P2/FINANCE
  for Screen Printers
            2.0
  User's Guide
INSTITUTE
for Resource and Environmental Strategies
U.S. EPA


-------
P2/FINANCE for Screen Printers
Version 2.0


User's Guide

Funded by the US Environmental Protection Agency's Design for the Envi-
ronment (DFE) Program.

Tellus Institute
11 Arlington Street
Boston, MA 02116-3411
USA

Telephone:       617-266-5400
Fax:            617-266-8303
Email:          p2finance@tellus.org
Web:           www.tellus.org

Copyright © 1997 Tellus Institute, Boston, MA, USA. All rights reserved. No
part of this publication or associated software  may be reproduced or
transmitted in any form or by any means, without prior written permission.

October 1997

-------

-------
Acknowledgments
Tellus Institute developed P2/FINANCE for Screen Printers (P2/FINANCE-SP Version
2.0) with funding from the U.S. Environmental Protection Agency's Design for the Envi-
ronment (DfE) Program in cooperation with the Screenprinting and Graphic Imaging As-
sociation International (SGIA).  We gratefully acknowledge  the guidance provided by
Stephanie Bergman (EPA Project Manager) of EPA's DfE Program.

We thank Mike Ukena of SGIA for reviewing the software and User's Guide and the nu-
merous reviewers of earlier versions of P2/FINANCE who provided us with valuable
feedback on how to improve the tobl. We are also grateful to the reviewers of the soft-
ware's Non-Compliance Module, and our case study firm for providing the opportunity to
demonstrate the  effectiveness  of P2/FINANCE-SP for evaluating pollution prevention
options available to screen printers.

The Tellus project team included Karen Shapiro (Project Manager), David Miller, David
White, and Robert Graff.

-------

-------
 Table of Contents

 1.   INTRODUCTION	l

 1.1.     COMPUTER SPECIFICATIONS...:.	.2
 1.2.     INSTALLATION PROCEDURE	..;	       3

 2.   PROGRAM ADMINISTRATION	4
 2.1.     SYSTEM MENU	4
    2.1.1.      Directories	4
      2.1.1.1.    Creating, Copying, and Deleting Directories	5
      2.1.1.2.    Archiving and Unarchiving Directories	       5
      2.1.1.3.    Backing Up Directories	                6
      2.1.1.4.  '  Restoring Directories	         g
      2.1.1.5.    Reindexing Files	              g
    2.1.2.      Saving Your Work.	                                g
    2.2.3.      Exiting P2/FINANCE-SP	!.11"I"1ZIZ!"!"Z!Z"""!"1	7
 2.2.    EDIT MENU	"1.1.".".....!...."!.	7
 2.3.    HELPMENU	                                	:	7
    2.3.1      Using Help	™"""Z"""ZZ""Z"Z"""""""z
    2.3.2.      On-Line Calculator	 j
      2.3.2.1.    Entering Numbers and Performing Calculations	7
      2.3.2.2.    Entering Calculated Values from the Calculator	8
      2.3.2.3.    Moving and Closing the Calculator	                                            g
    2.3.3.     P2/FINANCE-SP Overview	  	9
    2.3.4.     About P2/FINANCE-SP	!.!!."!!!.'.'.'."!!.'.'.".'.'."!.'.'.'."!."!!!!.'."!.'.'."9

 3.    BASIC OPERATIONS	10

 3.1.    MOVING AROUND IN P2/FINANCE-SP	                     10
    3.1.1.     Page Tabs	""""""""""""""""""""" W
    3.1.2.     Pushbuttons	     JQ
    3.1.3.     Radio Buttons	.'.	""""""""""""! ".H
    3.1.4.     Drop-Down Boxes	               n
   3.1.5.     List Boxes	                  ^
   3.1.6.     Check Boxes	         ^
   3.1,7.     Data Windows	    -              12
   3.1.8.     Data Boxes	-.	!Z!!"l!ZmZ!Z!!Z	12
 3.2.    ANALYSIS STEPS	      	12
 3.3.    STARTING THE SOFTWARE	I""!.".""!."!!	15

 4.     COST INVENTORY DEVELOPMENT	17

 4.1.    STAND-ALONE vs. INCREMENTAL ANALYSES	      17
 4.2.    PROJECT NAME	!".'"!!!.'"!!.'."."."."."	17
   4.2.1.     Creating a Project	        ^8
   4.2.2.     Copying a Project	               	^g
   4.2.3.    Deleting a Project	.'	"""!!".."."""!!."	19
4.3.    INVESTMENT YEAR...	!.!!."!.".'."!!.'.'."!!.".'	19
   4.3.1.     Creating a New Investment Year.	    	29
   4.3.2.    Copying an Investment Year	;	  20
   4.3.3.    Deleting an Investment Year.	           20
4.4.    COST INVENTORIES	Z."Z1"	21
   4.4.1.    Investment Costs	;                   £1

-------
    4,4.2.      Operating Costs	22
    4.4.3.      Modifying Cost Lists	22
      4.4.3.1.    Cost Items	.'	22
      4.4.3.2.    Cost Categories	23
      4.4.3.3.    Complete vs. Tailored Lists	24
      4.4.3.4.    Cost List Reports	25
•4.5.    GENERATING A REPORT	25
    Sample Report	27

 5.    INVESTMENT COST DATA ENTRY	29

 5.1.    PROJECT NAME	30
    5.1.1.      Copying a Project	30
    5.1.2.      Deleting a Project	31
 5.2.    INVESTMENT YEAR	31
    5.2.1.      Copying an Investment Year	31
    5.2.2.      Deleting an Investment Year	32
 5.3.    PROJECT PARAMETERS	32
    5.3.1.      Project Lifetime	33
    5.3.2.      Tax Rates	33
    5.3.3.      Depreciation	34
      5.3.3.1.    Depreciation Methods	35
      5.3.3.2.    Depreciation Period	36
      5.3.3.3.    Offset Period	!	36
      5.3.3.4.    Developing Depreciation Methods	37
    5.3.4.      Inflation	38
 5.4.    DATA ENTRY	39
    5.4.1.      Cost Data	39
    5.4.2.      Depreciation Method Selection	40
    5.4.3.      Working Capital	41
 5.5.    GENERATING A REPORT	41

 6.    OPERATING COST DATA ENTRY	43
 6.1.    PROJECT NAME	44
    6.1.1.      Copying a Project	44
    6.1.2.      Deleting a Project	45
 6.2.    PROJECT PARAMETERS	45
    6.2.1.      Project Lifetime	45
    6.2.2.      Tax Rates	46
    6.2.3.      Inflation	47
 6.3.    DATA ENTRY	47
    6.3,1.      Escalation	i	47
    6.3.2.      Cost Data	48
    6.3.3.      Revenue Data	48
    6.3.4.      Noncompliance Worksheet	49
 6.4.    GENERATING A REPORT	51

 7.    ANALYSIS	53
 7.1.    INCREMENTAL vs. STANDALONE ANALYSIS	53
 7.2.    ANALYSIS PARAMETERS	54
    7.2.1.      Reporting Years	,	54
    7.2.2.      Discount Rate	54
 7.3.    ANALYSIS OUTPUT	55
    7.3.1.      Format	55

-------
    7.3.2.     Output	
      7.3.2.1.    File Menu	                	bb
      7.3.2.2.    Edit Menu..	  	5°
 7.4.    GENERATING REPORTS	IZ....7.........7..	5*
    7.4.1.     Summary Report	        	'	J3
    7.4.2.     Tax Deduction Report	    	  '
    7.4.3.     Cash Flow Report	            	  '
    7.4.4.     Profitability Report	........1.....1	'	L
     7.4.4.1.    Net Present Value (NPV)	'".""'."".'."'..	J*
     7.4.4.2.    Internal Rate of Return (IRR)	.."....	  I
     7.4.4.3.    Discounted Payback	"".	

APPENDIX A.  CASE STUDY
                             	A-l

APPENDIX B.  COST LIST	
                                 	•	B-l

APPENDIX C.  NONCOMPLIANCE WORKSHEET METHODOLOGY	C-l

-------

-------
  User Evaluation: P2/FINANCE for Screen Printers 2.0

  We would like to receive comments and  suggestions from the users of P2/FINANCE for Screen Printers
  (P2/FINANCE-SP) so we  can improve future versions. Please take a few minutes to complete the following
  questions to provide comments on the tool and User's Guide and to make suggestions for future versions Use
  additional paper if necessary.
 Name and Title


 Company


 Address
                                              State                  Zip


 Phone                                        Fax
 1.  How did you hear about P2/FINANCE?
i 2.  Did you find the format of P2/FINANCE user-friendly? Please explain.
3.  What software enhancements would you recommend for future versions?
4.  Did you find the User's Guide helpful? Please explain.
5.  What enhancements to the User's Guide would you recommend for future versions?

-------
 6.  Please describe a project for which you have used the software.
7.  Additional comments and suggestions.
Thank you for taking the time to complete this questionnaire.
                                                                                        Place
                                                                                        Stamp
                                                                                        Here
                                    Tellus Institute
                                    P2/FINANCE-SP
                                    11 Arlington St.
                                    Boston, MA 02116

-------
                                                                                  Preface
             Preface


                         Welcome to P2/FINANCE for Screen Printers



                                    Pollution Prevention

               Financial Analysis and Cost Evaluation System


            This User's Guide introduces the P2/FINANCE for Screen Printers (Version 2.0) soft-
            ware system (hereafter referred to as P2/FINANCE-SP), a tool designed to assist you in
            evaluating the profitability of pollution prevention investments. The Guide offers step-by-
            step instructions for installing and using the P2/FINANCE-SP system. We recommend
            that you read this Guide while using the software.

            P2/FINANCE-SP has been designed to be as user-friendly as possible. Users of other
         .   standard   Windows™-based   software  should  have  little  trouble   understanding
            P2/FINANCE-SP's simple structure.


4Pization  Section 1 introduces P2/FINANCE-SP and describes the computer specifications required
            for use of the software and installation procedures.

            Section 2 discusses system administration tasks, such as defining system setup parame-
            ters, managing your data files, accessing on-line help, and exiting the program.
            Section 3 explains the terminology used throughout the program and prepares you for
            performing analyses with  P2/FINANCE-SP by introducing some of the basic operations
            used throughout the software. It explains the function of various elements of the user in-
            terface and methods for accessing these elements. It also describes  P2/FINANCE-SP's
            extensive on-line help system.

            Section 4 describes the screen printer-specific cost lists and how to develop a cost inven-
            tory.

            Section 5 describes the process of entering investment cost data and their  associated fi-
            nancial parameters.

            Section 6 describes the process of entering operating cost data and their associated finan-
            cial parameters.

            Section 7 explains how to  run an analysis and describes  the various types of reports you
            can generate and how to interpret them.
            ' Windows is a trademark of Microsoft Corporation.

-------
                                                                                      Preface


             Appendix A contains a case study performed with the software, which can be used as a
             systematic introduction to the software. Appendix B contains the complete cost inventory
             contained in the software. Appendix C describes the methodology behind the Noncom-
             pliance Worksheet. The worksheet is a tool to guide users to an estimate of future liability
             due to noncompliance with environmental regulations.


 Specifically  P2/FINANCE-SP was designed specifically for screen printers and includes a Core List
  for Screen  of costs and revenues related to the basic screen printing processes. At the same time,
     Printers  P2/FINANCE-SP allows you to expand the list of costs and revenues so that the software
             can be tailored to your business' current and future operations.
                 i

      Future  P2/FINANCE-SP has a new feature that  facilitates the estimation of future liability aris-
     Liability  ing from noncompliance with environmental regulations. A simple worksheet guides you
     Module  through a series of questions to characterize your business and the project you are ana-
             lyzing to give you an estimate of an annual noncompliance cost.


   Flexibility  P2/FINANCE-SP is a user-friendly program that allows you to tailor an analysis to the
             specific demands of the project. This approach makes it easy to build on prior analyses
             and to perform sensitivity analyses.


On-Line Help  P2/FINANCE-SP contains an extensive  on-line help system, which comprises much of
             this Guide. You can access the general  help screen and all  help topics from the Help
             menu option. You can also access screen-specific help for the current screen by pressing
             Fl while in that screen.
                                                     n

-------
                                                                                   introduction
             1.  Introduction
             Before you make a modification to your current process (e.g., switch to low VOC sol-
             vents or purchase a new press), you need to understand the financial impacts of this modi-
            . fication. P2/FINANCE-SP helps your decision-making by providing a platform for as-
             sessing the profitability of a potential investment. In an analysis, you estimate the costs
             and revenues, both initial investment costs and annual operating costs and revenues, of a
             potential pollution prevention (P2) investment.  Using this information, together with
             other qualitative judgments, you can feel more confident about your process change deci-
             sion.

             P2/FINANCE-SP is a Windows-based software system, designed to assist screen printers
             in evaluating the profitability of P2 investments. As a comprehensive cost  analysis tool, it
             can also be used to facilitate decision making about other environmental or even non-
             environmental decisions.

   Pollution  P2 refers to techniques  that reduce pollutants at their source rather than controlling their
  Prevention  release through end-of-pipe controls (known as the pollution control approach). For ex-
        (P2)  ample, if you are attempting to minimize VOC emissions,  P2 techniques could include
             implementing workplace practices that increase  the efficiency  of the  use of VOC-
          .   containing materials  or substituting VOC-containing materials with other  materials to
             eliminate emissions. A  pollution control approach, on the other hand, would apply tech-
             nical controls to limit the release  of VOCs into the atmosphere. P2  has  several advan-
             tages:

                   •   It may be more effective  than pollution control at reducing  the amount of
                       pollution because it reduces opportunities for emissions
                   •   It reduces  legal liability concerns because there are  reduced opportunities for
                       spills and accidents of chemical wastes
                   •   It may reduce costs associated with the use of hazardous materials
                   •   It may enhance production efficiency, thereby decreasing production costs
                   •   It may allow firms to avoid many future regulatory requirements


  Total Cost Companies often think  of P2 and other environmental investments as inherently costly
Assessment and neglect to fully consider these investments' potential profitability through cost  sav-
      (TCA) ings and  increased revenues. Total Cost Assessment (TCA) is an approach to removing
            potentially unwarranted  and misleading financial barriers to P2 investments, putting them
            on the same footing as other investments. TCA differs from conventional practices in four
            key ways, because it:

                   •   Expands the  cost inventories, savings, and revenue structures to include indi-
                      rect, less tangible items typically omitted from project analyses
                  •   Emphasizes the accurate allocation of  costs and savings to specific process
                      and product lines rather than lumping them as overhead costs

                                                    1

-------
                                                                                   Introduction
                   •   Extends the time horizon of the analysis to account for longer-term costs and
                       savings typical of P2 investments
                   •   Uses profitability indicators capable of incorporating the time value of money
                       and longer term costs and savings
            P2/FINANCE-SP incorporates all of the above TCA concepts by providing extensive,
            process-specific cost inventories and emphasizing the importance of allocation, a longer
            time horizon, and relevant profitability indicators.1
   Analysis  In a P2/FINANCE-SP analysis, you define cost and revenue data for a proposed invest-
  Structure  ment and financial parameters. You can structure your analysis to assess the profitability
            of a single investment or compare multiple investments. For a stand-alone analysis of a
            single project,  you create your project and build an inventory of cost items. If you are
            considering one or more alternative projects,  you create a project and build an inventory
            of cost items relevant to each project. You then enter cost data and conduct analyses of
            either a single project, or compare one or more alternative projects. The multiple report
            options include summary, tax deduction, cash flow, and profitability reports.
   Level of  P2/FINANCE-SP provides a user-friendly structure for inputting cost data and calculat-
Complexity  ing profitability. For advanced analyses, P2/FINANCE-SP allows you to define variable
            operating costs and capital investments in multiple years.
Tailored for  P2/FINANCE-SP is tailored for screen printers and is organized by the  following screen
    Screen  printing processes: Pre-Press, Press, Post-Press/Finishing,  Screen Reclamation, and Non-
   Printers  Process/Other. Within each of these processes, the software contains detailed lists of costs
            and revenues. For example, in Press, P2/FINANCE-SP lists  inks,  squeegees, and sub-
            strate as operating costs. These process-specific cost lists  can  assist you in including all
            relevant costs and revenues associated with the potential investment, fulfilling one of the
            important elements of TCA.

            1.1. Computer Specifications
            Operating P2/FFNANCE requires an IBM compatible 386 with 8 MB  of RAM, 4 MB of
            disk space, and Windows 3.1 or Windows 95. However, a 486 computer with Windows
            95 is recommended because P2/FINANCE uses considerable  system resources. If you
            experience difficulty operating the program, first close all other applications in Windows.
            If you still experience problems, use a system resources  management program such as
            Hurricane, QEMM, or RAM Doubler,
            1 For a more detailed explanation of TCA, see:  1) Allen White, "Accounting for Pollution Prevention,"
            EPA Journal, July-September 1993, pp. 23-25. 2) A.L. White, Ph.D., D.E. Savage, Ph.D., and A. Dierks,
            "Environmental Accounting: Principles for the Sustainable Enterprise," TAPPI Proceedings, International
            Environmental Conference 1995, Book 2, pp. 949-958. 3) Tellus Institute, Total Cost Assessment: Acceler-
            ating Industrial Pollution Prevention Through Innovative Project Financial Analysis With Applications to
            the Pulp and Paper Industry, December 1991.

-------
                                                              Introduction
1.2. Installation Procedure
To install P2/FINANCE, insert Disk #1 and enter Windows. From the Program Manager,
choose Run and type A:\setup  (or B:\setup  if the disk is in your  B drive).  When
prompted, select a group name. After the installation, double click on the P2/FINANCE
icon to open the program.
  Note to Windows 95 Users: If during the installation procedure, a dia-
  log box warns you that FoxPro for Windows requires a minimum FILES
  setting  of 40,  click  OK  and  ignore  the  message  to  alter  the
  CONFIG.SYS file.

-------
                                                          Program Administration
2.  Program Administration

2.1. System Menu
The System Menu assists in administering P2/FINANCE-SP. It enables you to organize
data from project analyses into different directories, to save your work, and to exit the
software.

2.1.1.   Directories
P2/FINANCE-SP allows  you to organize  data from
project analyses  into  different directories.  Projects
within the same  directory share data files, enabling
you to run analyses to compare one project to another
in the  same directory (see Section 7.1).  You can es-
tablish multiple directories to  organize projects that
are not related to each other, i.e., that you will not
want to compare in an incremental analysis.
When  you select the Directories option from the System menu, your current  directory
(which is listed at the top of the screen in the blue banner next to the word P2/FINANCE)
is temporarily closed, and the following  screen appears. Before the directory is closed,
P2/FINANCE-SP asks if you want to save changes if any were made. If you do not save
changes, they will be lost when you reopen the directory.
                                            A project in P2/FINANCE-SP is
                                            an   investment  or  process
                                            change you are considering,
                                            such as switching from high
                                            VOC solvents to low VOC sol-
                                            vents  or  investing  in  a new
                                            press.
      EJP2/FINANCE Directories
        Directories
        >SCRNCASE
          SP
         New..
                                        'Archive
                                                  Uriarchiue
                                    | *  'Backup
                                                   Restore
                                    ^ Reindex Files  I
                                     ' til'
»  = Selected directory
    Se/eci another by doubte-dicking
 *=Archived
                                                             OK
The Directories list box lists (see Section 3.1 for descriptions of the window tools used
by P2/FINANCE-SP) all of the directories that are available for project storage. The first
                                        4

-------
                                                            Program Administration
 time you open this window, the default directory, SP, and the directory containing the
 case study data (see Appendix A) will be the only ones listed. A chevron (») indicates the
 active directory.

 2.1.1.1.   Creating, Copying, and Deleting Directories
 To create a new directory:
 1.  Click on the New... button under the Directories list box.
 2.  A dialog box will open prompting you for a name for the new Directory. Type in the
    name and click on the Create button.2

 When you return to the P2/FINANCE Directories  screen, you will see the new directory
 listed.
 To make a copy of an existing directory:
 1.  Click on the Copy... button under the Directories list box.
 2.  A dialog box will open prompting you to select which directory to copy from a pull-
    down menu and to define a name for the new directory. Make your selection, type in
    the new name, and click on the Copy button.

 When you return to the P2/FINANCE Directories screen, you will see the new directory
 listed.

 To delete an existing directory:

 1.  Select the directory you want to delete  by highlighting it in the list box. You can
    highlight it with a single mouse click, which will shade the directory name, as LP ap-
    pears in the picture on the previous page.
 2.  Click on the Delete button under the Directories list box.
 3.  Two  dialog boxes will open asking you  to confirm you
    want to permanently delete the selected directory. Click on
    the Yes button twice to delete the directory.

 When you return to the P2/FINANCE Directories screen, the deleted directory no longer
 appears in the list box.

 2.1.1.2.    Archiving and Unarchiving Directories
 To  create more disk space in your computer  you may want to archive (temporarily place
 into storage) a particular directory. First,  select the directory to be archived from the
 Directories list box. Then, click on the Archive button. P2/FINANCE-SP compresses  all
 files in the selected directory into one file.  At the same time, it deletes all uncompressed


- The name can  be up to eight characters long. Directory names are not case sensitive;  cannot contain
spaces, commas, backslashes, or periods; and cannot be identical to other directory names. Only the letters
A through Z, numbers 0 through 9, and certain special characters [ _ A $ ~ !#%&-{} @ ' ' ( ) ] can be
used.
To  rename  a  direc-
tory,  first  copy  the
directory to the  new
name, then delete the
original directory.

-------
                                                           Program Administration
 files. Archived directories are marked with an asterisk (*) in the Directories list box (as FP
 appears in the picture on the previous page) and are unavailable for use in this form until
 they are unarchived.
 To unarchive an archived directory, highlight the archived directory (marked by an asterisk)
 and click on the Unarchive button.  P2/FINANCE-SP decompresses the files and  restores
 them to a usable form.

 2.LL3.    Backing Up Directories
 This function allows you to copy the data files from any directory to a remote floppy disk
 drive or another directory on your hard drive. Highlight the directory  you wish to backup
 and click on the Backup button. P2/FINANCE-SP asks you to select a drive  and directory
 for the backup. In  backing  up directory files  to a floppy  disk  or other directory,
 P2/FINANCE-SP compresses the data files in the chosen directory into  one file (identical to
 the procedure for archiving a directory) and then copies that file to  a disk or specified
 directory. A popup box appears if there is not enough space to perform the task; in this case,
 P2/FINANCE-SP instructs  the user to insert an additional  disk in the drive  or cancel the
 backup.
2.1.1.4.    Restoring Directories
This function allows the user to restore a directory
that was copied either to a floppy disk or your hard
disk.  If restoring from  a  floppy disk,  insert  the
floppy disk into a remote floppy disk drive and click
on  the Restore button. P2/FINANCE-SP asks you
for the directory name and location of floppy drive
or hard drive directory. When complete, the copied
directory appears in the Directories list box.
Note: Be careful when restoring
directories from a floppy disk or
your hard drive. If the directory
still  resides in P2/FINANCE-SP,
the  software  overwrites   the
existing files with those stored on
the  floppy  disk,  unless   you
rename the existing directory.
2.1.1.5.   Reindexing Files
P2/FINANCE-SP is programmed in the FoxPro database program. FoxPro uses database
files (*.DBF) in association with one or more index files (*.CDX). The database files are
repositories for data input by the user, whereas the index files serve to associate the data in
ways that allow P2/FINANCE-SP to perform calculations. Reindexing files serves to make
sure that all *.DBF files are associated with their appropriate *.CDX files.
The reindexing option is only necessary if an unforeseen error has damaged the index files.
In such a circumstance, P2/FINANCE-SP instructs you to reindex your files. Under normal
circumstances, you do not need to reindex files, though there is no harm in doing so.

2.1.2.   Saving Your Work
The Save option in the System menu enables you to save any changes you have made to a
project or projects without exiting the software.  You can thus save your work and con-
tinue editing. As with all software programs, it is recommended that you periodically

-------
                                                          Program Administration
  save your work so that in the event of hardware problems (e.g., computer lock-up, power
  failure), you do not lose all of your work. P2/FINANCE-SP only enables the Save option
  if changes have been made since you entered the program or since you last saved.

  2.1.3.  Exiting P2/FINANCE-SP
  To  exit P2/FINANCE-SP, select Exit from the System menu. If you have made changes
  that have not been saved, P2/FINANCE-SP asks if you want to save these changes.

  2.2. Edit Menu
  The Edit menu contains standard Windows  commands to facilitate simple data manipula-
  tion. P2/FINANCE-SP has options to Undo (Ctrl+Z), Cut (Ctrl+X), Copy (Ctrl+C)  and
  Paste (Ctrl+V).

  2.3. Help Menu

 2.3.1.  Using Help
 P2/FINANCE-SP  contains an extensive on-line help system. You can access the general
 help screen and all help topics from the Help menu by selecting Contents or Search for
 Help on...  You can also access screen-specific help for the current screen by selecting Fl
 while in that screen.

 From the Help menu,  a good way to look for information is to choose the Search for Help
 on... button. Search is like an automated book  index, with  hundreds  of key words and
 cross-references. Follow the directions in the Search dialog  to find the information you
 need.
 2.3.2.   On-Line Calculator
 P2/FINANCE-SP has an on-screen calculator that can be accessed from the Help menu.
 The calculator appears in a standard window that you can move, deactivate, and close.
2.3.2.1.   Entering Numbers and Performing Calculations
Once the calculator is accessed, numbers can be entered from
the keyboard using either the keyboard's number pad or the
number line above the letter keys. Alternatively, numbers can
be entered into the calculator by clicking the desired numbers
on the calculator with the mouse.

