
White water pump























15% of materials and labor

Consultant feasibility study, 1989

          74
Project 1 - Company Analysis

-------
Project; >Vhife>yafer/ Fiber Reuse Projeri
Capital Costs (continued) Cost Totals
Start-up/Training
Vendor/Contractor
In-house
Trials/Manufacturing Variances
Training SO
Contingency
5140,403 ' SO
Permitting
Fees
In-house Staff $0
Initial Charge of Catalysts and Chemicals
$0
Working Capital (Raw Materials, Product, Inventory.
Materials and Supplies)

$0
Salvage Value
$0

Ref.














page 2
Date:
Notes:




10% of materials, labor, and engineering









         75
Project 1 - Company Analysis

-------
Operating Costs
Raw Materials/Supplies
Fiber loss (includes transport)     3457.000
filler loss (includes transport)      S79.700
Utilities (elec., steam, water, sewerage)
                   Whitewater/Fibtr Reuse Project
       hem
                   CURRENT PROCESS
                           Annual Cost
                           (S/year)        Total
                       Ref
                                              S536.700
iVastc Management
 'disposal, hauling, insurance, storage, etc.)
                                                    SO
 rfcshwater Pump, and Treat.
Freshwater Heating
 Was'.ewatcr Pumping
 Wastawaier Treatment

Labor       	
S273.000
              S273.000
                                                    $0
 Other
                                                    $0
 Regulatory Compliance
  (manifesting, reporting, monitoring, testing, labeling, etc.)
                                                     SO
 Insurance
                                                     SO
                             Costs are positive  f            ••
                             Savfcigs.and revenjues arebegatjye', " *
                                                ALTERNATIVE PROCESS
                                                          Annual Cost
                                    Item                  (S/year)       Total
                                                              Raw Materials/Supplies
                              =iber loss (includes transport)
                             Filler loss (includes transport)
                             Flocculating agents for saveall
                                                                                                                      Date:
                                                        Ref
                                                                        pages
                                                                       11/4/91
                                                                                                S91,500
                                  $16,000
                                                                                              $275,200
                                                                                                             $382,700
                                                              Waste Management
                                                              (disposal, hauling, insurance, storage, etc.)
                                                                                                                   SO
                                                              Jtilities (elee.. steam, water, sewerage)
rreshwater Pump, and Treat.
Freshwater Heating
Wastewater Pumping
Wastewater Treatment
Bee. for Equipment Operation
Labor
$204.765
$102.870      $307,635
                                                              Equipment Operation
                                                                                                 $3.120
                                                                                                               $3,120
                                                              Other
                                                                                                                   SO
                                                              Regulatory Compliance
                                                               (manifesting, reporting, monitoring, testing, labeling, etc.)
                                                                                                                    SO
                                                              Insurance
                                                                                                                    $0
                                                                                                                       3a
                              Difference
                               Cur. - Alt.)
                                                                                                                                    $154.000
                                                                                                                                          SO
                                                                                                    ($34.635)
                                                                                                      ($3,120
                                                                                                                                          $0
                                                                                                                                          $0
                                                                                                                                           $0
 Revenues
                                                     SO
 Revenues - Marketable By-products
 Total
                                                     SO
                                               S809.700
                                                               Revenues
                                                                                                                    $0
                                                               Revenues - Marketable By-products
                                                                                                                    SO
                                                                                                              $693.455
                                                                  76
                                                                                                                                           SO
                                                                                                                                           SO
                                                                                                                                     $116,245

-------
Project: Whitewater/Fiber Reuse Project

CAPITAL AND OPERATING COST SUMMARY
Capital Costs S Operating Costs
Equipment 3345,985
Materials 3374,822
Utility Connections $0
Site Preparation $0
Installation 3397,148 '
Engineering/Contractor 5211,046 '
Start-up/Training $0
Contingency $0
Permitting $0
Initial Catalysts/Chemicals '" $o %
Depreciable Capital $1,329,001 •>
Working Capital $0 ',
Subtotal $1,329.001 "
Interest on Debt $0 '
Total Capital Requirement $1,329,001
Salvage Value $0
% Equity 100% '
%Debt 0% '"
Interest Rate on Debt. % 12.0%
Debt Repayment, years 5 ,.
Equity Investment $1.329.001
)ebt Principal $0
Interest on Debt $0
Total Financing $1,329,001
Depreciation period 15
Income Tax Rate, % 40%

Escalation Rates, % 5.0%

Cost of Capital (for NPV) 16.00%

Raw Materials/Supplies
Waste Management
Utilities
Labor
' Other
Regulatory Compliance
Insurance
Maintenance - % of Capital
Labor
:. Materials
Overhead -
(% of Labor)
Labor Burden
Revenues
•• tevenues -
Marketable By-products
TOTAL
'uture Liability
' (Year expected = 1.2.3. etc.)

0%
0%

0%

0%

Ref.
page 4
Date: 11/4/91
Difference
Current Alternative fCur - Ait \
5536,700
$0
$273,000
$0
$0
$0
$0
$0
$0
$0
$0
$809.700
Year Expected
$382.700
$0
5307,635
53,120
$0
SO
$0
$0
$0
50
so
$0
$0
$693.455
$154,000
$0
($34,635)
($3,120)
$0
$0
SO
$0
$0
$0
$0
$0
$0
$116,245
Cost
(Curr. - Alter.)

















           77
Project 1 - Company Analysis

-------
Project: Whitewater/Fiber Reuse Project
Profitability Analysis
Operating Year 0
Escalation Factor 1.000
REVENUES
Revenue (prod, rate or value)
Marketable By-products
Annual Revenue
OPERATING JCOSTSJ/SAVJNGS
Raw Materials/Supplies
Waste Management
Utilities
Ubor
Other
Regulatory Compliance
Insurance
Maintenance
Overhead
Labor Burden
Liability
Total Operating (CostsJ/Savings
CAPITAL COSTS
Investment S1. 329.001
Book Value $1,329.001
Tax Depreciation pay Straight-line, 1/2 yr)
Tax Depreciation (by Double DB. 1/2 yr)
Tax Depreciation (by DD3 switching to SL)
Debt Balance SO
Interest Payment at : 12.0%
Principal Repayment
CASHFLOW
Revenues
+ Operating (CostsJ/Savings
Operating Cash Row (BIT)
* Depreciation
* Interest on Debt
Taxable Income
* Income Tax at: 40.0%
Net Income
+ Depreciation
• Debt Repayment
- Investment (Less Debt Princ ($1 ,329,001)
-Working Capital SO
+ Salvage Value
After-Tax Cashflow (Sl.329,001)
Cumulative Cashflow ($1,329,001)
Discounted Cashflow (S1.329.001)

1
1.050

SO
SO
SO .

S154.000
so
(534,635)
(S3.120)
$0
SO
SO
SO
SO
SO
SO
S1 16.245


51,240,401
$88.600
$88.600
588,600
SO
SO
SO

SO
51 16,245
$1 16,245
$88.600
SO
527,645.
S1 1.058
S16.587
S88.600
SO



S105.187
(51.223.814)
$90.678

2
1.103

SO
SO
SO

$169,862
SO
($38.202)
($3,441)
SO
SO
SO
SO
SO
SO
SO
S128.219


51.075,014
538,600
5165.387
5165,387
SO
SO
SO

SO
S128.219
$128,219
$165,387
SO
(537,168)
($14.867)
(S22.301)
S165.387
SO



$143.086
(51. 080.728)
$106.336

3
1.158

SO
SO
so

S178.332
SO
(540,107)
($3.613)
SO
SO
SO
SO
SO
SO
SO
5134.612


S931.679
588,600
5143.335
$143.335
50
SO
$0

SO
5134,612
5134,612
5143.335
SO
(S8.723)
(53,489)
(35,234)
$143.335
$0



$138.101
($942,627)
$88,475

4
1.216

$0
SO
so

S 187,264
SO
(S42.116)
(53,794)
SO
$0
$0
SO
SO
so
$0
5141,354


5807,455
588,600
5124,224
$124,224
SO
SO
SO

so
$141,354
S141.354
S124.224
SO
$17,130
S6.852
510,278
5124,224
SO



$134,502
(5808,125)
574,284

5
1.277

SO
so
so

S 196.658
SO
($44,229)
(53,984)
SO
SO
SO
SO
SO
SO
SO
S 148.445


5699,794
$88.600
$107.661
$107,661
SO
SO
SO

SO
$148.445
5148,445
5107,661
SO
$40,784
$16,314
$24,470
$107,661
$0



$132,131
($675,994)
$62,909

6
1.341

SO
SO
SO

5206.514
SO
(546.446)
($4,184)
SO
SO
$0
SO
SO
SO
SO
$155,884


$606.488
$88,600
S93.306
593.306
$0
$0
$0

SO
$155,884
$155,884
S93.306
$0
562,578
S25.031
S37.S47
593,306
$0



$130,853
($545.141)
$53,708
Date:

7
'1.408

SO
$0
SO

S21 6,832
SO
(S48.766)
(54,393)
SO
SO
$0
SO
SO
$0
$0
$163.673


5542.647
588,600
$80.865
$63.841
$0
SO
SO

SO
S 163.673
5163.673
S63.841
SO
S99.832
S39.933
$59,899
S63.841
SO



$123,740
(5421,401)
$43,783
pages
11/4/91

8
1.478

SO
$0
SO

5227,612
SO
(551,191)
(54.611)
SO
SO
SO
$0
$0
$0
$0
5171,810


5478,806
588,600
$72,353
$63,841
SO
SO
$0

SO
5171,810
5171,810
563.841
SO
5107.969
543,188
$64,781
S63.841
SO



5128,622
(5292,779)
$39,233
X« Present Value
Internal Kate of Return
Payback
Years 1-10 Years 1- 15
(5702.855) (5587.346)
0% 6%
11.4 years
               78
Project 1 - Company Analysis

-------

Profitability Analysis (continued)
Operating Year Number
Escalation Factor
REVENUES
Revenue (production rate or value)
Marketable By-products
Annual Revenue
OPERATING (COSTS)/SAVINGS
Raw Materials/Supplies
Waste Management
Utilities
Labor
Other
Regulatory Compliance
Insurance
Maintenance
Overhead
Labor Burden
Liability
Total Operating (Costs)/Savings
CAPITAL COSTS
Investment
Book Value
Tax Depreciation (by Straight-line, 1/2 yr)
Tax Depreciation (by Double DB, 1/2 yr)
Tax Depreciation (by DDB switching to SL
Debt Balance
Interest Payment at : 1 2.0%
Principal Repayment
CASHFLOW
Revenues
+ Operating (Costs)/Savings
• Operating Cash Row (BIT)
- Depreciation
- Interest on Debt
Taxable Income
- Income Tax at: 40.0%
Net Income
+ Depreciation
- Debt Repayment
- Investment (Less Debt Princ.)
- Working Capital
+ Salvage Value
After-Tax Cashflow
Cumulative Cashflow
Discounted Cashflow


9
1.552

SO
SO
SO

S239.008
$0
($53,754)
($4,842)
SO
$0
SO
$0
$0
SO
so
$180,412


$414,965
$88.600
$63.841
$63,841
$0
$0
• $0

$0
$180,412
$180,412
$63.841
$0
$116.571
$46.628
$69.943
$63,841
$0



$133,784
($158,995)
$35,179


10
1.630

$0
SO
SO

$251,020
SO
($56,455)
($5,086)
$0
$0
$0
$0
$0
SO
$0
$189.479


$351,124
$88,600
$55.329
$63,841
$0
$0
$0

$0
$189,479
$189,479
$63,841
$0
$125,638
$50,255
$75.383
$63,841
$0



$139,224
($19,771)
$31,560


11
1.712

SO
so
so

S263.648
SO
($59,295)
($5,341)
$0
$0
SO
SO
$0
$0
SO
$199,012


$287,283
$82.693
$46,817
$63,841
$0
SO
$0

SO
$199,012
$199,012
$63,841
$0
$135,171
$54.068
$81.103
$63,841
$0



$144,944
$125,173
$28,325


12
1.798

$0
$0
SO

S276.892
$0
($62,274)
($5,610)
SO
$0
$0
$0
$0
$0
$0
$209.008


$223,442
$82.693
$38.304
$63.841
$0
$0
$0

SO
$209.008
$209,008
$63.841
$0
$145.167
$58.067
$87.100
$63,841
SO



$150,941
$276,114
$25,428


13
1.888

SO
SO
so

$290,752
SO
($65.391)
($5,891)
SO
SO
SO
$0
SO
so
so
$219,470


$159,601
$82,693
$29,792
$63,841
$0
$0
$0

SO
$219.470
$219,470
$63.841
$0
$155,629
$62,252
$93.377
$63,841
$0



$157,218
$433,332
$22,832
Date:

14
1.982

$0
$0
$0

$305,228
$0
($68,647)
($5,184)
SO
$0
$0
SO
SO
$0
$0
$230,397


$95.761
$82,693
$21.280
$63.840
SO
$0
$0

SO
S230.397
$230,397
$63,840
$0
$166,557
$66,623
$99.934
$63,840
$0



$163,774
$597,106
$20,504
r—y1 w
11/4/91

15
2.081

$0
SO
$0

$320,474
SO
($72,075)
($6,493)
$0
so
$0
so.
SO
so
so
$241,906


$31,920
$82,693
$12,768
$63.841
$0
$0
$0

$0
$241,906
$241,906
$63,841
$0
$178,065
$71,226
$106.839
$63,841
$0


$0
$170.680
$767,786
$18.421
            79
Project 1 - Company Analysis

-------
            APPENDIX A-l
     COATED FINE PAPER COMPANY

            Project 1 - TCA

WHITE WATER AND FIBER REUSE PROJECT
                 80

-------
  Project:      Whitewater/Fiber Reuse Project

  Capital Costs
  Purchased Equipment

              Equipment - Phase I
              Equipment - Phase 1!
              Sales tax
              Price for Initial Spare Parts
 Materials
             Piping
             Electrical
             Instruments
             Structural
             Insulation/Piping

 Utility Connections and New Utility Systems

             Electricity
             Steam
             Cooling Water
             Process Water
             Refrigeration
             Fuel (Gas or Oil)
             Plant Air
             Inert Gas

Site Preparation

             Demolition, Clearing, etc.

Installation

             Vendor
             Contractor
             In-house Staff

Engineering/Contractor (In-house & Outside)

             Planning
             Engineering
             Procurement
            Consultants
CAPITAL COSTS

Cost           Totals
  $330.853
   $16,132
 $183.690
  $67.721
  $68.465
  $54.946
$397.148
                                                                                   Ref.  Notes:
                      Date:
 page 1
11/4/91
Saveall and associated pumps and tanks
White water pump
                                                                        $345.985
                 $374.822
                       $0
                       $0
                $397,148
$166.946
                                                        $44.100        $211.046
                                15% of materials and labor

                                Consultant feasibility study, 1989
                                                             81
                                                          Project 1 - TCA

-------
Project: Whitewater/Fiber Reuse Project
Capital Costs (continued) Cost Totals
Start-up/Training
Vendor/Contractor
In-house
Trials/Manufacturing Variances
Training SO
Contingency
$140,403 SO
Permitting
Fees
In-house Staff SO
Initial Charge of Catalysts and Chemicals
$0
Working Capital (Raw Materials, Product. Inventory,
Materials and Supplies)

$0
Salvage Value
$0

Ref.














page 2
Date:
Notes:




10% of materials, labor, and engineering









    82
Project 1 - TCA

-------
  Project:
  Operating Costs

         Item
                    CURRENT  PROCESS
                            Annual Cost
                   	($/year)       Total
  Raw Materials/Supplies
 Fiber loss (includes transport)      S457.000
 Filler loss (includes transport)	$79.700
                                                5536,700
  Waste Management
  (disposal, hauling, insurance, storage, etc.)
                                                     SO
 Jtilities (elec.. steam, water, sewerage)
Freshwater Pump, and Treat.       $168.630
Freshwater Heating
Wastewater Pumping
Wastewater Treatment
                                 $565.850
                                 $210.000
                                 $273,000
                                             $1,217,480
  .abor
                                                     $0
 Other
                                                     $0
  egulatory Compliance
  'manifesting, reporting, monitoring, testing, labeling, etc.)
                                                    $0
                                                    $0
                                                          Re
  Co5feare...f3psiti.ve          f  ^
  ;:Saii|ng.siaiKi::r.evenues a*e negative    * ' ,                  Qate:
                      ALTERNATIVE PROCESS
                                Annual Cost
ll	'tern	($/year)       Total          Re
                                                                Raw Materials/Supplies
  fiber loss (includes transport)
  Filler loss (includes transport)
  Rocculating agents for saveall
                                                                                                   $91,500
                                                                                                   $16,000
                                                                                                  $275,200
                                                                                                                $382,700
                                                                Waste Management
                                                               (disposal, hauling, insurance, storage, etc.)
                                                                Utilities (elec.. steam, water, sewerage)
                                                                                                                     $0
 Freshwater Pump, and Treat.
 Freshwater Heating
 Wastewater Pumping
 Wastewater Treatment
 Bee. for Equipment Operation
 Labor
                                                                                                  $56,210
$188.600
$157.500
$204.765
$102.870      $709,945
                                                               Equipment Operation
                                                                                                  $3,120
                                                                                                                 $3.120
                                                               Other
                                                               Regulatory Compliance
                                                               (manifesting, reporting, monitoring, testing, labeling, etc.)
                                                                                                                    $0
                                                               Insurance
                                                                                                                    $0
                                                                                                                                        page 3
                                                                                                                                       1.1/4/91
                                Difference
                                (Cur. - Alt.)
                                                                                                                                      $154,000
                                                                                                                                            $0
                                                                                                                                      $507.535.
                                                                                                                                       ($3.120)
                                                                                                                                           $0
                                                                                                                                           $0
                                                                                                                                           $0

                                                    $0
 evenues - Marketable By-products
                                                    $0
                                                              Revenues
                                                                                                                    $0
                                                             Revenues - Marketable By-products
                                                                                                                    $0
                                                                                                                                           $0
                                                                                                                                          $0
Total
                                            $1.754.180
                                                                                                            $1,095,765
                                                                                                                                     $658,415

-------
Project: Whitewater/Fiber Reuse Project
CAPITAL AND OPERATING COST SUMMARY
Capital Costs S ,- Operating Costs
Equipment $345.985
Materials S374.822
Utility Connections SO
Site Preparation SO
Installation 3397,148
Engineering/Contractor S21 1 .046
Start-up/Training SO
Contingency SO
Permitting SO
Initial Catalysts/Chemicals SO
Depreciable Capital $1,339,001
Working Capital SO
Subtotal $1,329.001
Interest on Debt SO
Total Capital Requirement $1. 329,001
Salvage Value SO
% Equity ' 100%
% Debt 0%
Interest Rate on Debt. % 12.0%
Debt Repayment, years 5
Equity Investment 51. 329.001
Debt Principal SO
Interest on Debt $0
Total Financing Si ,329,001
Depreciation period 15
Income Tax Rate, % 40%

Escalation Rates, % 5.0%

Cost o< Capital (tor NPV) 16.00%

•;
v»<
,\>
' *•.
v^
< '
^•>
•V-
''*!•
.*:•:
Raw Materials/Supplies
Waste Management
Utilities
Labor
Other
Regulatory Compliance
Insurance
Maintenance - % of Capital
Labor 0%
Materials 0%

Overhead - 0%
(% of Labor)
Labor Burden | 0%
Revenues
Revenues -
Marketable By-products
TOTAL
Future Liability Ref .
(Year expected = 1,2,3, etc.)
»
page 4
Date: 11/4/91
Difference
Current Alternative (Cur. - Alt.)
$536,700
SO
31,217.480
SO
SO
SO
SO
SO
SO
SO
SO
S1, 754, 180
Year Expected






$382,700
SO
S709.945
S3. 120
SO
SO
SO
SO
SO
SO
SO
$0
$0
$1. 095.765
$154,000
$0
$507.535
(S3.120)
SO
SO
SO
SO
$0
so
so
$0
$0
$658,415
Cost
(Curr. - Alter.)

