United States      Industrial Environmental Research  EPA-600/8-79-018a
          Environmental Protection  Laboratory          June 1979
          Agency         Research Triangle Park NC 27711


          Research and Development
v>EPA    A Standard Procedure
          for Cost Analysis
          of Pollution Control
          Operations;
          Volume I.  User Guide

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                 RESEARCH REPORTING SERIES


Research reports of the Office of Research and Development, U.S. Environmental
Protection Agency, have been grouped into nine series. These nine broad cate-
gories were established  to  facilitate further development and  application of
environmental technology. Elimination of traditional grouping was consciously
planned to foster technology transfer and a maximum interface in related fields.
The nine series are:

     1.  Environmental Health Effects Research

     2.  Environmental Protection Technology

     3.  Ecological Research

     4.  Environmental Monitoring

     5.  Socioeconomic Environmental Studies

     6.  Scientific and Technical Assessment Reports (STAR)

     7.   Interagency Energy-Environment Research and Development

     8.   "Special" Reports

     9.   Miscellaneous Reports

 This report has been assigned to the SPECIAL REPORTS series. This series is
 reserved for reports which are intended to meet the technical information needs
 of specifically targeted user groups. Reports in this series include Problem Orient-
 ed Reports, Research Application Reports, and Executive Summary Documents.
 Typical of these  reports include state-of-the-art analyses, technology  assess-
 ments, reports on the results of major research and development efforts, design
 manuals, and user manuals.



                        EPA REVIEW NOTICE

 This report has been reviewed by the U.S. Environmental Protection Agency, and
 approved for publication. Approval does not signify that the contents necessarily
 reflect the views and policy of the  Agency, nor does mention of trade names or
 commercial products constitute endorsement or recommendation for use.
 This document is available to the public through the National Technical Informa-
 tion Service, Springfield, Virginia 22161.

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                                      EPA-600/8-79-018a

                                               June 1979
A Standard  Procedure for Cost Analysis
     of Pollution Control Operations;
             Volume  I.  User Guide
                           by

                       Vincent W. Uhl

                  Environmental Protection Agency
                 Office of Research and Development
               Industrial Environmental Research Laboratory
               Research Triangle Park, North Carolina 27711


                   Program Element No. INE624A
                        Prepared for

              U.S. ENVIRONMENTAL PROTECTION AGENCY
                 Office of Research and Development
                     Washington, DC 20460

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                               ABSTRACT
     A  standard procedure has been devised for the engineering cost
 analysis of pollution abatement operations and processes.  The procedure
 is applicable to projects in various economic sectors:  private, regu-
 lated and public.  The models are consistent with cost evaluation prac-
 tice in engineering economy and financial analysis.  The report presents
 a recommended format, termed the Specification, that should not exceed
 eight pages when executed.  The guidelines facilitate the choice of
 procedures open to the estimator and the establishment of factors to be
 used in the evaluation.  The Specification has three segments:  des-
 criptive, cost analysis, and reliability assessment.  The bulk of the
 report  consists of 11 appendices that provide detailed background mater-
 ial and two comprehensive examples.  The appendix subjects are:  Capital
 Investment Estimation; Annual Expense Estimate; The CaAh F£ou) Concept;
 Discrete and Continuous Interest Factors; Measures of Merit; Cost In-
 dices and Inflation Factors; Rates of Return and Interest Rates; Methods
 of Reliability Assessment; Sensitivity Analysis; Example I -- Cost
Analysis of Flue Gas Desulfurization (FGD) Retrofit Facility; and
Example II -- Cost Analysis of Chlorolysis Plant.

     The Measures of Merit appendix considers:  return on investment,
 internal rate of return, payout time, equivalent annual cost, and unit
costs.   A glossary is provided.
                                    11

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                                PREFACE
     Several persons within EPA have keenly felt the need of a standard
procedure for preparing engineering cost analyses of projects which
either affect or are related to pollution abatement (or control).   Such
standard procedures are not new; even within the government several have
been developed over the years and for a wide range of technologies.

     Interest in an improved procedure has been prompted by the prepon-
derance of conceptual estimates that proved to be much lower than fig-
ures from later more detailed studies or the costs of actual plant
construction.  Also many of the cost estimates provided to support
feasibility studies have proved deficient, incomplete, hard to com-
prehend, and difficult to apply for comparison and future use because of
the absence of a uniform format.  In addition, many cost analyses fail
to provide a definition of the project scope, an appraisal of the stage
of development, and an assessment of the reliability of the economic
evaluation.  These unsatisfactory conditions can be largely obviated
through use of a standard procedure, such as presented in this report
for preparing engineering cost analyses.

     The essential part of the procedure is the specification which
consists of a descriptive segment, a cost evaluation segment, and a
reliability-assessment segment; this report includes step-by-step
methods for the execution of the three segments.  Guidelines have been
prepared to aid in the selection of financial and operating factors and
the establishment of the level of detail and comprehensiveness required.
These guidelines also serve to involve the requestor directly; he must
set the appropriate type of estimate and the discretionary factors.  The
application of the specification and the guidelines are illustrated in
two case studies (Appendices J and K).

     Some features of this report are:

  •  The subject has been developed in a complete but concise way.

  •  The rationale adopted for the evaluation of capital projects is
     consistent with accepted practice in both financial and engineering
     circles.

  •  The appendices (Volume II) review the background required to carry
     out a cost analysis and to evaluate the results.

  •  Examples are used where possible.


