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