*



     84
Project 1 - TCA

-------
-
Profitability Analysis
Operating Year , 0
Escalation Factor 1.000
REVENUES
Revenue (prod, rate or value)
Marketable By-products
Annual Revenue
OPERATING (COSTSJ/SAVINGS
Raw Materials/Supplies
Waste Management
Utilities
Labor
Other
Regulatory 'Compliance
Insurance
Maintenance
Overhead
Labor Burden
Liability
Total Operating (Costs)/Savings
CAPITAL COSTS
Investment $1,339,001
Book Value $1,329,001
Tax Depreciation (by Straight-line, 1/2 yr)
Tax Depreciation (by Double DB, 1/2 yr)
Tax Depreciation (by DDE switching to SL)
Debt Balance $0
Interest Payment at: 12.0%
Principal Repayment
CASHFLOW
Revenues
+ Operating (CostsJ/Savings
Operating Cash Flow (BIT)
• Depreciation
- Interest on Debt
Taxable Income
• Income Tax at: 40.0%
Net Income
+ Depreciation
- Debt Repayment
- Investment (Less Debt Princ ($1,329,001)
- Working Capital $0
+ Salvage Value
After-Tax Cashflow ($ 1 ,329,001 )
Cumulative Cashflow ($1 .329,001 )
Discounted Cashflow ($1,329,001)
Years 1 - 10
Net Present Value $1,242.536
Internal Rate of Return 36%


1


2
1.050 1.103


$0 $0
SO SO
$0 $0


$154,000 $169,862
$0 $0
$507,535 $559.811
($3.120) ($3,441)
$0 SO
$0
$0
SO
SO
$0
$0
$658,415


$1,240.401
$88.600
$38.600
$88.600
$0
SO
$0

SO
$658.415
$658,415
$88.600
so
$569.815
] $227.926
$341,889
. $88,600
$0



$430,489
($898,512)
$371,111
Years 1- 15
$1,808.334
38%
Payback 2.0 years


$0
$0
so
$0
so
so
5726,232


$1,075.014
$88.600
$165.387
$165.387
$0
$0
$0

SO
$726,232
$726,232
$165.387
$0
$560,845
$224.338
$336,507
$165.387
SO



$501.894
($396.618)
$372,989







3
1.158

SO
SO
SO

$178.332
SO
S587.726
($3.613)
$0
$0
$0
$0
SO
$0
$0
$762,445


$931.679
$88.600
$143.335
$143.335
$0
$0
$0

$0
$762,445
$762,445
$143.335
$0
$619,110
$247.644
$371,466
$143,335
$0



$514,801
$118.183
$329,811




85


4
1.216

SO
so
• $o

$187,264
$0
$617,163
($3,794)
$0
SO
$0
SO
SO
$0
$0
$800,633


$807,455
$88,600
$124.224
$124,224
$0
$0
$0

SO
$800.633
$800.633
$124,224
SO
S676.409
$270,564
$405.845
$124.224
SO



$530,069
$548,252
$292,752







5
1.277

$0
$0
$0

$196,658
$0
S648.122
($3.984)
$0
$0
$0
SO
$0
SO
$0
$840,796


$699,794
$88.600
S107.661
$107,661
SO
$0
$0

SO
$840.796
$840.796
$107.661
$0
$733.135
$293.254
$439.881
$107,661
$0



$547,542
$1.195.794
$260.692







6
1.341

$0
SO
so

$206,514
$0
$680,604
($4,184)
SO
SO
SO
$0
$0
$0
$0
$882,934


$606,488
$88,600
$93.306
$93,306
$0
$0
$0

SO
$882.934
$882,934
$93.306
$0
$789.628
$315.851
$473,777
$93,306
$0



$567,083
$1.762,877
$232,755





Date:

7
1.408

$0
SO
$0

$216.832
$0
$714.609
($4,393)
$0
$0
$0
$0
SO
$0
$0
$927,048


$542,647
$88.600
$80,865
$63.841
, $0
$0
SO

$0
$927,048
$927,048
$63.841
$0
$863.207
$345,283
$517.924
$63,841
$0



$581,765
$2.344,642
$205.846





^ay* -^
11/4/91

8
1.478

$0
SO
so

$227,612
$0
$750,137
($4,611)
$0
$0
$0
$0
$0
$0
	 $0_
$973,138


$478,806
$88.600
$72.353
S63.841
$0
$0
$0

$0
$973,138
$973,138
$63,841
$0
$909,297
$363,719
$545.578
$63.841
$0



$609,419
$2,954.061
$185,888





Project 1 - TCA

-------
Project: Whitewater

Profitability Analysis (continued)
Operating Year Number
Escalation Factor
REVENUES
Revenue (production rate or value)
Maikctable By-products
Annual Revenue
OPERATING (COSTSJ/SAVINGS
Raw Materials/Supplies
Waste Management
Utilities
Labor
Other
Regulatory Compliance
Insurance
Maintenance
Overhead
Labor Burden
Liability
Total Operating (CostsJ/Savings
CAPITAL COSTS
Investment
Book Value
Tax Depreciation (by Straight-line. 1/2 yr)
Tax Depreciation (by Double DB, 1/2 y)
Tax Depreciation (by DOB switching to SL
Debt Balance
Interest Payment at : 1 2.0%
Principal Repayment
CASHFLOW
Revenues
+ Operating (Costs)/Savings
Operating Cash Row (BIT)
• Depreciation
- Interest on Debt
Taxable Jncome
- Income Tax at: 40.0%
Net income
+ Depreciation
• Debt Repayment
- Investment (Less Debt Princ.)
- Working Capital
+ Salvage Value
After-Tax Cashflow
Cumulative Cashflow
Discounted Cashflow
/Fiber Reuse Project


9
1.552

SO
SO
SO

S239.008
SO
S787.694
(S4.842)
$0
SO
$0
$0
so
so
$0
$1.021,860


$414,965
S88.600
S63.841
$63.841
SO
$0
$0

SO
SI. 021 .860
$1.021.860
$63,841
$0
$958,019
$383,208
$574.811
$63.841
$0



$638.652
$3.592.713
$167.935


10
1.630

$0
SO
SO

5251,020
SO
S827.282
($5,086)
$0
so
SO
SO
so
so
so
SI, 073.216


$351.124
$88.600
$55,329
$63.841
SO
$0
$0

SO
SI. 073,216
$1.073.216
$63,841
$0
$1.009,375
$403,750
$605.625
S63.841
$0



$669.466
$4.262,179
$151.757


11
1.712

SO
SO
SO

$263.648
SO
$868,900
($5,341)
SO
SO
$0
SO
$0
$0
SO
$1.127,207


$287,283
$82,693
$46,817
$63.841
$0
$0
$0

$0
$1,127.207
$1,127.207
$63,841
$0
$1.063.366
$425,346
$638,020
S63.841
$0



$701,861
$4.964.040
$137,156


12
1.798

SO
SO
SO

S276.892
so
$912,548
(55,610)
$0
$0
$0
$0
$0
$0
$0
$1.183.830


S223.442
$82.693
$38.304
$63,841
$0
SO
SO

$0
$1,183,830
$1,183.830
$63.841
$0
$1.119.989
$447,996
$671,993
$63,841
$0



$735.834
$5.699,874
$123.961


13
1.888

SO
SO
SO

$290,752
$0
$958,226
($5,891)
$0
SO
$0
$0
$0
$0
so
$1. 243.087


$159,601
$82,693
$29,792
$63.841
$0
$0
$0

so
$1,243,087
$1.243.087
$63.841
SO
$1.179,246
$471,698
$707,548
$63,841
SO



$771,389
S6.471.263
$112.026
Date:

14
1.982

SO
SO
SO

S305.228
SO
51,005,934
(56,184)
$0
SO
$0
so
$0
$0
so
SI. 304,978


$95,761
$82,693
S21.280
$63.840
SO
$0
$0

$0
$1,304,978
$1.304.978
$63,840
SO
$1.241,138
$496,455
$744,683
$63,840
SO



$808.523
$7.279.786
$101,223
page 6
11/4/91

15
2.081

$0
$0
SO

S320.474
SO
51,056,180
($6,493)
$0
$0
$0
SO
$0
SO
SO
$1.370,161


$31,920
$82,693
$12,768
$63.841
$0
$0
SO

$0
$1.370,161
$1,370.161
$53.841
$0
$1.306,320
$522,528
$783,792
$63,841
$0


$0
$847.633
$8,127,419
$91,482
    86





Project 1 - TCA

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          APPENDIX  A-l - COATED  FINE  PAPER  MILL

          Project 1 -  Whitewater Recycling  Project  for:

                         Costing and  Financial  Analysis Documentation

                        Phase  I -  Installation  of  Saveall,  and
                        Phase ,11 - Separation of  Paper Machine No 9  and 11 White
                                             Water  Systems


   A. Capital Costs

   Note:   All costs, originally reported in  1989 dollars, have been inflated by 5% per year, and marked-up by 12.5%
          (engineering design estimates were +/- 25%.

   See Page 1 of Financial Analysis Report.
   B. Operating Costs

   Key:   M - thousand
          MM - million
          GD - gallons/day
          Current Process

1. Raw Materials

l.a.    Fiber and Filler Loss (includes freight)

Estimated solids loss - 1,500 tons/yr
Whitewater solids =  67% fiber and 33% filler

Fiber loss:
1,500 tons/yr x 0.67 = 1005 tons/yr
Fiber cost = S445/ton
Cost of lost fiber = 1005 tons/yr x $455/ton =

Filler loss:
1,500 tons/yr x 033 = 495 tons/yr
Filler cost = $161/ton
Cost of lost filler = 495 lons/yr x $161/yr  = S79.69S
White Water and Fiber Reuse
IJj. Fiber and Filler Loss (includes freight)

Estimated recoverable solids by Phases I & II - 1,200 tons/yr
Estimated solids loss -  1,500 - 1,200 tons/yr = 300 tons/yr

Fiber loss:
300 tons/yr x 0.67 = 201 tons/yr
Cost of lost fiber =  201 tons/yr x $455/ton = $91.45
Filler loss:
300 lons/yr x 033 = 99 tons/yr
Cost of lost filler = 99 tons/yr x $161/ton = S15.939/vr
                                                           Ic. Flocculating Agents for Saveall

                                                           Avg. Whitewater flow through saveall - 600 GPM (864 MOD)

                                                           Chemical Costs:
                                                           Cationic polymer cost - $0.056/Mgal
                                                           Anionic polymer cost - SO.Q35/Mgal
                                                                          total S0.91/Mgal

                                                           864 MGD x $0.91/Mgal x 350 days/yr = S275.200/vr
                                                87

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                  Currem
Whitewater and Fiber Reuse
2. Utilities

2.a.     Freshwater Pumping and Treatment

Average annualized freshwater use - 1.5MMGD

Chemicals Costs:

Alum
Sodium aluminate
Polymer
Sodium hypochorite
Total S
Energy Costs:

Variable freshwater
Misc.

S/MGD
0.025
0.009
0.034
0.003
0.071

S/period*
pumping $133,098
1.479
Total $134,577





S/MGD
S0.234
0.0026
$0.237
*period a 8 months, 1990
total use freshwater - 566.460MGD

Chemicals + Energy costs = S0308/MMGD

L5MMGD x 365 days/yr x ($0308xlOOO)/MMGD = $J|


2.C.     Freshwater Heating

1.5MMGD freshwater comes in at 57°, must be raised to 95°

1.5MMGD x 1 Btu/lb-°F x 8.4 Ib/gal x (95 - 57°F) =
                                      4.788 x 10s Btu/day

Fuel cost (No. 6) - SO-39/gaI
Estimated boiler efficiency = 82.5%

4.788 x 10* Btu/day x 1 gal No.6 fuel/1.4 x 10s Btu x S039/gal
x 1/0.825 x 350 days/yr - S565.850/yr
2.b. Freshwater Pumping and Treatment

Estimated freshwater use - 0.5MMGD

0.5MMGD  x  365days/yr  x  ($0.308  x  1000)/MMGD
                                     S56.210/vr
2.d.  Freshwater Heating

0.5MMGD freshwater	> $188.600/vr
2.e. Wastewater Pumping

4MMGD x 350 dayg/yr x S150/MMGD = S210.000/vr
2.f. Wastewater Pumping

3MMGD	> = S157.500/vr
                                                       88

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                  Current

2.g. Wastewater Treatment

       Average, annualized wastewater discharge rate - 4.0
       MMGD
       Wastewater treatment cost - S187/MMGD

4.0MMGD x 365 days/yr x S187/MMGD = S273.00G/vr.
3.  Labor
Whitewater and Fiber Reuse

2.h.  Wasiewater Treatment

-Average, annualized wastewater discharge rate - 3.0MMGD

3.0MMGD x 365 days/yr x S187/MMGD = S204.765/vr




2.i. Energy for .Equipment Operation

Electricity cost = $0.08/kWh

Phase I - New Equipment:               HP
Drive Pump                           1 HP
Scoop Pump                          1
Pressure Pump                        40
Feed Pump                           20
Recovered Stock. Chest Agitator Motor   5
Recovered Stock Chest Pump          25
Clear White Water Chest Pump        125
Phase II - New Equipment:
White Water Surge Pump             125
                                                                                           Total 342 HP

                                                              342 HP x 0.6 x 0.746 kW/HP x 8,400 hr/yr x $0.08/kWh
                                                                                           $102.870/vr
                                                              3.a. Equipment Operation - Saveall

                                                              4 hours/week labor
                                                              $15/hour - fully loaded wage rate

                                                              4 hrs/wk x 52 wk/yr x Sl5/hr =
                                                         89

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                                        APPENDIX A-2

                                    PAPER COATING MILL
 Company Background

       This mill employs approximately 900 people in its research center, corporate office, and
 manufacturing plants. The mill has extensive facilities for coating, laminating and converting a variety
 of (purchased) film, paper and foil substrates. Products made at this facility find use in a variety of
 industries, including electronics, graphic arts, publishing, engineering, and instant photography.

       Before March 1991, this mill was a division of a publicly held, large multinational corporation.
 The division was further divided into three sub-divisions that reflected product lines: photographic
 and specialty coated materials used in imaging, electronics, graphic arts and other applications; paper
 and films for use in pen and electrostatic plotters, diazo printing and xerographic copying; and plastic-
 coated, non woven materials used for book coverings, diaries, albums, menus and other products.

       Today, the mill is held privately by a group of investors who also own several other mills that
 were formerly part of the same corporation. Approximately 50%  of the companies volume comes
 from coated film production and the remainder from coated papers.

       As of March 1991, the mill had not yet changed hands, and the effect of the change on the
 financial and environmental practices of the firm were largely unknown. Therefore, this case study
 primarily reflects the procedures used under the former ownership, though we do refer to several
 changes in capital budgeting anticipated by management.
Environmental Management

       Environmental affairs in the paper coating business are managed by an Environmental, Safety,
and Health Manager (ES&H) who reports to the site manager who, in turn, reports to the president
of the business.  A manager of safety, a manager of health, and several environmental engineers
report to the ES&H. Manager, including a senior environmental engineer, responsible for regulatory
compliance and environmental community and public relations.  The primary person responsible for
environmental affairs in the film coating business is the Manager of Research and Development and
Environmental.  This manager relies on staff resources within the paper coating business for support
on environmental projects.

       Environmental management characterized the mill as "operationally driven-faster,  better,
cheaper, aiming to maximize revenue dollars per machine hour; while at  the same time seeking to
maximize environmental protection".  Though they consider waste reduction projects to be an
important component of their environmental strategy, the companies operational goals are seen as
driving environmental protection strategies toward end-of-pipe solutions. The business generally
considers an end-of-pipe approach as less threatening to product quality and production rates.  Several

                                             90

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 other barriers to implementation of such projects: high cost; inability to find the technology-
 equipment and materials—to implement certain measures; difficulty in recognizing and focusing on the
 "right" project; insufficient staff resources to identify and justify prevention projects; and an inability to
justify long-term projects.

       The last barrier was illustrated by a description of a long-considered end-of-pipe wastewater
filtration project designed to remove coating solids from wastewater prior to discharge to the POTW.
Though the mills wastewater is in compliance with the current, POTW discharge standards, the
sewering of unfiltered wastewater to the POTW has, on occasion caused discoloration of POTWs
discharge to the river. While there was a recognition that relations with the POTW and the town
would be improved by implementing the filtration project, the company began to seriously pursue the
project when they made the decision to begin the conversion to aqueous coating.

       Two and a half years ago, the mill made a pledge to the surrounding community to reduce
VOC emissions by 50%. Since that time, the mill has invested several million dollars to cut VOC
emissions from its solvent-based coating operations through a combination of VOC incinerator and
solvent recovery system improvements, and source reduction measures (including conversion of some
coating to aqueous).5 Despite these reductions, the mill remains a significant VOC emitter in the
region.


Capital Budgeting and Project Financial Analysis

       Capital projects fall into three categories: profit sustaining-must do maintenance and
regulatory compliance projects; profit adding-cost reduction projects; and expansion projects—projects
that increase market share. Profit adding projects generally have to pass a 50% Return on Assets
Employed (ROAE)6 hurdle rate.  Projects that fall into the profit sustaining category (e.g. the
majority  of environmental projects), are not subjected to the ROAE hurdle rate.7 Since there are
often many projects within this category competing for capital, environmental management would like
to shift environmental projects into the profit adding category by showing a return for the project.
They often try to represent these projects as "operational projects" rather than environmental projects.
      5 The mill estimates that VOC emissions have been reduced from 1,200 tons/yr in 1989, to 635 tons/year
   in 1991. A small percentage of the redaction is a result of a decline hi production.

      6 This firm calculates ROAE as follows:
                 (income after depreciation x 100)/(fixed + working capital)

                 and

          ROI as follows:
                 (income after tax and depreciation x 100)/(fixed capital)
      7 For the next year or two, as a result of the change in ownership, the mill will make investment decisions
   on the basis of cash flow from the investment, rather than ROAE.

                                               91

-------
However, they generally find it difficult to develop profit adding justifications for environmental
projects that can pass the 50% ROAE hurdle.

       Project ideas are typically initiated by middle level managers within the mill.  Once initiated,
the project is assigned to an engineer who will prepare an Appropriations Request (A.R.) containing:
a discussion of the need for the project; a description of the proposed technical approach and
rationale for approach; proposed process outline and schematics; and project cost estimate.  Based on
the cost estimate, an accountant within the appropriate operations group develops the project financial
analysis.  Mill engineers do not include non-disposal waste management costs, pollution control costs,
or regulatory compliance costs in project cost estimates.  Raw material and energy costs are typically
•included.  Potential liability costs associated with waste disposal and penalties and fines are commonly
considered in a qualitative fashion in the A.R.


Perspectives on TCA

       We encountered a great deal of enthusiasm, within the environmental department, for the
objectives of, and approaches to TCA.  This enthusiasm was demonstrated by their eagerness to
subject one of their projects to an in-depth TCA study.  Several possible barriers, however, to TCA
adoption within the company were cited:  difficulty in changing the practices of the company as a
whole when the need for more and better environmental investments is not uniformly understood;
difficulty in modifying the A.R. format and procedure to include less-obvious environmental costs;
difficulty in obtaining the necessary technical and cost data for a TCA; and extra time involved in
preparing a more thorough TCA project analysis (one Environmental Manager stated at the
conclusion of the in-depth project analysis, that he could only justify the time necessary to develop a
TCA for projects with a capital cost of $2 million or more).