                                  iii

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     Adherance to the specification will ensure that cost analyses are
prepared with care, thoroughness, and uniformity, and are suitably
characterized as to development, scope, and reliability.  The analyses
would be simply executed, and the results easily comprehended and
readily put to use.
                                  IV

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                               CONTENTS
Abstract	      ii
Preface	     iii
Figures	     vii
Tables	     vii
Acknowledgements 	    viii

1.  Introduction 	       1

      Need	       1
      Purpose	       1
      For Whom Intended	       2
      Range of Application	       2
      Characteristics of Cost Analyses 	       2
      Reliability	       2

2.  Standard Procedure for an Engineering Cost Analysis. ...       5

      Descriptive Segment	       5
      Cost Analysis Segment	       5
        Specified Factors	       5
        Cost Estimate -- Capital Investment	       6
        Cost Estimate -- Annual Expenses  	      11
        Cost Estimate -- Net Profit and CoA/i Flow	      12
        Feasibility Evaluation  	      14
        Summary Comments	      17
      Reliability Assessment Segment  	      17
        Factors Affecting Accuracy  	      17

3.  The Specification and Guidelines	      19

      The Specification	      19
        Descriptive Segment	      19
        Cost Analysis Segment	      22
        Reliability Assessment  Segment 	      33
      Guidelines	      34
        Capital Investment Estimate	      34
        Annual Expense Estimate	      34
        Feasibility Evaluation  	      40
        Reliability Assessment  	      40

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 4.  Some General Comments and Cautions	     41

      Background in Technical Economics	     41
      Sources for Cost Data	     41
      Quality of Cost Analyses	     41
      Cautions	     42
        For Generalized Cases	     42
        Adequate Technical Effort	     43
        Estimate in Harmony with Technical Effort	     43
        Acceptable Form	     43
        Inclusion of All Pertinent Costs  	     43
        Peculiarities of Particular Technologies 	     43
        Measures of Economic Feasibility  	     44
        Assessing the Reliability of the Cost Analysis ....     44
        Using Checks	     44
        Computer Programs	     44

 5.  References	     45

 6,  Glossary	     47

      Selected References	     ^3
                               VOLUME II

Appendices

A.  Capital Investment Estimation	    A-i
B.  Annual Expense Estimate	    B-i
C.  The Cd&h flow Concept	    C-i
D.  Discrete and Continuous Interest Factors 	    D-i
E.  Measures of Merit	    E-i
F.  Cost Indices and Inflation Factors	    F-i
G.  Rates of Return and Interest Rates	    G-i
H.  Methods of Reliability Assessment	    H-i
I.  Sensitivity Analysis 	    I-i
J.  Example I -- Cost Analysis of Flue Gas Desulfurization
    (FGD) Retrofit Facility	    J-i
K.  Example II — Cost Analysis of Chlorolysis Plant	    K-i
                                   VI

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                                FIGURES

Number

   1   Effect of various factors on projected and actual
       capital costs 	       4

   2   Estimations guide for capital investment	       8
                                TABLES

Number                                                           Page

   1   Definition of Five Basic Types of Estimates of Total
       Plant Cost	      7

   2   Items that Comprise Total Plant Cost — A Typical List.      9

   3   Annual Operating Expense Items and Information for
       Their Estimation	     13

   4   Annual General Expense Items and Factors for Their
       Estimation	     14

   5   Summary of Economic Evaluation — Descriptive Segment  .     20

   6   An Illustration of the Effect of Scope on Fixed Capital
       Investment	     21

   7   Summary of Economic Evaluation -- Cost Analysis Segment     23

   8   Capital Cost Estimating Alternatives from Table 7 ...     29

   9   Annual Operating Expense Estimate 	     30

   10   General Expense Estimate	     31

   11   Information To Be Provided by Guidelines	     35

   12   Typical Cost Ranges for Producing Capital Cost
       Estimates	     39
                                   VII

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                           ACKNOWLEDGEMENTS


     The  successful completion of this enterprise relied heavily  on  the
advice, information, encouragement, and strenuous effort of many  per-
sons.  The list following represents an attempt  to recognize  this in-
valuable  assistance.

Thomas Alexander  (formerly OPE/DC)
James H.  Black (Univ. of Alabama and (EPA/IERL-RTP)
John K. Burchard  (EPA/IERL-RTP)
Timothy W. Devitt and associates (PEDCo)
Clyde J.  Dial (EPA/IERL-Cincinnati)
William F. Hamilton (EPA/OAQPS, formerly Economic Analysis Branch)
Robert P. Hangebrauck (EPA/IERL-RTP)
Norbert A. Jaworski (EPA/IERL-RTP)
Richard Jenkins (EPA/OAQPS, Economic Analysis Branch)
Michael G. Klett  (Gilbert/Commonwealth)
Ralf C. Kuehnel (Metrek Div., MITRE Corp.)
David Marsland (North Carolina State University)
B. C. McBeath and associates  (The Engineering Societies Commission
     on Energy, Inc.)
Gerald G. McGlamery (TVA, National Fertilizer Development Center)
Robert A. Quaney  (California  State Polytechnic University and
     formerly EPA/OAQPS)
Gerald L. Robinson (Battelle)
Max M. Samfield (EPA/IERL-RTP)
Syed Z. Shariq (EPA/IERL-RTP)
Thomas Shrader (formerly OPE/DC)
John 0. Smith (EPA/IERL-RTP)
Robert Smith (EPA/MERL)
Paul W. Spaite (consultant)
David G.  Stephan  (EPA/IERL-Cincinnati)
W. M. Talbert and associates  (Pullman Kellogg)
M. Frank  Tyndall and associates (Catalytic, Inc.)
Jackson Yu (Bechtel)

     I am especially indebted to:  W. Gene Tucker, Chief, Special
Studies Staff, EPA/IERL-RTP, for guiding and encouraging this project;
A. William Hawkins (consultant with the Research Triangle Institute) for
his execution of portions of the project, and the reviews and refine-
ments of  the work; and Mrs. Shirley Milton for her unfailing  good
spirits and superb manipulation of her typewriter through many drafts.
My thanks also go to the many other persons who one way or another
served to contribute to the fulfillment of this project.
                                    Vlll

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                               SECTION 1

                             INTRODUCTION
NEED

     Within any technical organization there is a general need for a
standard procedure for economic evaluations, also termed engineering
cost analyses and life cycle cost analyses.  Such a consistent method
ensures not only that the results are couched in familiar terms and are
in comprehensible form, but also that the analysis is complete and
suited to the purposes at hand.  EPA has felt a need for such a standard
procedure to guide its R&D programs more effectively and for other uses
such as:

  •  Costing projects to characterize the costs to be incurred, and to
     ascertain their economic feasibility.