Any mathematical symbol on the calculator that can be typed on
the keyboard, such as the "+" or "=" sign, can be activated by
typing it or by clicking on the symbol with the mouse.
There are several different ways to perform mathematical and
memory functions on the calculator, using either the keyboard
Calculator

-------
                                                         Program Administration
or the mouse. Keyboard equivalents for some advanced calculator functions are shown and
described below.
MC   Memory Clear. Press this key once to clear a number   Calculator Keyboard
       stored in the memory.                               Equivalent Strokes
MR   Memory Restore. Press once to restore to the screen    Keystroke   Equivalent
       the number stored in memory.                             Q           ^
M+   Memory Add.  This key either  stores  a number in        R          MR
       memory (if none is there) or adds the screen value to        N           ±
       the number already in memory and saves the sum in        A          M+
       memory.                                                z          MC
M-    Memory Subtract. This subtracts the  screen value        s           M.
       from the number stored in memory, saving the result
       in memory.	
C     Clear. Press once to erase current value and twice to erase current calculated value
       and operator.

2.3.2.2.   Entering Calculated Values from the Calculator
Once a value has been calculated it can be entered directly into a selected data field using
cut and paste. To do this:
1. Perform the desired calculation.
2. Cut or copy the result using the Edit menu or the control keys (Ctrl+X or Ctrl+C).
3. Close the calculator or click on the P2/FINANCE-SP page to reactivate the software.
4. Highlight the cell in P2/FINANCE-SP where you want to paste the calculated value.
5. Paste the data from the Edit menu (Ctrl+V).
The calculated value appears in the chosen data field.

2.3.2.3.   Moving and Closing the Calculator
If the calculator window  is blocking part of the P2/FINANCE-SP page that you want to see
as you use the calculator, you can move the calculator window with the mouse.
1. Depress the mouse button on the  blue  bar running along the top of the calculator
   window (with the word 'Calculator' appearing on it)..
2, With the  mouse button  still pressed, move the  mouse to reposition the window. You
   will see an outline of the window move with the mouse.
3. When you have the outline of the window hi place, release the mouse button.
To close the  calculator,  simply double click the box in the upper left-hand comer of the
calculator window.
                                        8

-------
                                                            Program Administration
 2.3.3.   P2/FINANCE-SP Overview

 Selecting Overview from the Help menu or the opening screen of the software opens the
 P2/FINANCE-SP Overview, a flowchart of the steps required for an analysis.
  E1P2/FINANCE Overview
                     "S3
       j Create or Open [
       I     Project    |
               Define Years
               of Investment
 Develop Cost Inventory
for Initial investment and
 Annual Operating Costs
                      Enter Data and
                   Tailor Parameters for
                   Initial Investment Costs
 "  > ' •-? " V-|—%
• Y'         ~
   Enter Data for Annual
  I    Operating Costs
                                            Define
                                 •, "-f 1  Project Parameters
                                                   Generate    1-
                                               I Analysis Reports
                                                >	X
Click on a bubble for further f,
 * description of that step. - *">
                                                      OK
Clicking on any of the boxes provides further discussion on the steps required to use the
software.  See  Section 7  for  more discussion about  performing an  analysis  usine
P2/FINANCE-SP.
2.3.4.   About P2/FINANCE-SP

By selecting About P2/FINANCE, you can see information about the version of the pro-
gram that you are running. You can also access technical information about your hard-
ware and software.

-------
                                                              Basic Operations
3.  Basic Operations

3.1. Moving Around in P2/FINANCE-SP
P2/FINANCE-SP assists the user in developing an analysis with its user-friendly screen
interface. Movement through the software is accomplished with simple clicks of a mouse
button, and data are entered through the keyboard or the on-screen calculator. Being fa-
miliar with the user interface and how to access the interface components is useful while
you develop your analysis.
P2/FINANCE-SP's user  interface is  designed  for
ease of use and consistency. User interface elements
and the colors of these elements indicate where user
input is needed and the appropriate  format for this
input. A brief description of each tool and an exam-
ple from the software follows. These tools are stan-
dard Windows tools that will be  familiar to those us-
ers who have previously used Windows-based soft-
ware.
There  are  places in the  soft-
ware where the  text appears
faded  or  dimmed.  In these
places,  you  cannot  access
these elements. You may need
to select another item or move
to a different page to access
that command.
3.1.1.  Page Tabs
P2/FINANCE-SP is laid out on four main pages. A tab, similar to a tab on a manila
folder, appears at the top of each page and is labeled with the name of the page, or section
of the program (as shown below). To move from page to page, simply click on the tab of
] Cost Inventory
j
Investment Costs
I
Operating Costs -.-. |
'•:- -;•';,, Analysis^;/;' :Sn|
the page you want to move to. The new page will appear in place of the one previously
visible, and the page label will appear in bold print, as Cost Inventory does in this ex-
ample.
                                                          , Hew... -
                     | Delete 1
3.1.2.  Pushbuttons
Pushbuttons used in P2/FINANCE-SP, such as those pictured
here, are used to initiate a function from the active page. In
this example, these buttons could be used for project name management. A single click
on a button with an ellipsis (...) opens a new screen that prompts you for more informa-
tion or confirmation of the selected action. Clicking on the "New..." button asks you to
enter a new project name.
Buttons without an ellipsis carry out the command without further prompting (except for
confirmation in some cases).
                                       10

-------
                                                                  Basic Operations
 3.1.3.   Radio Buttons
 Radio buttons, which look like large circles, present an ar-
 ray of two  or more options.  Like their namesake (radio
 stations), only one of these options can be chosen at any
 one time.
 A radio button that has been chosen has a "•" in its center.
                                                          -Report to Create	
                                                            (~ Summary
                                                            P Tax Deduction
                                                            O Cash Flow     ^ v •>
                                                            & Profitability
                                                                              X,
                                                               for Summary, Report
                                                            «  (• Inwestment Costs,
                                                              , f* Operating Costs \
                                  Process
                                                      Cost Category
                                 J ALL PROCESSES   pllALL CATEGORIES
                                 r? .  ...   	   .	1	.	1—-J '•*       	
3.1.4.   Drop-Down Boxes
By clicking on the arrow on the
right-hand side  of a  drop-down
box, you  will open a list of op-
tions or descriptive names of P2/FINANCE-SP elements. Drop-down boxes display the
name of only one element at a time in the top window, with the remaining options listed
below. The element in the window is the active, or selected, item. To change the selected
item, click and hold the Arrow button, move the cursor to the  desired item,  and release
the mouse button. The new selection will appear in the box.
 3.1.5.  List Boxes
 List boxes present a list of items; most
 list boxes allow the selection of several
 items at a time, though some list boxes
 allow for the selection of only one item
 at a time.  A list box is similar in  ap-
 pearance to an opened list from a drop-
 down box.  With this type of list box,
 when you  select an  item  by  double
 clicking on it, a chevron (») appears to
 the left of its name. The arrows on  the
 right corners of the box can be used to scroll up and down the list. The box in the gray
 area shows the position of the visible portion of the list relative to the whole list. In this
 example, we are looking at. the top of the list.

 3.1.6.   Check Boxes
 Selecting a check box toggles the chosen  feature on or off.
 Check boxes are similar  to radio buttons in appearance and
 function, but differ in that check boxes are not mutually exclusive. There is no limit to the
number of check boxes in any particular array that can be turned on at one time.
                                       Pre-Press
                                        Purchased Equipment
                                          Air compressor
                                          Automatic coater
                                          Computer system
                                          Delivery
                                          Digital output systems
                                          Electronic imaging system
                                          Exposure lamp
                                          Exposure unit
                                          Film processing equipment
                                                              < Incremental Analysis?
                                        11

-------
                                                                 Basic Operations
3.1.7.   Data Windows

Pre-Press
Cost<$>

Saluage($) Equ

Purchased Equipment j ___JL— __ _j 	
Dry fBm imaging system
Start-up/Training
Training

30,000
'
1,300
	 i__
, 	

"I !•
___ J 	 	 . 	 	 L

,, ,,
! 1
,_| j.™..
,'1 ' 1
ipment Life Depreciation
\

Default
... .. „. .;_...-„.„.. .. ...„-.


ZZ2E
.»w....M,».Hn<..7»«r
Expensed !
~..~.»..~....— .. .— .—.. .—«.. ™ . ..~. ~^.« ..»» •.«. vr^ •
\ * i r
: I '
	 ' i "
-
In P2/FINANCE-SP, cost data are entered in fields located in data windows. Data entry
fields appear with a white background. To move the cursor to a data box, either use the
Tab key or use the mouse and triple click in the  box to highlight the entire field. The
field will be blue and any typing will overwrite the previous entry. If the field is white
and you see a blinking cursor, numbers  you type  will appear where the cursor is. The
software automatically inserts commas when you type in numbers. The data you type will
be accepted by the program when you press the Enter or Return key, the Tab key, or
when you click elsewhere on the screen with the mouse.

3.1.8.   Data Boxes
P2/FINANCE-SP   pa-  6="	~'^—	"	,,,_,,™,-™	^~	,	-,:,^,.^,,^
rameter data are entered in
data boxes. These boxes,
also with  a white back-
ground, display input  that
you type in from the key-
board  or  from  the  on-
screen calculator. Like moving to data windows described above, to move the cursor to a
data box, either use the Tab key or use the mouse and click in the box. After typing, press
Return/Enter, press Tab, or click the mouse button elsewhere on the screen to leave the
data box.
                                                   .,. ,-  . ..... •  .,_,, ..... ...  ,
                                                   Not'ec VVhen printed using portrait
                                                   mode, 5 years/ columns wiU fit on one
                                                   -page, while landscape can
                                                  !°riccomdcla1:e;7.''0efore printing, goto
                                                   • ihe menu File, Print Setup to select the
3.2. Analysis Steps
P2/FINANCE-SP helps you make decisions about how to allocate your investment re-
sources. It calculates the profitability of a potential investment by considering the cost of
the investment and the revenues or operating cost savings generated by the investment.
                                        12

-------
           Basic Operations
Throughout the Guide, "cost"
is used  to  indicate costs,
cost savings,  and revenues
except where  noted. Profit-
ability  is used throughout the
Guide  as a  measure of the
investment's   performance,
not as a formal accounting
term.
            Financial analysis is used to estimate the profitability of a potential capital investment. It
            includes two types of information: 1) cost and revenue data, and 2) financial parameters.
            The financial parameters include  information on depreciation, inflation rates, escalation
            rates, income tax rates, and discount rates. (All of these parameters are discussed in more
            detail later in the Guide). The cost and revenue data in-
            clude both  one-time investment  costs,  referred to  as
            capital costs, and ongoing operational costs, referred to
            as operating costs.
            A typical financial  analysis run  in  P2/FMANCE-SP
            includes the following steps:
                   •  create a project

                   •  define years of investment

                   •  develop cost inventory for initial investment and annual operating costs
                   •  define project parameters

                   •  enter data and tailor parameters for initial investment costs
                   •  enter data for annual operating costs
                   •  generate analysis reports


            Each step is described briefly below.


   Create a  The first step in P2/FINANCE-SP is to conceptualize the analysis you want to perform.
    Project  Are you considering expanding your current capacity?  Are you considering a process
            modification? By answering these questions, you can begin to define your analysis.
            You also should consider the level of detail required for the analysis. Developing relevant
            cost data takes time. Therefore, to  maximize your efficiency, begin by developing those
            costs that you think are the most significant.

            After developing a general framework for the analysis, you are ready to enter the software
            and create a project. You give each project a name so that P2/FINANCE-SP can organize
            the data. The name you choose for each project helps  you to organize all of the analyses
            you perform. If you want to compare a proposed modification to your current operations,
            you need to create two projects=one as the base project to represent your current opera-
            tions, and one as the alternative project for the proposed change.


 Determine  For  each  project,  you  indicate   when  the proposed  investment  will  be made.
   Year of P2/FINANCE-SP allows you to select the year or years (current year = Year 0) in which
Investment the investment will be made. P2/FINANCE-SP uses Year 0 by default. For most projects,
           therefore, you do not need to define additional investment  years. You do have to define
           additional years for complex projects with delayed or multi-year investments.

                                                  13

-------
                                                                              Basic Operations
Develop Cost The next step is to go through the items on the inventory list for the process or processes
   Inventory affected by the project and select the relevant items. Because P2/FINANCE-SP organizes
             your operations by process (Pre-Press, Press, Post-Press/Finishing, Screen Reclamation,
             and Non-Process/Other), you first need to consider the processes to include in your analy-
             sis. Determining the relevant processes is not always straightforward; thus, consider the
             possibility of impacts on  all processes when you make a process  modification. Simple
             process flow diagrams of (a) the current and (b) the alternative project are helpful. For
             example, a project pertaining to Pre-Press might have cost implications in Press as well.
             These "second order" effects can be as significant as, or even more significant than, direct
             "first order" effects.
       Define  Once you have developed your cost inventory, you need to define the financial parame-
      Project  ters for the project. These parameters are important elements of the financial analysis as
  Parameters  they establish methods of depreciation, rates of taxation and inflation, and the lifetime of
              the project.


       Enter Input the relevant capital costs associated with the inventory items you have selected. For
  Investment the conventional investment costs (e.g., equipment, construction), you most likely have a
   Cost Data fairly complete data set  in terms of equipment costs, contractor price quotes,  and your
             own project management evaluation of direct labor and materials. The remaining costs
             may be less clear and may require some investigation or estimation.


Enter Annual Defining operating costs (e.g., start-up training, permitting), like the process of entering
   Operating investment cost data, is one of the more challenging parts of performing a complete and
   Cost Data accurate financial analysis. Many of the cost items you selected for the inventory may be
             items that have not previously been measured and/or items for which good data are not
             easily assembled. It is important to make the effort to include any significant costs here.
             If you are confident that the costs ofeertain items in the inventory are not very significant
             and estimating them will entail substantial effort, you may want to omit them. However,
             when actual data cannot be readily compiled but you have some insight into the nature of
             the cost item, try to estimate the cost. It is generally preferable to have an imperfect esti-
             mation than to have none at all. In the end, you will have to make the trade-off between
             the quality of the data you enter (its resultant benefit to you)  and the effort required to
             collect it (the cost to you). In addition to entering the annual costs, you can enter  an es-
             calation percentage if you expect costs to rise at a rate different from the inflation rate.
             Alternately,  if you know precisely how operating costs will change in future years, you
             can enter the future values directly.
                                                     14

-------
                                                              Basic Operations
Generate Once you have all of the financial parameters and the cost data entered, you proceed to
 Reports the analysis section where you establish the parameters for the project. At this point, you
        determine the economic duration of the project and the discount rate to be used for the
        analysis. Now you are ready to generate one or more analysis reports.
       .P2/FINANCE-SP offers several report options. You can evaluate the profitability of a
        single analysis, you can compare the profitability of two projects in an incremental analy-
        sis, or, you can compare the profitability of multiple alternative projects against a single
        reference project. You can generate:

             •  summary reports to review the contents of an analysis
             •  tax deduction reports to view the tax effects of your project
             •  cash flow reports to calculate the discounted cash flows
             •  profitability reports to calculate profitability indicators for the analysis, such
                as net present value, internal rate of return, and discounted payback
        3.3. Starting the Software
        To start P2/FINANCE-SP, double click on the P2/FINANCE-SP icon in
        the P2/FINANCE workgroup or whatever workgroup you selected during
        installation.'At start-up, the software displays the main screen as shown below.
PS/FINANCE
                  P2/FINANCE
                               for Screen Printers
                               Pollution Prevention/
                      Financial Analysis and Cost Estimation
                                     Version 2.0
                           Copyright 1992-1997 Tellus Institute
        Developed by:
        Tellus Institute                                       Teh (617)266-5400
        11 Arlington Street                                   Fax: (617) 266-8303
        Boston, MA 02116^3411                        Email: p2finance@tellus.org
        USA                                         Web: http://www.tellus.org
                   Funded by EPA's Design for the Environment Program
                           I; Open Existing Project


       From the opening screen, you can access P2/FINANCE-SP's Help system (see Section
       2.3), see an overview of performing a P2/FINANCE-SP analysis (see Section 2.3.3), open
       an existing project, create a new one, or exit the software.
                                        15

-------
                        Basic Operations
    The software defaults to the most re-
    cently used directory. If there are no
    projects  in the default  directory, the
    Open Existing Project button will not
    appear.
To open a new project, click on the Create a
New Project button from this screen. A dia-
log box will appear prompting you for a new
name for the  project.  (See  Section 4.2 for
more information about naming projects.)
Simply enter the name for your project then click on the Create button.
To reopen a project you created previously, click on the Open Existing Project button and
a list of existing projects will appear in a dialog box. Select the project you want to re-
open then click on the Use button.
Once you have chosen a project  to open or reopen, you are ready to begin the analysis.
Sections 4 through 7 step you through each of the main pages of the software.
16

-------
                                                        Cost Inventory Development
 4.  Cost Inventory Development
 The first of the four pages of the P2/FINANCE-SP program is the Cost Inventory page.
 From here you can create your project and build an inventory of cost items that define the
 cost implications of the project.
      Cost Inventory   |   - Investment'CostS' • ,;| .   Operating Costs
                                                                   Analysis
   Project
                    In vestment occurs at end of year
                    1Tfo-  V-i" r*f "  "V~  -  Show/Edit
                                               *® Investment Cost List
                                               O Operating Cost List
1
   Process
                      ™ Ax-?* n    ~ !& ^  \ •
               fiif(CostCtAesory^ >x  "•_
   [ALL PROCESSES
               :* flALL. CATEGORIES
    Pre-Press
     Purchased Equipment
       Air compressor
       Automatic coater
       Computer system
       Delivery
       Digital output systems
       Electronic imaging system
       Exposure lamp
       Exposure unit
       Film processing equipment
                                                     :6.
                                                 Make Changes to Cost Lists-. I  ^
                                               (- Taiored bst and Other Included Items v
                                                                -
» = ftem included in current project
    Doubt&ciick to cKs
                                                                   Report
4.f. Stand-alone vs. Incremental Analyses
In addition to calculating the profitability of a single project, P2/FINANCE-SP enables
you to compare one project to another. For a stand-alone analysis of a single project, you
create your project and build an inventory of cost items. If you are considering one or
more alternative projects, you create a project and build an inventory of cost items rele-
vant to each project.  In subsequent pages of P2/FINANCE-SP, you then enter cost data
and conduct analyses of either a single project, or compare one or more alternative proj-
ects.

4.2. Project Name
In addition to opening projects from the software's first screen (as discussed in the previ-
ous section), you can create a new project or access an existing one from the Cost Inven-
tory page. You can also copy or delete projects.
                                         17

-------
                                                    Cost Inventory Development
4.2.1.  Creating a Project
The first step in using the software is to establish a name for the project(s) you want to
analyze. When  you create a new project, all of the data you enter are saved under that
project name.
1. From the Cost Inventory page, under the Project drop-down box, click on the New...
   button to create a new project. A dialog box appears on your screen prompting you
   for a name for your project.

2. Type in the name for  the new project.  Project
   names are limited to 25 alphanumeric characters
   including spaces. You can use special characters,
   except single (') and  double  (") quotes, in your
   project's name.
3. Once you have entered the name, click on the Create button to close the dialog box
   and return to the Cost Inventory page.

You will now see the name  of your project in the Project window, which means that it is
now the active project. As long as that project is showing in the Project window (which1 is
visible from all pages), any operations you perform—such as adding inventory items or
entering data—occur within that project.
                                                   The  name should  be  as de-
                                                   scriptive as possible so that, in
                                                   the future, when you go back
                                                   to look for the project, you will
                                                   be able to recognize it easily.
                                        \C3 Copy a Project
                                              Project to copy
                                            * I Base Case
     Er
                                             ,    ,   f   •
                                             Name for new Project
                                                   Copy
Cancel
4.2.2.   Copying a Project
One of the main features of P2/FINANCE-
SP is that it allows you to compare proj-
ects in terms of their financial attractive-
ness. You can  compare current processes
to new processes, or you can compare dif-
ferent variations of a new process to each
other. In many  cases,  you will find that a
new project you are considering and wish
to analyze has some overlap—in terms of
inventory items and costs—with projects
you have already entered. P2/FINANCE-
SP allows you  to  copy previous projects
that you can then modify as needed  for your next analysis. This feature is useful at differ-
ent stages of your analysis when you want to conduct sensitivity analyses for various cost
items.
1.  From the Cost Inventory page, under the Project window, click on the Copy... but-
    ton to copy the active project. A dialog box appears on your screen prompting you for
    the name of the project to copy and a name for the new project.
2.  Type a name for the new project using the guidelines mentioned above in the Creat-
    ing a Project section.
3.  Click the Copy button to return to the Cost Inventory page.
                                       18

-------
                                                    Cost Inventory Development
 The new copy of the project you were working on will now be visible in the Project win-
 dow and is therefore now the active project.
 4.2.3.  Deleting a Project
 Just as you can create a new project, you can delete an
 existing project.

 1.  Make sure you have the project you want to delete
    visible in the Project window.
 2.  From the Cost Inventory page, under the Project
    window, click on the Delete button to delete the
 You  should only delete proj-
 ects when you  are sure you
 will not want to use them in the
 future. Remember that it may
 be easier to  modify a project
 you  already  created than  to
 start a new one from scratch.

    active project. Two dialog boxes successively appear on your screen asking you to
    confirm the deletion.

    Click both Yes buttons to confirm and to return to the Cost Inventory page.
 4.3. Investment Year
 Most analyses target investments you  are  contemplating for the immediate  future.
 P2/FINANCE-SP assumes that investments occur at the end of the year and that once the
 investment is made, operating costs begin the following year. Thus, investment costs are
 incurred in Year 0, and operating costs begin in year one. When you start a new project, it
 is assumed that it is a current investment and therefore will occur at the end of Year 0.
 You may find, however,  that your investment has phases that  will happen in different
 years. For example, you may purchase a new building at the end of Year 0 and a new
 press at the end of year one. P2/FINANCE-SP provides the flexibility to allow you to use
 multiple investment years to account for one-time investment costs that happen through-
 out the lifetime of the project.

 4.3.1.   Creating a New Investment Year
 The default year for investments in P2/FINANCE-SP is Year 0, i.e., if you do nothing
 with respect to investment year, your analysis proceeds as if all  investments occur at the
 end of Year 0. If you are considering a multi-year investment, you need to add the addi-
 tional investment year(s) to the program.
 1.  To add a new investment year, click once on the
   New... button under the Investment occurs at end
   of year drop-down box  on the Cost Inventory
   page. A dialog box appears prompting you for the
   new year at the end of which your investment will
   occur.
2.  Type in the new year and press the Enter key
   twice or click Create once.
Remember:  The  year  you
choose will be the year be-
fore   the   operating   cost
changes take effect. If  your
investment is slated  for two
years from now,  use two as
the new investment year, and
the operating costs  will be
entered starting in year 3.
                                      19

-------
                                                    Cost Inventory Development
You will now see the investment year you selected in the Investment occurs at end of
year window, indicating that it is now the active year.  As long as that year is active, any
operations you perform—such as adding inventory items or entering data—occurs in that
year. To move between investment years, click once on the arrow next to the drop-down
box. You will see the year(s) you have entered and zero. Click the mouse arrow on the
year you want to be active, and.it will then be displayed in the box.

4.3.2.   Copying an Investment Year
For some multi-year projects, you may make similar investments in different years. For
example, you may be replacing or converting your three printing presses one at a time
(due to cash flow constraints,  or just to minimize disruption to  your business). In this
case, rather than creating two new investment years (end of year one and end of year two)
and developing a similar cost inventory three times, P2/FINANCE-SP allows you to copy
the inventory you have already built. In this instance, you can develop your  cost inven-
tory just once. Then you can copy that inventory to new investment years, rather than re-
building it. See Section 2.1.1.1 for a discussion of copying an inventory and cost data.
Once you have built your inventory for the base project year, you can copy that inventory
to other years.
                                         K Copy an Investment Year
                                         ' ** '* ' •
                                                 investment year to copy from
                                                   Hew Investment will be
                                                ;;'_" -made at end of year
                                                
-------
                                                    Cost Inventory Development
 2. From the Cost Inventory page, under the Investment occurs at the end of year win-
    dow, click on the Delete button to delete the active project. Two dialog boxes appear
    on your screen asking you to confirm the deletion.

    Click both Yes buttons to confirm and to return to the Cost Inventory page.
3.
 4.4.  Cost Inventories

 Developing a complete and relevant cost inventory is one of the main elements of TCA.
 P2/FINANCE-SP assists you in this task by providing extensive detailed costs lists or-
 ganized by screen printing process. Each process contains an investment cost list and an
 operating cost list from which you can develop your cost inventory.


 4.4.1.  Investment Costs

 P2/FINANCE-SP is equipped with an extensive and detailed list of investment costs spe-
 cific  to each screen printing process.  Process-specific investment cost items  are further
 grouped  into  cost  categories,  such  as  CONSTRUCTION/INSTALLATION and
 PURCHASED EQUIPMENT.

 1.  From  the Cost Inventory page, select the  In-
    vestment Cost List radio button.

 2.  Using the Process drop-down  box,  select  the
    process from which  you want to start building
    your inventory or choose ALL PROCESSES.

 3.  Using the Cost Category drop-down box, select
    the category you  wish to start with. If you pre-
    fer, you can leave ALL CATEGORIES visible,
    but it may be simpler to select one category at a
    time to focus your thinking and to avoid having to scroll through the whole list. The
    list box in the lower left-hand corner of the page should now show the investment
    cost list for the process and cost category that  you have selected.

4.  With your mouse,  position the cursor
    over each item you want to include in the
    inventory . and  double-click  the mouse
    button.  A chevron  (»)  marks the cost
    items that have been selected. To remove
    a selected inventory item from your proj-
    ect,  simply  double-click  on it  and  the
    chevron will disappear.