       Of particular interest to the company was the inclusion of developmental and start-up costs in
project analyses. They would like to be able to better predict, and include in a project analysis, the
costs associated with laboratory testing (this mill must match coating colors to color standards), and
lost productivity due to pilot tests and the "learning curve" associated with virtually all process changes.

       As we learned in the in-depth project analysis described below, the Company's procedure for
allocating certain costs to product lines may work against the objectives of a TCA approach. The
company allocates solvent recovery costs to the paper and film coating businesses on the basis of
quantity of coating prepared.  While the paper coating prevention project analyzed will reduce solvent
use and therefore the solvent flow to the recovery system, the current allocation system will not be
sensitive to this effect Management speculated that even if a decision is made to change the
allocation system, for various business reasons this coated paper line may still be required to subsidize
the recovery system in excess of its proportional share.


Project Background

       The paper coating business produces a line of coated paper that is used for book publishing,
binders, labels, menus and other related applications.  The business purchases the paper,  applies a
pigmented base coat and clear top coat, embosses, cuts and ships the paper to its customers. While
coating used to produce colored grades contains solvent and a small amount  of heavy metal-based

                                              92

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 pigment, white grades have been made with an aqueous-based coating for the last several years.  The
 mill has long considered converting colored grades to aqueous, and more recently to an
 aqueous/heavy metal-free coating, for several reasons (as cited in a recent memo):  "develop
 manufacturing flexibility"-to position themselves to respond to solvent-free/heavy metal-free market
 demand8; "reduce environmental impacts"~by reducing VOC emissions, and "improve health and
 safety"-by reducing worker exposure to fugitive solvent emissions and hazards associated with
 nitrocellulose  (a solvent coating ingredient) handling and storage.

       After expending $222,000 in capital in  1988 to begin the conversion to aqueous, the mill halted
 the project for two reasons: possible relocation of the plant and difficulty in meeting product
 specifications  during aqueous trial runs.  In September of 1990, the business resumed the process of
 converting the base coat mixture for colored grades to aqueous/heavy metal-free9, and plans to
 continue until 80% of its production is converted.  While their goal is 80% conversion by mid 1993,
 progress is slower than planned. Reasons cited are:  capital constraints (exacerbated by the change in
 ownership), concern over higher raw material costs for aqueous versus solvent coating; concerns over
 increased aqueous wastewater; slower than expected manufacturing rates (i.e. tons per machine-hour)
 for aqueous; and labor resource constraints.

       With a TCA for the aqueous project, Environmental Management hoped to improve the
 financial picture of the conversion project to overcome the economic barriers and shorten the
 conversion timeline.
Project Description

       Currently, the majority of colored, coated papers are produced in two steps, as illustrated in
Figure A-2.1. First the paper is coated with a pigmented base coat, consisting of a variety of solvents,
nitrocellulose, clay, calcium carbonate, and in approximately 50% of colored grades contain a.small
amount of lead, chromium, and cadmium-based pigments. The base-coated paper is run through a
dryer where most of the solvent is driven off and the remaining materials set on the paper. In the
second step, the paper is coaled again with a top coat of solvent and nitrocellulose. The paper is
dried again and rolled onto a reel; ready for converting. The vaporized solvent from the first and
second dryers is collected and sent to a solvent recovery system. In the recovery process, vaporized
solvent is adsorbed onto a carbon filter bed,  distilled to separate and purify the different types of
solvent, and drummed for reuse in the base and top coat mix, and for  washing operations (off-
specification solvents are also reused for washing). Waste solvents generated in equipment washing
are sent directly to the distillation system for recovery. The distillation system bottoms (or "still
bottoms"), consist of residual solvent, coating pigments, and other impurities carried into the recovery
system. Approximately 2,220 drums per year of hazardous still bottom waste are generated and
incinerated off-site.
      8 The European Economic Committee is expected to set a lead-free packaging standard which would apply
   to the products manufactured at this plant

      9  The term "aqueous/heavy metal-free" base coat is used functionally, not absolutely. The new aqueous
   coating contains small amount of solvent—4%—and, some barium, but does not contain lead, chromium, and
   cadmium found in the solvent-based coating.

                                              93

-------
       VOC emissions are generated at three points in the process.  VOCs not recovered in the
solvent recovery system are sent through 3 high efficiency tail gas combusters, and  residual VOCs
are emitted into the atmosphere. Fugitive VOCs from base coat mixing and from the coating
operation are emitted into the plant and then ultimately to the atmosphere.

       The aqueous coating process, pictured in Figure A-22, involves the basic steps described for
solvent coating, with several modifications.  The base coat consists of water, acrylic latex resin, and a
small amount of ammonia and solvent; pigments are heavy-metal free (with the exception of barium).
Currently, the wash water waste generated in the base coating section is treated (i.e. flocculated and
settled) in holding tanks prior to discharge to the POTW. If a recently submitted A.R is approved,
the waste water will be sent to a new ultrafiltration system before discharge.  Under this system the
water fraction will be sewered, and the solid fraction will either be reused in the coating process or
landfilled as a non-hazardous waste.  Vaporized solvent and wash solvent from the second dryer and
top coater, respectively, will be sent to the solvent recovery system. %

       Water-based coating has a shorter shelf-life than solvent-based coating (3 months compared to
5 years) since it is vulnerable to microbiological contamination. The mill expects approximately 100
drums of aqueous coating each year to spoil.  The mill will lose the raw material value of this product
and will pay for its management and disposal.  In addition, unlike solvent coating, aqueous coating can
freeze in cold weather.  Therefore, the mill must install a new steam heating system in the coating
storage area.

       Under the aqueous system, emissions of VOCs from the coating process will be reduced by 209
tons/year, but not completely eliminated. Solvent will still be used in the top coat, and a small
amount of solvent (4%) will be used in the pigmented coating mixture. Fugitive emissions of
ammonia from  the base coat mix process-and from coating will be emitted into the plant and then to
the atmosphere. Approximately 810 fewer drums of hazardous still bottoms will be generated and
disposed.

       To convert this coating system to aqueous will have to make several capital investments that
total to approximately $654,000 (1991 dollars). They are summarized below:

       1.     Waste water treatment system - ultrafiltration;
       2.     Coater upgrade (to increase drying capability);
       3.     Drum shed heating system; and
       4.     Mix room and coating machine modifications (implemented 1987 to 1990).
                                               94

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                                     96

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        The conversion will reduce costs related to waste management, solvent recovery, and,
 regulatory compliance; increase utility costs; and have a mixed effect on raw material costs. These are
 described below:

        Waste Management. Under the aqueous coating system, fewer drums of hazardous still
 bottom waste will be generated each year. In addition to lowering waste disposal costs, the mill
 expects costs associated with drum handling, storage, transportation, and state hazardous waste-end
 fees to be reduced. Two new waste streams will be created by the change - spoiled coating, and
 concentrated waste from the wastewater ultrafiltration system - offsetting the gains made at the
 solvent recovery plant.

        Regulatory Compliance. Fewer drums mean fewer manifests to fill out and manage, and fewer
 drums to label and inspect that translates into a labor cost  savings to the mill. The mill also expects to
 reduce laboratory analysis costs owing to an  expected cut in waste generation. However, a new
 wastewater sampling and analysis regimen will be required for the ultrafiltration system, adding a new
 cost to the aqueous process.

       Despite anticipated reductions in VOC emissions and waste generation, the mill does not
 expect to realize a reduction in RCRA, TRI  and state TUR reporting costs.

       Solvent Recovery.  Solvent from this product line constitutes 60% of the flow of solvent to the
 recovery system; the balance coming from plastic fflm coating.  It is estimated that this line will send
 only 10% of its current solvent stream to the recovery system (top coat solvent) when the aqueous
 conversion is made. While this effect will result in a reduction in variable costs for the recovery
 system, fixed costs will be unchanged.  However, since the mill currently runs two recovery units, they
 are considering either using the freed-up recovery capacity  to capture fugitive VOC emissions or
 completely shutting down of one units.

       Raw Materials. The higher solid content of aqueous coating requires fewer wet pounds of
 base coating, but the cost of heavy-metal free pigments drives the base coat cost up over that for
 solvent/heavy-metal. To achieve adequate protection of an aqueous base-coated sheet, greater coat
 weight of clear top coat is needed, driving up the top coat cost for the aqueous system. Controlled
 and fugitive solvent  emission losses for the solvent system base and top coat constitute a loss of
 valuable raw material.  These losses, Le. costs will be reduced through aqueous conversion.
 Anticipated aqueous coating spoilage will result in the loss of the value of spoiled material. The net
 result of these financial effects on raw material costs is a somewhat higher cost for the aqueous
 system.

       Utilities. Aqueous coating requires more energy for drying than solvent-based coating. The
 mill estimated that it will spend more each year for steam.  Steam and electricity consumption will
 increase further for drum storage heating and for the ultrafiltration system.


 Project Financial Analysis

       In 1987, the mill developed an A.R. for the conversion  of basecoat for color grades to aqueous.
At that time, the mill was not considering a switch from heavy metal-based to non-heavy metal
pigments.  The A.R. cost estimate included the following items:

                                              97

-------
       1. Capital Costs
              a.     Various mix room modifications
              b.     Various coating machine modifications
              c.     Wash water waste dilution system

       2. Operating Costs

              a.     coating materials
              b.     wash solvents
              c.     hazardous waste disposal - wash still sludge
              d.     controlled and fugitive solvent emission losses

The A.R. reported the results of financial calculations as follows:10

       Fixed Capital Required             $  340,000
                 Return                  $1,016,000
         "    "    R.O.I.*                  153.3%
 "   Payback*               0.61 Years

       * R.O.I. and payback include tax effects

The A.R. contained an untitled section that stated:
         auctions in levels 01 nigiuve emissions, ana amounts 01 soiia nazaraoi
         landfill, is very positive from a regulatory and community standpoint.
This section also mentioned several other possible financial benefits (which were not monetized in the
financial analysis), including possible shutdown of the solvent recovery process thereby eliminating
energy costs.

       Another section, titled "Safety/Health Impact of Converting From solvent to Aqueous
Coatings" listed several improvements in plant "safety/industrial hygiene" that will result from the
conversion, including:

       I. Safety
              A,  Flammability
                     1.      Minimize need for static control devices and procedures to maintain
                            static free work environment.
                     2.      Reduce risk of fire in chemical storage, mixing and coating areas.
                     3.      Minimize need for explosion proof electrical systems in lacquer handling
                            areas.
      10  This analysis was done prior to consideration of conversion from heavy metal to heavy metal-free
   pigments.

                                               98

-------
               B.  Material Handling
                      1.
Nitrocellulose
       Minimize special storage requirements in the drum lot.
                             b.
                             c.
                             d.
       Minimize special handling procedures for fire safety control.
       Minimize employee physical activity and fire risk when loosening
       and removing nitrocellulose from drums.
       Minimize special clean up activities to reduce threat of dried
       nitrocellulose.
               C. Industrial Hygiene
                      1.      Minimize employee exposure to organic vapors reducing health risks and
                             need for IH monitoring and record keeping.
                      2.      Minimize odor complaints in mill and the administration building when
                             retained solvents are released during converting or solvents are used to
                             clean converting equipment.

 The last section, called "Product Quality Impact" cited several product quality improvements that the
 mill expected from the conversion.

       An A.R. was recently developed for the waste water ultrafiltration system. Consistent with our
 earlier discussion of the capital budgeting/financial analysis protocol used at the mill, this investment
 analysis did not include a calculation of financial indices since it is considered a profit sustaining
 investment.  Rather, it contained only a capital and operating cost estimate.


 Company Analysis Versus TCA"

       Because the mill has already started to convert this product line to aqueous, and has already
 purchased and installed some of the required equipment, it was necessary to establish a baseline
 scenario in order to test the effect of a TCA approach on the bottom-line of the project. In
 conjunction with the company, we decided that the "current process" analyzed will be a 100% solvent
 base coat system, and the "alternative process" analyzed will be a 100% aqueous base coat system;
 setting 1992 as the year in which the conversion (hypotheticalfy) would be made, and then bringing all
 capital costs already expended up to 1991 dollars.

 1. Company Analysis

       The cost items contained in the Company Analysis come from the 1987 A.R., the 1990 A.R.
for the waste water ultrafiltration system, and several internal memos generated by the company.
Since the 1987 A.R. dealt only with the conversion to aqueous, but not the conversion to heavy metal-
free coating, the Company Analysis developed in this study is not comparable to  the financial analysis
intheA.R..
         Certain cost data for raw materials and utilities have been modified to protect confidential business
   information. However, annual savings and financial indicators for the Company and TCA presented hi this
   report are identical to those for analyses developed with true raw material and utility cost data.
                                               99

-------
2. TCA Analysis

       The TCA contains many costs omitted from the Company Analysis, including costs for non-
disposal waste management, water, sewerage, solvent recovery, regulatory compliance, and future
liability. The documentation attached to the financial analyses provides detail of cost calculations.
The estimation of future liability cost deserves further discussion here.

       Future Liability. The conversion to aqueous coating will significantly reduce the amount of
hazardous waste generated in the solvent recovery distillation system.  Using General Electric's TCA
method "Financial Analysis of Waste Management Alternative", we have developed an estimate of
potential, avoided future liability associated with a reduction in this waste stream.  This cost is
incorporated into the TCA as a one time cost in year 13.

       The methodology for estimating future liability using the GE method is described in Appendix
B. The mill sends its waste to a hazardous waste incinerator. On a rating scale of 3 to 9, 9 meaning
the highest risk facility, this incinerator scored 3.5 based on surrounding population, water supply
proximity, and leak history.  As directed by the method, this risk score was adjusted according to the
type of TSDF. Since the multiplier for incinerators  is 0.15, we end up with a score of 0.175 for this
incinerator.12  Future liability per ton for this waste stream is estimated as follows:
       $/ton =
0.175 x $350/6
10.2
       where $350 is an average liability cost/ton for a landfill with an average score of 6

       To estimate the projected year that liability costs may be incurred, we used the GE method
that makes a prediction based on waste toxicity and mobility. We averaged the projected years for
three major components of the still bottom waste stream, as follows:
              acetone
              toluene
              MEK
       Year Predicted

              16
              12
              12
       avg.    13
       Finally, we calculated total liability cost for year 13 as follows:

       Total tons avoided =     810 drums/year reduced x 55 gallon/drum x 12 Ib/gal
                                   x 1 ton/2,0001b x 13 year

                                   3432

                                   (assuming an average waste density of 12 Ib/gallon)
      12 As a point of reference, the multiplier for a landfill is 1.0, 2.0 for an injection well, 0.8 for a surface
   impoundment, and 0.1 for stabilization/solidification.

                                              100

-------
 and   Total avoided liability =   3432 tons x $10.20/ton

                                  $35,000
       In Tables A-2.1A-2.2, and A-2.3, we present a comparison of cost items included, financial
indicators, and operating cost categories for the Company Analysis and the TCA, respectively.
Following these tables are the detailed results of the Company Analysis, TCA and associated cost
calculation documentation.
                                             101

-------
Table A-2.1  Comparison of Cost Items in Company and TCA Cost Analyses

X" Coa(s) Included
P m Coafs) Partially Included                                      Comi
Capital Costs
         Purchased Equipment
         Utility Systems
         Engineering/Contractor
         Start-up/Training
Operating Costs
         Direct Coss:*
                   Raw Materials/Supplies
                   Waste Disposal
                   Labor

         Indirect Costs:*
                   Waste Management:
                            Hauling
                            Storage
                            Handling
X

X
X
P
P
X
                  Utilities:
                   TCA
                                                                 X
                                                                 X
                                                                 X
                                                                 X
                                                                 X
                                                                 X
                                                                 X
                   X
                   X
                   X
                   X

                   X
                   X
                   X
                   X
         Waste-end Fees/Taxes

         Energy
         Water
         Sewerage (POTW)
         Pollution Control/
                   Solvent Recovery
         Regulatory Compliance                                   X

         Future Liability                                         X

We use the term 'direct costs* here to mean costs that are typically allocated to a product or process line (i.e. not charged
to an overhead account) and are typically included in project financial analysis. "Indirect costs* here mean costs that are
typically charged to an overhead account and typically not included in project financial analysis.
                                                              102

-------
          Table A-ZZ  Summary of Financial Data for the Aqueous Conversion Project

                                                                   Company Analysis

          Total Capital Costs                                       $623,809

          Annual Savings (BIT)'                                    $118,112
 Financial Indicator
          Net Present Value - Years 1-10
          Net Present Value - Years 1-15
          Internal Rate of Return - Years 1-10
          Internal Rate of Return - Yeats 1-15
          Simple Payback (years)

          * Annual operating cash flow before interest and taxes
                             ($98,829)
                             $13,932
                              12%
                              16%
                              53
                                                          TCA

                                                          $653,809

                                                          $216,874
                             S232£17
                             $428,040
                              24%
                              27%
                             3.0
Table A-23.  Summary of Cost Categories and Differences for the Company Analysis and TCA
                                                Company
                                                Analysis
                             TCA
                                                                                      Difference
Capital Costs
          $623,809
$653,809
($30,000)
Net Operating Savings/(Costs):1

a) Raw Material
  (Spoiled Coating)
b) Waste Management
c) Utilities
d) Labor
e) Other
f) Regulatory Compliance
g) Future Liability4
          $18,112

          $121,500
          ($5,000)
          ($8,000)
          ($3,500)*
          ($5,000)

Total     $118412

           0
1. Before interest and taxes
2. Filters for wastewater ultrafiltration
3. Filters for wastewater ultrafiltration and solvent recovery
4. Not included in Annual Savings
($27,488)

$243,871
($87,029)
 ($8,000)
 $84,S203
 $11,000
 $35,000
($45,600)

$122371
($82,029)
     0
 $88,020
 $16,000

$98,762

$35,000
                                                                103

-------
               APPENDIX A-2
            PAPER COATING MILL
           Project 2 - Company Analysis

AQUEOUS/HEAVY METAL-FREE COATING PROJECT
                    104

-------
Project: Aqueous/Heavy Metal-Free Conversion
Capital Costs
Purchased Equipment
Mix Room and Coaler Modifications
Process Equipment
Waste Water Treatment System
CAPITAL COSTS
Cost Totals Ref.
S269.640 1
S91.740 2
$163.000 3
page 1
Date: 7/24/91
Notes:
1987-88 expenditure of $177,620 adjusted
to 1991 dollars
             Coater Upgrade
             Taxes
             Delivery
             Price for Initial Spare Parts
Materials
              Piping
              Electrical
              Instruments
              Structural
              Insulation/Piping

 Utility Connections and New Utility Systems

              Electricity
              Steam
              Cooling Water
              Process Water
             Refrigeration
             Fuel (Gas or Oil)
             Plant Air
             Inert Gas

Site Preparation

             Demolition, Clearing, etc.