  •  Comparing expected costs of alternative measures to identify the
     preferred control strategy.

Such an established methodology could also improve the quality and
utility of economic assessments to meet additional needs such as:

  •  Providing information needed to ascertain the economic burden of an
     abatement process on a specific plant or industry.

  •  Predicting the costs of pollution control for industrial and
     government groups in the evaluation of the ultimate costs to the
     consumer or taxpayer, and in gauging the effect on the economy and
     the benefit to society.
PURPOSE

     The report pjjjsents background and step-by-step instruction" fnr a
         prnnpHnrn nf 7ns* analysis.  The substantial portion is the
specification and a guideline.  The specification is actually a uniform
format:  It organizes the essential information; e.g., for R§D con-
tracts, compliance studies, and critical evaluations of cost analysis
from published sources.  The guideline provides choices such as the type
of capital estimate, and the desired measures of merit; it also aids in
the designation of financial and operating factors.

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      The  procedures  outlined  apply  to  evaluations  for a generalized
 case.  They are  not  intended  for  site-specific  studies; these require
 reviews of  local  circumstances  including  engineering surveys and de-
 tailed designs.   Both can have  significant  effects on cost.
 FOR WHOM  INTENDED

     The  standardized procedure presented in this report  is specifically
 designed  for  those  concerned with R§D  tasks:   contractors, project
 officers,  in-house  investigators, responsible  persons in  EPA, and the
 users of  the  end results.  However, it should  also prove  useful to other
 groups; e.g., departments and agencies of the  government, industrial
 corporations, engineering firms, and consultants.
 RANGE OF APPLICATION

     A standardized method of estimation must have wide adaptability
 because the processes and techniques to be costed will embrace a variety
 of technologies.  For example, it must be capable of providing reliable
 evaluations of chemical plants, liquid waste treatment facilities, a
 variety of combustion devices, and power plants.  In this connection, a
 number of methodologies have been established for generalized cost
 estimates for certain fields; e.g., saline water purification, nuclear
 energy, coal gasification, and wastewater treatment (1-4).*  For a valid
 evaluation of pollution control measures, the procedure must take into
 account the economic sector that governs; viz., private, regulated
 (e.g., electric utilities), or governmental (e.g., sewage treatment
 works).
CHARACTERISTICS OF COST ANALYSES

     To serve the foregoing purposes effectively, a cost analysis must
possess certain distinguishing features.  First, it must be simple and
sound; these qualities foster acceptance.  Then it must be uniform in
organization; this facilitates communication and permits ready com-
parison.  Finally, the method should include an expression of relative
reliability; this apprises users of the validity of the analysis.
RELIABILITY

     The reliability of cost projections varies widely.  Factors are
availability of basic data, stage of development, definition of scope,
     *
      Numbers within parentheses refer to references listed in Section 5,
                                   -2-

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the time expended on the analysis, and the experience brought to bear.
Figure 1 illustrates the effect of these factors on capital costs of
projected and actual facilities.  It will be noted that estimates in the
early stages of development cover a large range:  they may be much lower
or much higher than the actual capital cost.  Generally the initial
concept of a project is overly simple, but the opposite can be true.  In
any case, as more information is developed, the "envelope of variability"
(the shaded area) narrows.*  In addition, experience obtained in design,
construction, and operation of similar plants results in decreased
costs, both investment capital and annual expense.  This trend reflects
the influence of the so-called "learning curve."

     The accuracy of cost analyses is sometimes identified only with the
capital cost estimate, but reliability assessments must also take into
account the accuracy of all of the cash flows associated with the
operation; e.g., all operating expenses, and revenues including market
value of by-products.

     The inability to define scope satisfactorily contributes signif-
icantly to the deviation of estimates from actual costs.  Naturally this
plight is greater for estimates made in the early stages of R§D.  As the
project moves through the definitive and into the various design phases,
the scope becomes better defined with a corresponding improvement in
reliability.  Elements that especially affect the extent of the scope
are location, add-ons, extras for retrofit  (if applicable), and purpose
of the plant.
     *
      The area of the "envelope of variability" for a new process, and
for processes in new technologies, decreases as experience in estimating
costs is gained.


                                   -3-

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c
o
vt
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                   HIGH ESTIMATE •
                   FOR WORKABLE BUT OVERLY COMPLEX PROCESS
                   LOADED WITH EXTRAS, ADD-ONS. EXCESSIVE SAFETY FEATURES
                                                        5*   'NUMBERS REFER TO TYPES OF ESTIMATES
                                                             DEFINED IN TABLE 1.
                                                                                                       /SAME LOCATION
                                                                               COST OF LATER PLANTS BUILT<
                                                             ACTUAL PLANT BUILT     /                    \SAMESCOPE

                                                                                             CAPITAL COST DECREASES
                                                                                             IN ACCORDANCE WITH
                                                                                             THE "LEARNING CURVE."
LOW ESTIMATE
BASED ON POOR CONCEPT OF SCOPE
BASED ON INSUFFICIENT INFORMATION
        (EARLY STAGE OF DEVELOPMENT)
                            -ESTIMATED-
                                                             -ACTUAL-
                                n+2
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                                                                           n+5
                                                                                         fl+0
                              n+4
                       RELATIVE TIME, ywn

Figure 1. Effect of various factors on projected and actual capital costs.
                                                                               IH7
n+8