5.  Repeat steps 2 through 4 until you have a
    comprehensive investment cost inventory.
                                                Remember: Even if you are only
                                                planning  to make changes  in
                                                one process, consider changes
                                                in other processes (secondary
                                                changes) that will need to be
                                                made to accompany the primary
                                                changes.  These  costs,  which
                                                are  often obscured during the
                                                development  of  a cost  inven-
                                                tory, may be critical  to the fi-
                                                nancial success of the  project.
                                         If you are unsure whether to include an
                                         item from the list in your analysis, it is
                                         a good idea to include it initially. This
                                         way it will appear on your screen when
                                         you go to enter cost data. If you sub-
                                         sequently find that the item should be
                                         removed (e.g.,  because  it  is not rele-
                                         vant, a cost estimate cannot be made),
                                         it is easy to remove if  from the list
                                         later.
                                     .21

-------
            Cost Inventory Development
    With operating costs, it is likely capital
    changes in one process will affect op-
    erating costs in many processes.  Be
    as  thorough as  possible when  you
    consider  which   process  operating
    costs to include. As with capital costs,
    these  costs  may  be  non-trivial  and
    therefore influence the results  of the
    analysis.
4.4.2.  Operating Costs
P2/FINANCE-SP is also equipped with an
extensive and detailed list of operating costs
and revenues specific to each screen printing
process. Process-specific operating cost items
are grouped  into  cost  categories, such as
MATERIALS  and FUTURE  LIABILITY.
Operating cost items are selected using the
same method as described for investment costs.
1.  From the Cost Inventory page, select the Operating Cost List radio button.
2.  Using the Process drop-down box, select the process from which you want to start
   building your inventory.
3.  Using the Cost Category drop-down box, select the category you wish to start with.
   Again, if you prefer, you can leave ALL CATEGORIES visible. The list box in the
   lower left-hand corner of the page should now show the operating cost list for the
   process and cost category that you have selected.
4.  You can now select the cost items you  want to include by double-clicking each de-
   sired item. A chevron (») will mark the cost items that have been selected. You  can
   remove a selected inventory item from your project by double clicking on it.
A  cost inventory report is a good way to organize the data for the purposes of review  and
data collection because it prompts you to consider the relevance and significance of each
item you selected.  Once you have built your inventory, you may find it helpful to gener-
ate a report (see Section 4.5).

4.4.3.   Modifying Cost Lists
Although P2/FINANCE-SP comes equipped with an exhaustive list of cost items in its
inventory, you may find that you have cost  items or even whole categories for a specific
project that are not included in the software's inventory. You can make  changes to the
cost lists by clicking on the Make Changes to Cost Lists button from the Cost Inventory
page. When you click on that button, you  open a new dialog box from which you  can
make changes to the inventory. Although you can make changes to cost categories  and
cost items, the list of processes in P2/FINANCE-SP is fixed.

4.4.3.1.   Cost Items
The Make Changes to Cost Lists dialog box shows a list box identical to the box on the
Cost Inventory  page. Below the box are buttons you-can use to create, rename, and de-
lete your own cost  items.
22

-------
                                                        Cost Inventory Development
  Make Changes to Cost Lists
                                                   Show/Edit
                                                ' - ® Investment Cost List
                                                 ' ^ xp .Operating Cost List
    Process
                      Cost Category
    ALL PROCESSES
                     *| ALL CATEGORIES
^1 r*IRS»enue?
                        Hew,,. 1| Rename...! (Delete ]
      Purchased Equipment
       Air compressor
       Automatic coaler
       Computer system
       Delivery
       Digital output systems
       Electronic imaging system
       Exposure lamp
       Exposure unit
       Film processing equipment
                                                     •^ * ~ ** ^-     ^
                                                  <'£ Tailored List
                                                 * # (*"< Complete List
     Hew...   1 Rename...!
                                                                        OK     -   x
3 .
    To create a new cost item, you must first use the radio buttons to classify the item as a
    member of the operating cost list or investment cost list. Then you need to select the
    process and category in which you want the item to appear. To do this, you can either
    select a process and category from the Process and Cost Category drop-down boxes
    or simply highlight another cost item in the list box under the category and  process
    where you want the new item to appear.

    Click on the New... button to bring up a dialog box that will prompt you for the name
    of the new item.
    Enter the new cost item name, click on the Tailored List check box if you will use this
    item frequently in your analyses (see Section 4.4.3.3), and then click Create.
The new item you defined will now be visible in the list box (in alphabetical order). You
can rename or delete an item you previously added, in a similar manner using the Re-
name... and Delete buttons.

Please note that you cannot change or delete cost items originally  included in  the soft-
ware, the Core List.

4.4.3.2.    Cost Categories
Just as you can create new cost items, you can create whole categories in which new cost
items can be placed. You may, for example, be considering a project for which you would
qualify for financial and technical assistance. In this case, to  capture the benefits of this
assistance, you could create an investment cost category called ASSISTANCE in which
you could create cost items such as Pollution Prevention Grants. This category may offset
some of your investment costs and better reflect the economic benefit of the project.
                                         23

-------
             Cost Inventory Development
  |H Create a new Cost Category
       .Namefor new Cost Category
               f~ R«venue?
           i Create
Cancel
 1.  To create a new category, first indicate
    where you want the category to appear
    by selecting either Investment Cost List
    or Operating Cost List.
2.  Under the Cost  Category drop-down
    box,  click  on the New...  button  to
    bring up a dialog box with  a prompt
    for the new name.
3.  Enter  the new  cost category name,
    click on the Revenue check box if this category will contain revenues rather than costs
    (such as the category Assistance in the above example), and then click Create.
The new category is now visible in both the Cost Category drop-down box and the list
box. The category will be added to each of the four processes at the bottom of the Core
List. Renaming or deleting a category  you previously added can be  done in a similar
manner using the Rename... and Delete buttons.
Similar to the cost items, you cannot change or delete categories originally included in
the software.

4.4.3.3.   Complete vs. Tailored Lists
On both the Cost Inventory page and the Make Changes to Cost Lists dialog box, you
will notice radio buttons that allow you to select between viewing the Tailored List and
the Complete List. This choice determines what items you will see in the list box in addi-
tion to the Core List (the cost items originally included in the software). Please note that
on  the Cost Inventory page, the button is labeled Tailored List and Other Included
Items.
The investment and  operating Tailored Lists contain the cost items from the Core List
plus any additional items you specifically  add to the tailored list. You should add to this
list any items that you expect will be relevant for many of the analyses you will perform.
If there are items that you do not expect to use  again, it is better to leave these items off
of the  Tailored List  so that you do not have to wade through them each time you are
building a cost inventory. All items that you add, regardless of whether you place them
on the Tailored List, are placed on the Complete List. Thus, the Tailored List is a subset
of the Complete List.
24

-------
                       Cost Inventory Development
13 Report Options
     Coperating Cost List
C" Tailored List
f*" Complete List "
               then Process
        j Create Report |
Cancel
  4.4.3.4.    Cost List Reports
  Recognizing that each of the
  cost lists is quite  long,  you
  may find it helpful to have the
  complete  list  in   front  of
  you—either on the screen or
  on paper—before you begin
  to build your  project inven-
  tory. A copy of the Core  List
  appears as Appendix B in this
  User's  Guide. If you have
  tailored this list significantly,
  then you can display an up to
  date cost list. P2/FINANCE-
  SP enables you to view each
 list at any time from the Make Changes to Cost Lists dialog box.
  1.  Click the Report...  button which brings up a new dialog box titled Report Options.
    You are now presented with three options.

 2.  Simply chose the options you want then click on the Create Report button to have the
    software generate the report.

 You can list the costs in one of two ways using the Order by: radio buttons. With Proc-
 ess, then  Category selected, the report will list all of the categories and items within one
 process before listing any from the next process. For example, you will see all categories
 of Pre-Press costs listed, then all  categories of Press costs. Conversely,  with Category,
 then Process selected, the report will list all processes for a category (e.g., labor costs for
 Pre-Press, labor costs for Press) before listing those processes for the next category.
 In the upper left-hand corner of the report screen, the menu headings File and Edit ap-
 pear, which allow you to print or save the report. See Section 7.3 for a full description of
 saving and printing reports.

 4.5. Generating a Report
 From the Cost Inventory-page, you can generate a report that shows the cost items you
 have selected to be on your operating or investment cost inventory for the active project.
 By simply clicking on the  Report  button, a report like the one following will be  gener-
 ated.

 The format of this report can assist you in developing your cost inventory.  Once you have
 developed your comprehensive cost inventory, the report serves as a checklist, asking you
 whether each cost item is relevant to your project and significant from a cost perspective.
 The last column of the report assists data collection and  subsequent data  entry  into
P2/FINANCE-SP by providing a placeholder for collected cost data.
        25

-------
                                                    Cost Inventory Development
In the upper left-hand corner of the report screen, the menu headings File and Edit ap-
pear, which allow you to print or save the report. See Section 7.3 for a full description of
saving and printing reports.
Sample Report
Directory: CASESTDY
Project: Dry Film Imaging
                            INVESTMENT COST INVENTORY
10/06/1997
  Page   1
Pre-Press
  Purchased Equipment
    Dry film imaging system
  Start-up/Training
    Training
                                   Investment
                                      Years     Relevant?  Significant?     $
                            OPERATING COST INVENTORY
                                                Relevant?  Significant?   $/year
Pre-Press
  Materials
    Dry film
    Silver film & chemicals
  Labor
    Process camera operator
  Waste Management
    Disposal
  Service Bureau Costs
    Service bureau charges
    Transportation
  Maintenance Contract
    Maintenance cost
Press
  Labor
    Additional press labor
Post-Press/Finishing
  Labor
    Additional shipping labor
Non-process/cither
  Revenues (Revenue)
    Sale of product
                                       26

-------
                                                      Investment Cost Data Entry
 5, Investment Cost Data Entry
 The quality of the data you gather and enter into the program ultimately governs the util-
 ity of the analysis. The more reliable and accurate the data, the better and more effective
 the output of the program. Remember that the purpose behind performing this type of
 analysis is to reflect the true costs of a project in order to assess its relative profitability.
 The use of cost data that are inaccurate can skew the analysis and paint a distorted picture
 of the financial viability of the project.
 It is therefore important to get the best possible price quotes from product and service
 vendors for all capital costs. In addition,  as you go through your cost inventory, you want
 to be sure to use the best information available to estimate costs for which direct quotes
 are not available. If you have undertaken capital projects 'in the past, the costs they in-
 curred may serve as good indicators of costs you can expect with a new project. If you do
 not have this information available, your local trade association may  be able to provide
 data on which you can base your estimate.

 With that said, there is a trade-off between the incremental benefit of  increased accuracy
 and completeness and the associated cost of collecting cost data. Costs that you are cer-
tain are small, even if you do not know their precise amount, may not  be worth much ef-
fort. For each piece of data you collect, a quick mental calculation of the cost of your
time versus the  expected benefit in terms of analysis accuracy  should be made. This
analysis tool, like any other, should facilitate your decision making, not  hamper your ef-
forts. You have to be the final judge of how to best use your time.
Oost Inventory Jj
Project
Dry Film Imaging -r |
Hew... 1 1 Copy™ 1 1 Delete 1

investment Costs |_ C
Investment occurs at end of year
| Hiw... i ('Copy... | j;0elete,i ' ' '
•
Process Cost Category *" * _ -
! ALL PROCESSES \f :'|A[


* .»*», . ,£_„

Pre-Press %- /-
Purchased Equipment -
Dry fflm teagmg system
Start-up/Training ,. , •
Training * * !f-
.L CATEGORIES •»•.,
,1 ,. ™ *„•-,.„" ^. ^^ i^
Cost ($) Saluage I
' .,*r7, -r. ,^ ;
. i . . ~ . T If -am . i
30,000
"..--. --". '"r^. .1"
- - ""*" 1,300
~ t, *• -! ^ ™^.™ ^
• ,1 "\ i / ~ 0 ~ ™ ~
-> " . - M? .,.:., - ~. - %• .
., i^., -^ ^-> -
' "»'* m*/«'«jnf . i^. Mm „. "» "VI1' ?
~ r ~^> •s^' ^j,™ ~^ ~ t v ^"
^ — *" " '*• __ < •»!_ J V J» --- J. f ^
Enter all coats «?3'* ^ jT*"^


>cfo//ars _ * - ~> "-
%_^ v"^-"^* - . i^— ,'* ^#-
> ~_ --C7 J i Vr -
Jgeratihg Costs %][_ Analysis |
•*" — " . — ~ 'ae* li
'project parameters f Default")
"V*. ^ ^ "^
— ** "" _
Project Lifetime drears) ("5^
F" . IaKlfiFes_._| „ * , 3^?,
j OcprecidtioRui iiDDB/r^O ^i
i
%
f ^ Inflation Rate j 3.00 %
,*.'^Tt, ""-
$) Equipment Life Depreciation . ^
* * * < ™ /(
^ t~ ~S - ^~.,^y
iDefault * v *" ^ '„ '
[Expensed ^ ^ r^^
•r ~- ^ -,
~^ ~ p-_ "^ -, V
_!, ^T
* * * S * ?
«i ~~ *" vK. -«• i- *
^""•1 -\ " ^ "*" « •*
* — x-
r '" • Report -1 ^ '

?
i
-s*
*flfc
l]
** J*
*?•
•^ ^
?.
J
"V
/,
                                       27

-------
                                                      Investment Cost Data Entry
 Investment cost data are entered on the second page of the program, Investment Costs,
 pictured above. The upper left portion of the box displays the same format and options
 you saw on the Cost Inventory page. It is included on this page as well so that you can
 see what part of what project you are working on and can jump to different categories,
 processes, or projects without going back to the Cost Inventory page. The upper right
 portion of the page shows a small box wherein you will define the project's financial pa-
 rameters. The entire bottom portion of the page shows a data window where the actual
 cost data will be entered. These latter two portions are described in detail below.
 All cost data entered in P2/FINANCE-SP are considered to be in Year 0 dollars. Because
 the software includes the effects of inflation in the analysis, this feature is important to be
 aware of and understand. For investment costs, this distinction becomes important if you
 have investment costs occurring in years  other than Year 0.
 For example, if you are considering a new  solvent dispensing system for your screen
 reclamation operation, but you do not anticipate purchasing it for two years, you would
 create your  cost inventory with an investment year set to two. The price quotes you get
 today for purchase and installation will be in today's (Year 0) dollars. In two years, if you
 go to buy the equipment and pay for the installation, you might find the prices higher than
 the  quote. The higher the  economy's  rate  of inflation, the greater this difference.
 P2/FINANCE-SP  automatically accounts for this difference by adjusting the data you
 enter. Therefore, all data must be  entered in Year 0 dollars so that the proper adjustment
 is made.

 5.1. Project Name
 Similar to the Cost Inventory page, you can copy or delete a project from  the Invest-
 ment Costs page.  You cannot create a new project from this page because it would not
 have a cost inventory.

 5.1.1.   Copying a Project
 One    of    the   main    features   of
 P2/FINANCE-SP is that it allows you to
 compare projects in terms of their  finan-
 cial attractiveness. You can  compare cur-
 rent processes to  new processes, or you
 can compare different variations of a new
 process to each other. In many cases, you
 will find that  a new project you  are con-
 sidering and wish to  analyze  has  some
 overlap—in terms  of inventory items -and
 costs—with projects you have already en-
 tered. P2/FINANCE-SP  allows  you  to
 copy previous projects that you can then modify as needed for your next analysis. This
feature is useful at  different stages of your analysis when  you want to conduct sensitivity
analyses for various cost items.
IK Copy a Project
     Project to copy
      ory Film Imaging
3
     liame for new Project
     [New project
                        Cancel
                                       28

-------
                                                      Investment Cost Data Entry
  1.  From the Investment Costs page under the Project window, click on the  Copy...
     button to copy the active project. A dialog box appears on your screen prompting you
     for the name of the project to copy and a name for the new project.
  2.  Type a name for the new project using the guidelines mentioned in Section 4.2.
"  3.  Click the Copy button to return to the Investment Costs page.

  The new copy of the project you were working on will now be visible in the Project win-
  dow and is therefore now the active project.

  5.1.2.   Deleting a Project
  Just as you can create a new project, you can delete an
  existing project.

  1.  • Make sure you have the project you want to delete
You should only delete proj-
ects when you are sure you
wil( not want to use them in the
future. Remember that it may
be  easier to modify a project
you  already  created than  to
start a new one from scratch.
     visible in the Project window.

 2.  From the Investment Costs page, under the Proj-
     ect window, click on the Delete button to delete
     the active project. Two dialog boxes successively appear on your screen asking you to
     confirm the deletion.

 3.  Click both  Yes buttons to confirm and to return to the Investment Costs page.

 .5.2. Investment Year
 Similar to the Cost Inventory page, you can copy or delete an investment year from the
 Investment Costs page. You cannot define a new year from this page because it would
 have no cost inventory.

 Most  analyses target  investments you  are contemplating  for the  immediate future.
 P2/FINANCE-SP assumes that investments occur at the end of the year and that once the
 investment is made, operating costs begin the following year. Thus, investment costs are
 incurred in Year 0, and operating costs begin in year  one. When you start a new project, it
 is assumed that it is a current investment and therefore will occur at the end of Year 0.
 You may find, however, that your investment has phases that will happen  in'different
 years. For example, you may purchase a new building at the end of Year 0 and a new
 press at the end of year one. P2/FINANCE-SP provides the flexibility to allow you to use
 multiple investment years to account for one-time investment costs that happen through-
 out the lifetime of the project.

 5.2.1.   Copying an Investment Year
 For some multi-year projects, investments in different years may be similar to each other.
For example, you may be replacing or converting your three printing presses one at a time
over 3 years (due to cash flow constraints,  or just to minimize disruption to your busi-
ness). In this case, rather than creating two new investment years (end of year one and
end of year two) and developing a similar cost inventory and entering similar  cost data

                                      29

-------
                                                     Investment Cost Data Entry
three times, P2/FMANCE-SP allows you to copy data you have already entered. In this
instance, you can develop your cost inventory and enter the cost data just once. Then you
can copy that information—both the cost items and the cost data—to new investment
years, rather than retyping it.
                                        ILJ Copy an Investment Year
                                                Inuestmerrt year to copy from
                                                   Hew Inuestment will be
                                                    made at end of year
                                                   Copy
Cancel
 Once you have built your inventory and entered cost data for the base project year, in-
 formation that will be the same for other
 project stages can be copied to other years.
 1.  From the Investment Costs page, un-
    der the Investment occurs at the end of
    year window,  click on the  Copy...
    button to copy the  active project year.
    A  dialog  box  will  appear on your
    screen prompting you for the year you
    want to  copy from and the year you
    want to copy to.
 2.  Select the year you want to  copy from
    (the base year where you already en-
    tered data) using the arrow next to the drop-down box.
 3.  Enter the new year.
 4.  Click the Copy button to return to the Investment Costs page.
 The new investment year will now be visible in the Investment occurs at end of year win-
 dow and is therefore now the active year. Any changes you now make in the investment
 inventory or cost data will be applied to that year only.

 5.2.2.   Deleting an Investment Year
 In addition to copying an investment year, you can delete an existing one.
 1.  Make sure you have the year you want to delete visible in the Investment occurs at the
    end of year window.
 2.  From the Investment Costs page, under the Investment occurs at the end of year
    window, click on the Delete button to delete the active project. Two dialog boxes ap-
    pear on your screen asking you to confirm the deletion.
 3.  Click both Yes buttons to confirm and to return to the page on which you were work-
    ing.

 5.3. Project Parameters
To properly measure the profitability of an investment, you need to calculate the cash
 flows that will result from that investment. The calculation  of cash flows requires the im-
position of financial parameters that characterize the monetary aspects of your invest-
                                      30

-------
                                                       Investment Cost Data Entry
 ment. Specifically, you need to consider how your investment will depreciate, what level
 of taxation you will be subject to, how your costs will increase over time, and how the
 value of money will inflate over time.
 P2/FINANCE-SP helps you define these parameters and then uses them to shape the
 analysis. In this way, you can tailor the analysis to your particular situation by using pa-
 rameters relevant to your facility and the project you want to analyze. For investment
 costs, you will want to consider project lifetime, depreciation, taxes, and inflation as you
 enter the data to perform the analysis.

 5.3.1.   Project Lifetime
 The lifetime of the project is composed of many variables such as the expected lifetime of
 the equipment and the number of years for which operating costs are reasonably predict-
 able. The maximum project lifetime you can enter in P2/FINANCE-SP is 15 years.
 P2/FINANCE-SP uses the lifetime  you enter to set a cap on the number of years for
 which you can enter operating cost data and the extent of results that the analysis  will
 generate. You will not be able to set Reporting Years (described in Section 7.2.1)  beyond
 the project's lifetime. The software will recognize gains and losses from assets that fully
 depreciate and working capital that is recovered only within the project's lifetime.
 1.

 2.
 3.
To enter the project's lifetime, click on the Project Lifetime (years) box on the In-
vestment Costs page.

Type in the lifetime you want to use for the project, in round years and press Enter.
A dialog box will ask you to confirm that you want to change the project lifetime pa-
rameter. Click Yes to confirm or No to cancel.
 5.3.2.   Tax Rates
 Taxes play a major role in determining the
 profitability for any project and are calcu-
 lated at a company-wide level. Therefore,
 when  you are defining your  income tax
 rates, consider whether the project  would
 change your current tax rates.
 Using tax rates, taxes are calculated by the
 software in the following  way. Operating
 costs and depreciation are  subtracted from
 revenues,  thereby  reducing the company's
taxable income. In addition, when applica-
 ble,  the  difference  between  the salvage
value of the equipment and its remaining
book value when sold (i.e., salvage value - book value) is added. Based on this taxable
income (i.e., Revenues - Operating Costs - Depreciation +  [Salvage  Value - Book
Value]), state and local taxes are calculated. The federal government allows you to deduct
1 Project Default Tax Rates
v \
» -•*;
-Tax Rates
T ./Federa
J."" State '
^' Total''"
- A ». l'**.
3*
'- , ''"-y "" vV
y «~

^^••^•••Tc

>r
1 j | 2.60 % -
J 	 1^,%-^
^tijt0?!^ r >'
«^mj. * "*-

3.57 %- -
4
v "*"*:
7 OK |
/",, -
,-»
, V -^ «.
~- * ' v
»l%v%T
i** % t."14
                                       31

-------
                                                      Investment Cost Data Entry
both local and state taxes before calculating your federal taxes. P2/FINANCE-SP thus
subtracts the local and state taxes from the taxable income, and uses this value to calcu-
late the federal taxes. The effective tax rate can be calculated as:
        total = federal x (l - state - local)+ state + local.
                                          Note: P2/FINANCE-SP assumes that capi-
                                          tal  gains  taxation  and  investment  tax
                                          credits are not relevant to financial analy-
                                          sis. These tax impacts, where applicable,
                                          can be entered manually into the software.
1. To enter tax rates for federal, state,
   and local levels,  click once  on the
   Tax Rates...  button from the  In-
   vestment Costs page. A dialog box
   titled Project Default Tax Rates will
   pop up with fields for federal, state,
   and local taxes.
2. The federal tax rate box will have white text on a blue background, which identifies it
   as the active box. Type in your federal tax rate, then press Tab, Enter, or use the
   mouse to move to the state tax rate box.
3. Type in your state tax rate, then move to the local tax rate box, and enter your local
   rate here if applicable. Notice that each time you enter tax rate information and then
   press Tab or Enter, the effective tax rate is updated in the Total box.
4. When you have finished entering your tax rates, click OK.
5. A dialog box appears asking you to confirm the change. Click Yes to return to the In-
   vestment Costs page.
5.3.3.   Depreciation
Equipment that you purchase and use for more than one year is said to depreciate. For
financial accounting purposes, the amount by which something depreciates each year rep-
resents the service potential that is lost that year due to use. For tax purposes, this amount
is governed by the tax code. In either case, depreciating an asset is a means of allocating
its cost to the years in which it is used. The depreciation is considered a cost that is sub-
tracted from  gross profit in order to  calculate pre-tax profit. Thus, the higher the depre-
ciation, the lower the taxable income, and the lower the tax you have to pay. Lower taxes
paid mean higher cash flows and higher investment profitability. It is therefore important
to optimize the depreciation of your assets within the constraints of the tax code.
The IRS requires firms to depreciate  many of the capital costs involved in an investment,
including soft costs such as engineering and installation. Firms may, however, be allowed
to directly expense  some initial investment costs such as site preparation and start-up re-
training in the initial investment year.  Expensed means that the entire  cost of the  asset
will be charged in the first year of the investment. Working capital costs cannot be depre-
ciated because they are recovered at the end of the  lifetime of the project. Land also can-
not be depreciated.
                                        32

-------
                                                       Investment Cost Data Entry
 All initial investment costs will be depreciated using the method you specify in the pro-
 gram. The way you choose to depreciate your equipment will be governed by IRS rules
 that you need to understand. Within these rules, you should choose the method that pro-
 vides the highest present value of tax deductions, i.e., you should accelerate your depre-
 ciation to the extent allowed by law.

 1.  To  select a default depreciation method for the project, click on the Depreciation pull-
    down menu. If this menu does not contain the desired depreciation method,  click on
    the Depreciation...  button to define a new depreciation method. A description  of the
    steps to define a new depreciation method appears in Section 5.3.3.4.
 2.  Click on the desired depreciation method.
 3.  A dialog box appears asking you to confirm the change. Click Yes to confirm  or No to
    cancel.

 5.3.3.1.   Depreciation Methods
 P2/FINANCE-SP offers four different  depreciation methods to choose from. The first
 three methods use a half-year convention, whereby only half the value of a full year's de-
 preciation is allowed in the first year. The other half is added on at the end of the formal
 depreciation period, adding a year to the recovery period. The half-year convention ad-
justs for the fact that assets are bought at different times throughout the year; the IRS as-
 sumes that, on average, assets are bought halfway through the year. The IRS allows the
 use  of  other conventions  for certain asset classes. These conventions can  be  entered
 manually into the program.

 1.  Straight Line (SL).  This is the most straightforward means of depreciating an  asset.
    Using straight-line depreciation, the asset cost is evenly spread over the depreciation
    period.