Installation

             Vendor
             Contractor
             In-house Staff

Engineering/Contractor (In-house & Outside)

             Planning
             Engineering
             Procurement
             Consultants
                                                       $150,000
                                                     $110,500
                                                      SSS.410
                                                                       $404,740
                                                                             30
                                                                            $Q
                                                                            50
                                                                           50
                                                                     $195.910
                                                                                     For drum storage shed
Technical and manufacturing
1987-88 costs (adjusted) and 1991 costs
                                                         105
                                                Project 2 - Company Analysis

-------
Project: Aqueous/Heavy Metal-Free Conversion
Capital Costs (continued) Cost Totals
Start-up/Training
Vendor/Contractor
In -house
Trials/Manufacturing Variances 523,159
Traininq $23.159
Contigency
SO
Permitting
Fees
In-house Staff 50
Initial Charge of Catalysts and Chemicals
$0
Working Capital (Raw Materials. Product. Inventory,
Materials and Supplies)

$0
Salvage Value
$0


Ref.


8











page 2
Date: 7/24/91
Notes:














     106
Project 2 - Company Analysis

-------
Project: Aqueous/Heavy Metal-Free Conversion

Current Process
Annual Cost
Item (S/year) Total
Raw Materials/Supplies
Coating and Wash Solvents S4,3 17,300
Solvent emission losses:
a. controlled $48,276
b. fugitive $84,672




$4,450,248
Waste Management
(disposal, hauling, insurance, storage, etc.)
Wash still sludge disposal $180,000
Drum handling
Drum storage
Drum transportation
State waste-end fees

$180,000
Utilities (electricity, steam, water, sewerage)
Steam for coaler




SO
Labor

$0
Other
Solvent Recovery

$0
Regulatory Compliance
(manifesting, reporting, monitoring, testing, labeling, etc.)
vlanaging manifests
Drum labeling
RCRA, TRI and TURA reporting
nspections
Lab analysis - haz. waste


SO
nsurance

$0
Ref
2a
2c
2c
3a
3c •'
3e
39
3i
4a
6a !'
7a
7c
7e
7g
7i
Costs are positive - ^
OPERATING COSTS Savings and revemies .ate negative ' Date:
Alternative Process
Annual Cost
Item (S/year) Total
Raw Materials/Supplies
Coating and Wash Solvents $4,404,920
Solvent emission losses (from top coat)
a. controlled $21,168
b. fugitive $6,048
Coating spoilage (value of material)



$4,432,136
Waste Management
(disposal, hauling, insurance, storage, etc.)
• Wash still sludge disposal $58,500
Drum handling
Drum storage
Drum transportation
State waste-end fees
Spoiled coating disposal
Cone, waste disposal - ultrafiltration $58,500
Utilities (electricity, steam, water, sewerage)
.. Steam for coaler
' Water - aqueous base coat
Steam heat for drum shed
Bectricity - ultrafiltration $5.000 $0
Water - base coat wash-up
Wastewater treatment (POTW) $5,000
Labor
.; Operator - ultrafiltration $8,000
$8,000
Other
Solvent Recovery - top coat
Filters - ultrafiltration $3,500
$3,500
tegulatory Compliance
(manifesting, reporting, monitoring, testing, labeling, etc.)
Managing manifests
Drum labeling
RCRA, TRI and TURA reporting
Inspections
Lab analysis - haz. waste
Lab analysis - ultrafiltration $5.000

$5,000
Insurance

$0
Ref
2b
2d
2d
2e
3b
3d
3f
3h
14b
3k
31
4b
4c
4d
4e
4f
43
5a
6b
6c
7b
7d
7f
7h
7j
7k

v>
>
X
&
•f
'&
\
sv
!
•>
••-.
%-v
>.
y
pages
7/24/91
Difference
(Cur. -Ait.)
$18,112
$121,500
(S5.000)
($8,000)
($3,500)
(S5.000)
$0

Revenues

SO
Revenues - Marketable By-products

$0
'*
••f,
1*
Revenues

$0
Revenues - Marketable By-products

$0

\
V
?•"••
J
SO
$0
Total
                                             $4,630.248
                                                                                                                    $4,512,136
                                                            107
$118,112

-------
Project: Aqueous/Heavy Metal-Free Conversion
CAPITAL AND OPERATING COST SUMMARY
YearO
Capital Costs S • 4 Operating Costs
Equipment S404.740
Materials $0
Utility Connections SO
Site Preparation $0
Installation SO
Engineering/Contractor $195,910
Stan-up/Training $23.159
Contigency SO
Permitting SO
Initial Catalysts/Chemicals SO
Depreciable Capital 5623.809
Working Capital $0
Subtotal $623.809
Interest on Debt $0
Total Capital Requirement $623,809
Salvage Value SO
% Equity 100.0%
% Debt 0.0%
Interest Rate on Debt. % 1 2.0%
>ebt Repayment, years 5
Equity Investment $623,809
Debt Principal $0
Interest on Debt SO
Total Financing $623.809
Jcpcociation period 15
ncome Tax Rate. % 40.0%

Escalation Rate, % 5.0%

Cost o< Capital (for NPV) 1 6.0%

£
f •
*x
Raw Materials/Supplies
Waste Management
Utilities
Labor
Other
Regulatory Compliance
Insurance
Maintenance - % of Capital
Labor 0%
Materials 0%
Overhead - | 0%
(% of Labor)
Labor Burden | 0%
Revenues
Revenues -
Marketable By-products
TOTAL
:uture Liability Ref.
page 4
Date: 7/24/91
Difference
Current Alternative (Cur. - Alt.)
$4,450,248
5180,000
$0
$0
$0
$0
so
$0
$0
so
$0
$4.630.248
Year Expected

(Year expected = 1.2.3, etc.)







$4,432,136
558,500
$5,000
58,000
$3,500
55,000
$0
$0
$0
SO
$0
$0
$0
$4,512.136




$18,112
$121,500
($5,000)
($8,000)
($3,500)
($5,000)
$0
$0
$0
50
50
$0
$0
$118,112
Cost
(Curr.-Alter.)





     108
Project 2 - Company Analysis

-------
Project:              Aqueous/Heavy Metal-Free Conversion

Profitability Analysis
Operating Year 0
Escalation Factor 1.000
REVENUES
Revenue (prod, rate or value)
Marketable By-products
Annual Revenue
OPERATING COST/SAVINGS
Raw Materials/Supplies
Waste Management
Utilities
Labor
Other
Regulatory Compliance
Insurance
Maintenance
Overhead
Labor Burden
Liability
Total Operating Costs
CAPITAL COSTS
Investment $623,809
Book Value $622,809
Tax Depreciation (by Straight-line, 1/2 yr)
Tax Depreciation (by Double DB, 1/2 yr)
Tax Depreciation (by DOB switching to SL)
Debt Balance $0
Interest Payment at : 12.0%
Principal Repayment
CASHFLOW
Revenues
+ Operating (Costs)/Savings
Operating Cash Row (BIT)
- Depreciation
- Interest on Debt
Taxable Income
- Income Tax at: 40.0%
Net Income
+ Depreciation
- Debt Repayment
'- Investment (Less Debt) $623,809
-Working Capital $0
+ Salvage Value
After-Tax Cashflow ($623,809)
Cummulative Cashflow ($623.809)
Discounted Cashflow ($623,809)


1
1.050

SO
$0
so

$19,018
$127,575
($5.250)
($8.400)
($3,675)
($5,250)
$0
SO
$0
SO
SO
$124,018


$582.222
$41,587
$41,587
$41.587
$0
$0
$0

$0
$124.018
$124.018
$41,587
$0
$82.431
$32.972
$49,459
$41,587
$0



$91.046
($532.763)
$78.488


2
1.103

SO
$0
$0

$19,978
$134,015
($5.515)
($8,824)
($3,861)
($5,515)
$0
SO
SO
$0
$0
$130,278


$504,592
$41.587
$77,630
$77.630
$0
$0
$0

SO
$130,278
$130.278
$77,630
$0
$52,648
S21.059
$31,589
$77,630
$0



$109.219
($423.544)
$81.168


3
1.158

SO
SO
SO

$20,974
5140,697
(55,790)
(59,264)
($4,053)
(55,790)
SO
SO
SO
$0
SO
S136.774


$437,313
$41,587
$67,279
$67,279
$0
$0
$0

so
5136,774
$136,774
$67,279
$0
$69.495
527,798
$41.697
$67,279
$0



$108,976
($314,568)
$69.816


•T
1.216

SO
SO
SO

$22,024
$147,744
($6,080)
($9,728)
($4,256)
($6,080)
$0
SO
SO
SO
SO
$143.624


$379.005
$41,587
$58,308
$58,308
$0
SO
$0

SO
$143,624
$143.624
$58,308
$0
$85.316
$34.126
$51,190
$58.308
$0



$109.498
($205.070)
$60,475


c
1.277

SO
SO
$0

S23.129
$155,156
(56,385)
(510,216)
($4,470)
($6.385)
SO
$0
$0
$0
$0
$150.829


$328.471
$41,587
$50,534
$50.534
$0
$0
$0

so
$150.829
$150,829
$50,534
$0
$100,295
$40.118
$60,177
$50.534
$0



$110,711
($94.359)
$52.711


6
1.341

$0
SO .
$0

$24,288
$162,932
($6,705)
($10.728)
($4,694)
($6,705)
SO
$0
SO
SO
SO
$158,388


$284,675
$41,587
$43,796
$43,796
$0
$0
$0

$0
$158,388
$158,388
$43,796
$0
$114,592
$45.837
$68,755
543,796
$0



$112,551
$18,192
$46,196
Date:

7
1.408.

SO
SO
$0

$25,502
$171,072
($7.040)
($11,264)
($4,928)
($7,040)
$0
$0
$0
$0
$0
$166,302


$254,709
$41,587
$37,957
$29.966
$0
$0
$0

$0
$166.302
$166.302
$29,966
$0
$136.336
$54,534
$81,802
$29.966
$0



$111.768
$129.960
$39.547
fsaya a
7/24/91

8
1.478

SO
SO
$0

526,770
$179,577
($7,390)
($11.824)
($5,173)
($7,390)
$0
SO
$0
$0
$0
$174,570


$224,743
$41,587
$33,961
$29,966
$0
$0
$0

$0
$174,570
$174,570
$29,966
$0
$144.604
$57,842
$86,762
$29.966
$0



$116,728
$246.688
$35.605
Net Present Value
Internal Rate of Return
Payback
Years t- 10 Years 1- 15
($98.829) $13.932
12% 16%
5.3 years
                                                       Project 2 - Company Analysis
                                                              109

-------
Projtct: Aqueous/Heavy Metal-Free Conversion

Profitability Analysis (continued)
Operating Year

REVENUES
Revenue (production rate or value)
Marketable By-products
Annual Revenue
OPERATING COST/SAVINGS
Raw Materials/Supplies
Disposal
Utilities
Labor
Supplies
Regulatory Compliance
Insurance/Liability
Maintenance
Overhead
Labor Burden
Liability
Total Operating Costs
CAPITAL COSTS
Investment
Book Value
Tax Depredation (by Straight-line, 1/2 yr)
Tax Depreciation (by Double DB, 1/2 yr)
Tax Depreciation (by DOB switching to SL)
Debt Balance
Interest Payment at : 12.0%
Principal Repayment
CASHFLOW
Revenues
•(• Operating (Costs)/Savings
Operating Cash Row (BIT)
- Depreciation
- Interest on Debt
Taxable Income
- Income Tax at 40.0%
Net Income
+ Depreciation
• Debt Repayment
'- Investment (Less Debt)
-Working Capital
+• Salvage Value
After-Tax Cashflow
Cummulative Cashflow
Discounted Cashflow


9
1.552

SO
SO
so

S28.110
$188,568
(S7.760)
($12,416)
($5,432)
($7,760)
SO
SO
SO
SO
$0
S183.310


$194.777
S41.587
$29.966
$29.966
SO
SO
$0

$0
S183.310
$183.310
S29.966
SO
S153.344
$61.338
$92.006
$29.966
so



$121,972
S368.660
$32,073


1C
1.630

SO
SO
so

$29,523
$198,045
($8,150)
($13,040)
($5,705)
(S8.150)
$0
$0
SO
SO
$0
$192,523


$164,811
541,587
S25.970
S29.966
$0
$0
$0

SO
5192,523
$192,523
$29,966
SO
$162,557
$65,023
$97,534
$29,966
$0



$127,500
$496.160
$28,902


11
1.712

SO
SO
SO

531,008
$208,008
($8,560)
($13.696)
(S5.992)
($8,560)
SO
SO
SO
SO
$0
$202,208


$134,845
$41,587
S21.975
$29.966
SO
SO
SO

$0
$202.208
$202508
$29,966
$0
$172,242
$68.897
S103.345
$29,966
$0



S133.311
$629.471
S26.051


12
1.798

$0
SO
$0

S32.565
$218,457
($8,990)
($14,384)
($6,293)
($8,990)
$0
$0
SO
SO
$0
$212.365


$104,879
$41,587
$17.979
$29.966
$0
$0
$0

$0
$212,365
$212,365
$29,966
SO
$182,399
$72,960
$109.439
$29,966
$0



$139,405
S768.876
$23,485


13
1.888

SO
.SO
$0

$34,195
$229,392
(S9.440)
($15,104)
($6,608)
($9,440)
$0
$0
SO
$0
$0
$222,995


$74,914
$41,587
$13.984
$29,965
$0
$0
$0

SO
$222.995
$222.995
$29.965
SO
$193,030
$77,212
S1 15.818
$29,965
$0



$145,783
S914.659
$21,172
Date:

•t *
i "r
1.982

$0
SO
SO

535,898
$240,813
(59,910)
($15,856)
($6,937)
($9,910)
$0
SO
SO
$0
SO
$234,098


$44,948
$41,587
$9.989
529,966
$0
$0
$0

$0
S234.098
$234.098
$29.966
$0
$204,132
$81,653
$122.479
$29.966
$0



$152,445
######
$19,085
page 6
7/24/91

15
2.081

$0
$0
$0

$37,691
5252,842
($10,405)
($16.648)
($7,284)
($10,405)
$0
SO
$0
$0
$0
$245,791


$14.983
S41.587
$5.993
$29.965
$0
$0
$0

$0
$245,791
$245,791
$29,965
$0
$215,826
$86.330
$129,496
$29,965
$0



S1 59,461
######
$17,210
     110
Project 2 - Company Analysis

-------
               APPENDIX A-2
            PAPER COATING MILL
               Project 2 - TCA

AQUEOUS/HEAVY METAL-FREE COATING PROJECT
                  111

-------
Projtcfc Aqueous/Heavy Metal-Free Conversion CAPITAL CO
Capital Costs Cost Totals
Purchased Equipment
Mix Room and Coaler Modifications S269.640
Process Equipment S91.740
Waste Water Treatment System S1 63.000
Coaler Upgrade $150.000
Taxes
Delivery
Price for Initial Spare Parts $404,740
Materials
Piping
Electrical
Instruments
Structural
Insulation/Piping SO
Utility Connections and New Utility Systems
Electricity
Steam $30.000
Coolinq Water
Process Water
Rofriq oration
Fuel (Gas or Oil)
Plant Air
Inert Gas $30,000
Sito Preparation
Demolition. Clearing, etc. $0
Installation
Vendor
Contractor
In-house Staff SO
Engineering/Contractor (In-house & Outside)
Planning $110,500
Engineering $85,410
Procurement
Consultants $195.910

STS
Ref.
1
2
3
4









5










6
7



page 1
Date: 7/24/91
Notes:
1987-88 expenditure of $177,620 adjusted
to 1991 dollars











For drum storage shed










Technical and manufacturing
1987-88 costs (adjusted) and 1991 costs



112




 Project 2 - TCA

-------
Project: Aqueous/Heavy Metal-Free Conversion
Capita! Costs (continued) Cost Totals
Start-up/Training
Vendor/Contractor
In-house
Trials/Manufacturing Variances 323,159
Training S23.159
Contigency
SO
3ermitting
Fees
In-house Staff SO
Initial Charge of Catalysts and Chemicals
SO
Working Capital (Raw Materials, Product, Inventory,
Materials and Supplies)

$0
Salvage Value
SO


Ref.


8











page 2
Date: 7/24/91
Notes:














  113
Project 2 - TCA

-------
Project: Aqueous/Heavy Metal-Free Conversion

Current Process
Annual Cost
Itsm (S/year) Total
Raw Materials/Supplies
Coating and Wash Solvents S4.317.300
Solvent emission losses:
». controlled S48.276
b. fugitive S84.672




S4.450.248
Waste Management
(disposal, hauling, insurance, storage, etc.)
Wash still sludge disposal S1 80,000
Drum handling $100,000
Drum storage $10,000
Drum transportation S90.000
State waste-end tees S1 0,920

S390.920
Utilities (electricity, steam, water, sewerage)
Steam for coater $189,000




$183.000
Labor

SO
Other
Solvent Recovery $97,800

S97.800
tegutatory Compliance
(manifesting, reporting, monitoring, testing, labeling, etc.)
Managing manifests S2.500
Drum labeling $2,500
RCRA, TRI and TURA reportin $15.000
Inspections $2.500
Ub Analysis. Haz. Waste $20.000


$42,500
Insurance

SO

Revenues

SO
Revenues - Marketable By-products

SO
Ref
2a
2c
2c
3a
3c
3s
39
3i
4a
6a
7a
rc
7e
7g

-
Costs, are positive :
f" t,
OPERATING COSTS Savings and revenues are negative Date:
Alternative Process
Annual Cost
Item (S/year) Total
Raw Materials/Supplies
Coating and Wash Solvents 54.404,920
* Solvent emission losses (from top coat)
a. controlled 321,168
b. fugitive S6.048
Coating spoilage (value of material) S45.600

i

$4,477,736
;• Waste Management
(disposal, hauling, insurance, storage, etc.)
Wash still sludge disposal $58.500
' Drum handling $50,000
Drum storage $2,000
Drum transportation S 15.000
State waste-end fees $3,549
Spoiled coating disposal $18,000
Cone, waste disposal - ultrafiltration $20.000 $147,049
Utilities (electricity, steam, water, sewerage)
' Steam for coater $226,800
• Water - aqueous base coat $24,458
' Steam heat for drum shed S5.500
Electricity - ultrafiltration $5,000 SO
Water - base coat wash-up $13.083
Wastewater treatment (POTW) $1,188 $276.029
Labor
Operator - ultrafiltration $8,000
$8,000
Other
Solvent Recovery - top coat $9.780
Filters - ultrafiltration $3,500
$13.280
Regulatory Compliance
(manifesting, reporting, monitoring, testing, labeling, etc.)
Managing manifests $500
Drum labeling $500
RCRA, TRI and TURA reporting S 1 5.000
, Inspections $500
Lab analysis - haz. waste $10,000
Lab analysis - ultrafiltration $5,000

$31,500
Insurance
:
i SO
Ref
2b
2d
2d
2e
3b
3d
3f
3h
14b
3k
31
4b
4c
4d
4e
4f
4g
5a
6b
6c
7b'
7d
7f
7h
7j
7k

»,r
f

pages
	 7/24/91
Difference
(Cur. - Alt.)
(S27.488)
$243.871
($87,029)
($8.000)
S84.520
$11,000
SO

Revenues

SO
Revenues - Marketable By-products

$0

-
's
/
$0
so
Total
                                              $5,170.468
$4.953,59'*
                                                                   114
$216,874

-------
Capital Costs
•Equipment
Materials
Utility Connections
Site Preparation
Installation
Engineering/Contractor
Start-up/Training
Contigency
Permitting
Initial Catalysts/Chemicals
Depreciable Capital
Working Capital
Subtotal
Interest on Debt
Total Capital Requirement
Salvage Value
% Equity
% Debt
Interest Rate on Debt, %
Debt Repayment, years
Equity Investment
Debt Principal
Interest on Debt
Total Financing
Depreciation period
Income Tax Rate, %
Escalation Rate, %

Cost of Capital (for NPV)