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                              SECTION 2

         STANDARD PROCEDURE FOR AN ENGINEERING COST ANALYSIS
     The specification format organizes the information for the economic
evaluation under these headings (segments) and subheadings (elements):

               Descriptive Segment
               Cost Analysis Segment
                    Specified factors
                    Cost estimate
                      - capital investment
                      - annual expenses
                      - net profit and c.a&h &tou3*
                    Feasibility evaluation
               Reliability Assessment Segment

     This section provides general information on each of these items.
Specific instructions are given in Section 5.  The Specification and
Guidelines.  Detailed background is presented in the Appendices.
DESCRIPTIVE SEGMENT

     The Descriptive Segment provides briefs on these five pertinent
items:

                    Facility description
                    Capacity rating
                    Abstract of scope
                    Performance specification
                    Stage of development
COST ANALYSIS SEGMENT

Specified Factors

     Certain key values must be specified; e.g., interest  (discount)
rate, facility life, depreciation period, time for construction, reference
                (in italics) means net profit plus depreciation.  See
Section 6 (Glossary) .

                                    -5-

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 year  for  costs,  reference unit  for process  costs,  applicable cost  indices,
 and inflation  rates  (if  applicable).  Aid for  this purpose  is provided
 by the  Guidelines  in Section  3.

 Cost  Estimate  -- Capital Investment

      Fixed  capital is comprised of the  funds required  to design, build,
 and bring a facility to  acceptable operation.

      Specifically, fixed capital  is comprised  of expenditures for:

   •   Land.

   •   Buildings and equipment  (physical  plant).

 In addition, the following may  contribute to the fixed capital  outlay:

   •   Spare  parts and special  tools.

   t   Interest  during construction (allowance for funds during construc-
      tion,  AFDC).

   •   Cost of modification of  the  facilities and start-up of the operation.

 In addition to fixed capital, a cash reserve,  termed "working capital,"
 is needed for  day-to-day operation.

 Estimation  Methods for Buildings  and Equipment —

      The  most  critical category of fixed capital is "buildings  and
 equipment;" it is  the part of the cost  estimate that takes  by far  the
 most  effort.   From the variety  of bases available, the ones best suited
 to the  task at hand  should be exploited.  The  actual method used for
 costing the physical plant, together with the  accuracy and  availability
 of the necessary data, determines the level of reliability  of the  cap-
 ital  investment  estimate.

     The  characteristics, purposes, and reliabilities  of five basic
 types of  plant cost  estimates are listed in Table  1 and described  in
 Figure  2.   This  procedure makes use of any one of  the  first four of
 these types of capital cost estimates; they are described below.

     !_._  Order of Magnitude Estimates -- The rapid but very approximate
Order of Magnitude methods are useful for a "ball park" figure  early in
 the study;  later they can provide a check on the results obtained from a
more detailed method.  Three of these rapid methods, outlined in Ap-
pendix A, are:    average fixed capital per unit of annual capacity;
 scaling a known  investment for a plant of different size; and turnover
ratio (annual revenue divided by total plant investment).
                                    -6-

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         TABLE 1.  DEFINITION OF FIVE BASIC TYPES OF ESTIMATES OF TOTAL PLANT COST  (adapted from  (5))
       Type   (Each has
     several designations)
  Characteristics
     Purpose
    Usual  ,
Reliability
i
--4
I
     1. Order-of-magnitude
        Ratio
     2. Study   (commonly a
        so-called factored
        estimate)

                   Q
     3. Preliminary
        Budget Authorization
     4. Definitive
        Project Control
     5. Detailed
        Firm
        Contractor1s
Rapid.  Very rough.
Requires flow diagram, mater-
ial and energy balance, type
and size equipment.

In addition to above, sur-
veys and some engineering of
foundations, transportation
facilities, buildings, struc-
tures, lighting, etc.

More detailed engineering,
but usually short of complete
specifications and working
drawings.   Requires experi-
enced estimating organization
and substantial outlay.
Complete site surveys, spec-
ifications, working draw-
ings.
Preliminary indication.            About +
Check on result by more            -60%
detailed method.

For generalized evaluations.         +_ 30%
Guidance for further investi-        ~"
gation.  Basis for process sel-
ection.  R§D guidance.

Basis for decision to undertake      + 20%
detailed engineering.  Sometimes
basis for budget authorization.
Can be for generalized evaluation,
but usually for site specific
installation.

Sometimes the basis for budget       + 10%
authorization.  Provides improved
estimate of project to be built.
For site specific installations.
Made to control cost of project      +_ 5%
being built.  For site specific      ~~
installations.
         30%
          aThis is a representative and comprehensive list of the types of estimates for total plant
     cost.  Other such lists differ in the number of estimate types and their descriptions.

           These apply for well established technologies.  For newer technologies, the ranges may be
     wider, particularly for the first three types of estimates.
          £
           The first three types of estimates are also termed "conceptual estimates."

           See Figure 2.

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    FROM:  R.H. PERRY AND C.H. CHILTON. ED.
    CHEMICAL ENGINEERS'HANDBOOK. 5E.

    COPYRIGHT 1973, MCGRAW-HILL BOOK CO.

    NEW YORK, 1973. USED WITH PERMISSION

    OF MCGRAW-HILL BOOK CO.
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            Error range %
                                     Figure 2. Estimations guide for capital investment (6;  p. 25 - 15).

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     .L.  Study Estimates -- For the purposes to be satisfied by the
standard procedure, the study type is generally appropriate.  These
estimates follow a variety of schemes which depend on the form of the
cost data and correlations; specific methods are identified with given
technologies.  For example:  the chemical process industries make wide
use of factored estimates; the unit process estimate is common for the
treatment of liquid wastes.