2.  150% Declining Balance (1.5DB). This method allows accelerated depreciation. The
    asset depreciates faster  at the beginning of its life, in the first year 1 !/2 times as fast as
    it would using straight-line depreciation. In subsequent years,  the remaining value of
    the  asset is  depreciated at this same  rate until the point at which the straight-line  de-
    preciation of the remaining book value is higher. The straight-line method  is used
    from that point until the asset is fully depreciated.
3.  200%  (Double) Declining Balance (DDB). Most business assets that have a useful life
    of 10  years or less can be depreciated  via DDB. This method works the same as
    1.5DB but the rate is twice the straight-line rate.
4. Enter Each  Year's Depreciation (EY). This method allows you  to enter directly  the
   percentage of total depreciable costs that should be depreciated  each year. It can be
   used for mid-month and mid-quarter conventions. Using this method, you can depre-
   ciate an asset up to, but not beyond, 100% of its value. When using this method, the
   software uses a half-year convention if you sell the equipment before you fully depre-
   ciate it.
                                        33

-------
                                                      Investment Cost Data Entry
 If an asset is salvaged before the end of its depreciation period, then only half of the de-
 preciation is taken in the salvage year. The IRS assumes that a salvaged asset is taken out
 of service halfway through the year and allows only one half of the depreciation for that
 year. Because of the half-year convention, if an asset is salvaged in the last year of the
 depreciation period, then the full depreciation is taken in that year. (Both the half-year
 convention and salvage convention assume that an asset is taken out of service half way
 through the year.) For more information on salvage value, see Section 5.4.1.

 5.3.3.2.    Depreciation Period
 The depreciation period is the tax life  of the asset as specified by the tax code. For the
 purposes  of calculating  depreciation, you want to use the tax life (for income tax report-
 ing) which  may be different from the economic life  (for financial reporting)..Under the
 Modified Accelerated Cost Recovery System enacted by Congress in the 1980s, assets
 are placed in certain classes which specify the period  over which they are depreciated for
 tax purposes. In general, the following periods prevail.3

 Asset                                                                Period
 Small tools                                                           3 years
 Automobiles, light trucks, computer equipment, research and development  5 years
 property
 Office equipment and furniture,  property not elsewhere classified includ-  7 years
 ing most manufacturing equipment, e.g. assets used in screen printing
 Buildings and real estate placed into service before 5/13/1993              31 Vz years
 Buildings and real estate placed into service after 5/12/1993                39 years

 5.3.3.3.    Offset Period
 The IRS also regulates  when depreciation should begin. Depreciation should begin, ac-
 cording to the IRS, not when you purchase the equipment, but when you "place it into
 service," that is, the time when the equipment is ready for use. The equipment does not
 necessarily have to  be in use at this time, but should be ready and available for use. Be-
 cause  for the  analysis we  assume  an investment  occurs  at the end  of a  year,
 P2/FINANCE-SP assumes that the equipment is placed into service the beginning of the
 following year. For example, if the investment occurs at the end of Year 0,  depreciation
 begins in Year 1.
 In most cases a firm purchases a  piece of equipment and
makes it ready for use almost immediately. However, in
some cases  there may be a delay between purchase and
making the  equipment ready for use. If a company pur-
chases a press at the end of Year 0, but  does not install it until the end of Year 1 because
                                                       year, not calendar year.
3 Department of the Treasury. Depreciation. Internal Revenue Service. Publication 534. 1995.

                                        34

-------
                                                        Investment Cost Data Entry
  of construction delays, the IRS does not allow the firm to begin depreciating it until Year
  2. This delay is known  as the offset period. P2/FINANCE-SP allows you to choose an
  offset period (in years).  In the example described above, the offset period would be  one
  year.
  5.3.3.4.    Developing Depreciation Methods

  In P2/FINANCE-SP, you determine the parameters for the depreciation of investment
  cost items. The software allows you to use one of the common depreciation methods or to
  define each year's depreciation.
  Depreciation

                                 Depreciation
            Depreciation Period jTl^o- J   ^ ^ Straight line
            1 4  - '^jT'lf   r^*; '^  ^ ^J O^50% declining balance oner straight line
                           l.°,t .l,^^£li.2«>%^ecnnta8 balance ooer straight line
                                                              on
                                             filter ¥eai%f Depreciation
            Each named set of depreciation parameters can be liiatcrlectto' any project or
            mvesimentco&titem, , _    s  f-^",—  "-/-'  '/''-"      /«-'«'
            Note AkfRanges you "make to 'depreciation parameters \vi!l affect at! projects '  ~~
            using that depreciation method!^   *~   ~ ^   ^  -  -       f *<*>'*
                                                   OK
 1.  To get to the Depreciation dialog box, click once on the Depreciation   button from
    the Investment Costs page. The dialog box will show the current default method in
    the window and the parameters that define it below. (These windows will be empty
    the first time you define a depreciation method in a project directory.)

2.  To  create  a new depreciation method,
    click on the New... button under the drop-
    down box.  A smaller dialog box will ap-
    pear  prompting you for a name for your
    new method.
3.  Type in the name you  want to use and
    click Create.

4.  Using the Tab key, an Arrow key, or the
    mouse, move the cursor to the Deprecia-
 If you do not have your own nomencla-
 ture for different depreciation  meth-
 ods, it may be helpful to use the for-
 mat xx/dp/oy, where xx represents the
 method (SL for straight-line, 1.5DB for
 150%  declining  balance,  DDB  for
 200% or double declining balance, or
 EY  for each year's depreciation),  dp
 represents  the depreciation  period,
and oy represents the offset year. For
example, SL/5/0 is straight-line depre-
ciation over five years with a zero year
offset.
                                        35

-------
                                                      Investment Cost Data Entry
                                                         Please note that you can-
                                                         not depreciate an asset
                                                         beyond its full cost,  i.e.,
                                                         more than 100%.
    lion Period data box and type in the depreciation period (in years).
5.  Next move to the Offset Year data box and enter the number of years to offset depre-
    ciation.
6.  Now you need to choose among the four depreciation
    methods using the radio buttons. If you choose to enter
    each year's depreciation, a new dialog box will open in
    which you can enter a specific percentage of the asset
    that will depreciate for each year.
7.  You have now created a new depreciation method. To create another, simply repeat
    the above steps (starting with Step 2). When you are ready to exit the Depreciation
    dialog box, click OK.
The new method(s) you create are now available in the drop-down list box next to the de-
preciation button. Select the method you want to use as your default. P2/FINANCE-SP
will ask you to confirm this change. Click Yes to confirm.
Please note, you can copy or delete depreciation methods  as well from the Depreciation
window.
Review of P2/FINANCE-SP Time Terms
       investment year(s)
          project lifetime


      depreciation period

           equipment life
             offset period

 analysis parameter years
                           the year(s) at the end of which investments occur (operating
                           expenses related to the investment begin to accrue  in the
                           following year)
                           the life of the project based on equipment life, desired du-
                           ration of operating costs, and other relevant business con-
                           siderations
                           the period over which a capital item can be depreciated for
                           taxation purposes
                           the expected economic life of a piece of capital equipment
                           the delay between when an investment is made and when it
                           is placed into service
                           the starting  and ending years of the  analysis report (the
                           choice of these years affects only the analysis report, not
                           the calculations)
5.3.4.   Inflation
The last of the Project Parameters relating to investment costs is inflation. The inflation
figure you use here should be your best estimate of the average annual rate of inflation of
all costs for the lifetime of the project.
1.  To enter the  inflation rate, click on the Inflation Rate box on the Investment Costs
   page.
                                       36

-------
                                                      Investment Cdst Data Entry
 2. Type in the inflation rate you want to use for the project and press Enter. A dialog box
    will ask you to confirm that you want to change the inflation rate parameter.
 3. Click Yes to confirm or No to cancel.

 5.4.  Data Entry
 In the data window that covers the bottom half of the Investment Costs page, you will
 see a spreadsheet with the cost items from your inventory in the left-hand column. Across
 the top of the spreadsheet are boxes (called cells) labeled Cost ($), Salvage  ($), Equip-
 ment Life, and Depreciation. You will notice that some of the cells below these headings
 are white while others are gray. This color-coding indicates the cells in which you can
 enter information; the cells with the white background allow user input.
 Data  you enter in this window will be applied only to the project name and  investment
 year showing on the upper half of the Investment Costs page. If you have a project with
 multi-year investments, you will have to enter data for each year. (See Section 5.2.1 for a
 discussion about copying cost data to different investment years.)

 5.4.1.   Cost Data
 The white cells in the Cost ($) column show where you can enter cost data, in round dol-
 lars, for each cost item you selected from the cost inventory.

 1. To enter cost data, place the cursor anywhere inside the data window and click once
   to activate the window.
2. Move the mouse to the  first box in
                                       P2/FINANCE-SP only accepts whole dollar
                                       numbers, i.e., the software will not recog-
                                       nize cents, so round to the nearest dollar.
                                       In addition, the cells are  not equipped to
                                       perform mathematical functions. You  can
                                       use  the  on-line calculator (see  Section
                                       2.3.2) to perform calculations.
    which you want  to enter data, and
    triple click. Alternatively,  you can
    use the Tab or Arrow key to move to
    the data cell. The data cell will now
    be highlighted and you can type  in
    the dollar amount of the cost. Once
    the number is typed, you can either
    press the Arrow or Tab key or use the mouse to move to the next cell.
3.  To modify, existing cost data, simply repeat the above procedure to overwrite your
    previous entry.

The next column, which also contains cells with a white background, shows where you
can enter Salvage Value. Salvage value reflects the dollar value of the equipment at the
end of the project, i.e., the amount for which your can sell the equipment. You enter these
data just as you entered cost data, in whole dollars. If you do not anticipate the item will
possess value at the end of the project,  you can leave this cell blank.
If an asset is salvaged before the end of its depreciation period, then only half of the de-
preciation is taken in the salvage year.  The IRS assumes that a salvaged asset is taken out
of service halfway through the year and allows only one half of the depreciation for that
year. Because of the half-year convention (see Section 5.3.3.1),  if an asset is salvaged in

                                       37

-------
                                                     Investment Cost Data Entry
the last year of the depreciation period, then the full depreciation is taken in that year.
(Both the half-year convention and salvage convention assume that an asset is taken out
of service half way through the year.) For more information on depreciation, see Section
5.3.3.4.
If you enter a Salvage Value for a particular cost item, you also need to enter a value for
Equipment Life. This number represents the expected lifetime of the item, which may be
different than its tax life. For example, you can depreciate a new film processor over five
years for tax purposes, but you may expect the processor to be useful for eight years. In
this  case, your depreciation method will be based on five years,  but you will set the
Equipment Life equal to eight. You do not need to enter an equipment life, if the item has
no salvage value.
If your depreciation method includes an offset year, P2/FINANCE-SP adds the equip-
ment lifetime to the offset year. For example, if you specify an offset period of one year
and an equipment lifetime of eight years, P2/FINANCE-SP will salvage the equipment in
Year 9, instead of Year 8.
Because land is not depreciable, you cannot enter a depreciation method for the LAND
category'. If your project includes the future sale of a land purchase, you may enter a sal-
vage value and equipment life  to represent the expected future value and the number of
years you anticipate retaining the land, respectively.

5.4.2.   Depreciation Method  Selection
The final step for entering a cost item is setting the depreciation method. The depreciation
for a cost item is automatically set to  Default, referring to the depreciation method ap-
pearing in the Project Parameters panel. You can change the depreciation for a specific
cost item as follows.
1.   When you click on a white cell in the
    Depreciation column, a small window
    with   the  established  depreciation
    methods will appear.
2,   Using the Arrow keys  or the mouse,
    select the method you want to use for
    the particular  item. If you  use the
    mouse, simply click on the method; if
    you use the Arrow keys, press return
    after you have highlighted the method.
    If none of the methods that appear is
    appropriate for the item, you need  to
    develop a new depreciation method as explained in Section 5.3.3.
Once you have completed a row, you can move on to the next and repeat the above proc-
ess. If there are problems with your entry, P2/FINANCE-SP will alert you and suggest
corrections before advancing to the next cost item.
Default refers to the method that is visible
in the Depreciation drop-down box win-
dow on the Project Parameters panel. If
you change which  method shows in this
box, all cost items that have Default se-
lected as their depreciation method will
use the new method shown in the window.
Expensed means that the entire cost of
the asset will be charged in the first year
of the investment. In other words,  if you
expense an item, you are not depreciating
it, but rather are treating  it like any other
business expense.
                                       38

-------
                                                       Investment Cost Data Entry
 5.4.3.   Working Capital
 When beginning a new process, developing a new product, or increasing production ca-
 pacity, it may be necessary to temporarily set aside funds for project start-up. The com-
 pany can recover these temporary investments at the end of the project's lifetime. During
 the project though, these investments are "tied up" in the project (i.e., not available for
 other investments) and the time value of money must be accounted for through the appli-
 cation of an inflation rate and a discount rate. An investment in inventories is a common
 working capital consideration that is relevant for the financial analysis of a project. For
 example, it may be necessary to purchase $3000 worth of inventory in substrates and inks
 when you bring a new printing press on-line at the end of Year 0, knowing that you can
 recover these costs by liquidating (i.e.,  selling) the inventory at the end of the project's
 lifetime. In this example, you would incur a cost at the end of Year 0 (included in the In-
 vestment Cost) and see a revenue (i.e.,  a release  of the tied up funds) at the  end of the
 project's lifetime (included as Final Year Working Capital). Because the company recov-
 ers working capital, working capital cannot be depreciated, and  therefore you  cannot en-
 ter a salvage value or depreciation method.

 Working capital on a facility-wide basis includes the amount of capital tied or freed up in
 accounts receivable, accounts payable, taxes payable, inventories and cash requirements.
 For a particular project, working capital  can be estimated as a percentage of the expected
 change in revenues due to the project. If the company's operations are stable and the pro-
 posed project is not expected to have a significant impact on the company's revenues,
 these other working capital impacts  are typically  minimal and can be omitted from the
 analysis. If developing an inventory, on the other hand, is directly linked to the proposed
 project, its costs should be included in the analysis as working capital.

 5.5. Generating a Report
 From the Investment  Costs  page you can generate a report that shows all of your in-
vestment costs and associated parameters. By simply clicking on the Report button, a re-
port like the one shown below will be generated.

In the upper left-hand corner of the report screen the menu headings File and Edit appear,
which allow you to print or save the report. See Section 7.3.2 for  a full description  of
saving and printing reports.
                                       39

-------
                                                              Investment Cost Data Entry
Directory:  SCRNCASE
Project:  Dry Film Imaging

Project Parameters
  Lifetime:   5
  Tax Rate:   3.57%
  Depreciation:  DDB/7/0
  Inflation Rate:    3.00%

Year 0 Costs
Pte-Press
  Purchased Equipment
    Dry film imaging system
  Start-up/Training
    Training
                                      INVESTMENT COSTS
                                         10/10/1997
                                           Page   1
Cost
 (S)
Salvage
  ($)
Equipment
 Lifetime
30,000

 1,300
               Depreciation



                 Default

                Expensed
* All costs reported in Year 0 dollars
                                              40

-------
                                                        Operating Cost Data Entry
 6.  Operating Cost Data Entry
 As previously noted, the quality of the data, you gather and enter into the program ulti-
 mately governs the utility of the analysis. The more reliable and accurate the data, the
 better and more effective the output of the program. Remember that the purpose behind
 performing this type of analysis is to reflect the true costs of a project in order to assess
 its relative profitability. The use of cost data that are inaccurate can skew the analysis and
 paint a distorted picture of the financial viability of the project.
 The operating costs you enter will accrue to the project each year of its life. Operating
 cost data errors will thus be magnified throughout the lifetime of the project. It is there-
 fore important to make the most realistic estimates of operating costs possible. Use cur-
 rent practices as a benchmark when considering the  effects of a new investment or proc-
 ess change on your operations. When the best estimate  you can make is a range of costs
 (e.g., labor costs will be reduced by  20-35%,  material costs will drop 10-15%), use
 P2/FINANCE-SP to run multiple scenarios to determine the sensitivity of  the overall
 analysis to these ranges. If the result does not change significantly with changes in these
 costs, then you can simply use an average. If the result does change, you either have to
 invest the time in getting a better estimate, or use the worst case to be conservative.
 It is important to understand that there is a trade-off between the incremental benefit  of
 increased accuracy  and completeness and the associated cost of collecting the data. Costs
 that you are fairly certain will be small, even if you do not know precisely what they will
 amount to, may not be worth much effort. For each cost item, a quick mental calculation
 of the cost of your time versus the expected benefit in terms of analysis accuracy should
 be made. This analysis  tool, like any other,  should facilitate your decision making, not
 hamper your efforts. You will have to be the final judge of how to best use your time.'
 Operating cost data are entered on the third page of the  program,  Operating Costs, pic-
 tured below. The upper  left portion of the box displays the same format and options you
 saw on the Cost Inventory page, except for the Investment Year box, which is not rele-
 vant to  operating cost data. The upper right portion of the page,  as on the Investment
 Costs page, shows a small box wherein you will establish the project's financial parame-
 ters, if you have not done so already. If you entered these data on the Investment Costs
 page, you need not re-enter them on the Operating Costs page. Changes made to Project
Parameters on the Operating Costs page will affect data previously entered on the In-
vestment Costs page. The entire bottom portion of the page shows a data window where
the actual data will be entered. These latter two portions—the Project Parameters and the
operating cost data window—are described in detail below.
                                       41

-------
                                                       Operating Cost Data Entry

Cost Inventory J_ Investment Costs J C
Project
j Dry Fhn Imaging •»•
| Hew... f | Copy™ j ( Delete |
Process Cost Category
JALL PROCESSES -r| | ALL CATEGORIES «r




;Esc% Year 1 Cost \
're -Press
Materials ;
Dry film" \ 0.00 56,000 |
"saverfflm a chemicals ; 0.00 15,000
Labor 	 , 	 I ....... . •
Process camera operator j 0.00 j 12,000
vitosTe Management f | --....'.
Disposal 1 3.00 j 3,000 j
Service Bureau Costs j [ ;
1,1 	 1

Derating Costs !jj_
Analysis 1
> Project Parameters ("Default*^
Project Lifetime (years) ["5"
Tan Rates... |
Depreciation... | E
inflation Rate
3.57 %
•"=->- •

j 2.50 %
1
~~ * ~ * *. „• ^
rear 2 Cost {Year 3 Cost | Year 4 Cost |Year
1
r
56,000 i 56,000
15,000 i 15,000
''••'••• "I
12,000 | 12,000
"• '• 1
3,000 | 3,000
I

WK > '
Enter all costs in Year 0 dollars, HoTOo^HanceWbrkiheet f
••" 	 '-'--"••- ',- ' 	 i-"

] ^
1 56,000 * 56
"^ 15,000 15
uzz .MIH
. 12,000 ; 12
J 	 j 	
_J_ 5,000 ^ 3
>

Report j

,*.
8saa



All cost data entered in P2/FINANCE-SP are considered to be in Year 0 dollars. Because
the software includes the effects of inflation in its analysis, this feature is important to be
aware of and understand. For operating costs, this distinction is important because annual
costs are assumed to rise over time as a function of inflation and escalation.
6.1. Project Name
Similar to the Cost Inventory and Investment Costs pages, you can copy or delete a
project from the Operating Costs page.
6.1.1.   Copying a Project
One   of   the    main   features    of
P2/FINANCE-SP is that it allows you to
compare projects in terms of their finan-
cial attractiveness. You can compare cur-
rent  processes to new processes, or you
can compare different variations of a new
process to each other. In many cases, you
will  find that a new project you are  con-
sidering  and wish  to  analyze  has some
overlap—in terms of inventory  items and
costs—with projects you have already en-
tered into the software. P2/FINANCE-SP
|O Copy a Project
      Project to copy
     I Dry Film Imaging
     Name for new Project
     JNew jDroject
           Copy
Cancel
                                       42

-------
                                                        Operating Cost Data Entry
  allows you to copy previous projects that you can then modify as needed for your next
  analysis. This feature is useful at different stages of your analysis when you want to try
  different options for various cost items.

  1.  From the Operating Costs page under the Project, window, click on the Copy... but-
     ton to copy the active project. A dialog box appears on your screen prompting you for
     the name of the project to copy and a name for the new project.
 .2.  Type a name for the new project using the guidelines mentioned in Section 4.2.1.
  3.  Click the Copy button to return to the Operating Costs page.

  The new copy of the project you were working on will now be visible in the Project win-
  dow and is therefore now the active project.

 6.1.2.   Deleting a Project
 Just as you can create a new project, you can delete an
 existing project.

  1.  Make sure you have the project you want to delete
You  should  delete  projects
only  when  you are sure you
will not want to use them in the
future. Remember that it may
be easier to modify an existing
project than to start a new one
from scratch.
    visible in the Project window.
 2.  From the Operating Costs page, under the Proj-
    ect window, click on the Delete button to delete
    the active project. Two dialog boxes successively appear on your screen asking you to
    confirm the deletion.

 3.  Click both  Yes buttons to confirm and to return to the Operating Costs page.

 6.2. Project Parameters
 To properly measure the profitability of an investment, you need to calculate the cash
 flows that will  result from that investment. The calculation of cash flows requires the im-
 position of financial parameters that characterize the monetary aspects of your invest-
 ment. P2/FINANCE-SP helps you define these parameters and then uses them to shape
 the analysis. In this way, you can tailor the analysis to your particular situation by using
 parameters relevant to your facility and the project you want to  analyze.  For operating
 costs, you will want to consider project lifetime, taxes, and inflation.

 6.2.1.   Project Lifetime
 The lifetime of the project is composed from many variables that will be specific to your
 business needs. Considerations, for example, should include the expected lifetime of the
 equipment, and the number of years for which  operating costs are reasonably predictable.
 The maximum project lifetime you can enter in P2/FINANCE-SP is 15 years.
 P2/FINANCE-SP uses the lifetime you enter to limit how far forward operating costs are
projected and the extent of results that it will  generate.  You will  not be able to set Re-
porting  Years (described in  Section 7.2.1) beyond the project's lifetime.  The software
                                       43

-------
                                                        Operating Cost Data Entry
                                           Project Default Tax Rates
will recognize gains and losses from assets that fully depreciate and working capital that
is recovered within the project's lifetime.
1.  To enter the project's lifetime, click on the Project Lifetime (years) box on the Oper-
    ating Costs page.
2.  Type in the lifetime you want to use for the project, in round years, and press Enter. A
    dialog box will ask you to confirm that you want to change the project lifetime pa-
    rameter.
3.  Click Yes to confirm or No to cancel.

6.2.2.   Tax Rates
Taxes play a major role in determining the
profitability for any project and are calcu-
lated at  a company-wide level. Therefore,
when you are  defining your  income  tax
rates, consider whether the project would
change your current tax rates.
Using tax rates, taxes are calculated by the
software in the following  way.  Operating
costs and depreciation are  subtracted from
revenues, thereby reducing the  company's
taxable income. In addition, when applica-
ble,  the   difference  between the  salvage
value of the equipment and its remaining
book value when sold (i.e., salvage value - book value) is added. Based on this taxable
income  (i.e., Revenues -  Operating  Costs  - Depreciation + [Salvage  Value - Book
Value]),  state and local taxes are calculated. The federal government allows you to deduct
both local and state taxes before calculating your federal taxes. P2/FINANCE-SP  thus
subtracts the local and state taxes from the taxable income, and uses this value to calcu-
late the federal taxes. The effective tax rate can be calculated as:
       total = federal x (l - state - local)+ state + local.
.- 1 art IMJlKi, 	 	
Federal |
State |~~
kiV Local _ (7
2.60 %
1.00 %
0.00 %

Total |
3.S7 %
I.  To enter tax rates for federal, state, and local levels, click once on the Tax Rates...
    button from the Operating Costs page. A dialog box titled Project'Default Tax Rates
    will pop up with fields for federal, state and local taxes.
2.  The federal tax data box will have white text on a blue background which identifies it
    as the active  box. Type in your federal tax rate, then  press Tab, Enter, or use the
    mouse to move to the state tax rate box.
3.  Type in your  state tax rate, then move to the local tax rate box and enter your local
    rate here if applicable. Notice that each time you enter tax rate information and then
    press Tab or Enter, the effective tax rate is updated in the Total box.
                                        44

-------
                                                         Operating Cost Data Entry
  4.  When you have finished entering your tax rates, click OK to return to the Operating
     Costs page.

  6.2.3.  Inflation
  The last of the Project Parameters relating to operating costs is inflation.  The inflation
  figure you use here should be your best estimate of the average annual rate of inflation of
  all costs for the lifetime of the project.

  1.  To enter the  inflation rate,  click on the Inflation Rate box  on the Operating Costs
     page.

  2.  Type in the inflation rate you want to use for the project and press Enter. A dialog box
     will ask you to confirm that you want to change the inflation rate parameter.
  3.  Click  Yes to confirm or No to cancel.

  6.3. Data Entry
 In the data window that covers the bottom half of the Operating Costs page, you will see
 a spreadsheet with the operating cost items from your inventory in the left-hand column.
 Across the top of the spreadsheet  are boxes (called cells) labeled  Esc %, Year 1 Cost,
 Year 2 Cost, etc. Similar to the Investment Costs data entry box, you will notice here
 that some of the cells below these  headings are white while others are gray. This color-
 coding indicates the cells in which you will enter information;  the  cells with the white
 background allow user input. (However, white cells beyond the project's lifetime will not
 accept user input.)

 6.3.1.  Escalation
 In addition to the base inflation rate, the program allows you to  identify escalation rates
 for individual operating cost items. Escalation,  defined as a percentage, represents cost
 increases different from the inflation  rate. For
 example, waste disposal costs often rise at a rate
 higher  than inflation. If you predict that infla-
 tion will be 3%,  but that waste disposal costs
 will rise an average of 6%, then the escalation
 rate for waste disposal costs is equal to 3%, i.e.,
 the difference between the item-specific price increase and the overall inflation rate.
 The white cells in  the Esc % column allow you to enter an escalation percentage, if appli-
 cable, for each cost item.

 1. To enter an escalation rate, place the cursor anywhere inside the data window and
   click once to activate the window.

2. Move the mouse to the first box in which you want to enter data, and triple click. Al-
   ternatively, you can use the Tab or  Arrow key to move to the data cell. The data cell
   will now be highlighted and you can now type in the escalation percentage associated
Note: An escalation rate can  be a
negative percentage, indicating that
for a particular cost item, costs are
expected to rise at a rate lower than
inflation.
                                        45

-------
                                                      Operating Cost Data Entry
   with the item. Once the number is typed, you can either press the Arrow or Tab key or
   use the mouse to move to the next cell.
3. To change a percentage already entered, simply repeat the above procedure to over-
   write your previous entry.