Aqueous/Heavy Metal-Free Conversion
CAPITAL AND OPERATING COST SUMMARY
YearO
'»*•
5 Operating Costs
S404.740
$0
$30,000
SO
SO
S195.910
S23.159
SO
so
so
5653,809
SO
$653,809
$0
5653,809
$0
100.0%
0.0%
12.0%
C
$653,809
SO
$0
$653,809
15
40.0%

5.0%

16.0%


Raw Materials/Supplies
Waste Management
Utilities
Labor
Other
Regulatory Compliance
Insurance
Maintenance - % of Capital
Labor o%
Materials o%
Overhead - [ p%
(% of Labor)
Labor Burden | p%
Revenues
Revenues -
Marketable By-products
TOTAL
Future Liability Ref.
page 4
Date: 7/24/91
Difference
Current Alternative (Cur. - AIt_l
S4.450.248
$390,920
5189,000
SO
$97,800
$42.500
SO
SO
$0
$0
$0
$5,170,468
Year Expected
$4,477.736
$147,049
$276,029
S8.000
$13.280
S31.500
SO
SO
SO
SO
SO
SO
SO
54,953.594
($27.488)
$243,871
($87,029)
(58,000)
$84,520
$11,000
SO
SO
SO
SO
$0
50
SO
$216,874
Cost
(Curr.-Alter.)
(Year expected = 1,2.3. etc.) 8



13







535.000




115
Project 2 - TCA

-------
Project: Aqueous/Heavy Metal-Free Conversion
pages
Date: 7/24/91
Profitability Analysis
Operating Year 0
Escalation Factor 1.000
REVENUES
Revenue (prod, rate or value)
Marketable By-products
Annual Revenue
OPERATING COST/SAVINGS
Raw Materials/Supplies
Waste Management
Utilities
labor
Other
Regulatory Compliance
Insurance
Maintenance
Overhead
Labor Burden
Liability
Total Operating Costs
CAPITAL COSTS
Investment S653.809
Book Value $653.809
Tax Depreciation (by Straight-line, 1/2 yr)
Tax Depreciation (by Double DB, 1/2 yr)
Tax Depreciation (by DDB switching to SL)
Debt Balance $0
interest Payment at : 12.0%
Principal Repayment
CASHFLOW
Revenues
+ Operating (Costs)/Savings
Operating Cash Row (BIT)
• Depreciation
- Interest on Debt
Taxable Income
- Income Tax afc 40.0%
Net Income
t Depreciation
• Debt Repayment
'• Investment (Less Debt) S653.809
• Working Capital SO
+ Salvage Value
AneKTax Cashflow (S653.809)
Cummulallve Cashflow ($653,809)
Discounted Cashflow ($653,809)

1
1.050

SO
so
so

($28,862)
S256.065
(S91.380)
($8,400)
$88,746
S1 1,550
$0
$0
so
SO
SO
5227,719


$610.222
S43.587
$43,587
$43,587
$0
$0
$0

$0
$227,719
$227,719
$43.587
$0
SI 84. 132
$73,653
S1 10,479
543,587
$0



5154,066
($499.743)
$132,816

2
1.103

$0
$0
SO

($30,319)
$268.990
($95,993)
($8.824)
S93.226
$12,133
$0
$0
$0
$0
SO
S239.213


$528.859
$43,587
$81,363
$81,363
$0
$0
$0

$0
$239.213
$239,213
$81,363
SO
$157.850
$63.140
$94.710
$81,363
$0



$176,073
($323.670)
$130,851

3
1.158

SO
$0
SO

($31,831)
$282,403
($100,780)
($9,264)
$97,874
$12.738
$0
SO
$0
so
$0
$251,140


$458,344
$43,587
$70,515
$70,515
$0
$0
$0

$0
$251,140
$251.140
$70,515
$0
$180,625
$72,250
$108,375
$70,515
$0



$178,890
($144,780)
$114,607

4
1.216

SO
$0
$0

(533,425)
S296.547
($105.827)
($9.728)
$102,776
$13,376
$0
SO
$0
$0
SO
$263,719


$397,231
$43,587
561,113
$61,113
$0
$0
SO

SO
5263,719
$263.719
561,113
$0
$202,606
$81,042
5121,564
$61.113
$0



S182.677
$37.897
$100,891

5
1.277

SO
SO
SO

($35,102)
5311,423
(511 1,136)
($10,216)
$107,932
$14,047
SO
SO
so
so
so
$276,948


$344,267
$43,587
$52,964
$52.964
$0
$0
SO

SO
5276,948
$276,948
$52,964
$0
$223,984
$89.594
$134.390
$52.964
$0



$187.354
$225,251
$39,202

6
1.341

$0
SO
so

($36,861)
$327,031
($116,706)'
($10,728)
$113,341
$14,751
SO
SO
$0
$0
$0
$290,828


$298.365
$43,587
$45,902
$45,902
$0
$0
$0

$0
$290.828
$290.828
$45,902
$0
$244,926
$97,970
$146.956
$45.902
$0



$192,858
$418.109
$79,157

7
1.408

SO
$0
$0

($38.703)
$343.370
(S122.537)
(S1 1.264)
$119,004
81 5,488
$0
$0
SO
$0
$0
S305.358


S266.958
$43,587
S39.782
$31,407
$0
$0
$0

$0
$305.358
$305,358
$31,407
$0
$273,951
$109,580
$164.371
$31,407
$0



S195.778
$613,887
$69,272

8
1.478

SO
$0
$0

($40.627)
$360.441
($128.629)
($11,824)
$124,921
$16,258
$0
$0
SO
SO
SO
$320,540


$235,551
$43,587
$35,594
$31,407
$0
$0
$0

SO
$320.540
$320,540
$31,407
$0
$289,133
$115.653
$173,480
$31.407
SO



S204.887
$818.774
$62,496
Net Present Value
internal Rate of Return
•
Payback
Years 1 - 10 Years 1- 15
$232,817 $428.040
24% 27%
3.0 years
    116
Project 2 - TCA

-------
Project: Aqueous/Heavy Metal-Free Conversion
oaae6
Date: 7/24/91
Profitability Analysis (continued)
Operating Year

REVENUES
Revenue (production rate or value)
Marketable By-products
Annual Revenue
OPERATING COST/SAVINGS
Raw Materials/Supplies
Disposal
Utilities
Labor
Supplies
Regulatory Compliance
Insurance/Liability
Maintenance
Overhead
Labor Burden
Liability

9
1.552

SO
SO
SO

($42,661)
3378,488
($135.069)
($12,416)
$131,175
$17,072
SO
$0
so
$0
so

1A
1.630

so
SO
SO

(544,805)
S397.510
(5141,857)
(513,040)
5137,768
517,930
SO
SO
SO
$0
$0

11
1.712

SO
SO
so

(547,059)
S417.507
(S148.994)
(S13.696)
S 144.698
S18.832
SO
SO
SO
$0
$0

12
1.798

SO
SO
SO

(549,423)
S438.480
(5156,478)
($14,384)
$151,967
$19,778
$0
SO
$0
SO
SO

13
1.888

SO
$0
so

(551,897)
5460,428
(5164,311)
(515,104)
5159,574
520,768
$0
SO
so
so
$66,080

14
1.982

$0
SO
so

(554,481)
5483,352
($172,491)
($15.856)
5167,519
521,802
SO
SO
SO
50
SO

15
2.081

SO
so
so

(557,203)
5507,496
($181,107)
($16,648)
$175,886
$22,891
$0
SO-
SO
$0
so
 Total Operating Costs

 CAPITAL COSTS
 Investment
 Book Value
 Tax Depreciation (by Straight-line, 1/2 yr)
 Tax Depreciation (by Double DB. 1/2 yr)
 Tax Depreciation (by DDB switching to SL)
                $336,589
5353.506
                                          S371.288
                                                       5389,940
                                      5475,538
                                                                                5429,845
 Debt Balance
 Interest Payment at:
 Principal Repayment
12.0%
CASHFLOW
Revenues
+ Operating (Costs)/Savings
Operating Cash Flow (BIT)
- Depreciation
- Interest on Debt
Taxable Income
- Income Tax at:                40.0%
Net Income
+ Depreciation
-  Debt Repayment
'- Investment (Less Debt)
- Working Capital
+ Salvage Value	
After-Tax Cashflow
Cummuiative Cashflow
Discounted Cashflow
                                                                                            S451.315
$204.144
$43,587
$31,407
$31,407
$0.
$0
$0
so
$336.589
$336,589
$31.407
so
$305,182
$122,073
$183,109
$31,407
SO
$172,737
$43,587
$27.219
$31,407
$0
$0
$0
$0
$353,506
$353.506
S31.407
$0
$322.099
$128.840
$193.259
$31.407
$0
$141,330
$43,587
$23.032
531,407
$0
SO
SO
SO
5371.288
5371,288
$31,407
$0
5339,881
$135.952
$203.929
531.407
SO
$109,923
$43,587
$18,844
$31.407
$0
SO
so
SO
$389,940
5389,940
$31,407
$0
$358,533
$143,413
$215,120
$31.407
$0
S78.516
$43.587
$14.656
$31,407
$0
$0
$0
$0
$475,538
5475,538
$31,407
$0
$444,131
$177.652
$266.479
$31,407
SO
$47,110
543,587
$10,469
$31,406
SO
SO
SO
SO
$429,845
S429.845
$31,406
$0
$398,439
$159,376
$239.063
$31.406
$0
$15,703
$43,587
$6,281
$31.407
$0
SO
$0
SO
$451,315
$451,315
$31,407
$0
5419,908
5167,963
$251,945
$31.407
$0
                5214,516     5224,666     S235.336     S246.527     $297,886
              $1.033,290   $1,257,956    51,493.292   51,739,819   $2,037,705
                 $56,408     $50.928      $45.989      S41.531      $43.261
                                                  5270,469    S283.352
                                                $2,308.174   $2.591,526
                                                   $33.861     $30,581
                                                                 117
                                                            Project 2 - TCA

-------
APPENDIX A-2 - PAPER COATING MILL
Project 2 - Aqueous/Heavy Metal-Free Coating Project
                   Costing and Financial Analysis Documentation
      Capital Costs

      1.
1987-88 capital expenditure - $222,025 on mix room and coating machine
modifications
80% of $222,025 - equipment	> $177,620
20% of $222,025 - engineering

Adjust 1987-1988 expenditure to 1991 dollars:

             $177,620 x (1 + 0.11=7 = $269,640

* 11% nominal discount rate
      2.    Various Mix Room
            #14 Web Temperature
            Mix Room Drum Handling
            Bulk Resin
            In-line Mixing
                              $30,000
                               11,000
                               11,000
                               21,240
                               18.500
                              $91,740 (Expended)
      3.     Waste-water Treatment System - $163,000
            estimate includes: engineering and design, installation and contingency
      4.     Coater Upgrade - $150,000


      5.     Installation of Drum Shed heating system to prevent freezing of aqueous
            coating - $30,000
      6.     Labor - Technical and Manufacturing - $110,500 (Expended)
            - Equivalent 2 Man/years + 30% fringe
                                    118

-------
7.     Engineering

       a.     1987-1988 Engineering on Capital Projects

                        $222,025 x 0.2 = $44,405

             Adjust 1987-88 expenditure to 1991 dollars:

                     , $44,405 x (l+O.ll)4 = $67,410


       b.     Ultrafiltration System - $18,000


8.     Trials and Manufacturing Variances (5/90 - 4/91)

       a.     Average Productivity Loss       $17,302
      b.
Yield Loss
  5,857
$23,159
                              119

-------
B.  Operating Costs
                         Solvent

 1. Raw Materials and Supplies

 la. Coating and Wash Solvents

 54,317,300/yr

 Ic. Solvent emission losses

 Controlled:
    96 tons/yr x $0.21/15 x 2000 Ib/ton = $40,320/yr
 Fugitive:
    (97+71)tons/yr x S0.21/lb x 2000 Ib/ton = $70,560/yr
 2. Waste Management

 2a. Wash still sludge disposal -
     from base coat and bottom coat

 Disposal Cost - S150/drum

 2^00 drums/yr x S150/drum = $180,000/yr
 2c. Drum Handling:

 2 man yr @ S50,000/yr (including benefits) = S100,000/yr
                                                                                 Aqueous
Ib. Coating and Wash Solvents

$4,404,920/yr

Id. Solvent emission losses:

Controlled:
 42 tons/yr x S0.21/lb x 2000 Ib/ton = Sl7,640/yr
Fugitive:
 12 tons/yr x $0.21/lb x 2000 Ib/ton = $ 5,040/yr
                                                         le. Coating Spoilage - value of lost raw material:

                                                         Spoilage of stored aqueous coating from micro-
                                                         bacteriological build-up.

                                                         100 drums/yr at a cost of $45,600/year

                                                         - estimate 100 drums/yr spoiled
2b. Wash still sludge disposal - from top coat only

390 drums/yr x $150/drums - $58,500/yr
2d. Drum Handling:

1 man yr @ $50,000/yr
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                         Solvent
                         Aqueous
 2e.  Drum Storage:

 S10,000/yr
 estimate, based on calculated cost of $4/sq. ft./year for
 heating, lighting, and fire protection
2g. Waste Transportation

S90,000/yr - estimate,
based on waste disposal invoices
2L  Massachusetts waste-end fees

1,200 drums wash still sludge/yr x 50 gal./drum x
$0.182/gal = $10,920/yr

Tellus estimate based on state waste transportation fee -
        $0.182/gal
 2f.  Drum Storage

 $2,000/yr

 (See 2e)



 2h.  Waste Transportation

 $15,000 - estimate




 2j. Massachusetts waste-end fees

 390 drums/yr x 50 gal/drum x $0.182/gal - $3,549/yr

 (See 2i)



2k. Spoiled coating disposal

Disposal Cost - $18/drum

100 drums/yr x $18/drum = $18,000/yr

(See 2i)
                                                        21.      Disposal of concentrated waste from waste water
                                                                ultrafiltration

                                                        Disposal Cost - $0.50/gal

                                                        150 gal/day x $0.50/gai x 267 days/yr = $20,000/yr
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                       Solvent
                       Aqueous
3. Utilities
3a. Steam for coater

S27/hr x 7,000 hrs/yr = S189,000/yr
3a. Steam for coater

1.2($27/hr x 7,000 hrs/yr)  = S226,800/yr
        Based on an estimated 20% increase in steam
        needed to dry aqueous coating
                                                        3c. Water for Aqueous Coating

                                                        Based on 60% water content of coating

                                                        1,450,000 Ib water/yr x gallon/8.3 Ib x $0.14/gal
                                                        = $24,458/yr


                                                        3d. Steam Heat for Drum Shed

                                                        Drum shed steam heating will be needed to prevent freezing
                                                        of aqueous coating

                                                        Annual Steam Costs = $5,500/yr
                                                        3e. Electricity for Ultrafiltration System

                                                        S5,000/yr
                                                        Based on S0.105/kwh
                                                        3f.  Water Use for Base Coat Wash-up

                                                        3,500 gal/day x 267 day/yr x $0.14/gallon == $13,083/yr
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                        Solvent
                                                                                  Aqueous
 4.  Labor
5. Other

5a. Solvent Recovery (S.R.)
                          Totilroduct LineC60%')
                                       $880,800
S.R. Ann. Oper. Cost  $1,468,000

Fair Market Value of
  Solvent Produced      1.323.000

Net Cost               $145,000

S.R. Annual Cost includes:

- utilities
- labor
- engineering (in-house and consultants)
- supplies
- maintenance
Cost allocated to Product Line based on 60% solvent
contribution from Product Line coating.  Costs are based
on 3 year average.
                                                          3g. Wastewater Treatment (POTW) of Washwater

                                                          Treatment of wastewater discharge from ultrafiltration
                                                          system

                                                          2,850 gal/day x 267 days/yr x $0.00156/gaUon = $l,188/yr
                                                          4a. Operator - Ultrafiltration

                                                          $8,000/yr
5b. Solvent Recovery

$97,800/yr x 0.1 = $9,780

Solvent recovery of top coat solvents only.  Cost based on an
estimated 10%  of solvents in solvent coating attributed to
top coat.
                                                         5c. Filters - Ultrafiltration

                                                         $3,500/yr
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                        Solvent
                                                   Aqueous
6a.
6c.
6e.  $15,000/yr
 6. Regulatory Compliance*
 Managing Hazardous
 Waste Manifests
 Waste Drum Labeling
 RCRA, TRI and Mass.
 TURA Reporting
 Inspections
 Laboratory Analysis-
 Hazardous Waste
 Lab Analysis -
 Ultrafiltration
 *A11 costs are estimates based on current expenses.
7.  Future Liability
6g.
61 $20,000/yr
6b. $500/yr

6d. $500/yr
6f.  S15,000/yr

6h. $500/yr
6j.  SlO,000/yr

6k. S5,000/yr
                                                              535,000 in year 13 (see project write-up)
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                                         APPENDIX A-3
                                 SPECIALTY PAPER COMPANY
 Company Background
        This Division of a large U.S. corporation operates four small mills on nearby sites.  The mills
produce 160 tons per day of bond (some cotton-content), writing, vellum, wedding, and drawing papers
and other high quality grades from purchased pulp and pre-consumer wastepaper.13 The Division
currently markets several (pre-consumer) recycled grades of paper, and expects to increase their
recycled line - including two post-consumer grades. The four mills generate approximately
$120,000,000 in annual sales.                                                        y

        Two mills treat and discharge their own wastewater; the third mill discharges all wastewater to
a POTW; and the fourth runs a primary treatment system-discharging the liquid phase under permit
to a river, and pumping the solid phase to a POTW for additional treatment.

        One mill utilizes a two-phase bleaching/color stripping system-a hypochlorite stage followed by
a hydrosulfite stage-to process both incoming market pulp, purchased pre-consumer colored
wastepaper, and recycled broke (i.e. in-house scrap). Colored grades are produced with dyes
containing copper, phenolic and biphenolic compounds."


   Environmental Management

          The Division's Technical Manager has primary responsibility for environmental projects
   at all four sites. He is assisted by an Environmental Coordinator who spends approximately
   50% of his time on compliance work.  The focus of environmental projects is wastewater
   treatment. The Division recently completed a NPDES permit renewal for one mill that uses
   primary treatment only. It requested, and received, an increase in the BOD discharge limit.
   The permitting process involved a series of toxicity tests, which the mill will be required to
   perform regularly under the new permit.  In the next few months,  the Division expects to enter
   into negotiations with the state permitting authority for a new permit at another site.

          A POTW used by one mill is facing a shortage of landfill capacity for its wastewater
   sludge. The town is considering a study of alternative sludge disposal methods, and since the
   mill is a significant contributor of solids to this treatment plant it will likely participate in and
   fund the study.
      13 Pre-consumer waste consists of trimmings or off-specification paper which is purchased from another mill
  or on the open-market, but has not been used or discarded by a consumer. Post-consumer waste includes those
  materials which have reached the final end-user and have served their useful life.
        These chemical can react with chlorine to form toxic chlorophenolic compounds.
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       A primary objective of environmental management is to minimize use of town-owned
and operated POTWs by treating wastewater on-site, where  appropriate.  Management
expressed frustration with lack of control over the operation of town-owned plants, and the cost
that they are required to pay for treatment services.  For example, they would like to have
discretion over the types and levels of chemical flocculants and the choice of sludge disposal
locations as well as the ability to optimize the operating conditions at the plant in accordance
with the changing nature of the mill's wastewater stream.