     The common factor methods are identified by the name of their
innovators or protagonists; e.g., Lang, Chilton, Guthrie.  These call
for the purchased cost of the principal pieces of equipment (also called
major plant items or MPIs).  Sources of equipment cost information are
given in Appendix A.

  •  In the Lang method, the total plant investment is found by multi-
     plying the sum of the delivered MPIs by an appropriate single
     factor, which varies from about 3 to 5.  This method should only be
     used for a rough check of the sum of the factors to be applied to
     the sum of the costs of MPIs.

  •  The Chilton scheme can be grasped from Table 2.
   TABLE 2.  ITEMS THAT COMPRISE TOTAL PLANT COST  — A TYPICAL LIST
   (Representative factors for the Chilton method  (7) are also shown.)
Item                                   Multiplying Operating  Cost of
 No.           Item                       Factor  on  Item No.    Item


 1.  Cost of delivered equipment  (MPIs)      1.0         1      $
 2.  Installed, erected equipment cost       1.60        1
 3.  Piping (includes insulation)            0.40        2
 4.  Instrumentation                         0.15        2
 5.  Buildings and site development          0.20        2
 6.  Auxiliaries  (electric,  steam, etc.)     0.25        2
 7.  Other                                   0.12        2      	
 8.    Total physical cost  (items 2
       through 7), or direct cost                             $
 9.  Engineering  and construction            0.35        8
10.  Contingency  and contractor's fee        0.15        8      	
11.    Total plant cost (items  8
       through 10)                                            $
      Q
      Includes outside  lines  (process  lines  outside the battery limits),
 site  development,  etc.
                                     -9-

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  •  The Guthrie method applies factors for both  (field) material and
     labor  separately  to individual MPI costs  to  identify the contri-
     bution of  each  to the Total Physical Cost.   From  this  sum the Total
     Plant  Cost is found by applying the factors  for engineering and
     construction, contingency, and contractor's  fee;  these are the same
     as those used in  the Chilton  scheme  (see  Table 2).

     Unit process estimates for capital costs  sum the  contribution of
 the  capital cost for each of  the process steps which together comprise
 the  overall operation,

     3^ Preliminary Estimates —  This category requires the individual
 independent estimation of each item of physical cost,  as listed in
 Table  2.  The Total  Plant Cost is  then found from the  Total Physical
 Cost by the procedure  outlined for factored estimates.

     A preliminary estimate is made either when a higher degree of
 accuracy is sought than attainable by the study type,  or the cost data
 are  not available in a form to permit a study  type to  be readily exe-
 cuted.  It  will be shown later, Table 12 in Section 3,  that a prelim-
 inary  estimate  costs about 3  times as much as  a study  estimate.

     4.  Definitive  Estimates— This type calls  for detailed informa-
 tion Trbrn an engineering design and is costly  to  prepare.   Definitive
 estimates should not be made  unless construction  is contemplated or
 detailed engineering information is available.

 Retrofit Versus New  Plant —

     Often  the  facility for pollution abatement will represent an add-
 on,  or retrofit, to  the basic plant.  An example  is the retrofit of a
 flue gas desulfurization process to an existing power  plant.  As a rule
 of thumb, retrofits  cost 25 to 40  percent more than new construction;
 however, the variation can be greater.  The range is due to factors such
 as the relative complexity of the  system, plant layout, age of basic
 facilities,  and unusual land  or structural requirements.

 Allowance for Funds  During Construction --

     For some pollution control facilities, the time from the beginning
 of the project  until the start-up  extends over several years.  During
 this period, funds must be available to meet installments due the engi-
 neering-construction firms.  Private sector companies  often use surplus
 funds,  but  regulated industries and governmental  bodies generally
 arrange for loans which are repaid when the project is "capitalized;"
 the  interest paid on these loans represents the "interest during con-
 struction," or  allowance for funds during construction  (AFDC).  The
 interest for such loans is usually the prime rate which has  been 8 to 12
percent in  recent years.   See Appendix G.   Rates  of Return  and Interest
Rates.
                                  -10-

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Modification of Facilities and Start-Up --

     Substantial outlays are sometimes required for equipment modifica-
tions and start-up, particularly for first-of-a-kind installations.
Private sector firms generally expense start-up costs, others capitalize
them.  For estimating purposes, these range from 5 to 20 percent of the
Total Plant Cost.

Land --

     Land generally represents a small fraction of the investment and
for a rough estimate can be taken as 3 percent of the Total Capital
Investment.  Often it is neglected or included in the contingency.
However, when solids are to be disposed of, land requirements can be
considerable; in such case the land needs must be carefully evaluated.

Working Capital --

     Working capital may be defined as the funds necessary for  the
normal conduct of business.  It can be roughly approximated by  10  to  15
percent of the fixed-capital investment or 15 to 35 percent of  the
annual revenue.  For actual estimates, it is figured  from the value of
the raw material stocks, in-process inventory, product inventory,  and
credit extended to customers  (accounts receivable).   Sometimes  a per-
centage  (10-15 percent) of net annual expenses is added  to cover current
obligations.

Summary Remark-Total Capital Investment —

     Several schedules prepared to facilitate the organisation  of  spec-
ific kinds of capital cost estimates are presented  in Section 3 under
the Specification.  Other schedules might be used.

Cost Estimate -- Annual Expenses

     Net annual expenses are defined as all payments  transferred  (paid)
to entities outside the operating organization.  Total annual expenses
include  the above, plus depreciation for the year which  is retained by
the organization.

     For certain industries or fields of technology (e.g., electric
utilities  and sewage plants), usually only the direct day-to-day costs
of operation, designated as 0£M for operating and maintenance costs,  are
taken into account for cost studies.  Note that  these 0§M costs repre-
sent only  a portion of the total annual expenses, which  include labor
additives, plant overhead, depreciation, and general  expense.