6.3.2.  Cost Data
The next column that will also contain cells with a white background allows you to enter
cost data, in round dollars, for each item you selected from the cost inventory. You enter
these  data just  as you entered the escalation percentages. Step-by-^step  instructions are
repeated below.
1. To enter cost data, place the cursor anywhere inside the data window and click once
   to activate it (if it  is not active already as indicated by scroll arrows on the right and
   bottom sides of the box).
                                          Please  note,  P2/FINANCE-SP only  ac-
                                          cepts  whole  dollar numbers,  i.e.,  the
                                          software  will  not  recognize cents, so
                                          round to the nearest dollar. In addition,
                                          the cells  are  not equipped to perform
                                          mathematical functions. You can use the
                                          on-line calculator (see Section 2.3.2) to
                                          perform calculations you need.
2. Move the mouse to the first box in
   which you want to enter data, and triple
   click.  Alternatively, you can use the
   Tab or Arrow key  to move the data
   cell. The data cell will  now be high-
   lighted and you can type in the dollar
   amount of the cost. If the cost begins in
   Year 1, enter it in the Year 1 column. If
   it begins in Year 3, leave the cells under Years 1 and 2 blank and enter the value un-
   der Year 3. Once the number is typed, you can either press the Return key or move
   the mouse arrow to the next box and click on it.
3. To change cost data  already entered, simply repeat the above procedure to overwrite
   your previous entry.
Once you enter a cost, the value automatically appears in subsequent cost year columns
for as many years as specified for the project lifetime. P2/FINANCE-SP provides the
flexibility to manually alter these costs. For example, if you are installing a computerized
pre-press system and plan to eliminate your use of a service bureau after your system has
been operating for two years (as you build capabilities and become self-sufficient), you
would enter your expected' service bureau costs for Year  1. This cost would, automatically
appear in subsequent years. By  changing the cost to 0 in the Year 3 cell, service bureau
costs for Year 3 and subsequent years would become $0.

6.3.3.   Revenue Data
An investment you are considering may affect your company's revenues. For example, by
installing brighter energy-efficient light bulbs, worker productivity may increase, thereby
yielding higher revenues. You would want to consider this effect in your analysis by en-
tering an estimate of these revenues.
                                       46

-------
                                                        Operating Cost Data Entry
 P2/FINANCE's cost inventory is equipped with a REVENUES  cost category. Alterna-
 tively, you can create a new cost category following the instructions in Section 4.4.3.2.
 Either way, the software treats these values as revenues, rather than costs. Therefore, data
 can be entered using positive numbers.

 6.3.4.   Noncompliance Worksheet
 One of the special features of P2/FINANCE-SP is that it includes a cost category for Fu-
 ture Liability and a worksheet to help you calculate one of these liabilities, noncompli-
 ance. Future liabilities are among the least tangible costs you might include in a financial
 analysis, but that does not mean they are insignificant. These liabilities are probabilistic,
 but real, costs. Inclusion of such costs—in instances where they can be quantified	can
 tip the balance of an analysis from unprofitable to profitable.

 P2/FINANCE-SP encourages you to incorporate these costs wherever possible. In most,
 if not all, cases, it will require some type of estimate on your part. One way to make this
 estimate is by multiplying the cost of the liability if it was to occur by its probability of
 occurrence. You should annualize this probabilistic cost and enter it as your cost data. For
 the cost item, Noncompliance (Worksheet), P2/FINANCE-SP provides a  worksheet to
 facilitate your estimate.

 There  are two different ways to enter the worksheet to create an estimate of future liabil-
 ity from noncompliance with environmental regulations. The first way is  to  select the
 Noncompliance Worksheet cost item from the Cost Inventory page.  This cost item is in
 the Future Liabilities cost category under all four processes. Once  selected, one click in a
 white cost cell in the Noncompliance (Worksheet) row on the Operating Costs page will
 send you to the worksheet. The second way to enter the worksheet is to click on the Non-
 compliance Worksheet button from the Operating Costs page. In either case, you will be
 prompted to select the process in which to place the cost item before you enter the  work-
 sheet.   .

 The first page of the worksheet is shown above. In the upper left corner, you need to enter
 the Start Year and End Year for this cost item. Operating costs generated by this  work-
 sheet will run from Start  Year to the End Year.

 The next input required is a selection of which base data to use to estimate noncompli-
 ance liability. Both choices use historic fine data: one uses default values based on  actual
 environmental regulatory noncompliance penalties; the other uses data that you provide
 based on your fine history. The former is taken from generalized data that you will tailor
to your situation by answering a number of questions about your business and your proj-
ect. The latter is your own historic data that you have the ability to modify. It is strongly
recommended that if you have paid noncompliance fines in the past that you use your
own historical data. Generalized data is less preferable because it relies on averaging and
a qualitative assessment of your situation. Please refer to Appendix C for a detailed de-
scription of assumptions behind the Noncompliance Worksheet.
                                       47

-------
                                                       Operating Cost Data Entry
II Noncompliance Worksheet for Pre-Press, Page 1

• 	

Start Year fj*
End Year j~~5
Historic Fine Data Used
C Use Default Values
f Enter Values
-General Self-Asses
How would you r»
Environmental I
reduction,
Rapport with Re
n iiiiii 1 1 11111111111,1

i i
,j jii i '
H
1
1
• H - • t , ,
Include
noncompliance
costs for:

•^•^•^•^•^•^•^•^•xi

Historic Fine Data
(Annual Averages)
Defaults Your Values,
100, j
F Solid (Hazardous) Waste S50 |
F Water
f~ Reporting
50 |
50 |*~
750
1,000
100
0,
, > }'I 4 ' ^' * r
', , • , 'i T Below Close to
eyoun Average Average
Management (include commitment to waste C"^S^ f"(1-0)
integrity of material handling systems, etc.) ~"
.gulators r (1>1) r (1<0)
HI It, ( H
1 \ i \t rU 5* -J ^ ^
Next 1 Report f
t i 5
Above
Average
T (0.9)
-[".
OK j

* ' t''
y» —
Delete J
r
Next, you select the  areas—air, solid (hazardous) waste, water,  and/or reporting—for
which you could incur regulatory fines, by clicking on the appropriate check boxes. Even
if you have not incurred penalties in the past, in order to make the analysis as complete as
possible, you should include some measure of cost for which you could become poten-
tially liable.

If you have selected the Use Default Values radio button, the worksheet shows average
annual noncompliance fines in the upper right-hand corner of the screen as Historic Fine
Data Defaults. If you chose the Enter Values radio button, enter your average annual
noncompliance fines in the appropriate data boxes under Your Values.
With the top half of page 1 complete, the rest of the worksheet contains general questions
about your facility and project. The bottom half of the page poses two  general questions
about the facility. With these questions, as with those on subsequent pages of the work-
sheet, the answers  serve to weight the historic noncompliance fine data. For example, if
you rate your environmental management as  being above average, your estimated non-
compliance cost is reduced by 50%. The number  in parentheses next to  each radio button
indicates the weight associated with the respective answer. You must answer all questions
to complete the worksheet properly.
Once you have completed all of the information on page 1 of the Noncompliance Work-
sheet, you are ready to move on to page 2 using the Next button. Pages 2 and 3  contain
questions related to each of the four areas of regulatory noncompliance checked on page
1. Page  3 does not appear if you enter your own historic fine data or if you do not check
the  water and reporting areas. In any case, you simply complete all questions.  When you
are  on the last page, the estimate of your annual  noncompliance cost appears  at the bot-
                                       48

-------
                                                       Operating Cost Data Entry
 torn. Once-the worksheet is complete, this number is the cost that is entered on the Oper-
 ating Costs page.

 Buttons labeled Report, OK, Delete, and Previous and/or Next appear at the bottom of
 each page of the worksheet.  Report produces a report summarizing the information en-
 tered in the worksheet. OK brings up a dialog box asking you to confirm that you wish to
 save the information entered  and return to the Operating Costs page. Delete also brings
 up a dialog box that asks you to confirm that you want to return to the Operating Costs
 page without  saving the changes.  You should only use the OK and Delete buttons when
 you are ready to return to the worksheet. Previous and Next allow you to move back and
 forth through  the worksheet.

 The following steps outline the Noncompliance Worksheet process.


 1.  From the  Operating Costs page, enter the Noncompliance Worksheet by either (a)
    clicking inside a cell in the row of the Noncompliance (Worksheet) cost item or (b)
    clicking on the Noncompliance Worksheet button.

 2.  In  the upper left-hand corner of page 1 of the Noncompliance Worksheet,  enter the
    Start Year and End Year in the appropriate data boxes.

 3.  Choose either Use Default Values or Enter Values as the source for historic fine data.
 4.  In the upper right-hand corner of page 1 of the Noncompliance Worksheet, select the
    relevant regulatory areas for which you could be penalized.
 5.  If you are entering your own historic data, enter it in the respective data boxes.
 6.  On the bottom of page 1 of the Noncompliance Worksheet, answer the two General
    Self-Assessment questions.
 7.  Click on the Next button to continue to page 2.
 8.  Answer all questions on pages 2 and 3 of the Noncompliance Worksheet.
 9.  Click on the Next button if applicable, otherwise click on Exit to enter the calculated
    noncompliance cost in the  project and return to the Operating Costs page.
 When you return to the Operating  Costs page, the estimate of annual noncompliance
 cost appears in the data box cells for the chosen years.

 6.4. Generating a Report
 From the Operating Costs page you can generate a report that shows all operating costs
 and revenues for the project. Listed in the  report are the default financial parameters de-
 fined for the project, and the percentage by which each cost will inflate each year (infla-
tion plus escalation). By simply clicking on the Report button and selecting First Year,
Last Year, and Interval, a report like the one shown below appears.
                                       49

-------
                                                       Operating Cost Data Entry
Directory: SCRNCASE
10/10/1997
Project: Dry Film Imaging
Page 1
Project Parameters
Lifetime: 5
Tax Rate: 3.57%
Inflation Rate: 3.00%
Prc-Press
Materials
Dry film
Silver film and chemicals
Labor
Process camera operator
Waste Management
Disposal
Service Bureau Costs
Service bureau charges
Transportation
Maintenance
Mainenance contract
Press
Labor
Additional press labor
Post-Press/Finishing
Labor
Additional shipping labor
Non-process/other
Revenues (Revenue)
Sale of product
* All costs reported in Year 0
OPERATING COSTS
Escalation
Rate {%) Year 1
56,000
15,000
12,000
3.00 3,000
21,000
600
2,700
51,250
16,400
360,000
dollars
Year 2 Year 3
56,000 56,000
15,000 15,000
12,000 12,000
3,000 3,000
21,000 21^000
600 600
2,700 2,700
51,250 51,250
16,400 16,400
360,000 360,000
In the upper left-hand corner of the report screen the menu headings File and Edit appear,
which allow you to print or save the report. See Section 7.3.2 for a full description of
saving and printing reports.
                                        50

-------
                                                                               Analysis
 7.  Analysis
 Once you have developed your cost inventory and entered the relevant cost and financial
 data, the bulk of the work is behind you, and you are ready to run your analysis from the
 Analysis page.
       Cost Inventory	\  Investment Costs  J[. "' Opefjting Costs   |
                                         Analysis
   Base Project
p-Report to Create
         ••*   ~
   Silver Film Processing
   Iv' Incremental Analysis?   ,   "^
      'Atternatives (marked with »)  "'
      ss> Dry Film Imaging
         ary
  r Tan Deduction
 ~T Cash Row
  
-------
                                  	Analysis


If your project does not have direct bearing on your current operations or if you simply do
not want to use a baseline for comparison, you can run a stand-alone analysis.
1. To run a stand-alone analysis, select the project you want to analyze in the Base Proj-
   ect drop-down box.
2. Make sure the Incremental Analysis box is NOT checked.

7.2.  Analysis Parameters

7.2.1.   Reporting Years
The next step hi running the analysis is  to establish the final parameters needed for the
financial calculations. The year and interval parameters allow you to specify which years
of the project to view in the report. Your choice here does not affect the calculations; it is
merely a means for you to limit the information presented in the report you generate.
One of the elements of TCA that distinguishes it from traditional capital  project analyses
is that it uses an expanded time horizon over which to view investments. Many busi-
nesses calculate the return on their investments over a period of two to three years, a time
horizon that may be inadequate to capture the full costs and savings from a pollution pre-
vention project. Because some of these cost savings from P2 projects may take longer to
materialize, it is important to maintain a longer-term perspective on P2 projects so that
the true benefits are realized in the analysis.
1. To specify a range of years for your analysis report, enter the first and last years you
   want to view in  the data boxes on the Analysis Parameters panel  of the Analysis
   page.
2. You can further restrict the report output by specifying an interval by which the data
   will be displayed (e.g., every other year, every third year).  Enter the interval in the
   data box on the same panel.

7.2.2.   Discount Rate
A critical component of assessing the performance of a long-term project is incorporating
the notion that the value of money changes over time. There are two aspects of how peo-
ple value money that render this concept important. Central to this idea is the assumption
that money loses its  value over time. In  any economic system experiencing monetary or
economic growth, prices of goods and  services inevitably rise over time.  This inflation of
prices means that the value of a  dollar decreases over time. A dollar at  any point in the
future has less purchasing power than it does today. Therefore, the first aspect of the time
value of money is that, due to inflation, money today has more value than money tomor-
row.
The second aspect of the time value of money is that, even without inflation, most people
(or businesses) would prefer to have money sooner rather than later. Called the time pref-
erence of money, this idea keys  on the concept of opportunity  cost. If you have money
today, you have the opportunity to use it  now to grow your business, for example. Even if


                                        52

-------
                                                                         Analysis
 prices remain stable—i.e., the money will not lose purchasing power over time—it is
 better to have the money now so that you have the opportunity to use it in ways that can
 make the money grow. Put another way, there is a cost if you receive the money tomor-
 row instead of today.
- Putting these two ideas—inflation and opportunity cost—together, you need a way to ac-
 count for the time value of money. You need to adjust the value of future dollars to reflect
 their diminished value to you today. The mechanism for making this adjustment is called
 a discount rate.
 A discount rate is a percentage that is applied to a future sum or stream of cash flows to
 reflect the cost of not having it today. Typically, for business decisions, the discount rate
 chosen represents the business's cost of capital plus some level of desired return on an
 investment plus an additional margin to account for uncertainty. The cost of capital is
 your cost of tax-adjusted debt and equity costs to funding your operations. The return on
 investment your business achieves above this cost is your profitability. On an economic
 basis, any new  investment should meet that return. Because your investments also have
 risk associated with them (as compared to taking the money and putting it in the bank),
 you may want to discount the expected returns further to account for that risk. However,
 it is best to decouple the risk and directly account for it within the analysis.
 Enter the discount  rate for the project as a percentage in the Discount Rate data box on
 the Analysis Parameters panel on the Analysis page.

 7.3.  Analysis Output
 When you generate a report, you must choose how you want to format your report and
 whether you want to display it on the screen or print it out.

 7.3.1.  Format
 P2/FINANCE-SP gives you  an option for formatting your output. You can specify the
 order in which the  results are presented. Relevant for the Summary and Tax Deduction
 Reports, this option allows you to choose whether to order costs first by process (e.g., list
 all Pre-Press costs,  then all Press costs) or by category (e.g., list all Materials costs, then
 all Labor costs).

 7.3.2.  Output
 A screen report allows you to quickly review the results of the analysis, to check for accu-
 racy,  or to determine appropriate  sensitivity  analyses. All  reports  generated by
 P2/FINANCE-SP follow roughly the same format, and can be saved and printed in the
 same manner as follows.
 When you click on a report button in P2/FINANCE-SP, a new window appears with a
 banner and menu headings as above. Scroll bars on the right-hand side and bottom of the
                                        53

-------
                                                                          Analysis


 window enable you to scroll through reports too large to fit on your screen. From this
 window, you can copy, save, and print the report shown.

 7.3.2.1.    File Menu
 The File menu contains commands that let you print and save reports.
 To save a report as a text file:
-1.  Choose the Save As...  option under the File menu.
 2.  A dialog box appears, prompting you for the name of the file. Since this file will be a
    regular DOS file, it is subject to standard DOS limitations.4 In the above picture, the
    filename would replace the word unfitted. In this dialog box, you can also choose the
    directory in which to locate the file.
 3.  Click OK to return to the report window.

 Once you save the file, you can import it into word processing or spreadsheet programs.
 To change print settings:
 1.  Choose the Print Setup... option under the file menu.
 2.  Select  the printer, the orientation (portrait or landscape), the paper  size and source,
    and, optionally, the dithering and intensity control.
 3.  Click OK to return to the report window.
 To print your report, simply choose the Print... option under the file menu. The report is
 queued to the printer chosen from the Print Setup window. P2/FINANCE-SP works with
 any printer you are using in Windows. To cancel a print job, you must access Windows
 Print Manager.

 7.3.2.2.    Edit Menu
 From the Edit menu, you can copy text using Copy (Ctrl+C) which becomes active once
 text has been selected. You can select text by highlighting it with the mouse or the key-
 board, or, if you want to copy the whole report, by choosing Select All (Ctrl+A). The se-
 lection is copied to the Windows clipboard from which you can paste it to a word proces-
 sor or other file.
4 The name before the period can be up to eight characters; the extension after the period can be up to three
characters. File names are not case sensitive; cannot contain spaces, commas, backslashes, or periods; and
cannot be identical to other file names. Only the letters A through Z, numbers 0 through 9, and certain spe-
cial characters [_A$~!#%&-{}@' '()] can be used in file names. It is recommended that .txt be
used as the extension for P2/FINANCE-SP report filenames.

                                        54

-------
 	.	Analysis

  7.4. Generating Reports
  Once you have established your analysis parameters and format, you are ready to gener-
  ate reports. P2/FINANCE-SP creates four different reports to allow you to look at differ-
  ent aspects of the analysis.

  7.4.1.   Summary Report
  Summary Reports may be generated  for both stand-alone and incremental analyses. A
  summary report depicts the project as it was defined  in the cost screens without per-
 forming any of the calculations. It lists the parameters and cost data you entered.
 A capital cost summary report lists the amount (in Year 0 dollars) of the investment. The
 operating cost summary lists the cost  and revenue data (also in Year 0 dollars) for each
 cost item. Summary reports provide a quick look at the project data and financial  pa-
 rameters. You must generate a separate  summary report for operating and  investment
 costs.

 To generate the report, select Summary and either Investment Costs or Operating  Costs
 from the Report to Create panel on the Analysis page.

 7.4.2.   Tax Deduction Report
 Tax Deduction Reports can be calculated for both stand-alone and incremental analyses.
 The Tax Deduction Schedule displays the investment items and calculates any relevant
 tax deductions during each year of the project's life. For each capital item, this report lists
 the depreciation method chosen, the cost  (in the first year of investment) or book value
 (in subsequent years) of the investment (in Year 0 dollars), the amount depreciated each
 year, and the salvage value and taxable gain or loss at the end of the equipment's life if
 the lifetime is within the analysis reporting years. The report shows only the expense
 amount for items that are expensed, and "N/A" for working capital items since they are
 not depreciated. The report then summarizes the total depreciation, expenses, and gains
 accrued for each year and calculates the amount of the tax deduction. In this  report, the
 tax deduction is determined as depreciation plus expenses less capital gains.
 To generate the report, select Tax Deduction from the Report to Create panel on the
 Analysis page.

 7.4.3.   Cash Flow Report
 Cash Flow Reports can  be calculated for both stand-alone and incremental analyses. For
 an incremental analysis, a cash flow report calculates the difference between  the two
projects. A cash flow report views the scenario over time and allows you to see the cal-
culations clearly. Cash flow reports include the effects of inflation and escalation.
The Cash Flow Analysis report is the basis for calculating the project's profitability and
is separated into two sections:  Tax Calculation and Cash Flow Calculation. For the Tax
Calculation, the first line lists the project's revenues and the next lists operating costs  or
                                       55

-------
                                                                         Analysis


savings. These costs appear negative if the alternative project has lower operating costs
than the reference project.
Depreciation and expensed capital costs are then subtracted because the IRS allows you
to amortize your capital investments over time through depreciation tax breaks. Finally,
the difference between salvage value and book value (taxable gain or loss), when appli-
cable, is added to calculate the Taxable Income. Based on this taxable income, state and
local taxes are calculated. The IRS does not require you to pay federal taxes on money
used to pay state and local taxes. Therefore, you can deduct these taxes from your Federal
Taxable Income. Federal taxes are calculated and subtracted from the Federal Taxable
Income and the local, state, and federal taxes are summed to calculate the Total Taxes
related to the project.
The Cash Flow Calculation starts with the operating savings or costs as above. The total
taxes calculated in the first section of the report are then subtracted. Then, other costs and
revenues associated with the investment are included: Investment Costs, Working Capital
Recovery,  and Salvage Value. Working Capital  Recovery equals the amount of capital
that is freed up at the end of the project's lifetime. (Note that the  initial working capital
outlay is included in the Investment Cost). Salvage Value is the expected revenue from
the resale of the project equipment at the end of the project's lifetime. The result of these
operations is the After-tax Cash Flow. The After-tax Cash Flow is then discounted to cal-
culate the Discounted Cash Flow for each year.
To generate the report, select Cash Flow from the Report to Create panel on the Analysis
page.

7.4.4.  Profitability Report
The Profitability Analysis Summary Report uses common financial indicators to measure
the profitability of a project. This information can help you make well-informed decisions
as to how to reinvest in your business or modify current practices  to reduce costs and/or
increase revenues. Profitability can be calculated for a stand-alone analysis,  an incre-
mental analysis, or multiple incremental analyses in which more than one alternative to
the current project is identified. You can select up to three alternative projects at one time
to include in an incremental profitability analysis.
One of the important components of Total Cost Assessment (TCA) is the use of multiple
financial indicators in measuring profitability. P2/FINANCE-SP offers three indicators:
Net Present Value, Internal Rate of Return, and Discounted Payback. Each indicator has
specific strengths and weaknesses. By considering all three indicators you can minimize
these limitations and gain a deeper understanding of the project's profitability.

7.4.4.1.     Net Present Value  (NPV)
Net Present Value (NPV) is the sum of the discounted cash flows. A project with an NPV
of zero provides a return equal to your discount rate. Therefore, any project with a nega-
tive NPV is unprofitable (i.e., provides a return below your discount rate), and any project
with a positive NPV is profitable. If you are considering only one project, it is financially


                                        56

-------
                                                                          Analysis
  justifiable if the NPV is positive. If you are looking at a number of projects and must pri-
  oritize among them, you should choose the one with the highest NPV, i.e., the most prof-
 . itable one.

  NPV is a very useful indicator because it is a direct measure of the project's profitability
  in dollars and therefore most directly relates  to the company's interests (i.e., higher cash
  flows). It does, however, depend significantly on the value of the discount rate. If you are
  not comfortable with your chosen discount rate, you can perform a sensitivity analysis by
  trying different discount rates and comparing the results. In general, NPV is the strongest
  of the three indicators because it has few limitations and can be used in all types of analy-
  ses
 The profitability report lists NPV (and IRR) under each year you specified in the Analysis
 Parameters panel. The dollar values (or percentages) under a given year represent the
 NPV (IRR) from Year 0 through that year.

 7.4.4.2.   Internal Rate of Return (IRR)
 IRR is the discount rate that makes the Net Present Value (NPV) of the discounted cash
 flows equal to zero. The IRR can thus be compared to the company's discount rate or to
 the IRR calculated for  other projects. If the IRR is higher than the company's discount
 rate, then the project is profitable. When comparing multiple investments, the  one with
 the highest IRR is the most profitable.

 IRR is a useful indicator because it is easy to interpret and considers equally all of the
 cash flows of the investment. P2/FINANCE-SP calculates IRR for the range of years and
 interval you specify in the Report Screen.

 Despite these benefits, IRR does have its limitations. For example, if you are performing
 a complex analysis (e.g., capital costs in multiple years or widely fluctuating operating
 costs and revenues), you should avoid using this indicator. P2/FINANCE-SP does not
 calculate IRR if the analysis is too complex, instead reporting "N/A". (Complex  analyses
 contain more than one  change in the mathematical  sign of the cash flow  allowing for
 multiple IRR values).

 In addition, IRR can be  misleading because  it does not directly measure the magnitude of
 the cash flow or investment but instead measures the return on the investment.  Suppose
 you are interested in two investments; A requires an initial outlay of $50,000 and B re-
 quires only $500. Even if investment B has a higher IRR than investment A, this does not
 necessarily indicate that B is more profitable for the company in absolute terms. In fact, B
 can have an IRR of 173% and A an IRR of 85% over the first five years and A would
 generate more than four times as much revenue. Therefore, when you are comparing in-
 vestments with significantly different magnitudes of costs and revenues, you should use
 NPV because it is a direct measure of the dollars the investment will generate.

 7.4.4.3.    Discounted Payback
Discounted Payback is one of several payback calculations, which, in general, measure
the time it .takes for a company to break even on an investment. Payback calculations

                                       57-

-------
                                                                         Analysis

typically do not incorporate the time  value of money through discounting.  However,
P2/FINANCE-SP calculates Discounted Payback, a method that includes inflation, esca-
lation, and discounting. A project's Discounted Payback is the time at which the Net Pre-
sent Value of the investment equals zero, i.e., when you have recovered your investment
costs.
Many companies base their investment decisions on payback because it is easy to under-
stand and use. Knowing that payback for a one press is 4 years while payback for another
press is 6 years can help guide decision-making. However, you should be aware of certain
limitations of this indicator before using it.
One limitation is that payback does not account for all of the cash flows of a  project. It
considers the cash flows before the investment is paid back, but ignores all cash flows
after this threshold. Ignoring these later cash flows can mislead you as to the true profit-
ability of the investment.
As an example, suppose you are considering two investments, A and B, and each requires
an initial investment of $50,000. Investment A generates $25,000 in revenues for the next
three years, whereas investment B generates $20,000 in revenues for the next 20 years.
Using  payback principles, investment A is more profitable  than investment B because
you  recover the initial capital costs earlier with investment  A. However, investment A
generates revenues for only three years, whereas B continues to earn revenues  for 20
years. This example illustrates that an investment's payback does not necessarily reflect
its overall profitability  because payback only measures the time it takes to  reach the
break-even point of an investment. For P2 projects, this is an especially significant limi-
tation because  many operating cost savings and revenues occur several years after the
initial capital expenditure.
A second limitation exists because there can be multiple paybacks in complex scenarios
(e.g., when operating costs and revenues vary significantly  from year to year or when
there are investments  in multiple years). P2/FINANCE-SP does  not calculate  a dis-
counted  payback when  there is the possibility of multiple paybacks (i.e.,  when the
mathematical sign of the cash flow changes more than once). Instead it reports  "N/A"
when payback cannot be calculated.
To generate the report, select Profitability from the Report to Create panel on the Analy-
sis page.
                                        58

-------
                                                                      Case Study
 Appendix A.  Case Study
 Company Background
 Print Design5, a screen printer employing approximately 40 people and generating $3
 million in annual revenues, is a digital shop—most jobs either come in on disk or are
 scanned into the computer. However, because Print Design does not have a high resolu-
 tion output device, it uses service bureaus to generate camera-ready art and proofs (as
 needed). Service bureau charges are approximately $89,000 per year.
 Print Design  currently  generates positives from camera-ready  art using  gelatin silver
 photographic  film. Because Print Design uses an on-site septic system, it is prohibited
 from disposing process water from its darkroom down the drain. Silver is recovered from
 washwater, and washwater and fixer are separately collected for off-site disposal.