       To meet this objective, environmental management is evaluating two technical options.
The first is a new secondary treatment plant for one site that currently discharges wastewater to
a POTW.  This plan is synergistic with the company's desire to utilize higher levels of
wastepaper at this site.  Unlike market pulp, wastepaper contains starch. When wastepaper is
repulped, much of the starch ends up in wastewater, increasing wastewater BOD levels. It is
possible that the mill will exceed the BOD limit set by the POTW if it increases its use of
wastepaper.  Environmental management sees an opportunity to justify the construction of a
new secondary treatment plant on the basis of the company's goal to expand their line of
recycled paper products.

       The second option under evaluation is a new plant that would process wastewater sludge
from all sites by separating reusable fiber and filler from non-reusable solids.  The mill would
recycle the recovered fiber and filler and landfill the residual material  This technology is still in
its infancy and the potential technical and economic feasibility for this mill is still under
investigation.

       The mill is in the process of implementing a saveall system (a screening device used for
in-plant recycling of fiber, filler,  and water, and reduction of solids and BOD in wastewater) for
one papermachine.  This project was proposed several years ago .on the basis of an estimated 0.9
year payback.  The attractive financial outlook for the project is primarily attributable to
recovery of high-value, purchased fiber.


Capital Budgeting and Project Analysis

       The Environmental Department, in conjunction with Division Management develops a
capital plan  for the coming year. A recent plan included a feasibility study for the use of mill
sludge as daily cover for a landfill.  Corporate Management recently required the Department to
develop a five year environmental capital plan as part of an overall five year plan for the
Division. After researching proposed regulations for  air emissions, water effluent, and storm
water runoff, the Department developed capital needs projections for wastewater treatment,
plant maintenance projects, permitting costs, waste disposal fee increases, and other projects
needed in anticipation of new or changed regulations and permit renewals.

       Any capital improvement project above $5,000 must  be justified on a Capital
Improvement form (CI form).  For environmental projects, the Technical Director or
Environmental Coordinator completes most of the form alone or with the help of the plant
engineers.  They prepare the:

       • problem statement
       • solutions
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        • alternative solutions                        ;
        • scope of work
        • cost/savings summary.

 The form is sent to the Finance Comptroller (for calculation of the various financial indices) the
 Vice President of Manufacturing and President of the Division.  As in most corporations, large
 projects must receive additional anafysis and approval from corporate management. The time
 horizon used in the corporate financial analysis is 17 years.

        The CI for the saveall project mentioned above was prepared by the Environmental
 Coordinator.  The costs and savings included in the cost/savings analysis included:

        •     replacement value of the recovered fiber
        •     savings from reduced polymer usage in primary treatment
        •     reduction in sludge transportation costs.

 Though the Coordinator mentioned that the project will save costs associated with energy use
 and labor at the treatment plant (they could potentially shut down the belt press for a day and
 put the treatment plant operator to work elsewhere), these costs were not included in  the
 financial justification.  Typical project analysis considers waste hauling and disposal costs, but
 not wastewater treatment costs. Potential impacts on revenue are handled qualitatively.

       The Technical Manager has been working with the Comptroller to disaggregate
 environmental expenses within the internal cost accounting system used by the Division, into
 sub-categories-labor, operations, maintenance, engineering, fees/fines/penalties. While the
 Manager's initial efforts are focused on wastewater treatment and sludge disposal costs, he will
 likely include compliance costs. Though this is currently done for budgeting purposes, the
 Manager hopes that this accounting framework will help him do a better job of financial
justification for environmental projects

       The Technical Manager acknowledged that he often has difficulty gaining approval for
 environmental projects because these projects have to compete with other non-environmental
 uses of capital that management views as priority, profit-expanding or market  expanding
 investments. He looks for project opportunities that will result in direct and measurable
 financial benefits, such as reduced waste disposal costs. This was the case for a project designed
 to collect sludge from one of their primary treatment plants for transport to a boxboard mill that
will use the waste as a raw material.  If possible, the Director will link environmental projects
with non-environmental, strategic projects, as coupling secondary treatment with the recycled
fiber use strategy, thereby making the environmental project more competitive than it would
otherwise be.
Perspectives on TCA

       The Technical Director and Environmental Coordinator were interested in estimating
potential future liability. However, their primary interest in applying such a methodology is to
evaluate "remediation" options (e.g. PCB-contaminated transformer and asbestos removal
options) and waste disposal alternatives (e.g. for wastewater treatment sludge), not to quantify
the avoided liability cost associated with a pollution prevention investment.  By breaking out a

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category of costs in their cost accounting system -"fees, fines, and penalties"-the firm is
beginning to bring these costs to the attention of management.
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                                      APPENDIX A-4

                         INTEGRATED BLEACHED KRAFT MILL
 Company Background

        This mill is a subsidiary of a large U.S. pulp and paper corporation. The facility operates
 as an integrated bleached kraft mill comprising kraft pulping, pulping chemical recovery,
 bleaching, drying of market pulp and papermaking. Average daily production is approximately
 600 tons.
 Environmental Management

        Environmental management is handled by an Environmental Manager with overall
 responsibility for environmental compliance.  The Manager also develops investment
 recommendations in conjunction with a management team comprising the mill manager and the
 managers of all operating units at the facility. Environmental initiatives are evaluated according
 to regulatory requirements, environmental benefits, and compatibility with other non-
 environmental objectives for the mill.  Emphasis is placed, first, on projects aimed at compliance
 with applicable state and federal standards and, second, on discretionary (i.e. non-compliance-
 driven) environmental projects that are considered to be in the best interest of the mill. If a
 proposed, discretionary environmental project will result in reduced operating costs, it is re-
 classified as a "profit-adding project with an environmental benefit".  In  other words, its identity
 as an environmental project is downplayed in favor of a designation that enhances the project's
 prospects within the capital budgeting process.

       Approximately one-third of all capital expenditures at the mill are allocated to
 environmental projects, a figure that is expected to rise to 50% by 1995. Overall environmental
 investments at the mill in 1990 were in the range of 3-4 times the projected before tax profits
 for that period, a reflection of the heavy demands on capital budgets stemming from
 environmental compliance.

       The mill attempts to anticipate and remain ahead of state standards that often exceed
 those promulgated by EPA.  This posture is evident in recent capital expenditures aimed at
 reducing dioxin emissions prior to either a state or federal regulatory mandate.  Other recent
 investments include a combination of cost-reducing measures plus "good-will" projects (e.g. odor
 control, boiler upgrades, dust control) to enhance relations with its residential community.


 Capital Budgeting and Project Analysis

       The firm operates within the overall framework of the parent corporation's capital
budgeting process. A management committee at the facility assembles capital projects from the
various units at the plant.
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       As environmental projects are developed, those that are compliance-driven (profit-
sustaining) and defined by a single technological option are subject to minimal financial analysis.
These are viewed as "must-do" and likely to rely on proven, least-cost solutions.  At the other
extreme, projects of greater technological complexity that are profit-adding (through reduced
costs or market expansion) are typically analyzed over a 3-5 year time horizon using standard
financial indicators typical of large firms.

       Financial analyses include conventional operating and capital costs. Where liability can
be reasonably estimated using actuarial data to estimate risks from comparable projects, such
estimates may form part of the project financial analysis. In instances where such data is non-
existent or unacceptably soft, estimates do not appear as part of the quantitative assessment but,
instead, are subject  to qualitative assessment in the request for funding.

       Once investments are assembled and ranked, the package is submitted for review to a
division of the parent corporation. Those projects that are necessary to achieve compliance
receive priority, with the remaining projects reconciled with the parent corporation's overall
capital investment plan.  The more discretionary the investment, the more comprehensive the
financial analysis must be to secure funding.  In all cases, requests that exceed a prescribed
threshold must be approved  by the Corporation's Board of Directors.


Perspectives on TCA

       Utilization of TCA raises some serious concerns for this firm  due to the inclusion of less
tangible benefits that in  large measure distinguish TCA from conventional analysis.  Liability
avoidance benefits are quantitatively included in project financial analyses only where reliable
estimates are possible, a situation present in only a small fraction of all projects submitted for
capital funding. However, liability is addressed qualitatively in the narrative section of most
written project justifications.  Other intangible benefits such as corporate or product image are
viewed as non-quantifiable.  Environmental investments made in anticipation  of new regulations
or made on the basis of "good-will"  have, in certain cases, brought on public criticism of the mill
by highlighting the prior existence of a problem or remaining pollution. In this firm's view, the
better role for TCA is its use in refining financial analysis of compliance investments where
more than one technology option is available.
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                APPENDIX B




DETAILED DESCRIPTIONS OF THREE TCA METHODS
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                                        APPENDIX B-I

      FINANCIAL ANALYSIS OF WASTE MANAGEMENT ALTERNATIVES (GE METHOD)
       Prepared for:

       Prepared by:

       Publication date:
General Electric, Corporate Environmental Programs
Richard W. MacLean, Manager
General Electric, and
ICF Technology
1987
       The purpose of the GE method is "...to aid plant professionals in selecting and justifying waste
management investment decisions which are both environmentally sound and reduce GE's long-term
liabilities."   It was developed as a tool to help the user identify possible options for waste
minimization and focus on the most profitable projects.1
The method is designed to be used at the plant level by process and environmental engineers working
with financial professionals.  Direct and potential liability costs associated with current and alternative
waste management practices are identified, quantified and compared to evaluate the economic
viability of waste minimization investments.

       The method divides waste management costs into two categories:

       1.      Direct costs - operation, maintenance and capital, including the out-of-pocket cash costs
              routinely associated with waste management and disposal. These costs include:

                     Waste-end taxes
                     Investment in waste management equipment
                     Engineering
                     Waste collection and transportation services
                     On-site raw material and labor costs sampling,
                     monitoring, and record-keeping
              •      Production costs affected by waste management decisions  (e.g. raw material
                     consumption, energy or productivity penalties)
              •      Insurance

              Future liabilities - include potential environmental liabilities for remedial action costs,
              as well as related costs for personal injury and property damage.  These costs include:
       'The Manual provides the following definition of waste minimization "Waste Minimization
   generally applies in a regulatory context to include reduction or elimination, of the amount of
   waste requiring ultimate disposal, through treatment steps, recycling steps, and/or waste source
   reduction". Waste source reduction is further defined as "any method which will reduce or
   eliminate the amount of hazardous waste before it is generated within the process". While the
   focus of the Manual is on waste minimization, it can be helpful in evaluating other pollution
   prevention investments.
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               •      Cost recovery actions, administrative orders, or negotiated settlements under
                      CERCLA
               •      Corrective action costs under RCRA at company-owned (on-site) treatment,
                      storage, or disposal facilities
               •      Site remediation costs at third-party (off-site) treatment, storage, or disposal
                      facilities for which the waste generator becomes liable under CERCLA
               •      Liabilities arising out of third-party lawsuits seeking compensation for bodily
                      injury and/or property damage
               •      Liabilities arising out of claims seeking compensation for natural resource
                      damages

       This system can be used  to analyze an entire pknt or a single process.  The manual
recommends an assessment of an entire plant to encourage the consideration of a wide array of waste
management alternatives that might otherwise be overlooked.

       The following is a brief, step-by-step description of the method:

Step 1:       Describe current waste generation and management practices, and alternative projects
              designed to  minimize waste

       In this step, the user must develop a waste flow diagram that describes the relevant waste
generation and management activities in a format which allows subsequent cost analysis.  The
workbook employs a flow diagram format which uses different shapes to represent wastes and waste
management techniques for the current and alternative process.

              The user is instructed to diagram and describe:

              a)     Waste generation activities (in the plant or in one area of the plant) including
                     volume, rate of generation, physical form of waste, and RCRA regulatory status.

              b)     Subsequent on-site waste management steps. Detailed checklists are provided
                     to help the user identify all relevant wastes and management steps.

              c)     Any alternative projects which  might reduce waste generation or reduce the
                     volume and toxicity of wastes handled. The manual includes a checklist of
                     suggestions for quantity and toxicity reduction, and a table of treatment
                     technologies for specific types of industrial wastes to help the user identify
                     alternative waste management practices.


Step 2:       Describe current and alternative waste management practices involved in final
              disposition of the waste streams identified in Step 1

              In this step the user characterizes final disposition of wastes under current and
              alternative scenarios, using the flow diagram format described in Step 1.

              The user is instructed to diagram and characterize:
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              a)     Current waste management practices involved in final waste disposition. A
                    checklist of common on-site disposal or discharge, and off-site transportation,
                    treatment, storage and disposal activities is provided to assist the user.

              b)     Alternative waste management practices  involved in final waste disposition.
                    The manual provides a checklist containing examples of the kinds of
                    information that must be gathered to evaluate a waste management facility and
                    a discussion of risks associated with the most commonly used facilities used for
                    final disposal.

Step 3:        Identify and analyze costs associated with current and alternative waste generation and
              management practices

              a)     Identify capital, operating, future liability costs associated with each current
                    and alternative waste management activity addressed in Steps 1 amd 2.  Some
                    guidance is provided to help identify relevant costs.

                    Since only the changes in cash flow for the alternative practice relative to the
                    current practice are of concern, it is not necessary to include the costs of
                    activities that remain the same under the alternative practice.

              b)     Estimate potential total future liabilities, and time when they are likely to be
                    incurred.

                    The method presents a procedure for estimating the magnitude and timing of
                    future liability costs associated with the current and alternative waste
                    management practices. The method is based on the premise that environmental
                    and technological factors affect the size and frequency of future liability claims,
                    while the characteristics of the waste affect their likely onset.

                    The user first develops a score for the TSDF based on the technology that it
                    employs, and on the location of the facility (i.e. surrounding population density,
                    proximity to water supply, etc.).  This score is then used to adjust-up or down-
                    a per ton cost estimate for corrective actions and claims developed for a base-
                    case, generic hazardous waste landfill.  The base case cost estimate was
                    developed in a study comparing the long  term liabilities associated with
                    landfilUng or incinerating wastes, conducted for the Department of Defense in
                    1984.2 The estimate, expressed as total cost and $/ton of waste landfilled,
                    includes costs of surface sealing, fluid removal and treatment, personal injury,
                    real property claims, economic losses, and natural resource damage claims.

                    The modification of the estimate is based on a score developed for the disposal
                    facility, which consists of: a) a  combined rating of three environmental and
                    technological parameters:  population, proximity to water supply and record of
      *ICF Technology, "A Comparison of the True Costs of Landfill Disposal and Incineration
   of DOD Hazardous Wastes," Prepared for Environmental Policy Directorate, Office of
   Secretary of Defense, Defense Environmental Leadership Project Office, Washington, D.C.,
   September 21, 1984.

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        leaks, and b) a relative weighting factor based on GE risk assessments (no
        description of the weighing protocol is provided).

        The workbook contains a procedure which helps the user to estimate the year in
        which a liability claim may occur.  The determination is based on the toxicity
        and mobility of the hazardous waste constituents.

        Note:  This method assumes that there are no liability costs for on-site waste
               reduction and/or minimization processes described in Step  1.  If the
               user thinks that this assumption is inappropriate, s/he can use this
               framework to factor in these liability costs.

 c)     Enter cost estimates and other input parameters (inflation rate, discount rate,
        etc.) into financial analysis worksheets

        The cost calculations can be done either with or without software.  The
        Financial Calculation Software which accompanies the manual, was developed
        with Lotus 1-2-3 version 2.01 and can be run on an IBM-PC, XT, AT or
        compatible microcomputer. The software limits the number of waste
        management activities to nine, so the user must aggregate several activities into
        one if more than nine activities are to be analyzed.
        For each activity, the user enters estimates of capital costs, operating expenses,
        and future liabilities expected for each year up until the year that capital costs'
        are recovered.

 d)     Calculate streams of after-tax incremental annual cash flows

       Based on cost estimates and input parameter values, the software will calculate
       the streams of after-tax incremental annual cash flows.  The manual contains a
       step-by-step procedure for calculating cash flows for users who do not use the
       software.

 e)     Calculate key financial indices - net present value (NPV), break-even point,
       return on investment (ROI), discounted cash flow rate of return (DCRR)

       The workbook provides step-by-step instructions for entering cost data into the
       software spreadsheets or worksheets provided in the workbook (Step 3).  The
       software automatically calculates streams of after-tax incremental cash flow, the
       net present value (NPV) for the current and alternative practice; and the
       following financial parameters: a) break-even point, b) return on investment
       (ROI), and c) discounted cash flow rate of return. Recommendations are given
       to assist in the identification and ranking of alternative practices which may be
       preferable to the current practice.

f)      Using the financial indices to identify "good" projects

       The financial indices can be used to identify and rank alternative waste
       generation and management practices which may be preferable to the current
       practice. The manual states that GE Corporate Financial Management
       recommends NPV as the key financial index with which to compare alternative

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practices. A rule-of-thumb is given for each financial index to guide the user's
investment decision. For example, the rule given for ROI is: "Accept an
alternative waste generation and management practice if the ROI based on
incremental cash flows is greater than the cost of money (or discount rate)."
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                                        APPENDIX B-H

                POLLUTION PREVENTION BENEFITS MANUAL (EPA METHOD)
        Prepared for:



        Prepared by:

        Publication date:
Office of Solid Waste and Office of Policy, Planning and Evaluation
U.S. Environmental Protection Agency
Dr. Ron McHugh, Project Manager

ICF Incorporated

October 1989 (available to the public, but not officially released in final
form)
       The stated purpose of the EPA method "...is to promote a complete objective analysis of the
 economic benefits of PP projects." The manual further states This manual enables you to calculate
 the true cost of the current materials and waste management practice and then evaluate the financial
 payback of the PP alternative."

       The method sets up a hierarchy of costs as follows:

       Tier 0 - Usual Costs:        i.e. equipment, labor, and materials
       Tier 1 - Hidden Costs:      i.e. compliance, and permits
       Tier 2 - Liability Costs:      i.e. penalties/fines and future liabilities
       Tier 3 - Less Tangible Costs: i.e. consumer responses and employee relations

 They are arranged in order of increasing uncertainty, and uncertainty of estimation.   At each tier, the
 user calculates all costs associated with the current and alternative PP project and then estimates key
 financial indicators of the economic viability of the PP project based on the  costs associated with the
 tier.

       The results of the financial calculations for each tier are added a tier at a time, until either the
 result concludes that the PP alternative is economically feasible, or all tiers have been completed. For
 example, if the results of the Tier 0 financial calculation indicates that the alternative strategy is
 economically feasible, the user can end the analysis.  If, however,  the result does not show economic
feasibility, then the user proceeds to calculate and add the Tier 1  results to the Tier 0 results and so
on.

       The method assists the user in calculating three key financial indicators:  annualized savings,
internal rate of return, and net present value.  The manual does not come with software, however it
does contain worksheets which assist in organizing and presenting results from the cost calculations.

       A brief discussion of the methodology used to calculate each Tier follows:
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TIER 0 COST PROTOCOL:  USUAL COSTS

       Assessing current facility operations, developing options, and estimating direct expenses of the
options are the activities included in the Tier 0 protocol.

       The EPA method does not provide a detailed framework for the calculation of usual costs.
Rather, it contains a discussion of the recommended steps and describes the cost elements that should
be considered in this tier. The user is referred to other information sources, such as the EPA Waste
Minimization Opportunity Assessment Manual3, engineering handbooks and manuals, trade
associations, and professional auditing firms for information on pollution prevention alternatives,
equipment and operating costs.

       The recommended steps for calculating usual costs are:

       Step 1: Identify pollution prevention alternatives

       The manual suggests the following four steps for identifying pollution prevention alternatives:

              1)     Create a team of in-house and outside experts who can provide experience and
                     expertise on current and alternative practices;
              2)     Collect facility operations data to identify the types and quantities of wastes and
                     pollutants generated;
              3)     Develop pollution prevention alternatives; and
              4)     Determine the technical feasibility of the alternatives.