     For most study and preliminary estimates a  reasonable basis  is a
level of operation of 80 to 100 percent of capacity.
                                     -11-

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Estimate of Annual Expense --

     The annual expense consists of the sum of the operating and the
general expenses; see Tables 3 and 4.  There are two alternate sources
of information on total annual expense (or at least the 0§M portion):
actual costs  (suitably adapted) and factored estimates.

     Adaptation of Actual Costs -- Records of actual costs of similar or
identical operations offer the best basis for cost information where
these are available.  However, recourse to accounting records requires
an understanding of the rationale for the allocation of indirect costs;
e.g., labor additives, plant overhead, general expense.

     Factored Expense Estimates -- Because of the frequent unavaila-
bility of actual operating cost records, or the difficulty of reworking
them for estimates of annual expense, factored values are commonly used
for indirect costs and some direct cost items.

     Mass and energy balances are necessary to determine the quantities
of raw materials and the utility duties.  The total plant cost (Ip) pro-
vides a basis for the fixed charges.  The fourth component needed is the
direct (operating) labor, usually a rough estimate, from which the
overhead items are generally factored.  Thus, the total annual expenses
are either direct or factored values from these four bases:  raw mater-
ials, utilities, direct (operating) labor, and total plant cost (Ip).

     A list of operating expense items is given in Table 3.  Also shown
are typical factors for their calculation from the four bases mentioned
directly above.  Table 4 tabulates the general expense items with typi-
cal factors for their estimation.

Use of Only 0§M Expenses --

     The use of direct expenses, or OJJM, is common in studies comparing
processes or assessing the financial burden of pollution control in
connection with compliance actions.  Here one should be careful to
include all costs that change in going from one alternative to another;
note that often these include overhead items.

Cost Estimate — Net Profit and CcL&k Flow

     Net profit is calculated if there is revenue associated with the
operation.   In any case,  ca&h {low is needed; it represents the benefit
to the operating entity or portion thereof.  It is comprised of the
depreciation plus net profit or net saving.

     For comparison of alternate operations where revenue is unaffected,
the c&6h {low is equivalent to the depreciation minus the extra net
operating expense corrected for the effect of income taxes.  Appendix C
should be consulted for a development of the Cjd&h. {low concept which
applies here.
                                  -12-

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               TABLE 3.   ANNUAL OPERATING EXPENSE ITEMS
                 AND INFORMATION FOR THEIR ESTIMATION
Raw Materials       Consult current issue of Chemical Marketing
                    Reporter (8) for rough estimate; secure quotes
                    or consult commodity experts for lower contract
                    prices.

Operating (Direct)  The number of full-time operating personn|l
Labor               times average earnings of $12-15,000/year
                    (includes shift differential and overtime).

Direct Supervision  10 to 25% of earnings of operating labor.
                    Annual earnings of supervisors, $18-24,000/yr.

Maintenance         4 to 10% of total plant cost, !„  (supervision
                    of maintenance is included in plant overhead).

Operating           6% of earnings of operating  labor or  15% of
Supplies            maintenance expenses.

Labor Additives     25 to 50% of operating labor earnings; may
(fringe benefits)   also include maintenance labor  earnings.
Utilities           Develop directly from energy balances plus
                    allowance for losses.
an
Plant Overhead      50 to  100% of direct operating and maintenance
                    labor  earnings, or 50% of direct  operating  and
                    25% of maintenance labor earnings, or 45-50%
                    of operating labor earnings plus  1 to 5% of
                    total  plant cost, I

Control Laboratory  $40,000 to $50,000 per analyst,a  or  10  to 20%
                    of operating labor earnings.

Technical and       $40,000 to $50,000 per man;a may  be  included
Engineering         in plant overhead.

Insurance and       1 to 2% of I  .
Property Taxes

Depreciation        Varies but common rate is 10% of  Ip  or  total
                    depreciable investment for  10 years.
     a!977 rates.

NOTE:  See Appendix  B for  sources  for  the numerical  values


                                    -13-

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                TABLE 4.  ANNUAL GENERAL EXPENSE  ITEMS
                   AND FACTORS FOR THEIR ESTIMATION
Administration  -  2  to 3% of  sales or capital investment.

Sales           -  usually 2 to  6% of sales; but up  to  30% for
                  specialty items.

Research        -  2  to 5% of  sales or capital investment.

Finance         -  largely interest on bonds; often  not considered in
                  conceptual  estimates.
NOTE:  See Appendix B for sources for the factors.
Feasibility Evaluation

     Expected values of both the capital investment and the annual
expenses are necessary to judge the economic feasibility of a project.
For a fair comparison between possible alternatives, the investment and
at least the affected portion of the annual expenses (such as O&M) must
be estimated.  These cost data, plus the revenues  (if expected), are
used to calculate several measures of merit which  represent the criteria
for assessing economic feasibility.

     For the calculation of several measures of merit, an understanding
of the ca&k ££OM> concept is required; viz., that the benefit (or burden)
to the operating entity or portion thereof is the  depreciation plus net
profit (or minus net operating expense corrected for income taxes).
(See Appendix C.)

Measures of Merit —

     Several feasibility criteria are defined below.  Details can be
found in Appendix E.

     Return on Investment -- Annual net profit divided by total capital
investment (including land and working capital) gives return on original
investment (ROI).  This has been a widely used criterion for profit-
ability.

     Internal Rate of_ Return — Internal rate of return (IROR;  also
known as Interest Rate of Return, Discounted Cash Flow Rate of Return,
and Profitability Index)  is a standard criterion.  It is the discount
rate which gives a value of zero for the sum of the present values of
the C£i&h &tow,  capital outlays, and end-of-life recoveries, occurring
during the project lifetime.  The procedure takes into account the
timing of these cash effects and whether they are continuous over a

                                   -14-

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period of time or are discrete (instantaneous)  transactions.   The cal-
culation of IROR is by trial and error.