 Project Background
 Prompted by  increasing waste disposal costs and costly service bureau charges, Jack,
 Print Design's president, began examining production changes that would decrease its
 reliance on waste haulers and service bureaus. One option identified was the purchase of
 a dry film imaging system,  enabling Print Design to generate positives directly from a
 computer, and thus by-pass the darkroom. This option would not only reduce service bu-
 reau charges, but also potentially reduce darkroom and waste disposal costs.
 As Print Design further explored this  production change, it discovered an important limi-
 tation—while  it currently produces jobs up to 48 inches in width, the maximum width of
 dry film is currently 42 inches. Thus,  the dry  film imaging system could be used for pro-
 ducing about 85% of Print Design's jobs, representing approximately 60% of its annual
 square footage yield. This case study  examines the profitability of installing the dry film
 imaging system, given the system's limitation.

 Estimating Costs

 Current Pre-Press Operations—Annual Operating Costs
 Print Design first collected operating cost data for its current pre-press process. These are
 as follows:
5 The name of the case study firm has been changed.

                                    A-l

-------
                                                                  Case Study
          Table 1. Annual Operating Costs of Current Silver Film Process
           Operating Costs                                  $/year
           MATERIALS
                 Silver film and chemicals                    48,670
           WASTE MANAGEMENT
                 Washwater and fixer disposal                3,315

           LABOR
                 Process camera operator                     24,000

           SERVICE BUREAU COSTS
                 Service bureau charges                      89,355
                 Transportation                             2,000

           REVENUES
i
                 Sale of product                            210,000

Silver film and chemical costs were available in Print Design's general ledger, as were
service bureau costs. Jack  estimated the labor devoted to process camera operation based
on his knowledge of the business.

Dry Film Imaging—Investment Costs
Next, Jack assembled investment costs for purchased equipment (Table 2). These costs
are simply those quoted by the system vendor. Delivery, installation,  and setup are in-
cluded at no extra cost.
The $1,300 training budget will allow Jack and one other employee to take an intensive
three-day course.
            Table 2. Investment Costs for the Dry Film Imaging System
            Investment Costs                                $
            PURCHASED EQUIPMENT
                  Dry film imaging system                 30,000

            START-UP/TRAINING
                  Training                               1,300
                                   A-2

-------
                                                                      Case Study
 Dry Film Imaging—Operating Costs
 Based on information from the vendors, combined with Print Design's expected annual
 throughput, Jack estimated his annual cost for silver film and processing chemicals. Be-
 cause the dry film system can handle only jobs up to 42 inches wide, Print Design will
 continue  to use the darkroom and service bureau for its widest jobs. Jack estimates that
 the  process camera  operator will be required half-time ($12,000/year) and that annual
 service bureau costs will be reduced to $21,600 ($21,000 for service bureau charges and
 $600 for transportation).

 The dry film  imaging system will allow Print Design to get its jobs to press faster by
 avoiding  the at least 24 hour turnaround time required when using service bureaus. Jack
 expects that the new capabilities and reduced turnaround time that the new system pro-
 vides will net him an additional $96,000 in earnings (revenue minus costs before taxes) in
 the first year. He based this estimate in part on the jobs he had to turn down last year be-
 cause sending the jobs to the service bureau would have taken too long to meet the cus-
 tomers'  deadlines.  The  additional  jobs will require  hiring a  full-time pressman
 ($51,520/year) and a half-time shipper ($ 16,400/year).

 Developing Financial Parameters
 After estimating all relevant investment and operating costs, Jack developed a list of fi-
 nancial parameters necessary for the analysis:
 •  Tax Rates: Federal = 2.6%
              State = 1%
              Local  = 0%
 •  Project Lifetime:  5 years
 •  Depreciation Method: Double declining balance (over 7 years)
•  Discount Rate: 12%
•  Inflation Rate: 3%
                                    A-3

-------
                                                                   Case Study
             Table 3. Operating Costs for the Dry Film Imaging System
             Operating Costs                               $/year
             MATERIALS
                   Dry film                               56,000
                   Silver film and chemicals                 15,000

             LABOR
                   Process camera operator          ,        12,000
                   Additional press labor                    51,250
                   Additional shipping labor                 16,400

             WASTE MANAGEMENT
                   Washwater and fixer disposal              3,000

             SERVICE BUREAU COSTS
                   Service bureau charges                    21,000
                   Transportation                            600

             MAINTENANCE
                   Contract for dry film imaging system       2,700

             REVENUES
                   Sale of product                         306,000

Performing an Analysis Using P2/FINANCE-SP
Jack decided. to assess  the  profitability of the dry film imaging  system  by using
P2/FINANCE for Screen Printers (P2/FINANCE-SP). A step-by-step-description of the
analysis is described below. The reader should refer to relevant sections of this Guide for
further information. Data reports for this analysis are found at the end of the Appendix.
P2/FINANCE-SP evaluates the profitability  of investments on a stand-alone basis or by
comparing the costs of a base, or business-as-usual, case with one or more alternatives. In
order to analyze the financial profitability of the computer pre-press  system, Jack needs to
create two new projects in P2/FINANCE-SP. One project represents the continued use of
the darkroom and the service bureau, and one represents the costs associated with the
purchase and use of the new dry film imaging system.
                                   A-A

-------
                                                                           Case Study
  Silver Film Processing

  Creating the New Project
  After installing P2/FINANCE-SP (see Section 1.2 for directions), Jack opens the  pro-
  gram. He chooses the Create a New Project button the Main screen; when prompted, he
  enters the name 'Silver Film Processing' for the project which represents the business-as-
  usual case.
 Defining Year of Investment
 Jack is now on the Cost Inventory page of P2/FINANCE-SP. The next step is to define
 the year of the investment. His base case, 'Silver Film Processing,' does not  require an
 investment, so he skips this step.

 Developing the Cost Inventory
      Cost inventory
   Project   -
                        ItwestrnenfCosts  jl ^30perating7Costs   '][        Analysis
   Silver Film Processing
    iteiM«.   Copy™  1 Delete
                     . Investment occurs at end of year
                      
-------
                                                                      Case Study
Category drop-down box to create the category SERVICE BUREAU COSTS. He then
creates two new cost items, Service bureau charges and Transportation,  in this new
category by clicking on the New... button under the cost item list. He adds these cost
items to the tailored list as he anticipates using them in future P2/FINANCE-SP analyses.
Then he adds Silver film and chemicals to the MATERIALS category, and adds Process
camera operator to the LABOR cost category, first selecting the cost category and then
creating a new cost item. Jack returns to the Cost Inventory page  and double clicks  his
new cost items to add them to the project cost  list. (For more information on the Make
Changes to Cost List dialog box, see Section 4.4.3.)
Finally, he changes the process from Pre-Press to Non-Process/Other by selecting from
the Process drop-down box, and double-clicks Sale of product in the REVENUES cate-
gory.
1 Make Chanties to Cost Lists
  Process
                    ""iViIi'Vii Inn! IP ' i   A* -A, L *s*
                Cost Category
                                                 Show/Edit
                                                 O Investment Cost List
                                                 €> Operating Cost List
                  T] |ALL CATEGORIES
                                       !•«• I JT* Reiienue?
                      Hew~  11 Rename...} | Delete |
Materials
  Blockout
  Bulbs tor exposure lamp
  Chemicals
  Degreasers
  Diskettes
  Drylilm
  Emulsion
  Film
  Fitters
    Jtew^^jlRename^ir^elete \ F Tailored List?
                                "" I' "»"! \l
                                                 Show:
                                                  rTaHoredtist
                                                  & Complete List
                                            :: Report...  I
                                                                      OK
Defining Project Parameters
Jack now moves to the Operating Costs page by clicking on the Operating Costs tab.
His next step is to define the project parameters located in the Project Parameters box on
the top right corner of the page. Jack sets the project lifetime, tax rates, .and inflation rates
in this box. He first changes the project lifetime to 5 years by highlighting the number in
the box and typing 5, as some of the equipment will be technologically obsolete after 5
years. He sets the tax rate by double clicking the Tax Rates... button and then entering the
appropriate tax rates  (2.6% Federal, 1% State and 0% local) in  the Project Default Tax
Rates dialog box. Because operating costs are not depreciable, the Depreciation...  button
appears in gray. Last he sets the default inflation rate at 3%. (For more information on
Project Parameters, see Section 5.3.)
                                      A-6

-------
                                                                     Case Study
 Entering Costs
 Jack is now ready to enter cost data for the 'Silver Film Processing' project. The bottom
 half of the Operating Costs page is a spreadsheet containing the cost items selected from
 the Cost  Inventory page. Jack enters costs  once, in the cell corresponding to the first
 year the cost is incurred. P2/FINANCE-SP automatically extends that cost to following
'years.  He can end the cost in a later year by entering zero, or he can change it to another
 dollar  amount. The program automatically inflates costs  when computing reports. For
 Disposal, Jack also  enters an escalation rate of 3% because waste disposal costs have
 been increasing at a rate of 3% above inflation. (For more information on entering cost
 data, see Section 6.3.)
-post Inventory.
Project

— ~ - 'V
i_ Investment Costs F- |
~, ^ ,,,».j,v,>,.^.,^^t.,vA>-.-.-.-.-.J-.t ^ 	 U
Silver Film Processing
1 Mew,., |
, Process
3.' "" - - , ~ , '\
Copy_i|'DelIte1 -' « ." J.C '
""" " s&4 V*" '*i'5'«'tst'1K'"'-ti ^ """ -*

| ALL PROCESSES
*>
^ » •
-
^s ^.l^^S
F
Cost Category ~ - -
^ |f [ALL CATEGORIES
*^ «*.

Pre-Press j _ * _ - '.*
Materials
i "* ^-- ^.-.r^—-^^"!^.^
s- ».- £sa% Yearl
, .,_. . i/-, "-,^.." ,.'^..
1 : Operating Costs ¥
*s*Sr
r , > Project Parameter
' -- , <
;-'„. •" ^ Project Lifetime (jreai
' i « ^•

«

/'"

*
D/y F//m Imaging

Creating the New Project
Jack returns to the Cost Inventory page to create the alternative project. He chooses the
New... burton under the Project drop-down box and, when prompted, names the project
'Dry Film Imaging' and then chooses Create. 'Dry Film Imaging' is now the active proj-
ect. To access 'Silver Film Processing' or any other project, Jack clicks on the Project
drop-down box and selects the project he wants.                   :

Defining Year of Investment
The project 'Dry Film Imaging' requires an initial investment for the cost of the system,
as well as training. All of these investments will  occur in the immediate future, so they
                                     A-7

-------
                                                                  Case Study
are Year 0 investments. The default investment year is Year 0, so Jack does not need to
create new investment years.

Developing the Cost Inventory
Much as he did for the 'Silver Film Processing' project, Jack selects relevant cost items
from the Pre-Press process for his cost lists. This project, however, includes investment
costs as well as operating costs. Jack selects the Investment Cost List radio button and
Pre-Press from the  Process  drop-down box. He selects Training in the START-
UP/TRAINING cost category. He then creates a  new cost item under PURCHASED
EQUIPMENT called Dry film imaging system.
He then selects the Operating Cost List radio button and again limits the list to Pre-Press
cost items. He chooses Silver film and chemicals under MATERIALS, Process camera
operator under LABOR, and Disposal under WASTE MANAGEMENT.  Jack adds a
new  cost  item,  Dry film under  MATERIALS.  He  also  adds  a  new  category,
MAINTENANCE, with one cost item, Service contract. Finally, he selects  Service bu-
reau charges and Transportation under the SERVICE BUREAU category.
Next, Jack selects Non-process/Other from the Process drop-down box and REVENUES
from the Cost Category drop-down box. Jack chooses  Sale of product from this cate-
gory. He also creates two new cost items: Additional press labor under the Press process
and LABOR category, and Additional shipping labor under the Post-Press process and
LABOR category.
"
	 	 ; 	 • 	 	 •• 	 ;-, 	 ii:.aji:.r'l
Cost Inventory I
Project " "' 	 ' " 	 "'"" 	 "
J Dry Film Imaging »

Hew~ 1 1 Copy-, j | Delete
. 'u 	 ,,;,; ';'' ;;;;;;llk:,;:i;i
I If" 1 '
Operating Costs | Analysis |
Investment occurs at end of year "
11° M- .. ' "

anow/cait
(Si lnvp«rtinpnt f~n«f 1 ist
j New.- j|copy...l|_peletej n Operatinq Hnst 1 .1st
iluU^WMS^
Process 	 " ' 'cist Category'"" ' '' 	 "•""""'
,1
1 *9* 4 ' to - f / " * ^rjf*" *• Je
L,IJ >'* V . ... * 3 ' «,, * ,2
nr« * h k - t ; ' * ^f s"t ' p
ALL PROCESSES "II ALL CATEGORIES <* L"1, '
;• „••- ;, _;; , 	 i':-?;!. k'BjflJ 	 tail
1^^ r - ; ;. ^: v-f
• Pre-Press Q
ri
Purchased Equipment
Air compressor
Automatic coater
Computer system
Deiivery
Digital output systems
» Dry film imaging system
Electronic imaging system
Exposure lamp
Exposure unit

; 	 i .\ 	 CouiS&c&Sto' j^
,,• ;„' , ••; 	 i : > il|JISi|Sf
«*
i" 	 »M 	 	 HP 	 *7«v 	 , 	 fc|n^,,,*; 	 u * |u * ™K
anas status; j
WlirtSWWiSffllfflBiH "flrf "*A»

1"

i ^ ^ „ -^
^ \ * '
Show:
t f C ^Tailored List and Other Included items
Incomplete List
^ «r
y&Sw V ^ipp'm** f^ ^ ^7^ " * ft"
!L* *" *'*'*
S&4i<#i|.1l*^ ^Hf^s-i , -ii (j.< .fii^^Sip
T *• " * " ' t Report 1
*lj»*l~ JL,,W If, \ '- x ' « ' iff 'JSf
                                   A-8

-------
                                                                          Case Study
 Defining Project Parameters
 I Depreciation
                                     UJj CgEJyLj I jtetetej-
            Depreciation Period   7.0
                    X,~    "*\j*
                 ,'Offseryear
  -CstralghtlirMT,
s"x -sCj50%^declinmo balance o«er straight line
 ,  1? 200% declining balance over straight line
- ^ f'Enter each year's depreciation
                                              Enter Year^raepi eciation
                        any prajecf
                named sef
-------
                                                                            Case Study
    Cost Inventory    f   Investment Costs- If     Operating Costs   jf
            ;.nl'n' ""'           '- '     -          - " - *" - •'"*  '*"'  "•
Project
                                                                         Analysis
                        Inucstment occurs fit end of year
  |Dfy Fifan Imaging
  I Hew... \ [copy^J LPejgte] I.JJg**~ J Lc°g*:J Ijgglgt.'O
  Process
                      Cost Category
I ALL PROCESSES   H: I ALL CATEGORIES
*               '   ' "••••	  	
Project Parameters ("Default"}

Project Ufetirne (years)          f~?
1  Tax Rates... I              3.57
                                                     Depreciation.. |
                                                               DDB/7/0
                                                    inflation Rate
                                 "u'nii i  tm r*
                                  Cost ($)  | Saluage ($) |Equipment Life|Depreciation|
      Purchased Equipment
       [>Y film kraatfng system
                                   30,000
      Start-up/Training
                             JL
       TraWng
                                    1,300
            [Default
                                                  "T-
     ...;.-:-,;.r.^i..j.-., .;:;,;,     .}•
            [Expensed
                     ''^/'"L"' 1;	l1''*;''"1^'!	jj*1'^,!
                                                               .!_
                                                                       :{:§ir-|
                                                                      .»»»«««».»,«.»..«|tf.rH
       iJikilj'r^K
            JXS	J
     	,,„,/	;,.,;	ii,	sm	i«^^^^^^^^^    	;;:;«^^^^^
     Enter ail costs in Year 0 dollars.
     -• -	i	• I	-	"'Si	ii	I|J'!	lliiiiifJilijJ!	ii	iii:	"Sf	tj	-Sift!	S'"--«!sS: SfjitSBSf
     .' -	;:•'	•;	if •	',.7.	uilii*<	*!i	ii:1!	iife	.f	iijIiMi'li	v~^i^y"^i:mf
Entering Cost Data
Jack is now ready to enter cost data for the 'Dry Film Imaging'  project. He enters the
relevant costs at the bottom of the Investment Costs page. (See Section 5.4.) He expects
most of the equipment to have very little salvage value after five years, so he leaves  both
the Salvage  and Equipment Life columns blank. Training  costs  are expensable. To
change the depreciation method for this cost item, Jack chooses the Expensed option from
the popup menu that appears when he tabs to the depreciation cell.  He then switches to
the Operating Costs page and fills in the appropriate cost information in the  spreadsheet
at the bottom of the page, much as he did for 'Silver Film Processing.' Again, Jack enters
an escalation rate of 3% for Disposal costs.

Generating Reports
As a final  step, Jack analyzes the profitability of the 'Dry Film Imaging' project.  Entering
the Analysis page, Jack defines the first year for the analysis (0), last year (5), an interval
(1) to report each year's cash flow, and the company's discount rate of 12%.
                                        A-10

-------
                                                                           Case Study
       Cost Inventory
        Investment Costs
                Operating Costs
Analysis    "  I
   Base Project
   Silver Film Processing

   P? Incremental Analysis?
      "Alternatives (marked with »)
-Report to Create—
  f" Summary
 "TDrTax'Beduction
<~~ " ~   "*?<*   ra.L
  T 'Cash Flow -
       Dry Film Imaging
      » -"A&erriatffe'prQJeci fo'c
          Double-cttckjto change
                                 1  ^ f^f_
                                 4£*i— ^,"K
                                       Operating Costs^
                                                         r-Forrnat-
                                        Order costs first by
                                        C Pioce*s,ttsen Category
                                         jFAna^sis Parameters  / . '• ~"
                                                                               t  i
                             V-'
                                  rLa^Year-"" ~
                                  %-j,^ _ '^.-  S^^
                                r iriterual
                                  Discount Rale
                              .j* li^Nofe When printed using portraft,
                           _1^^VJ m&cte, 5 years/columns will tS on one ,„'
                            - * 7 -s*- P9Se« white landscape can
                            ™,*'-_^ accomotfete? Before porting, go to" :
                            —".—»   Ws menu Ffi!e, Print Setup to select the
                            JM9,J%, appropriate mode
                                  Jo'ViS?
                     -^^
•»A,^! " --
                                                                     Report  I
 Because Jack wants to compare the profitability of Print Design's current business sce-
 nario to the dry film imaging scenario, he selects  the Incremental Analysis check box.
 Jack selects 'Silver Film Processing' in the Base Project drop-down box and 'Dry Film
 Imaging' in the Alternatives list box.  Radio buttons alter the type of report produced
 (Summary, Tax Deduction, Cash Flow and Profitability) and the costs and revenues in-
 cluded (investment costs, operating costs).  Jack can also alter how cost items are organ-
 ized within reports, either first by process and then category, or by category then process.
 (For more information on Reports, see Section 7.4.)
 The Summary Report depicts the project as  it was defined in the cost screens without per-
 forming any of the calculations. It lists the parameters and cost data entered. The Invest-
 ment Costs Summary report lists the amount (in Year 0 dollars) of the investment and the
 Operating Costs Summary report lists the cost and  revenue data (also in Year 0 dollars)
 for each cost item.

 The Tax Deduction report displays the investment items and calculates any relevant tax
 deductions  during each year of the project's life. For each investment item, this report
 lists the depreciation method chosen, the cost (in the first year of investment) or  book
 value (in subsequent years) of the investment (in Year 0 dollars), the amount depreciated
 each year, and the salvage value and taxable gain or loss at the end of the equipment's life
 if the lifetime is within the analysis reporting years. The report shows only the expense
 amount for items that are expensed. The report then summarizes the  total depreciation,
 expenses, and gains accrued for each year and calculates the amount of the tax deduction.
In this report, the tax deduction is determined as depreciation plus expenses less capital
gains.
                                      A-ll

-------
                                                                      Case Study
The Cash Flow Analysis report views the scenario over time and allows Jack to see the
calculations clearly. Cash flow reports include the effects of inflation and escalation.
The Cash Flow Analysis report is the basis for calculating the project's profitability and
is separated into two sections: Tax Calculation and Cash Flow Calculation. For the Tax
Calculation, the first line lists the project's revenues and the next lists operating costs or
savings. These costs appear negative if the alternative project has lower operating costs
than the reference project. Next, depreciation and expensed investment costs are sub-
tracted because the IRS allows amortization of capital investments over time through de-
preciation tax breaks. Finally, the difference between salvage value and book value (tax-
able gain or loss), when applicable, is added to calculate the Taxable Income. Based on
this taxable income, state and local taxes are calculated. State and local taxes are de-
ducted from the Federal Taxable Income as the IRS does not require payment of federal
taxes on money used to pay state and local taxes.  Federal taxes  are calculated and sub-
tracted from the  Federal Taxable Income and  the  local,  state, and federal taxes are
summed to calculate the Total Taxes related to the project.
The Cash Flow Calculation  starts with the operating savings or costs as above. The total
taxes calculated in the first section of the report are  then subtracted. Then, other costs and
revenues associated with the investment are  included: Investment Costs  and  Salvage
Value. The result of these operations is the After-Tax  Cash Flow. The After-Tax Cash
Flow is then discounted, using the discount rate Jack entered, to calculate the Discounted
Cash Flow for each year.
As the last step, Jack selects the Profitability Report radio burton, generating a profitabil-
ity analysis of the investment. This report calculates three indicators of profitability: Net
Present Value, Internal Rate of Return, and  Discounted Payback. Net  Present  Value
(NPV) is the sum of the discounted cash flows. A project with an NPV of zero provides a
return equal to the discount rate. Therefore, any project with a negative NPV is unprofit-
able (i.e., provides a return below your discount  rate), and any project is with a positive
NPV is profitable. Since the  NPV in Year 5 is $291,932, this project is profitable.
IRR is the discount rate that makes the Net Present Value (NPV) of the discounted cash
flows equal to zero. The IRR can thus be compared to the company's discount rate or to
the IRR calculated for other projects. If the IRR is higher than the company's discount
rate, then the project is profitable. Since Jack entered a discount rate of 12%, and the IRR
in Year 5 is 274.2%, the project is profitable.
Lastly, Discounted Payback  measures the time it will take Perfect Print to break even on
the investment. Payback  calculations typically  do not incorporate  the  time value of
money through discounting.  However, P2/FINANCE-SP calculates Discounted Payback,
a method that includes inflation, escalation, and discounting. As shown in the  Profitabil-
ity Report, the discounted payback for the computer pre-press system is 0.41 years. Thus,
all financial indicators show that this investment is profitable.
                                     A-12

-------
                 ro  n
                 0)  II
                 >H  II
CM
CM
ID
m
cn
r-
r~~
^T
m


CO
05
'"I
CO
CM
CO
r—
CM
CM
rH
O
[-!"
CM


in
CM
CM
^o r- cn ||
CO CO rH ||
•=i< in co II
•^ CO CM II
o ||
rH II
II
II
II
II
II
LO 0 rH ||
co r~ in ||
rH in CM II
*• *» K. II
-=r o CM II
0 II
rH II
II
II
II
II
j
co rH in II
«a< -^ co II
Cn ^0 rH ||
- - II
CO
in
•=f
cn
rH

cn
[^
CO
CO
rH

CM
CO
rH
                                CO     VD     CO      [— CM  II  CO
                                m     CM.            cn      n  co
                                                                               tfl
                                                                               0)
                                                                             CO
                                                                              m
                                                                              CD
                                                                                                     CM
                                                                                                    in
                                                                                                    co
                        co
                        CM
                                                                                             co
                                                                                             CM
                                                                                             co
                                                                                             r-
                cn  n  cn
                CM  II  CM
                CM  II  CM
•CM  II
      II
  M  II
  ro  ti
  CU  II
 >H  II
                m
                0)
                               ^i1     CM      in     r^ CM  II  o
                               CO     U3      CM     Cn CM  II  -=r
^
in


o
CO
rH
«.
o
in


m
CM


o
CM
t-
».
"^
CM


CO -=r CM
cn


•*3" <£> O
rH CO VO
in o o
k. «- w
CO CM CM
cn


II
II
II
II
II
II
II
II
II

II
II
II
II

II
II
r-
r-
rH

O
ID
^<
^
CM
r-
rH

                                                                              m
                                                                              0)
 s-i
 1C
 Q)
                cn  ||  cn
                oo  ||  co
                r-  II  r-
                 -  II    -
                CM  II  CM
                CM  II  CM
                CM  II  CM
                                                                                            O   II   O
                                                                                            o   ll   o
                                                                                            CO   II   CO
               1-1  II  1-1
               CM  II  CM
                    II
                                                                                                               to
                                                                                                               4-1
                                                                                                               CO
                                                                                                               O
                                                                                                               O
                IB
                0)
 (B   II
 0)   II
»   II
                                                                                                               rH
                                                                                                               m
 cn
 C
•ri
 to
 co
 0)
 o
 o
 M
di



EH
CO
0
O

O
J£3
M
EH
rf
frt
u
eu
0
n
n
n
n
n
n
ii
n

jj
jj
n
||
jj
II to
II to
II 0)
II M
II cu
II i
II cu
II M
II Qj






to
rH
ro
-H
(H
CD
4-1
ro
s


and chemicals

g
rH
-H
MH

^
cu
[>
rH
•H
CO




ra operator
nt
cu
B
ro
u

to
to
CD
u
M 0
O SH
Q Pl
ro



cu
B
cu
Cn
ro
c
ro
S

Q)
4-1
CO
ro
s






rH
ro
to
0

to
-H
Q




Costs
p
ro
CU
M
3
m

0)
o
•H

M
Q)
CO


II
II
II
II
II
II
II
II
II
II
to ll
CU II
Cn ||
M II
ro n
.d ii
0 II
ll
D C 11
ro o H
cu
M
D
X!