       Step 2: Estimate the usual costs of current and alternative practices

       Usual costs are broken down into two categories:  depreciable capital expenditures that must
       be depreciated for tax purposes, and other expenses that can be deducted from taxes in a
       single year.  Depreciable capital expenditures include equipment, materials, engineering and
       procurement; and expenses include start-up, permitting, raw materials, and labor costs.

       Step 3: Complete the Tier 0 cost worksheet

       The last step, is the completion of the worksheet for the Tier 0 costs.  For this and other tiers,
       the cost calculations may be performed a) one time for the alternative relative to current
       practice (Le. an incremental calculation), or b) two times - once for the current practice and
       once for the alternative practice.  If the second approach is  chosen, the user will be instructed
       to subtract the annualized cash flows for the current process from the cash flows for the
       alternative process in the financial protocol section of the workbook.  The escalation rate (or
       inflation rate), first year of cash flow, lifetime of expenditure/revenue from the process, and
       cash flow estimate (from Step 2) must be supplied by the user. The worksheet provides a
       place for entering changes in operating revenues, such as changes in the production rate, or
       production of marketable by-products which may result from the adoption of the alternative
       practice.
       'U.S. EPA, Hazardous Waste Engineering Research Laboratory, "Waste Minimization
   Opportunity Assessment Manual (EPA/625/7-88/003)," Prepared by Jacobs Engineering
   Group, July 1988.
                                               138

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       The manual instructs the user to proceed to the financial protocol, after the second column of
       the Tier 0 worksheet has been completed. The financial protocol provides guidance for
       calculating annualized cash flow and financial indicators for the investment.  The financial
       protocol will be described later in this appendix.

TIER 1 COSTS PROTOCOL:  HIDDEN COSTS

       The Tier 1 Cost Protocol assists the user in estimating hidden regulatory costs for monitoring,
paperwork,  and permitting activities associated with the current and alternative practices.  The
following steps are presented for estimating these costs:

       Step 1:       Establish your facility's regulatory status

       The  manual contains a Regulatory Status Questionnaire and a summary of relevant regulatory
       programs to help the user determine the regulatory status of the facility for the purpose of this
       analysis.
       Step 2:
Estimate hidden capital expenditures
       The manual provides guidelines for identifying technology-forcing regulatory requirements
       which may require a capital expenditure in the near future. The user is instructed to estimate
       the capital outlay necessary to satisfy these requirements, and report them in the worksheets.
       The manual suggests that the user consult the regulations (or the summary provided),
       specialized literature, or experts in the field to obtain information needed to quantify these
       future costs.
       Step 3:
Estimate hidden expenses
      In this step, the user is directed to estimate costs associated with regulatory compliance
      activities.  The procedure is outlined below:

             1.     Identify applicable regulatory requirements.  The manual contains a series of
                    tables designed to assist the user in identifying the specific compliance activities
                    required under each regulatory program applicable to the facility.  These
                    compliance activities include:  notification, reporting, monitoring/testing, and
                    recordkeeping.

             2     Estimate the cost of each applicable regulatory requirement  To calculate costs
                    associated with each compliance activity, the user can estimate these costs by
                    one of three methods:

                    a)     use actual, total annual costs for your facility;

                    b)     use cost equations provided in the  manual, with parameter values
                           specific to the facility; and

                    c)     use the cost equations with the default values (adjusted if necessary)
                           provided in the manual.
                                              139

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             5.
Sum all costs
              Cost estimates from item 2 are entered into the Tier 1 worksheet and summed.
              Note:  Steps 2 and 3 focus on a the compliance costs for a facility, rather than a
                    practice or process. The protocol does not address attaching these costs to a
                    specific process. Therefore, if the user is assessing a process within the facility,
                    s/he will have to use judgement in determining which costs are specifically
                    related to the process being evaluated.

       Step,4:       Complete the Tier 1 cost worksheet

       Similar to the Tier 0 worksheet, Worksheet 1, Tier l-Hidden Costs segregates compliance costs
       that are depreciable capital expenditures from those that are considered expenses.

       The user is again instructed to proceed to the financial protocol to calculate financial
       indicators of Tier 0 through 1 costs.

TIER 2 COST PROTOCOL: LIABILITY COSTS

       This section discusses the method proposed to estimate two types of potential liability costs:
penalties and fines associated with regulatory non-compliance, and other liabilities associated with
waste management and disposal practices.

       Penalties and Fines

       The procedure used to first identify,  then estimate the expected costs is outlined below:

       Step 1:       Identify regulatory programs under which penalties and/or fines could be
                    incurred

       The method contains an exhibit titled, Summary of Penalties and Fines Under EPA Federal
       Programs (Fiscal Year 1987X which shows a) the major EPA programs and requirements
       which prescribe penalties and fines, and b) the range of penalties and fines which can be
       assessed under the program.  The user is instructed to check off the regulatory programs
       involving possible penalties or fines for non-compliance.  Since this list contains only federal
       programs, supplemental information  regarding state and local programs must be furnished by
       the user.

       Step 2:      Estimate the expected annual penalties and fines associated with each
                    program/requirement

       The user is instructed to select a dollar value of the penalty or fine, for each
       program or requirement, from the exhibit described in Step 1 above. This value is then
       multiplied by a probability number, from 0 to 1, assigned by the user based on the likelihood
       of occurrence. The results of these calculations are summed to calculate the total potential
       liability from penalties and/or fines.
                                              140

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1.
Step 3:        Identify waste management components to which liabilities can be attached

In this step, future liabilities associated with current and alternative waste management
practices are identified. The manual recommends focusing on activities involving: treatment
or storage of waste in tanks, waste transportation, and land disposal of waste (on-site, or off-
site).  No other guidelines are provided in this step.

Step 4:        Estimate total expected liabilities

Liability costs are disaggregated into seven categories:

         Soil and waste removal and treatment
         Ground-water removal and treatment
         Surface sealing
         Personal injury
         Economic loss
         Real property damage, and
         Natural resource damage.

      Two methods are suggested for estimating total expected liabilities, as follows:

             Estimate the magnitude of liabilities by comparing the current and alternative
             practices to other known, similar activities where actual claims, awards, or
             settlements have occurred and have been documented.

             Use the conceptual framework contained in the manual for estimating these
             costs. This framework consists of seven cost equations and management-
             specific parameters which are used to estimate the seven types of future liability
             listed above.  For example, a cost equation is provided for Soil and Waste
             Removal and Treatment for a hazardous waste storage tank, as follows:

                   FL1  = 8.92 x a x b x Q, where:

                   FL1  = cost ($000) of soil and waste removal and treatment
                   a = correction factor
                          2 if underground,  1 if above ground
                   b = fraction of the total annual quantity expected to be released
                   Q =  total quantity of waste managed (kgal/yr).


            Suggested values are given for tanks, transportation,  and disposal (landfill) so
            that costs associated with soil and waste removal and treatment for each waste
            management activity can be calculated separately.

            The manual does not explain the methodologies used to develop the cost
            equations or the recommended variable values.
                              141

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       Step 5:
Estimate year when liabilities are expected to be incurred
       Since penalties and fines are calculated on an expected annual basis, these liability costs are
       calculated annually starting from the first year (year 1), through the end of the PP project.

       For future liabilities, the method includes an equation and recommended parameters for tanks,
       transportation and disposal, that is used to estimate the expected year that these costs will be
       incurred.
       Step 6:
Estimate your share of total future liabilities
       Generally, the future liability costs calculated in Step 4 are total costs of, for example, sealing
       the surface of a landfill which receives waste from a number of different companies;. Since one
       firm may not be liable for all these costs, the user must calculate a fraction which represents a
       share of the liability.  This fraction, called alpha, is approximated in the manual as:

                     alpha  = Q / Qt

                     where: Q = waste quantity contributed by the current or alternative
                                   practice, and

                            Q, = total quantity of waste managed.

       Alpha is calculated for each management activity - treatment of storage tanks, transportation,
       and disposal in landfills, as needed. Finally, the user must sum up the seven types of liability
       cost for each waste management practice and then multiply them by their corresponding alpha
       value.

       The user is instructed to proceed to the financial protocol to calculate the financial indicators
       for Tier 0 through 2 costs.

TIER 3 COST PROTOCOL:  LESS TANGIBLE COSTS

       This tier is designed to help the user identify certain less obvious financial benefits that may be
realized through the implementation of pollution prevention.
       Step 1:
Qualify less tangible benefits of pollution prevention
       The user is asked to describe the benefits of pollution prevention from, for example, increased
       sales through publicity of pollution prevention efforts; and improvements in employee/union
       relations, reduced health benefits costs and fewer accident related injuries from reductions or
       elimination of waste managed in the workplace.
       Step 2:
Quantify less tangible benefits of pollution prevention
       No guidance is given for the quantification of less tangible benefits. If these costs can be
       estimated, they are factored into the analysis through an adjustment of the estimates calculated
       in previous tiers. If, for example, the pollution prevention alternative will result in a two
       percent increase in sales, the cash flow estimate for operating revenues is adjusted by an
       amount corresponding to the increase.
                                               142

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       After completing this tier, the user proceeds to the financial protocol to calculate financial
       indices of Tier 0 through 3 costs.  We now turn to a discussion of the financial protocol.

FINANCIAL PROTOCOL

       The method contains a financial protocol that is used to evaluate the economic viability of the
pollution prevention alternative. The user is instructed to conduct the financial analysis, as outlined in
the Protocol, after completion of the cost calculations in each tier has been completed.  Financial
indicators are calculated for an individual tier, and through the tier just completed (i.e. calculated for
Tiers 0, 1, 2, and 3; and Tiers 0 through  1 after Tier 1 has been completed, 0 through 2 after Tier 2
has been completed, and so on).

       The protocol provides equations and instructions for the calculation of three financial
indicators:

              •  total annualized savings (TAS)
              •  net present value (NPV)
              •  internal rate of return (IRR)
                                              143

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       Prepared by:
           APPENDIX B-m

              PRECOSIS4

George Beetle Company
George R. Beetle
       Publication date:     August 1990

       PRECOSIS, consists of a set of programs and a user's manual which is designed to "support
analysis of financial advantage in waste reduction schemes:.  The software was designed to support
participants at a series of U.S. Environmental Protection Agency-sponsored seminars on waste
minimization in 1989. The method has since been enhanced and placed in general distribution under
license by the George Beetle Company. The software is a menu-driven program consisting of ten data
input tables and two output reports containing financial calculations. The programs can be used on
any IBM-compatible microcomputer having 512 kilobytes or more of base memory.  The software is   .
programmed  in BASIC.

       Economic data is grouped into three categories, as follows:

       1.     Resource effects

              •  labor costs
              •  material costs
              •  facility costs

       2.     Revenue or value effects

              •  changes in output quantity
              •  changes in quality of output
              •  secondary products/services

       3.     Waste management effects

                 storage, handling, hauling, disposal
                 monitoring and reporting
                 insurance - workers
                 insurance - third party
                 Litigation

Economic costs and gains associated with the alternative waste minimization process are calculated as
incremental costs or values from the base case.
      xOriginalfy prepared for the U.S. Environmental Protection Agency, Center for
   Environmental Research Information, Cincinnati, Ohio.
                                             144

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        PRECOSIS uses the technique of initiating new files from a template file which contains
 sample data.  The system is designed this way to familiarize the user with the types of values that are
 needed for a particular table.

        The financial assessment of alternative waste reduction strategies is conducted in four basic
 steps, as follows:
 Step 1:
 Enter Data Describing Baseline Plant or Process
        The user's first task is to enter descriptive, qualitative information about the project.  This
 information is used to identify and manage the project file.

        Both narrative and quantitative information regarding the existing process, is entered into the
 "Process Characteristics Data" table. The numerical data entered in this table, such as processing
 detention minutes, and feedstock user per output unit are used to characterize the current process.
 Labor, material and facility costs of the current and alternative manufacturing processes are entered
 in unit cost rather than total cost form. For example, an hourly wage is entered for each class of labor
 employed either in the current process or for the proposed alternative.  Again the file template
 contains data which the user can use directly or modify.

        To calculate costs associated with the current process, the user must enter the number of units
 of each category of labor, materials and facilities in concert with the unit cost entries. The system
 calculates the real costs of the current process by multiplying the unit cost of each  resource by the
 corresponding number of units of that resource used.

        Unlike the GE method and EPA method, PRECOSIS explicitly includes revenue from sale of
 product and secondary products (e.g. recovered metals) in the analysis.
Step 2:
Enter Effects Data for the Alternative Strategy
       To calculate costs associated with the alternative process, the user must enter an expected
increase or decrease in the number of units of real, resources that will result from the process change.
For example, if one fork-lift truck operator is used for the current system, and two will be needed for
the alternative system, then the expected increase in the units of fork-lift truck operators is one.
Revenue and waste management costs for the current system, and expected changes in revenue,
product value, and waste management costs for the alternative process are calculated in  a similar
manner.
Step 3:
Run Financial Calculations
       The system generates two financial calculation output reports.  The first called "Consolidated
Financial Evaluation Results", reports the following information for the current process, and for the
incremental affect of process change considered:

          Annual production
          Revenue/value effects
          Indirect recurring costs
          Waste management costs
          Total annual recurring costs
          Net operating value (costs)
                                              145

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       •  Investment annual equivalent costs
       •  Total fixed & variable annual costs
       •  Net value (cost) after fixed charges
       •  Net value per output unit after fixed charges.

Taxes and depreciation are not included in the analysis and must be separately calculated by the user.

       The second report, titled "Comparative Economic Evaluation Results" reports the results of
additional constant and current dollar calculations for the base case, and for up to five alternative
projects (for comparison among alternatives), including:

       Constant Dollar Evaluation:

              •  Estimated payback years (at the user-entered interest rate)
              •  Internal return on investment

       Current Dollar Evaluation:

                 5-year average net operating value
                 10-year average net operating value
                 Dollar difference relative to worst alternative
                 Estimated payback years
                 Restated internal return on investment
Step 4:
Repeat Steps 2 and 3 for Additional Alternative Strategies
       The user can repeat Steps 2 and 3 to compare financial differences among alternative waste
minimization strategies. Up to five alternatives can be compared.
                                              146

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 APPENDIX C




BIBLIOGRAPHY
    147

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                 TOTAL COST ASSESSMENT FOR POLLUTION PREVENTION

                                      BIBLIOGRAPHY
Balagopal, V. G., 1989. Total Probable Risk Analysis: A Technique for Quantitative Risk Evaluation
of Hazardous Waste Disposal Options," Hazardous Waste & Hazardous Materials, Mary Ann Liebert, Inc.,
Publishers. Volume 6, Number 3.

California Department of Health Services, July 1988. Economic Implications of Waste Reduction, Recycling,
Treatment and Disposal of Hazardous Wastes,  Jfie Fourth Biennial Report, Toxic Substances Control
Division, Alternative Technology Section, Sacramento, CA..

Campbell, John M. Jr., June 1989. "Market-Based Incentives for Pollution Prevention Projects," presented
at the Hazardous Materials Management Conference & Exhibition International, Atlantic City, New Jersey.

Cebon, Peter B, July 1990. "Organizational Behavior as a Key Element in Waste Management Decision
Making", presented at Second International Conference on Pollution Prevention, Washington D.C.

CMANEWS, February 1988. "Economics is Driving Waste Minimization."

Cunningham, V., Ph.D., et. aL, 1986. ECAS-Environmental Cost Analysis System, New York: Van Nostrand
Reinhold.

Cunningham, V., Ph.D., 1988.  "Integration of Waste Minimization Into New Product
Development," presented at Succeeding at  Waste Minimization,  University of Wisconsin, Madison,
Wisconsin, April 25-27, 1988.

Dharmavaram, Seshasayi, J. Brian Mount and Bernard A. Donahue, July 1990. "Automated Economic
Analysis Model for Hazardous Waste Minimization," Journal of Air and Waste Management Association,
Volume 40, No. 7 (1004-1011).

Financial Accounting Standards Board, 1975. Statement of Financial Accounting No. 5: Accounting for
Contingencies.

Fleet, Bernard, et al, 1988.  "A Study of the Economic Factors Relating to the Implementation of
Resource Recycling or Zero-Discharge Technologies for Heavy Metal Generating Industries in Canada,"
University of Toronto: Toronto, Canada.

Frornm, Carl H. and David Butler, n.d  "Practical Guidelines for Estimating the Profitability of Waste
Minimization Measures," Pasadena, CA: Jacobs Engineering Group, Inc.

General Electric Company, Corporate Environmental Programs, 1987.  Financial Analysis of Waste
Management Alternatives.

Gulledge, William P., 1989. "Developing a Pollution Liability Insurance Underwriting Model: Managing
for the Potential Exposure from Toxic Releases," The Environmental Professional, Volume 11 (447-453).
                                            148

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 Hacket, David P., Summer 1990. "The Banks' New Role as Environmental Policemen: Lender Liability
 for Toxic Waste Cleanup," Baker and McKenzie Attorneys at Law, Hazardous Waste Update.

 Harding, John T., 1990. "Actuaries Are Focusing On Environmental Area," Newark Star Ledger  July 8
 1990.                                                                                 '      '

 ICF Consulting Associates, Incorporated, Bartles Wells Associates and PRC Engineering, December 1985.
 Economic Incentives for the Reduction of Hazardous Wastes, and Appendices to Final Report, prepared for
 Alternative Technology and Policy Development Section, Toxic Substances  Control Division, California
 Department of Health Services.

 Karam, Joseph; Verderese, James and Bailey, Paul, June 1989. "How Full Cost Accounting Can Drive the
 Economic Viability of a Pollution Prevention Project," presented at the Hazardous Materials Management
 Conference & Exhibit/International, Atlantic City, New Jersey.

 Kjeldgaard, Edwin A., Jose H. Saloio, and G. Bruce Varnado; August 1990.  Development and Test Case
 Application of a Waste Minimization Project Evaluation Method, prepared by Sandia National Laboratories
 for the U.S. Department of Energy, Albuquerque, New Mexico.

 Kruse, John F., 1988. "Future Liability Environmental Economics and ROI Objectives," presented at the
 Third Annual Conference on Hazardous Wastes Science and Management, Diamond Point, New York,
 October 13, 1988.

 MacLean, Richard W., 1987a. "Financial Analysis of Waste  Minimization Options - Considerations in
 Developing a Corporate Program."  Presented at  the 1987 Waste Minimization  Workshop, Chemical
 Manufacturers Association, Washington, D.C., November 11-13,  1987.

 MacLean, Richard W., 1987b. "Estimating Future Liability Costs for Waste Management Options,"
 presented at Hazardous and Solid Waste  Minimization:  Corporate Systems & Strategies Conference,
 Government Institutes, Inc., Washington, D.C. November 19-20, 1987.

 MacLean,  Richard W., 1989a.   "Economics  of Waste Minimization,"  presented before  the  Waste
 Minimization Conference, sponsored by the New Jersey Department of Environmental Protection, Division
 of Hazardous Waste Management, New Brunswick, NJ. May 10, 1989.

 MacLean, Richard W., 1989b.  "Motivating Industry Toward Waste Minimization and Clean Technology,"
 presented at Waste Minimization and Clean Technology: Moving Toward the 21st Century, ISWA and EPA
 Conference, Geneva, Switzerland. May 30, 1989.

 Naj, Amal Kumar, May 11,1988. "Can $100 Billion Have 'No Material Effect' on Balance Sheets?," Wall
 Street Journal.