     Payout Time -- Payout time is frequently mentioned, but  actually is
only of secondary importance.  This criterion is the time in  years
required, after start of operations,  for the accumulation of  c.at>k ^loul
over those years to equal the depreciable investment.

     Equivalent Annual Costs -- These cost procedures make possible
life-cycle cost analyses.  They can be obtained by calculation, first of
the present value of the cash flows of concern* through use of an as-
signed discount rate.  Then the present value is converted (at the same
discount rate) to an equivalent annual cash flow or cost over the life
of the project.  It can be expressed either as a uniform end-of-year
amount or as a continuous rate of flow throughout each year.

     Unit Costs -- These refer to capital investment, operating expense
(total, or only 0§M), revenue requirement, or total resource costs per
unit of product or service; e.g., for pollution abatement.  The revenue
or resource requirement per unit of product or service  is usually dis-
counted to time zero.  For this calculation the units of output  (pro-
duction or service) can also be discounted; in addition, the relative
value of the output may be escalated as for costs.  Since several pos-
sibilities exist, the basis needs to be clearly defined; this matter  is
treated in detail in Appendix E.

     The total resource costs per unit of product or service corres-
ponding to the treating cost per 1,000 gallons  (3.8 cu. meters) of
liquid waste are used for cost-effectiveness analysis in connection with
the EPA construction grants program.

     It is to be recognized that unit  costs are often based on design
capacity.  Since facilities generally  operate at  less than capacity,  and
the throughput or output may vary with time, these variations may be
taken into account.

Characteristics of Specific Measures of Merit --

     The internal-rate-of-return method, the equivalent annual cost
methods, and usually unit costs  (levelized costs) take  the time value of
money  (interest) into account, whereas return on  original investment  and
payout time do not.  Accordingly,  the  former methods are preferred;  in
fact, one of these is considered essential for determination of  economic
feasibility.  For private sector studies ROI and  payout are calculated
if possible because of their  familiarity,  ease  of determination,  and
value as checks.
      The  cash  flows  of  concern  depend  on the  nature of the  equivalent
 annual cost  to  be  calculated  which,  in  turn, is governed by  the applicable
 sector  (private, regulated, or public).
                                    -15-

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      If the project  under  consideration  has no revenue or profit associ-
 ated with it (such as  a  retrofit, pollution control project),  IROR, ROI,
 and payout can be applied  to  show the  effect of  the proposed project on
 the associated or parent operation.  However, a  comparison  of  alter-
 native control processes,  without bringing in the unaffected cash  flows
 of the parent  plant, is  possible with  the equivalent  annual cost ap-
 proach.   Then  the comparison  of the  alternatives proves  to  be  more
 striking.

 Choice of Specific Measures of Merit —

      The specific measures of merit  used in a cost analysis are by
 custom governed by the financial sector:  privately financed,  regulated,
 or publicly funded.  Privately financed  projects with revenue  use  IROR,
 with ROI and payout  as complements because of their simplicity and
 familiarity.   Equivalent annual cost is  used to  compare  retrofits  or
 add-ons.   For  public utility  (regulated) financed facilities,  either
 equivalent annual (annualized) cost  or unit (levelized)  costs  are  com-
 puted to give  the revenue requirement.   Publicly financed projects use
 either a version  of  levelized cost called "equivalent annual value," or
 a  unit cost termed "total resource cost  per unit of service."

 Computation Features --

      Selection must be made from these features  in computing the meas-
 ures  of merit:

      Discounting  -- generally applied.

      Revenue requirement -- needed in some form  for private and regulated.

      Investment recovery --by depreciation charges and  end-of-project
      recoveries.

      Accounting for inflation -- not used for public  projects; not
      always advantageous for  other sector evaluations.

      Annual expenses -- use total annual expenses where  revenue is in-
      volved; otherwise, 0§M may be used.

      Interest  (discount)  factors — can use discrete  or  continuous
      interest  factors.

Modes of Cost Analysis --

      From custom,  different modes of cost analysis have become associ-
ated with each of the financial sectors.   These are presented  in Appen-
dix E and illustrated by examples in Appendices E, J,  and K.  Each mode
generally follows the common principles of evaluation as set forth in
engineering economy and financial analysis texts.
                                   -16-

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Summary Comments

     The initiator and the estimator need to judge the degree of detail
to be incorporated into the cost analysis.   Costs based on a raw concept
and a rough process design hardly justify the preparation of a pain-
staking schedule for cash flows which take into account the fluctuations
of capacity and the conjectured effects of inflation.  For most study or
preliminary estimates then-current dollars should be used, but the
reference year needs to be specified, such as the scheduled time of
plant start-up.  It should be realized that many recent generalized cost
studies related to energy and pollution control have used mid-1975 as
the reference year.
RELIABILITY ASSESSMENT SEGMENT

     Unfortunately many managers and engineers accept a cost estimate as
being almost exact regardless of the background for the computation.
Accordingly for each cost analysis the audience should be both warned
that the estimate is only approximate and informed of the level of
accuracy that the background data and costing technique can support.

Factors Affecting Accuracy

     Although desirable, it is difficult to establish the accuracy of a
cost estimate.  This exercise should take into account factors such as
the stage of development, the definition of scope, the availability and
quality of cost and technical data, and the expertise of the estimator.
In addition, there are uncertainties about future events such as busi-
ness climate, weather conditions, and the capability of the organization
used to construct the plant.  Each of these items may significantly
affect the actual costs.

Accuracy from Available Correlations —

     In Table 1 in Section 2, the range of reliability for the capital
investment of the plant is exhibited as a function of only one of the
above factors, namely, the extent of the engineering or the completeness
of the design.  Information concerning the effect of other factors on
the accuracy of capital investment, such as stage of development and
definition of scope, is lacking.  Also, there are no guides to the
reliability of annual expense items.  Little information in a correlated
form is available for reliability analyses.