CD
O
•H

^1
CD
CO




-•H II
4-> II
ro ll
4-1 II
M II
O II
a ll
CO II
C II
ro ii
M II
EH ||
I!
ll
u

EH
CO
0
CJ

C5
2
M
EH

K
tt
CU
o

t •]
rt!
EH
o
EH
                                                                            KI
                                                                             4J  II
                                                                             O  II
                                                                             3  II
                                                                             T!  II
                                                                             O  II
                                                                                    S-I
                                                                                    0)
                                                                                    43
                                                                                    4J
                                                                                    O
                                                                                    to     MH
                                                                                    to  to  O
                                                                                    Q)  (U
                                                                                    o  3  a;
                                                                                    O  C rH
                                                                            W
                                                                            Pi
                                                                                        0)
                                                                                                   tt
                                                                                                   D
                                                                                            ro   u
                                                                                    a > co   n
                      o
                      EH
                                                                                                               CU
                                                                                                              •H
                                                                                                              rH  CO
                                                                                                               tt  cu
                                                                                                               0,4-1
                                                                                                               ro  ro
                                  o   •
                                  O  O
                                   •  to
                                  CO  0)

                                  M-l  O
                                  O -H
                                     m
                                  0) -H
                                  4J  O
                                  ro  cu
                                  M  a
                                      to
                                  a  i
                                  o  g
                                  •H  CU
                                  4J 4-1
                                  ro -H
                                  rH
                                  m  to
                                  c  ro
                                  ro  cu
                                  a  2
                                  c
                                  c  to
                                 £,  ro

-------
f- rH
en
en
\o
o
   
   Hi
 "I
 >.
 >4 "

 StJ
 U tt)
 dj -n
 U O
 •H M
 O CU
            CM

            M
            CO
            CU
            X
             0)

;

o

M
CO
0)


























EH
co
8

EH
Z

s
EH
CO

^
j2
M




























-U
C
0)

a
-H
3
cr
w
•o
0)
m co
CO CO
CD .C
u o
CU M
1 3
CD Oi
M




0
O
O
»,
O
oo













g
0)
4J
i

Q


































O1
C
•H
C
•H
CO
M
EH

7x

1
4J
M

j i
CO





o
o
n
^
rH




























cn
C
•H
C
•H
CO

EH




II
II

II
II

II
II
11


||
41
11
II
II
II
II

II
II
II
II
II
II
II
II
II
II
II
II
II
II
1
II
II
11
11
II
H
1
II
II
II
II
II
II
II




o
0
00
^
rH
n



















EH
CO
O
O

EH
Z

s
EH
CO

£>
23
M

^J
rt;
EH
O
EH
CO
O
U
.-i
rH
m

o
•p

Tf
cu
-H
rH
Q,
0,
CO

O
O
•
ro

4-t
o

0)

CO
$-1

fU
o
-H
-P
CO
4-1
C
•H

rH
(0
^
C
C
(^

*













CO
0)
4J
CO
H
.
O
CO
0)

o
-H
m
•H
o
0)
p.
CO
|
£5
CU
•p
-H
CO
CO

.H
rH
CD
s

CO
CO



-------
r-
en
EH
W
O
O
3
M
EH'
CM
o
                   M
                   ro
                   in
                   rt
                   tu
                  >H
                   m
                   w
                   M
                   rd
                   Q)
                  >H
                   (H
                   m
                   w
cn en
rH CO
en ro
-g. r-
ID rH
co ro
CM CO
O CO
ro vo
VO rH
ro rH
en cn
rH OO
rH vo
VD rH

O -a1
rH rH
-a< en
CTi in
in 
ro

rH
r-
ro
ro
o
CO
rH
ro
in VD
"3* Cn
ro VD •
"^
CM
VO ID
to r~-
VO VO
ro
CM
r- vo
«a< in
Cn VD
CM
CM

en r~
r- ro
CM VO
CM
CM
O CO
ro I-H
VD vo
rH
CM
0 II
ro II
rH II
•^ 1
•"• II
ro II
II
II
II
II
II
II
II
en II
to II
0 II
^ 11
""• II
to II
II
II
II
II
II
II
II
0 11
in n
cn n
^ ji
*» 11
CM II
II
ji
II
II
II
11
II
II
•^ II
VO II
CO II
*• II
CM II
II
II
II
II
II
II
II
<-H II
CO II
r- II
^ 1
*• II
CM II
II
                                                                                     en
                                                                                     in
                                                                                     CM
                                                                                     oo
                                                                                     CM
                                                                                     o
                                                                                     o
r-  II
ro  II
                                                                                     co  ll
                                                                                     oo  ll
               CM  II  o
               rH  II  00
               o  II  oo
                                                                                                           o
                                                                                                           CM
00
in
       o
       o
       CM
CM
CTl
                                                                                                   cn
                                                                                                   cn
                                                                                                   ro
vo
r~
en

co
co
CM
en
co

vo
,-1
                      en
                      r-
                      ro

                      ro
                      co
                                                                                                                      rfl  II
                                                                                                                      <
                                                                                                                      M
                                                                                                                      ro
                                                                                                                      0)
                                                                                                                                     co
                                                                                                                                     ro
                                 in
                                 ro
                                                vo
                                                o
                                        co
                                        ro
                                        r-
                                                       in
                                                       ro
                                                                                                                                            vo
                                                                                                                                            o
                                                                                                                                     ro
                                                                                                                                     ro
                                                                                                                                     in
                                                                                                                                     ro
                                                                                                                                     vo
                                        ro
                                        ro
                                        in
                                        ro
                                        vo
                                                                                                                                     CM  II  CM
                                                                                                                                     ro  II  to
                                                                                                                                    o
                                                                                                                                    co
                                 o
                                 CO
                                                                                                                                            in
                                                                                                                                            rH
                                                                                                                                            ro
                                                                                                                                                        CO
                                                                                                                                                        o
                                                                                                                                                        0
                   rd
                   0)
                   SH
                   to
                   W
                                                                   10.

                                                                   O
    d
    -rl
O
S  -H
 O  4->
-P  O
 O  0)
 0)  T-i
 M  O
-H  M
Q  Oi















EH
CO
O
O

O

M
EH

[Vfl
CM
O
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II-
II
II
II
II CO
II rH
II co ro
II CO -H
II tt) M
HMO)
II CM 4J
II 1 rd
II 0) 2
II H
II CM
co
rH
rd
U
•iH
e
tt)

0

•d
c
rd

e
rH
-H
S 1-1
rH
•H M
m cu
£>
>lrH

Q CO





iH
o
4-1
m
M
tt)
a
o

rd 4-)
H C
tt) tt)
e e
rd tt)
U Cn
ro
co d
co rd
tt) S
O
MOO)
O SH 4->
.£) CM co
rd rd
r3 5









CO
4->
CO
o
o

rj
(0
0)
M
rH rj
ro OQ
CO
0 0)
a u
CO -H
-H >
C3 M
0)






CO
0)
cn
M
ro
£
U

a c
td O
0) -rH
M -I-*
0 «
O 4J
M
a> o
o a
•rl CO
> c
M rd
tt) SH
W EH



II
11
II
II
II
II
4-> II
0 II
10 II
r< II
4-> II
C II
0 II
0 II
II
0) II
0) 0 II
O C II
C rd II
rd C II
C tt> II
tt) C II
4-1 -H II
C rd II
-H S II
rd II
S II
II
II



H
0
J3
rd
r-H

CO
CO
0)
H
a

rH
rd
C
0
•rH
4J
-r)
M TJ
O T3
co J3 (=t;
CO (0
tt) J

CM

1

1
1




Cn
1 C
1 -H
1 .£
1 CO
1 -H
1 C
1 -H
1 6u
1 ^
1 CO
1 CO
1 'tt)
1 M M
1 Cu O
1 1 X!
1 4J rd
1 CO ,-q
1 0
1 Cu
M II
0 II
X! II
rd II
rH II
II
Cn II
C 11
-rH 11
a ii
a ii
•rl II
£ II
CO II
II
rH II
rd II
C II
O II
-H II
4-> II
•r) II
T3 II
•a ii
«: ii
II
II
II










EH

o
u

0
z
M
EH
rt
K
f-r*]
CM
o

t-q
EH
o
EH
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
a ii
D 11
Z II
W II
> II
m ii
c£ II












M
0)

4J
o
\
CO
CO
 CO
0)
3^


i
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1 Cd
1 D
1 Z
\ W
1 >
i a
1 OS
i
i .-H-
i <
1 EH
1 O
EH
                                                    T)
                                                    0)
                                                    -rl
                                                    t-H  CO
                                                    O, tt)
                                                    0,4-1
                                                    (0  (0
                                                        !H
                                                    o\o
                                                    o   •
                                                    o  u
                                                     •  CO
                                                    ro  cu

                                                    m  o
                                                    O -rl
                                                       MH
                                                    0) -r)
                                                    4->  O
                                                    ro  o
                                                    M  a
                                                        CO
                                                    C  I
                                                    O  S
                                                    -rl  0)
                                                       4-)
                                                       -r)
                                                                                                                                                        rd
                                                     rd  tt)
                                                     3  S
                                                        co
                                                        rd

-------
r- HI
, cu
SS-H
OS Cu
10 !•
M 1
(0 1
0) I
"""*
1
II
••a*

^
CO 1
X



ro
M B
(0 II
CO B
* 5
I
1

CM

^ 1
m i
o>
|
M
t-H. »

(4 U
CO I
(U II
X
U
N
i
i
R
O 1

M 1
CO

^_l
















4-1
C
0)
s

•r-J
3

W

•o
CD
cn w
CO nt

M O

1 3
0) cu
CU
oS p*
VO VD
k, k.
<£> CM




rH CO

cn r~
cn cn •



cn co
H- i "o*
i-l CM
^ k.
cn in


r- r-

cn cn
k. k.
CO P-

TJ< <£)
I-H CO
r- CM
k. k.
m T
CM





O
o
0
k.
0
cn


o
-v. a) c cu ^~
r- 3 o 3 co
-••. i-H -H rH CO
CQ (0 4-> CO O
Q > ro > i-5
Q -H —
^-J4 O Q)
O CU Cn C
E; O S-l CO -H
0) CQ Q. > CO
±>^* a> <-i ts>
CO 4-> O CO
>t CO W
CO O
CJ
Cn
C Cn
•H C
Cn -H
co C

•H CO

S EH

•H ci

1
>1 4-J
M M
Q CO
4J
CO

11 r-
II r-
11 &
H -
CM
11
11
II
II
II
II
II 00
II ^
I r-
jl cn
i!
ii
n
ii
n
II 00
II CM
Ii *•
II LO
|j
II
II
ii
Ii i-
ii ^
II ro
II -
II r-
II
II
II
ii
u
II
O il VD
O II CO
cn II CM
- II -
rH II ^
II
1
1
II
II
jj
0 II
0 II
cn II
k. II
.-H II
II
II
II
II
II
II
cu cu ii
3 CO II C
.-i a ii o
CO CU II -M
> Qi II 4->
X II CO
-V KJ II -H
O II O
0 II  II CU
—-co II Q
•a o ii
Q) U II >H
CO 11 OH
C II <
(U II S
a ii s
X II D
W II CO
•— II
II Z
Cn HO
C II M
•H II EH
C II O
-H II D
CO II Q
M II W
E-" II Q
||
IS
II EH
r-
^D
>.
CM




CO
^
f^_
cn



CO
CM
k.
ID


r^
^ji
m
k.
r—

O VD
o co
cn in
k. k.
^H m














CO
C
C 0
-H -H
CO J->
CJ O
CO 3
(1) CU T3
CO i-l CU
C X! Q
CU CO
a x x
X co ro
CJ EH EH

+ 1 II




















-------
II
II m
I
SH
II ro
II 0
H x
II
n
II
II
II
II
II

i
1 SH
ii ro
II 0
II X
II
II
II
II
II
II
II
II ro
11
II SH
II (^j
II 0
II
11
II
II
II
II
co II
M II CM
CO H
X II SH
1-3 	 ii ro
^•h ii w
i^V !! ^
^^^ n
S II
0 II
£—1 Ii
P4 H
a !!rH
CO II
< II SH
o n ro
n 0
II X
11
II
n
n
ii
n
n
II 0
11
II SH
ii ro
II 0
II >H
II
II
II
Cn II
C II
•H II
CO II
CO II
0 II
0 II
0 II
SH II
Oj II
-P II
0 g II
0 OlrH ||
•n C -H II
W O -H fa II
CO SH Cn II
rt3 Oa ro SH II
O g 0 II
2 0 H > II S
Q^l^^k^ i — 1 11 O
cfl^M to i! £
Sl'H 0 || ID
SH 0 >, O II O
0 OS SH C! II rH
-p Q 0 ii PC
01 in IIO
0-0 II
SH EH EH m II X
-H i-3 i-3 0 II KC
Q SC Sfi OS II EH

o ro r-
cn "a1 r—
CM CM CO
h. k. •.
rH CM CM
rH rH
rH


cn r— co
"a1 cn ^
o co r—
*. *. •»
co rH ro
O rH
rH
rH ^ CO
O CO -a1
cn in CM
•a1 rH LO
O rH



co co r~~
^ ro *a*
oo CM ro
*. *. «.
rH rH I—
O rH
rH




o cn o CD
CO rH O CO
co cn ro CM
*. •*. *. *.
CO' O rH -a"
Cn rH

















	
CO
Cn
C CO
•H 4-1
> CO
ro o — .
CO O CO
— CO
73 0
CO 0 h-3
4-1 CO —
co a
O 0 C C
O Q, 0 -H
x -H ro
Cn E£] 4-i CD
co c ro
0 -H i-H --H 0
3 4-1 ro U rH
c ro -H 0 x)
a) SH 4-i SH ro
t> 0 -H p, X
0 a c 0 ro
OS O M Q EH

111 +
II
0 rH H
r- -sr II
ro <=F • II
II
co ro II
o^ ii
II
II
II
II
11
II
11
•a- cn ||
o cn ||
•a1 CM II
II
CM ro ||
cn ||
II
II
II
I)
It
II
II
II
cn -^ n
co -a- II
0 rH ||
. j
*• *• 11
co ro II
CO ||
II
II
II
II
II
II
11
ro ro II
co r- n
CM cn ||
II
ro CM II
CO ||
II
II
II
II
II
II
II
in rH ||
r~ -a1 II
ro en ||
II
CM CM II
CO ||
II
II
II
11
II
11
II
II
II
II
II
II
II
II
II
II
II
II
II
II
11
11
II
II
II
II
II
II Z
II 0
II H
II EH
II rtl
0 II 1-3
g II D
0 II O
0 II J
C II <
M 11 0
X II
0 ro ii B
rH EH || O
X! II J
ro 0 n fa
X g II
ro o ii a
EH O II CO
C II cC
II M II 0

o ro rH

CM CM -=F
•-».•*
rH CM ro
rH rH
rH


cn r^ cn
••a* cn cn
O CO CM

co rH ro
O rH
rH

'O ^o i
Cn 4-> SH
C CO 0
•rl O >
> O O
ro o
CO 4-10
0
CO g rH
4-> 4-> ro
CO CO 4-1 0
O 0 -H D
O > OjrH
x c ro ro
cn ro M o >
CO C EH
0 -H r-i cn 0
P 4-> 0 -ro C cn
c ro g -ri -H ro
0 SH O 4J 44 >
> 0 U -H SH rH
0 a c c o ro
OS O M M B CO

1 1 1 + +
11
co cn ||
o -a> II
CO CM II

in -a1 II
cn in 11
II
II
II
II
11
II
II
ro o II
in rH ||
co o ii

CM en ||
cn in II
II
II
11
II
II
II
II
ro co ||
cn cn ||
rH rH ||
0* -a^ II
cn co ||
II
II
II
II
II
II
H
r- *a< 11
ro co ||
CO CO ||

r^ cn ||
CO CO ||
j|
II
jj

II
II
11
O rH ||
CM rH ii
o cn ii
- - ii
in in ii
co r— 11
II
II
II
II
II
II
II
0 0 II
O OH
ro ro II
- - II
rH rH ii
ro ro ||
l I II
II
II
jl
II
jj
II
cK> ii
o ii
0 II

CM II
rH Ii
jj
 II
S II
0 S II
rH OH
fa rH II

J3 II
CO Xi II
ro co n
o ro n
O II
X II
ro -d ii
EH 0 II
1 4-1 II
0 § !!
4-> OH
MH 0 II
eC co II
•rl ii
ii a ii

-------
r-
(Xi
O  RJ
-s. Ol
,-H
i
i
i
if
B
i
i
|j
1
n
8
X
n


t
1
i










H
1






[j
il
n
!














en
C
•H
to

O rH
c e -H
Q) rH CO
M -H
0) b ••
m (1)
0) S». U
03 M C
Q 0)
1 M
.. 0)

r3 r3 0)
« rt 05
in

M
(0
0)
x






^J*

^
(0
0)
X




ro

U
ro
0)
X



CM

^
ro
0)
X


rH
M
(0

CSJ W

W
3 MH
rH 0
ro
> 0)
4-1
4J ro
C! K
03
to rH
d) ro
M C
Ou M
0)
4-> 4-1
0) C
Z M
II
II
II
II
II
II
II
It
II
II

II
II
Ii
II
n
11
II
II
II
II
II
II
!!
II
If
II
II


II
II
i
i
i!
'I
u
n
||
jj
jj
n
n
u
n
||
I!
u
n
to II
ro n
i II
II
rH II

II
0 II
i
II
[|
II
||
II
' II
dP II
O II
O II
11
CM II
rH II
jj
oy IE
jj
*^ jj
u n
ro n
X! II
>i' n
ro n
DJ H
n
•d n
0) II
4-1 11
c n
3 II
O II
0 II
to II
-H II
Q II

-------
                                                                                   Cost List
Appendix B.  Cost List


Investment Costs


Pre-Press

Purchased Equipment
   Air compressor
   Automatic coater
   Computer system
   Delivery
   Digital output systems
   Electronic imaging system
   Exposure lamp
   Exposure unit
   Film processing equipment
   Initial spare parts
   Insurance
   Large format color printer
   Measuring devices
   Pickness guage
   Pin registration system
   Process camera
   Processing sink
   Processor filter
   Proofing system
   Safe lights
   Sales tax
   Scanner
   Screen frames
   Screen stretching device
   Screen tension meter
   Silver recovery unit
   Software
   Special tools
   Spill kits
   Tensioning system/device
   Thermometers
   Work tables'
Materials
   Electrical
   Fire suppression system
   Gas lines
   Instruments
   Insulation
   Other materials
   Piping & valves
   Pneumatic distribution system
   Structural
 Utility Systems and Connection
    Cooling
    Electrical
    General plumbing
    Heating
    Humidity control
    Pneumatic power
    Refrigeration
    Sewerage
    Static control
    Water

 Planning/Engineering
    Consultant fees
    Contractor fees
    In-house planning/engineering
    Procurement
    Vendor fees

 Site Preparation
    Consultant fees
    Contractor fees
    Demolition & clearing
    Equipment rental
    Equipment/Rubbish disposal
    In-house
    Land improvements
    Vendor fees

 Construction/Installation
    Consultant fees
    Contractor fees
    Equipment rental
    In-house
   Vendor fees

 Start-up/Training
   Consultant fees
   Contractor fees
   In-house
   OSHA hazard comm. training
   Training
   Trials/Manufacturing variances
   Vendor fees

Permitting
   Consultant fees
   Contractor fees
   In-house
                                            B-l

-------
                                                                                     Cost List
   Permit Fees
   Vendor fees
Working Capital
   Accounts receivable/payable
   Cash
   Product inventory
   Raw material inventory
Contingency
   Contingency
Buildings
   Buildings
Land
   Land

Press

Purchased Equipment
   Color analyzer
   Color booth
   Curing unit
   Delivery
   Densitometer
   Digital scales
   Drying unit
   Fork lifts
   Hydraulic lifts
   Initial spare parts
   Ink mixer
   Ink inventory control system
   Insurance
   Paper cutter
   Pollution control devices
   Sales tax
   Squeegee holders
   Squeegee sharpener
   Stacking unit
   UV Curing unit
   Viscometer
Materials
   Electrical
   Fire suppression system
   Gas lines
   Instruments
   Insulation
   Other materials
   Piping & valves
   Pneumatic distribution system
   Structural
Utility Systems and Connection
   Cooling
   Electrical
   General plumbing
   Heating
   Humidity control
   Pneumatic power
   Refrigeration
   Sewerage
   Static control
   Water

Planning/Engineering
   Consultant fees
   Contractor fees
   In-house planning/engineering
   Procurement
   Vendor fees

Site Preparation
   Consultant fees
   Contractor fees
   Demolition & clearing
   Equipment rental
   Equipment/Rubbish disposal
   In-house
   Land improvements
   Vendor fees

Construction/Installation
   Consultant fees
   Contractor fees
   Equipment rental
   In-house
   Vendor fees

Start-up/Training
   Consultant fees
   Contractor fees
   In-house
   OSHA hazard comm. training
   Training
   Trials/Manufacturing variances
   Vendor fees

Permitting
   Consultant fees
   Contractor fees
   In-house
   Permit fees
   Vendor fees

Working Capital
   Accounts receivable/payable
   Cash
                                             B-2

-------
                                                                                      Cost List
    Product inventory
    Raw material inventory

 Contingency
    Contingency

 Buildings
    Buildings

 Land
    Land

 Post-Press/Finishing

 Purchased Equipment
    Coaters
    Corner cutters
    Corner notchers
    Delivery
    Delivery vehicles
    Die cutter
    Folding equipment
    Fork lifts
    Grommet machine
    Heat press
    Hole drill
    Initial spare parts
    Insurance
    Laminator
    Laser cutter/etcher
    Packing devices/machines
    Packing tables
    Plastic bending machine
    Sales tax
    Saws (band, table, panel)
    Scales
    Sewing machine
    Shrink wrap machine
    Slitter/scorer
    Spray booth
    Stock cutter/trimmer
Materials
    Electrical
    Fire suppression system
    Gas lines
    Instruments
    Insulation
    Other materials
    Piping & valves
   Pneumatic distribution system
   Structural

Utility Systems and Connection
   Cooling
    Electrical
    General plumbing
    Heating
    Humidity control
    Pneumatic power
    Refrigeration
    Sewerage
    Static control
    Water

 Planning/Engineering
    Consultant fees
    Contractor fees
    In-house planning/engineering
    Procurement
    Vendor fees

 Site Preparation
    Consultant fees
    Contractor fees
    Demolition & clearing
    Equipment rental
    Equipment/Rubbish disposal
    In-house
    Land improvements
    Vendor fees

 Construction/Installation
    Consultant fees
    Contractor fees
    Equipment rental
    In-house
    Vendor fees

 Start-up/Training
    Consultant fees
    Contractor fees
    In-house
    OSHA hazard comm. training
    Training
    Trials/manufacturing variances
    Vendor fees
Permitting
   Consultant fees
   Contractor fees
   In-house
   Permit Fees
   Vendor fees

Working Capital
   Accounts receivable/payable
   Cash
   Product inventory
   Raw material inventory
                                             B-3

-------
                                                                                   Cost List
 Contingency
    Contingency
 Buildings
    Buildings
 Land
    Land

 Screen Reclamation

 Purchased Equipment
    Automatic screen cleaners
    Chemical distribution system
    Filtration system
    High pressure washing system
    Solvent recycling system
    Tension meters
    Washout booth

 Materials
    Electrical
    Fire suppression system
    Gas lines
    Instruments
    Insulation
    Other materials
    Piping & valves
    Structural
 Utility Systems and Connections
    Cooling
    Electrical
    General plumbing
    Heating
    Humidity control
    Refrigeration
    Sewerage
    Water
Planning/Engineering
   Consultant fees
   Contractor fees
   In-house planning/engineering
   Procurement
   Vendor fees
Site Preparation
   Consultant fees
   Contractor fees
   Demolition & clearing
   Equipment rental
   Equipment/Rubbish disposal
   In-house
   Land improvements
    Vendor fees

 Construction/Installation
    Consultant fees
    Contractor fees
    Equipment rental
    In-house
    Vendor fees

 Start-up/Training
    Consultant fees
    Contractor fees
    In-house
    OSHA hazard comm. training
    Training
    Trials/manufacturing variances
    Vendor fees

 Permitting
    Consultant fees
    Contractor fees
    In-house
    Permit Fees
    Vendor fees

 Working Capital
    Accounts receivable/payable
    Cash
   Product inventory
   Raw material inventory

 Contingency
   Contingency

 Buildings
   Buildings

 Land
   Land

Non-process/Other

Purchased Equipment
   Delivery
   Equipment
   Initial spare parts
   Insurance
   Photocopier
   Sales tax

Materials
   Electrical
   Fire suppression system
   Gas lines
   Instruments
                                            B-4

-------
                                                                                     Cost List
    Insulation
    Other materials
    Piping & valves
    Structural
 Utility Systems and Connection
    Cooling
    Electrical
    Fire control
    General plumbing
    Heating
    Refrigeration
    Sewerage
    Water