 Peer Consultants, P.C. and George Beetle Company, April 1990. User's Guide for Pollution Prevention
Economic Assessment (PPEA), Version 1.1, prepared for U.S. Environmental Protection Agency, Center
 for Environmental Research Information, Cincinnati, Ohio.

 Rich, Gerald A., August 1989. "Cost Estimating Spreadsheet for Pollution Control Equipment," Pollution
Engineering, 85-91.
                                             149

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 Ross* Marc 1986.  "Capital Budgeting Practices of Twelve Large Manufacturers," Financial Management,
 Winter, 15-22.

 Rubenstein, Daniel Blake,  October 1990.  "Let  Love Keep You, Warm When Accounting For
 Environmental Obligations",  Unpublished paper, Office of Auditor General, Government of Canada.

 Todd, Rebecca, 1989.  "Accounting and the Environment:  Patching the Information Fabric," presented
 at the Waste Reduction: Research Needs in Applied Social Sciences Workshop, National Research Council,
 Committee on Opportuhties in Applied Environmental Research and Development, Annapolis, Maryland,
 May, 1989.

 U.S. Congress, Office of Technology Assessment, September 1986. Serious Reduction of Hazardous Waste:
For Pollution Prevention and Industrial Efficiency, Washington, DC:  U.S. Government Printing Office.

 U.S. Environmental Protection Agency, October 1987b.  Waste Minimization: Environmental Quality with
Economic Benefits, Office of Solid Waste and Emergency Response, Washington, D.C.

 U.S. Environmental Protection Agency, 1988a.  Waste Minimization Opportunity Assessment Manual
 EPA/625/7-88/003.

U.S. Environmental Protection Agency, 1989b. Pollution Prevention  Benefits Manual: Vol 1: The Manual,
Phase II.

U.S. Environmental Protection Agency, 1991. Economic Incentives: Options for Environmental Protection,
 Report of the U.S. EPA Economic Incentives Task Force, Office of Policy, Planning, and Evaluation.

Wallach, Paul G., 1988. "The SEC and Corporate  Environmental Responsibilities,"  Hazmat World,
November, 1988.

Waste Advantage , Inc.,  1988.  Industrial Waste  Prevention, Guide  to Developing an Effective Waste
Minimization Program, Waste Advantage, Incu, Southfield, Michigan.

Weiss, Malcolm, Esq., April 1984. "Issues of Confidentiality and Disclosure in Environmental Auditing,"
prepared for Regulatory Reform Staff, Office of Planning, Policy and Evaluation, U.S. Environmental
Protection Agency.

White, Allen and Becker, Monica 1991.  "Total Cost Assessment: Catalyzing Corporate Self Interest In
Pollution Prevention." Papar presented to the National Academy of Engineering Workshop: "Engineering
Our Way Out of the Dump," Woods Hole, MA, July 1-3, 1991.

White, Allen, Monica Becker, James Goldstein. Alternative Approaches to the Financial Evaluation of
Industrial Pollution Prevention Investments.   Draft Report. Prepared for the New Jersey Department of
Environmental Protection, Division of Science and Research, September 1991.

Wigglesworth, David, 1988. Profiting From Waste Reduction in Your Small Business, Anchorage, Alaska:
Alaska Health Project.
                                             150

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     APPENDIX D
SURVEY QUESTTONAIRE
       151

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                                                                      Monica Becker
                                                                      Allen White
           INSTITUTE
           for Resource and Environmental Strategies

                         TOTAL COST ASSESSMENT SURVEY

                                                           Contacts:


Part I -  Company Profile:  General and Environmental

             Please fill out Part I of the survey and return it to us prior to our visit. Use
             extra sheets and attachments as needed. Part H comprises open-ended
             questions we would like to  cover during our interview.  You need not answer
             these in writing, but we suggest you review them prior to our visit


Tfie first set of questions cover general management, product lines and processes

1.    a.  Name and address of company:
     b.  Name(s), title(s), and telephone number(s) of respondent(s):
2.    SICcode(s)	

3.    Briefly describe the major products which are manufactured at your mill. Please list in
      order of significance (based on 1990 sales).

      Product
4.    Size of mill

      a.  number of employees
      b.  sales ($/year)
                                          152
                89 Broad Street, Boston, MA 02110-3542 . Tel: 617-426-5844 • Fax: (617) 426-7692;

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                                                                         TCA Survey
                                                                         Parti
5.    History of mill

      a.   When was mill opened?
      b.   What major changes in product lines and/or processes have occurred in the last 10
          years.
6.     Management structure

      a.   List the individuals in the mill/corporate office normally involved in decisions on
          environmental matters?
          Name
                      Title
Responsibility
          Briefly describe the management structure of the mill/corporate office as it relates
          to environmental management.
     c.
Does the company have an environmental quality mission statement or corporate
commitment, a waste or pollution reduction goal, or an incentive structure for
environmental initiatives and/or performance?  If so, describe
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                                                                          TCA Survey
                                                                          Parti

TJie next set of questions concern your and solid waste, air pollution and water pollution
management practices.

7.    Waste generation and management profile

    a.  What principal types of waste are generated and how are they disposed?
    Waste Tvpe     Annual Volume
    (e.g. wastewater sludge,
    coating wastes, waste oil)
On-Site Mgmt./
Disposal
(e.g. recycling,
 incineration)
Off-Site Mgmt./
Disposal
(e.g. recovery,
landfill)
    b.  On average, during the last five years, approximately how much, and what percentage
       of the mill's total capital and operations/maintenance budget was spent on waste
       management and disposal?
       capital
       O&M
   c.  How are waste management costs allocated, or charged to specific processes or
       product lines?
       capital costs:

       O&M costs:
   d.  Do you anticipate any significant increases or decreases in waste management costs in
       the next few years?  If so describe.
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                                                                             TCA Survey
                                                                             Parti
 8.  Air pollution control profile


     a.  List principal air pollutants generated at the plant and control measures used for each
        Air Pollutant
        (e.g. chlorine, SO2)
   Pollution Control Device
   (e.g. scrubber, ESP)
    b.  On average, during the last five years, approximately how much, and what percentage
        of the mill's total capital and operations/maintenance budget was spent on air
        pollution control?
        capital
        O&M
    c.  How are air pollution control costs allocated, or charged to specific processes or
        product lines?
        capital costs:

        O&M costs:
    d.  Do you anticipate any significant increases or decreases in air pollution costs in the
        next few years?  If so describe.
9.  Water pollution control profile

    a.   List principal water pollutants generated at the plant and control measures used for
        each
        Water Pollutant
        (e.g. BOD, sulfuric acid)
Pollution Control Device
(e.g. on-site secondary treatment, discharge to POTW)
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                                                                           TCA Survey
                                                                           Part!
    b.  On average, during the last five years, approximately how much, and what percentage
       of the mill's total capital and operations/maintenance budget is spent on water
       pollution control?
       capital
       O&M
                 S/vear
    c.  How are water pollution control costs allocated, or charged to specific processes or
       product lines?
       capital costs:

       O&M costs:
    d.  Do you anticipate any significant increases or decreases in water pollution costs in the
       next few years?  If so describe.
10. Waste, air and water pollution reduction initiatives

    a.  How, and to what extent, has the mill reduced the generation of waste, air pollution,
       .water effluent? - Include material substitutions, process and product modifications, and
       on-site recycling projects.

    Project 1:
     Description:		

     (e.g. installed saveall to recover solids)

     Impetus:     ______	„	—	


     Effects on Waste Generation, Air Emissions, and Water
     Effluent:	

      (e.g. reduced solids load to treatment plant by 20%)

     Approximate Capital Outlay:	.

     Year Completed:            	
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                                                                      TCA Survey
                                                                      Parti
Project 2:
  Description:
  Impetus:
  Effects on Waste Generation, Air Emissions, and Water Effluent:
  Approximate Capital Outlay:

  Year Completed:
b.  Is your mill currently considering, or have you recently considered materials
    substitution, process  modifications, or on-site recycling aimed at reducing waste
    generation, air emissions, or water effluent? If so, describe

Project 1:
  Description:	
  Impetus:
  Projected Effects on Waste Generation, Air Emissions, and Water
  Effluent:
  Approximate capital outlay:

  Status:
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                                                                       TCA Survey
                                                                       Part I
Project 2:
  Description:
  Impetus:
  Projected Effects on Waste Generation, Air Emissions, and Water
  Effluent:              	
  Approximate capital outlay:

  Status:              	
                                        158

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 Part II - Financial Analysis of Environmental Projects


    The following questions were developed to provide a preview of questions that we will be
    asking during our visit It is not necessary for you to answer them now, however, we
    request that you review them in preparation for our meeting.

 1.    Decision-making processes regarding environmental management

        a. How are pollution control investments and waste management options assessed,
          selected,  and justified?

        b. Does your mill have a standard procedure for conducting financial analysis of these
          projects?  If so, describe.

           i.  what types of costs are calculated?

           ii. what financial criteria is/are decisions based upon (e.g. total capital outlay
              NPV)?                                                             "

        c.  Are assessments  and justification of environmental projects similar or dissimilar to
          non-environmental projects?  If so, describe.
2.
Views and practices regarding waste and pollution reduction (ie. operational, process,
material, and product modifications designed to reduce the quantity and/or hazardous
nature of waste, air emissions and water effluent)

a.   How important are waste and pollution reduction projects in your business?

b.   What are the barriers to implementation of these projects?

c.   If waste and pollution reduction projects are commonly considered?

     (1) How and by whom are they generally initiated?

     (2) Is a financial evaluation always conducted prior to implementation?

     (3) Is the financial evaluation  critical to the decision to implement the project?

     (4) What types of costs and savings are calculated?

     (5) What financial criteria is/are decisions based upon? (e.g. payback period,
         return on investment, net present value)

     (6) Are  assessments and justification of these projects similar or dissimilar to
        non-environmental projects? If so, describe.

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                                                                           Part II
        c.  Do pollution prevention projects have to compete with more conventional
           investments that are expected to yield comparable or superior returns?

        d.  Are financial or technical risks associated with pollution prevention investments
           considered higher, lower or the same as risks of other investments, including those
           for pollution control?

3. Views on Total Cost Assessment (TCA)

        a.  Based on what you have heard/read about TCA (sometimes referred  to as "full-
           cost accounting"), is there a need or value for more comprehensive, systematic
           financial analysis of waste reduction and pollution prevention projects in your  mill?

        b.  What potential  benefits do you see in using TCA in project evaluation?

        c.  What barriers do you see to the implementation of TCA?

        d.  How persuasive would  a positive result (ie. meets or surpasses the
           mfll's/corporation's investment criterion) from a TCA be in deciding to proceed
           with a pollution prevention investment?

        e.  Among the following, which costs components are (1) currently not incorporated
           in the mill's/corporation's project analysis procedure, and (2) if not, should be?
                                             Incorporated
                                                   Yes              No    If no. should be

            • waste management costs
                storage
                treatment
                hauling
                disposal
             compliance costs
               • permitting
               • reporting, monitoring, and recordkeeping
               • manifesting
               > training
            • liability insurance costs
            • future liability costs
             •• penalties and fines
             •• personal injury  and property damage
            • effects  on raw material and energy inputs
            • revenue (or cash flow) effects from changes in product
             quality, or the creation of marketable by-products
            • worker health/safety  effects
            • corporate and product image effects
            • assessing costs over a longer time horizon (e.g. 10 or 20 years)
            • other
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                                                                           Part!!

        f.   What kinds of changes would have to take place in order to modify the way
            project financial analysis is conducted at your mill (e.g. change in accounting
            system, different personnel responsible for project financial analysis)?

             How feasible are these changes?

4. Views on existing TCA  methods

        a.   Do these methods appear to be useful to your mill?

        b.   Are they structured  in a manner that is consistent with the way project financial
            analysis is currently  conducted?

        c.   Would these methods be usable considering the  personnel who currently perform
            project financial analysis?

5. Perspectives on existing and  potential government incentives/disincentives regarding
   generation of waste, air emissions, and water effluent

        a.   Rank the following proposed or actual incentives in order of how effective each
           would be in influencing your mill to make waste and pollution reduction
           investments.

         1)  grant programs for pollution reduction feasibility studies or equipment;

         2)  loan programs (e.g. low interest loans) and loan guarantee programs;

         3)  waste reduction  tax incentives (including tax exempt financing for waste
             reduction investments);

         4)  accelerated depreciation of capital expenditures for pollution  prevention;

         5)  technical assistance, such as free  audits and technical recommendations;  and

         6)  local, state or federal recognition programs for good  citizenship

       b.  Are there other pollution prevention incentives to which your mill/corporation
           would respond  positively?
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       APPENDIX E
TECHNICAL ADVISORY GROUP
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                                  Technical Advisory Group
 Nicholas Ashford
 Center for Technology, Policy
  and Industrial Development
 Massachusetts Institute of Technology
 Cambridge, MA 02139

 Jim Verderese
 ICF, Inc.
 9300 Lee Highway
 Fairfax, VA 22031

 George Beetle
 George Beetle Company
 533 Arbutus St.
 Philadelphia, PA  19119

 Richard Conway
 Union Carbide
 PO Box 8361 (BLDG. 770 Room 342)
 South Charlestown, WV 25303

 Virginia Cunningham, Ph.D.
 Smith Kline & French Laboratories
 709 Swedeland Road L25
 King of Prussia, PA  19406

 John Foster
 Monsanto Chemical  Company
 730 Worcester Street
 Springfield, MA 01151

 Kevin Gashlin
 New Jersey Technical Assistance Project
 Northeast Hazardous Substance Research Center
 New Jersey Institute  of Technology
 Newark, NJ 07102

Ken Geiser
Toxics Use Reduction Institute
Department of Work and Environment
University of Lowell
Lowell, MA 01854
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 Margaret Glover
 Corporate Environmental Programs
 General Electric Company
 3135 Easton Turnpike W1D1
 Fairfield, CT 06431

 Linda Greer, Ph.D.
 Natural Resources Defense Council
 1350 New York Ave. NW
 Washington, DC 20008

 Corrine Kupstas
 Monsanto Chemical Company
 730 Worcester Street
 Springfield, MA 01151

 Richard MacLean
 Corporate Environmental Programs
 General Electric Company
 3135 Easton Turnpike W1D1
 Fairfield, CT 06431

 Mark Mahoney
 EPA Region I
 JFK Federal Building
 Boston, MA 02203

 Tern Goldberg
 NEWMOA
 85 Merrimac Street
 Boston, MA 02114

 Tim Greiner
 Lisa Garabedian
 Marlene Wittman
 Massachusetts Office of Technical Assistance
 EOEA 100 Cambridge Street
 Room 1904
 Boston, MA 02202

Bob Pojasek
 Geraghty and Miller
50 Milk Street
 Boston, MA 02109

 Ron McHugh
U.S. EPA
401 M Street SW
Washington, DC 20460
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        APPENDIX F




GLOSSARY OF FINANCIAL TERMS
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Annual Cash Flow
Break-Even-Point
Capital budget
Cash flow (from
an investment)
Cost Accounting System
Cost Allocation
Discount Rate
Discounted Cash Flow
Rate of Return (DCRR)
For an investment, the sum of cash inflows and outflows for a given year
(see cash flow).

The point at which cumulative incremental annual cash flows of an
investment aggregate to 0. The Break-Even-Point designates the end of a
project's investment Pay Back Period (see Incremental Cash Hows and Pay
Back Period).

A statement of the  firm's planned investments, generally based upon
estimates of future sales, costs, production and research and development
(R&D) needs, and availability of capital


The dollars coming to the firm (cash inflow) or paid out by the firm (cash
outflow) resulting from a given investment.

The internal procedure  used to track and allocate production cost and
revenues to a product or process. Defines specific cost/profit centers,
overhead vs. allocated costs, degree of cost disaggregation.

A process within an internal cost accounting system of assigning costs and
revenues to cost and profit centers for purposes of product pricing, cost
tracking, and performance evaluation.

The discount rate is either the interest rate at which money can be invested
or borrowed.  In profitability analysis, the discount rate is used  in Net
Present Value (NPV) calculations to express the value of a  future
expenditure in the present year.  The discount  rate is  expressed as a
percentage.
See Internal Rate of Return.
Financial Accounting
Financial Reporting
The process that culminates in the preparation of financial reports relative
to the enterprise as a whole for use by parties both internal and external
to the enterprise.

Required by authoritative  pronouncement,  regulatory  rule or  custom,
including: corporate annual reports, prospectuses, annual reports filed with
government  agencies,  descriptions  of  an  enterprise's  social   or
environmental impact.
Financial Statements
The principal means through which financial information is communicated
to those outside an  enterprise.  Statements include the balance sheet,
income statement, and statement of cash flows.
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 Full Cost Accounting
Hurdle Rate
Incremental Cash Flow
(of an investment)
Internal Rate of Return
(IRR)
Managerial Accounting
Measure of Profitability
Net Present Value (NPV)
 A method of managerial accounting which accounts for both the direct and
 indirect costs of an item. Full cost accounting uses historical data to assign
 all costs to a process, product or product line, most often for purposes of
 pricing.

 The internally defined threshold, or minimum acceptable rate of return,
 required for project approval, e.g. 15% ROI, or 2 year payback
The cash flow of an alternative practice (e.g. after a pollution prevention
investment  has been  implemented)  relative  to the  current  practice.
Incremental cash flow is calculated by taking the difference between the
cash flow for the current practice and the alternative practice.
The discount rate at which the net savings (or NPV) on a project are equal
to zero. The computed IRR of an investment is compared to a company's
desired rate of return.

The process  of identification,  measurement,  accumulation,  analysis,
preparation, interpretation, and communication of financial information
used by management to plan, evaluate, and control all activities within an
organization to ensure appropriate use, and accountability for its resources.
Capital budgeting is one component of managerial accounting.

An index that helps to answer the question: are the future savings/revenue
of a project likely to justify a current expenditure? Synonyms: "decision
rule", or "financial index", or "profitability index", or "capital budgeting
technique". Includes:  NPV,  IRR, payback, ROI.

The present  value of the future cash  flows of an investment  less the
investment's current cost.
                           NPV =
              CF,
              1+k
CF
.....  CF
                           where: CFX is cash flow in period 1

                                  CF2 is cash flow in period 2, etc.

                                  I is initial outlay or investment cost

                                  k is cost of capital or discount rate
                                         An investment is profitable if the NPV of the cash flow it
                                         generates in the future exceeds its cost, that is if the NPV
                                         is positive.
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Payback Period
Project Financial
Analysis
Project Justification
Process
Project Justification
Return on Investment
(ROI)
The amount of time required for an investment to generate enough cash
flow to just cover the initial capital outlay for that investment.

Payback = Investment/Annual Net Income
Costing (i.e. calculating the costs and savings) and calculating cash flow
and/or profitability measures of a project.
A generic term for a series of steps which are necessary to get approval for
a project.

A document prepared in the project justification process which comprising
a written description of the project, a project financial analysis, and a
discussion of benefits and risks which are not quantified in the financial
analysis.
A measurement of investment performance, calculated as the ratio of
annual net income (minus depreciation) over the initial investment amount.
Total Cost Assessment
(TCA)
ROI = Annual Net Income/Investment


A comprehensive financial analysis of the lifecycle costs and savings of a
pollution prevention project. A TCA approach includes:

       a)     internal allocation of environmental costs to product lines
              or processes through full cost accounting;
       b)     inclusion in a project financial analysis of direct and indirect
              costs,  short  and long term costs; liability costs, and less
              tangible benefits of an investment;
       c)     evaluation of project costs and savings over a long time
              horizon, e.g. 10-15 years;
       d)     use measures of profitability which capture the long-term
              profitability of the project, e.g. NPV and IRR.
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