 Planning/Engineering
    Consultant fees
    Contractor fees
    In-house planning/engineering
    Procurement
    Vendor fees

 Site Preparation
    Consultant fees
    Contractor fees
    Demolition & clearing
    Equipment rental
    Equipment/Rubbish disposal
    In-house
    Land improvements
    Vendor fees

 Construction/Installation
    Consultant fees
    Contractor fees
    Equipment rental
    In-house
    Vendor fees

Start-up/Training
    Consultant fees
    Contractor fees
    In-house
    OSHA hazard comm. training
   Training
   Trials/Manufacturing variances
   Vendor fees
Permitting
   Consultant fees
   Contractor fees
   In-house
   Permit fees
   Vendor fees
Working Capital
   Accounts receivable/payable
   Cash
   Product inventory
   Raw material inventory
Contingency
   Contingency
Buildings
   Buildings
Land
   Land
                                             B-5

-------
                                                                                   Cost List
 Operating Cost List

 Pre-Press

 Materials
   Blockout
   Bulbs for exposure lamp
   Chemicals
   Degreasers
   Diskettes
   Emulsion
   Film
   Filters
   Personal protective gear
   Razor blades
   Safe light bulbs
   Screen mesh
   Shop towels
   Silver recovery cartridges
   Spill kits
   Tape
 Labor
   Inspection/QA/QC
   Maintenance
   Manufacturing recordkeeping
   Operating
   Supervision
 Utilities
   Electrical
   Fuel
   Inert gas
   Plant air
   Refrigeration
   Sewerage
   Water
Waste Management
   Chemical hauling
   Disposal
   Hauling (other)
   Insurance
   On-site handling
   Pre-treatment
   Shop towel laundering
   Silver recovery maintenance
   Storage
   Treatment
Regulatory Compliance
   Air permits
   Closure/Postclosure care
   Future regulation
   Generator fees/taxes
   Inspections/Audits
   Labeling
   Manifesting
   Monitoring/Testing
   Permitting
   Pollution fees
   Recordkeeping
   Reporting
   Training
   Wastewater discharge permit

Insurance
   Commercial General Liability
   Pollution
   Unemployment
   Workers compensation

Future Liability
   Attorney and court costs
   Business shutdown
   Fines/Penalties
   Natural resource damage
   Noncompliance (Worksheet)
   Personal injury
   Property damage
   Site cleanup and monitoring
   Superfund

Revenues
   Marketable pollution credits
   Scrap film
   Silver from recovery unit

Press

Materials
   Adhesives
   Coatings
   Color booth replacement bulbs
   Emulsion removers
   Defoamers
   Ink trays
   Inks
   Ink remover
   Personal protective gear
   Retarders
   Shop towels
   Spot remover
   Squeegees
   Squeegee holders
                                            B-6

-------
                                                                                       Cost List
     Substrate
     Thinners
  Labor
     Inspection/QA/QC
     Maintenance
     Manufacturing recordkeeping
     Operating
     Supervision
  Utilities
     Electrical
     Fuel
     Inert gas
     Plant air
     Refrigeration
     Sewerage
     Water

 Waste Management
     Chemical hauling
     Disposal
     Hauling (other)
     Ink hauling
     Insurance
    On-site handling
    Pre-treatment
    Shop towel laundering
    Storage
    Treatment
 Regulatory Compliance
    Air permits
    Closure/Post-closure care
    Future regulation
    Generator fees/taxes
    Inspections/Audits
    Labeling
    Manifesting
    Monitoring/Testing
    Permitting
    Pollution fees'
    Recordkeeping
    Reporting
    Training
    Wastewater discharge permit
Insurance
    Commercial General Liability
    Pollution
   Unemployment
   Workers compensation
Future Liability
   Attorney and court costs
     Business shutdown
     Fines/Penalties
     Natural resource damage
     Noncompliance (worksheet)
     Personal injury
     Property damage
     Site cleanup and monitoring
     Superfund
  Revenues
     Marketable pollution credits
     Pallets
     Sale of product
     Scrap corrugated
     Scrap substrate

  Post-Press/Finishing
  Materials
     Blades
     Coating/Laminating materials
     Grommets
     Other packing supplies
     Plastic  bands
     Plastic  film
    Tooling replacement
 Labor
    Inspection/QA/QC
    Maintenance
    Manufacturing recordkeeping
    Operating
    Supervision
 Utilities
    Electrical
    Fuel
    Inert gas
    Plant air
    Refrigeration
    Sewerage
    Water

 Waste Management
    Chemical hauling
    Disposal
    Hauling (other)
    Insurance
    On-site handling
    Pre-treatment
    Storage
   Treatment

Regulatory Compliance
   Air permits
                                             B-7

-------
                                                                                    Cost List
    Closure/Post-closure care
    Future regulation
    Generator fees/taxes
    Inspections/Audits
    Labeling
    Manifesting
    Monitoring/Testing
    Permitting
    Pollution fees
    Recordkeeping
    Reporting
    Training
    Wastewater discharge permit
 Insurance
    Commercial General Liability
    Pollution
    Unemployment
    Workers compensation
 Future Liability
    Attorney and court costs
    Business shutdown
    Fines/Penalties
    Natural resource damage
    Noncompliance (worksheet)
    Personal injury
    Property damage
    Site cleanup and monitoring
    Superfund
 Revenues
    Marketable pollution credits
    Pallets
    Sale of product
    Scrap corrugated
    Scrap substrate

 Screen Reclamation

Materials
   Emulsion removers
   Haze remover
   Ink remover
   Other chemicals
   Personal protective gear
   Shop towels
Labor
   Inspection/QA/QC
   Maintenance
   Manufacturing recordkeeping
   Operating
   Supervision
 Utilities
    Electrical
    Fuel
    Inert gas
    Plant air
    Refrigeration
    Sewerage
    Water

 Waste Management
 '   Chemical hauling
    Disposal
    Hauling (other)
    Insurance
    On-site handling
    Pre-treatment
    Shop towel laundering
    Storage
    Treatment

 Regulatory Compliance
    Air permits
    Closure/Post-closure care
    Future regulation
    Generator fees/taxes
    Inspections/Audits
    Labeling
    Manifesting
    Monitoring/Testing
    Permitting
   Pollution fees
   Recordkeeping
   Reporting
   Training
   Wastewater discharge permit

Insurance
   Commercial General Liability
   Pollution
   Unemployment
   Workers compensation

Future Liability
   Attorney and court costs
   Business shutdown
   Fines/Penalties
   Natural resource damage
   Noncompliance (worksheet)
   Personal injury
   Property damage
   Site cleanup and monitoring
   Superfund
                                             B-8

-------
                                                                                    Cost List
 Revenues
    Marketable pollution credits
    Reclaimed Screens

 Non-process/Other

 Materials
    Chemicals
    Maintenance supplies
    Raw materials
    Storage
    Transport

 Labor
    Equipment/Facility maintenance
    Inspection/QA/QC
    Manufacturing recordkeeping
    Operating
    Supervision

 Utilities
    Electrical
    Fuel
    Inert gas
    Plant air
    Refrigeration
    Sewerage
    Water

Waste Management
    Disposal
    Hauling
    Insurance
   On-site handling
   Pre-treatment
   Storage
   Treatment

Regulatory Compliance
   Air permits
   Closure/Postclosure Care
   Future regulation
   Generator fees/taxes
   Inspections/Audits
   Labeling
   Manifesting
   M on itor ing/Testing
   Permitting
   Pollution fees
   Recordkeeping
   Reporting
   Stormwater permit
   Training
   Wastewater discharge permit
Insurance
   Commercial general liability
   Pollution
   Unemployment
   Workers compensation
Future Liability
   Attorney and court costs
   Business shutdown
   Fines/Penalties
   Natural resource damage
   Noncompliance (worksheet)
   Personal injury
   Property damage
   Site cleanup and monitoring
   Superfund

Revenues
   Marketable pollution credits
   Sale of product
                                            B-9

-------

-------
                                           Noncompiiance Worksheet Methodology
  Appendix C.  Noncompiiance Worksheet Methodology

  General Methodology
  The Noncompiiance Worksheet assists printers in estimating their future liability stemming
  from-noncompliance with local,  state, and federal environmental regulations. Future
  liability from other sources (e.g., Superfund; acute incidents  resulting in personal injury,
  property damage, or natural resource damage; workers' compensation claims) is not cov-
  ered by the Noncompiiance Worksheet. Other liability cost items can be selected from the
  Cost Inventory with cost estimates entered manually as for any other cost item.

  The Worksheet uses historical penalty information—provided either by the user or pulled
  from the default penalty database—and qualitative ratings of the facility's operations to
  guide the calculation of the  facility's  noncompliance liability. In  addition to  choosing
  whether to enter facility penalty data or use the default  database, the user chooses which
  of  four statutes—Clean Air Act (CAA), Resource Conservation and Recovery Act
  (RCRA), Clean Water Act (CWA), and Emergency Planning and Community  Right-to-
 know Act (EPCRA)—to include in the calculation. Detailed descriptions of each of the
 qualitative ratings used in each of these four sections follow.

 If you have historical penalty information, you should enter it directly into the Worksheet.
 However,  default data allow you to develop an estimate of potential  noncompliance
 liability if historical data are  lacking. To assist you in  deciding between these two ap-
 proaches, the source of the default penalty data is described below.

 Source of Default Penalty Data
 Despite the attention the printing industry has received in recent years regarding envi-
 ronmental issues, there is a paucity of penalty data  available for the industry. While federal
 and state enforcement databases  generally record all  penalties assessed,  they do not
 necessarily  track enforcement action by specific industries. Recent efforts  to integrate
 databases and restructure the data to include industry designations—such as Standard In-
 dustrial Classification  (SIC)—have improved  the resolution of the  data in general  but
 industry-level data remain scarce. For example, the Resource Conservation and Reco'very
 Information System (RCRIS) database includes SIC data  only for those facilities classified
 as Treatment, Storage, and Disposal Facilities (TSDF). The majority of printing  facilities
 are not TSDFs. Consequently, a search for printing industry data from the Integrated Data
 for Enforcement Analysis system (in which enforcement data for various environmental
 statues are stored) yielded no penalties despite the fact that 62% of enforcement actions
 against the printing industry are taken under RCRA.6

 Given the inadequacy  and scarcity  of enforcement data specifically for the printing in-
 dustry, the Worksheet uses a top-down approach to estimate noncompliance penalties.
 Recent enforcement data for administrative penalty orders for the four statutes  that are

'US EPA. Profile of the Printing Industry. Office of Enforcement and Compliance Assurance  EPA 310-
R-95-014, September 1995.

                                       C-l

-------
                                          Noncompliance Worksheet Methodology
 considered in this worksheet—CAA, RCRA,  CWA, and EPCRA—provide a basis  for
 estimating penalties for the printing industry.7 These four statutes are most applicable to
 the printing industry and represent most of the enforcement action affecting printing  fa-
 cilities.8

 Two data sources were used for estimating noncompliance penalties for these four stat-
 utes. EPA's Enforcement and Compliance Assurance Accomplishments Report provides
 the annual number of enforcement actions  by statute as well as the total penalties (in dol-
 lars) issued under each statute (see columns 1  and 2 in the table below). From these data,
 the average penalty size issued under each statute can be determined (column 3). How-
 ever, because these data are aggregated across all industries it is not possible to determine
 printing industry-specific penalties.
 A  second EPA document, Profile of the Printing Industry, provides the number of en-
 forcement actions and penalties issued under each statute for the printing industry. During
 a five year period, 514 enforcement actions were  undertaken in the printing industry,  an
 average of 103 actions  per year. Of these actions, 31% were carried out under the CAA,
 3% under the  CWA, 62% under RCRA, and  4% under  EPCRA. Column 4 in the table
 below allocates the annual actions to these statutes. The size of these penalties, however,
 is not provided. Therefore, we determined the annual dollar value of penalties issued under
 each statute (column 5) by multiplying the  number of statute-specific enforcement actions
 (column 4) and the average penalty  size from column 3. An average penalty per facility
 was then  determined (column 6) by dividing  these totals by the  number  of printing
 facilities with 20 or more employees to estimate a per-facility penalty. We limited facilities
 to  those with  20  or more employees on  the belief that very small facilities  face less
 regulatory scrutiny.

Statute
CAA
CWA
RCRA
EPCRA
All Industries
Number of
Enforcement
Actions
171
272
103
242
Total Pen-
alties ($)
3,882,550
5,154,892
9,824,031
8,266,020
Ave.
Penalty
($)
22,705
18,952
95,379
34,157
Printing Industry
Number of
Enforcement
Actions
32
3
64
4
Total Pen-
alties ($)
723,562
58,447
6,079,072
140,454
Ave. Penalty
per Facility
($)
72
6
608
14
Because the magnitude of the per facility dollar amounts are low and were arrived at
through a conservative methodology, the final numbers were rounded up to represent re-
alistic nominal penalties that a facility might be assessed. The rounded numbers are the
7 US EPA. Enforcement and Compliance Assurance Accomplishments Report FY1994. Office of Enforce-
ment and Compliance Assurance. EPA 300-R-95-004. May 1995.
8 US EPA. Federal Environmental Regulations Potentially Affecting the Printing Industry. Office of Pollu-
tion Prevention and Toxics. EPA 744-B-94-001. March 1994.
                                       C-2

-------
                                           Noncompliance Worksheet Methodology
  dollar amounts used by the software as the expected penalty amount for the average fa-
  cility. These amounts are used only if the user declines to enter his or her own data based
  on enforcement history.

  User-Entered Data Method
  Users are encouraged to choose the user-entered data method because we believe that
  your facility's historical fine experience allows a more accurate picture of your noncom-
  pliance liability than generic fine data. You can use this method in two ways. You can look
  through your own records to estimate your average fines over the past several years for
  each of the four statutes. Alternatively, you can simply adjust  the  default fine data to
  better reflect your view of the facility's regulatory strengths and weaknesses.
  In addition to entering your own noncompliance penalty data, you define how the current
  project you are  considering might  change your  noncompliance liability.  P2/FINANCE
  adjusts all user-entered penalty data up or down by 50% based on whether you estimate
  that the project will increase, decrease, or leave unchanged the level of emissions that have
  been the cause of past penalties. This large factor reflects comments from regulators that
  indicate enforcement  activity against a facility is greatly affected  by  its enforcement
  history. The data are further adjusted by a general self-assessment of your facility's envi-
 ronmental management and rapport with regulators discussed below.

 General Self-Assessment
 Using either the user-entered data or the default data method, the aggregate expected pen-
 alty amount is adjusted by a general self-assessment that is meant to  capture factors be-
 yond those specifically associated with individual statutes. The premise of this adjustment
 is that a facility's general approach to environmental management and compliance impacts
 its likelihood of being penalized.

 We  have included two questions to broadly assess your  facility's approach. The first
 question relates to general  environmental  management and encompasses  the  facility's
 commitment to waste reduction, integrity of materials storage and handling systems, con-
 sistency of monitoring and reporting, and demonstrated concern for employee and com-
 munity safety. We assume that these components of environmental management are strong
 indicators of environmental performance and susceptibility to enforcement. Therefore this
 question adjusts penalty amounts significantly (by 50%).
 The  second question leads to a more modest adjustment of penalty amounts (by 10%) and
 relates to your facility's relationship  with regulators, especially enforcement personnel
 While this measure is quite subjective, conversations with both state and federal regulators
 suggest that facilities that are more forthcoming and cooperative  are less likely to have
penalties assessed to them. Facilities  demonstrating a willingness and intent to address
problems are often granted an opportunity to correct them  before a penalty is assessed
Conversely, facilities that refuse to cooperate with enforcement officials may be subject to
more scrutiny and therefore a higher level of enforcement actions.
                                       C-3

-------
                                           Noncompliance Worksheet Methodology
 While the information covered by these questions may not change from one project to the
 next, its inclusion can help estimate the appropriate magnitude of expected penalties.

 Default Data Method
 If historic penalty data for your facility are lacking, you can use the provided default data.
 The general self-assessment (described above), combined with qualitative assessments of
 each of the four statutes, then tailors the generic default penalty data to your facility.

 Each statute—CAA, RCRA, CWA, and EPCRA—is considered in  terms  of regulatory
 status, penalty history, the effect the project will have on relevant emissions, and other
 mitigating or amplifying circumstances. Each of these considerations is represented by a
 weighting factor that adjusts the expected penalty for  each statute.  (The respective
 weighting factor for each answer appears on-screen in the worksheet.) The penalties for
 each statute are then summed and multiplied by the factor derived from the general self-
 assessment as follows.

       Noncompliance cost = WG (WA * EPA + Wsw * EPSW +WW* EPW  + WR * EPR),

 where H4, etc., are factors for  general self assessment, air, solid waste, water, and re-
 porting; and EPA, etc. are the expected penalties.

 The various  weighting factors used by this worksheet are admittedly quite subjective. We
 solicited and integrated comments  from regulators and other experts  on both  the overall
 model and the specific factors. Nevertheless, you are encouraged to consider to what ex-
 tent the individual factors are appropriate for your situation.

 Air: Clean Air Act (CAA)
 Facilities  required to have a Clean Air Act Title V permit are assumed to have a penalty
 burden 50%  higher than the average, while facilities not requiring the permit are assigned
 a burden 90% below the average. The user should respond to this question assuming im-
 plementation of the project under consideration. The increase for permit holders reflects
 the fact that these facilities have higher emissions and have to follow fairly complex, spe-
 cific regulatory requirements. The state  or regional EPA office administering the permits
 has explicit enforcement duties to ensure  compliance. Conversely, the decrease from the
 average for facilities not requiring the permit is because without a permit, an enforcement
 mechanism does not exist unless there is a flagrant violation.
 If the facility has incurred CAA penalties in the past three years, the expected penalty  is
 increased by  50% or is decreased by 50% hi the absence of such a penalty history.
 In conjunction with the CAA, facilities in extreme or severe ozone non-attainment zones
 are subject to lower thresholds of permissible emissions. These facilities are assumed to
 have a 50% higher liability than average; firms located in less-than-severe non-attainment
 zones are  expected to have a 50% lower liability.  This factor is relevant to  all facilities,
 even those without permits, because air  enforcement in non-attainment areas is generally
more aggressive.
                                       C-4

-------
                                          Noncompliance Worksheet Methodology
  Finally, P2/FINANCE adjusts the expected penalty amount up 50% if the project will in-
  crease air emissions that have been the cause of past penalties, and down 50% if it will
  decrease such emissions. For this adjustment, only significant changes in air  emissions
  should be considered.

  Solid (Hazardous) Waste: Resource Conservation and Recovery Act (RCRA)
  Facilities classified under RCRA as large quantity generators of hazardous waste are as-
  sumed to  have a penalty burden 50% higher than the average, while those classified as
  small quantity generators are assumed to be average, and those classified as very small or
  conditionally exempt are at 50% below the average. The user should  respond to this
  question assuming implementation of the  project under consideration. The increase for
  large generators reflects the fact that these facilities generate large amounts of hazardous
 waste and are therefore subject to more scrutiny than others. Following the same logic,
 those firms generating comparatively little waste are assumed to be least likely to face an
 enforcement action.

 If the facility has incurred RCRA penalties in the past three years, the expected penalty is
 increased by 50%, but is decreased by 50% in the absence of such a penalty history.
 Two factors relating to the generation of solid hazardous waste further adjust the expected
 penalty value. The first considers the presence of an underground storage tank (UST). A
 UST may  increase the likelihood of RCRA  enforcement. The second factor concerns the
 location of the facility—whether it is in a densely populated area. With limited resources,
 enforcement officials must  prioritize their enforcement activities; their highest priority
 would be facilities in densely populated areas that may pose a threat to public health or
 safety. These two factors have lower weights than the others do because they are assumed
 to be of secondary importance.  The location factor is weighted very little because it is
 relevant only in high-risk but low-probability situations, i.e., when public health or safety is
 perceived to be at risk.

 Finally, P2/FINANCE adjusts the expected penalty amount up 50% if the project will in-
 crease hazardous waste generation that has been the cause of past penalties, and down
 50%  if it will cause a decrease. For this adjustment, only significant changes in  levels of
 hazardous waste generation should be considered.

 Water - Clean Water Act (CWA)
 Enforcement of water discharge regulations is broad and varied; much enforcement occurs
 at the local level. Many  municipalities establish  their own pollutant  thresholds  for
 commercial facilities within the larger framework of the CWA. Facilities that discharge
 directly into water may be required to hold a National Pollution Discharge Elimination
 System (NPDES) permit, depending on the volume and nature of the discharge and local
regulations. Facilities that discharge indirectly, through a publicly-owned treatment works
(POTW), may be required to hold a Significant Industrial User (SIU) or equivalent permit.
Facilities required to hold one of these permits are assumed to have a penalty burden 50%
higher than the average, while those without are assumed to be at 90% below the average.
The user should respond to this  question assuming implementation of the  project under
                                       C-5

-------
                                          Noncompliance Worksheet Methodology
 consideration. The increase for permit holders reflects the fact that these facilities have
 higher discharges and are subject to regulatory scrutiny. The sharp decrease from the
 average for those not required to have a permit follows the same logic to conclude that
 without a permit, no enforcement mechanism exists unless there is a flagrant violation.
 If the facility has incurred CWA penalties  in the past three years, the expected penalty is
 increased by 50% or is decreased by 50% in the absence of such a penalty history.
 In addition, the location of the facility in relation to a public water supply influences its
 noncompliance liability. With limited resources, enforcement officials must prioritize their
 enforcement activities, and their highest priority would be given to a facility that may pose
 a^threat to public water supplies. A facility  that is upstream of a public water supply has a
 higher probability of having a direct impact. This factor is weighted  less because it is
 relevant only in a high-risk but low-probability situation, i.e., when public health or safety
 is perceived to be at risk.

 Finally, P2/FINANCE adjusts the expected penalty amount up 50% if the project will in-
 crease water emissions that have been the cause of past penalties, and down 50% if it will
 decrease  such emissions. For this adjustment,  only significant  changes  in levels of water
 emissions should be considered.

 Reporting - Emergency Planning and Community Right-to-Know Act
 EPCRA includes the provision that printing facilities that produce or use over a  certain
 amount of listed toxic chemicals must annually report their emissions to  the Toxics Re-
 lease Inventory (TRI).  Facilities required to report TRI data are assumed to have a penalty
 burden 50% higher than the average, while others are assumed to be at- 90% below the
 average. The user should respond to this question assuming implementation of the project
 under consideration. The increase reflects the  fact that facilities reporting under EPCRA
 have higher emissions and additional reporting  obligations and are therefore subject to
 regulatory scrutiny. The sharp decrease from the average for those not required to report
 follows the same logic to conclude that without reporting, the enforcement mechanism
 does not exist.

 If the facility has incurred EPCRA penalties in the past three years, the expected penalty is
 increased by 50% or is decreased by 50% in the absence of such a penalty history.
 Finally, P2/FINANCE  adjusts the expected  penalty amount up 50% if the project will in-
 crease TRI emissions that have been the cause of past penalties, and down 50% if it will
 decrease such emissions. For this adjustment, only significant changes  in TRI emissions
 should be considered.

 Critical Assumptions
The previous sections describe some of the assumptions built into the specific weighting
factors chosen for the various statutes. This  section delineates the underlying assumptions
upon which this model was built. A model of this nature possesses inherent  uncertainty.
Within that context, the general assumptions on which the model  rests  have been  estab-
lished based on research, experience, and qualitative judgment. By making these assump-


                                       C-6

-------
                                          Noncompliance Worksheet Methodology
 assumptions explicit, P2/FINANCE not only provides the user with an understanding of
 the output the model generates, but also exposes these assumptions to the user's scrutiny
 so that they might be improved upon.
 The first assumption is that firms equally share the financial burden of regulatory en-
 forcement. The use of averages to calculate an expected penalty value does not consider
 the distribution characteristics of the data. It is possible that a majority of the enforcement
 penalties assessed fall on a very small number of facilities, each facing penalties far above
 the average. The expected penalty facing a 'typical' firm, in this scenario, may therefore be
 lower than the average. The weighting factors, described above, are intended to adjust for
 this potential lack of conservatism.

 A second assumption is that past numbers and amount of enforcement actions are ade-
 quate indicators of expected future actions. In other words, this model assumes that the
 general enforcement framework will not significantly change and that regulators will im-
 pose fines at the same level in the future as they have in the past. There are some indica-
 tors that this assumption may be  questionable. The first is that there are many initiatives
 afoot at all governmental  levels to change current enforcement practices. Small business
 amnesty, self audits, and the US  EPA's Common Sense Initiative  and XL programs are
 examples of how regulators are changing their approach to enforcement. Another indica-
 tor that suggests the  past may not be a good proxy for the future is that year-to-year fed-
 eral enforcement data shows significant change in aggregate penalty amounts  over time.
 Yet another change  is the advent of multimedia  inspections, already in  force in some
 states, that may affect the probability of enforcement of any single regulatory statute.
 A final assumption of this  model is that the expected penalty amounts can be adjusted by a
 single weighting  factor to account for both the likelihood of enforcement and the likeli-
 hood  of a  larger penalty. In other words,  the factors blend the considerations of what
 characteristics are more likely to lead  to any enforcement with those that are likely to in-
 crease the magnitude of that enforcement.  The amount of empirical data that would be
 required in order to elevate the model to a level of sophistication enabling separation of
 these factors is well beyond that which is currently available.
 The foregoing discussions of the  assumptions underlying this model are included  so that
 the user fully understands  the basis on which the numbers  have been generated. As these
 numbers can influence the outcome of the overall analysis, the  user should consider these
 assumptions and the  degree to which they hold for the individual situation. The inclusion
 of this worksheet in the software is intended to encourage the user to consider this poten-
tial liability and make some effort, albeit imperfect, to quantify that liability. In most cases,
 although the magnitude  of the liability is difficult  to estimate with a  high level  of
confidence, a rough  estimate is more conservative and  probably more accurate than no
estimate. This logic  extends to all other forms of liability to which the facility may be
 subject. Keeping  with the  spirit of Total Cost Assessment, incorporating these costs into
an analysis provides a clearer economic picture of a project and therefore facilitates better
decision making.
                                       C-7

-------

-------