Procedures for Assessing Reliability of a Feasibility Measure --

     An indication of the accuracy of a feasibility measure, such as
ROI, must take into account the possible range of values of the dominant
cash flows  (e.g., revenue, total annual expense) as well as capital
investment and factors such as plant life, income tax rate, and rate of
inflation.
                                     -17-

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     Sensitivity analysis demonstrates the effect on a measure of merit
of varying, one at a time, the major cash flows within expected limits.
Several cash flows can be scrutinized in this fashion.  See Appendix I.
Of particular interest is the probability of having a combination of
values that would lead, say, to an unacceptably high value of annualized
cost, or to a low value of ROI.  Such situations can be analyzed for in
a statistically sounder manner by means of an uncertainty analysis.

     The following two modes are suggested:

  •  Opinion based on experience and correlations.

  •  Uncertainty analysis by statistical methods.

Most cost analyses are presented using the "best-guess" or most likely
values along with qualifying remarks.  The first mode above requires
that the estimator put his opinion on the line; an orderly basis for
this, at least as it applies to the capital cost of the plant, is delin-
eated in Appendix H.  The statistical approaches require a notion of the
expected ranges of the major cash flows and factors.  In addition the
uncertainty analysis generally calls for a program and a computer.
Disadvantages of the latter method are that the results are presented in
an unfamiliar form (cumulative frequency distribution) and in terms
(standard deviation, variance) with which users may not be conversant.
                                 -18-

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                              SECTION 3

                 THE SPECIFICATION AND GUIDELINES
     The format that has been devised to present the complete cost
analysis is called "the specification."  Guidelines are presented to
facilitate the choice of various procedures open to the estimator and to
establish factors to be used in executing the analysis.

     Examples of complete specifications and guidelines are given in
Appendices J and K.
THE SPECIFICATION

     The specification consists of three segments:  descriptive, cost
analysis, and reliability assessment.

Descriptive Segment

     The descriptive segment should be given in a page and conform to
the format of Table 5.  Instructions for its preparation are given
directly below.

Elements of Descriptive Segment —

     The five elements in Table 5 that describe the project under scrut-
iny are discussed below.

     Facility Description -- A few key words should identify the process
to be carried out and state the nominal capacity or size of the facil-
ity.  A schematic flow diagram and process description should be ap-
pended or referred to.  The plant location needs to be stated (this can
be a geographical region).  Area construction labor costs should be
identified.  Construction time should be established.

     Capacity Rating  -- Besides the capacity of the primary facility,
information regarding the rate of pollutant flow and removal  (or similar
information) is  germane.  This is illustrated in Appendix J.

     Abstract £f Scope -- A statement of scope is  frequently detailed
and  lengthy; accordingly an abstract of the scope  should be used which
conveys the degree to which particulars have been  worked out  as well as
the  extent of the subsidiary facilities required.  Table 6 demonstrates


                                     -19-

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               TABLE 5.  SUMMARY OF ECONOMIC EVALUATION
                        — DESCRIPTIVE SEGMENT
FACILITY DESCRIPTION
CAPACITY RATING
ABSTRACT OF SCOPE
PERFORMANCE SPECIFICATION
STAGE OF DEVELOPMENT
                                  -20-

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                TABLE 6.  AN ILLUSTRATION OF THE EFFECT
                 OF SCOPE ON FIXED CAPITAL INVESTMENT
                          (Adapted from (9))
Capital Investment                                           Investment
                                                               $/kW


Base Investment

Limestone slurry process (including fly ash removal, but
not disposal) - 500-MW new, coal fired (coal:  3.5% S,
12% ash), 90% SO  removal, 30 year life, 127,500
hours operation, on-site solids disposal, proven system,
only pumps spared, no bypass ducts, experienced design
and construction team, no overtime, 3-year design -
construction program, 5% per year escalation,
cost basis - mid-1974

TOTAL for base investment                                       50.30


Add-ons

Overtime for 50% of  labor requirements                          3.20
R$D costs for first-of-a-kind technology                        5.00
Capital for power generation for lost capacity  (one way
of handling this item)                                          4.50

For reliability, redundant scrubbers, and other equipment;
also ducts, dampers,  instrumentation for changeover,
if required                                                     6.00

Additional bypass ducts and dampers                             2.00
Retrofit difficulty                                             10.00
Fly ash pond; module closed-loop provisions                     5.50

500 foot (152 meter)  stack                                      6.00

Air quality monitoring system                                   0.70

Cost escalation of 10%/year instead of 5%/year                  4.80

Possible delay of 2  years because of slow material deliveries   15.00

TOTAL of add-ons                                                62.70
TOTAL PLANT  INVESTMENT,  INCLUDING ADD-ONS                      113.00
                                    -21-

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 the  importance  of  a defining  scope; here  the  investment,  including the
 add-ons,  is more than  double  the value  of the base  investment.

      Performance Specification  -- The types and quantities of pollutants
 being removed should be  identified; the desired concentrations of pol-
 lutants  in the  effluent  should  be stated.  The regulation which governs
 the  pollution control  should  be noted.

      Stage £f_ Development  --An essential part of a cost  estimate is the
 qualification on the stage of development.  If there are  critical data
 gaps,  if  some of the information is poorly understood, or if the basis
 is a raw  concept for which the  process  is only sketchily  established,
 the  reader will automatically be conditioned  to expect an uncertain cost
 estimate.  By the  same token, a process backed by experience or pilot
 studies should provide a basis  for a reliable cost  estimate.

 Cost Analysis Segment

      This is made  up of the specified parameters, the cost estimate, and
 the  feasibility evaluation.   The cost evaluation segment, with its sev-
 eral  elements, should be condensed into four  or five pages; it generally
 follows the schedule given in Table 7.  Several optional  forms for capi-
 tal  cost estimation  are displayed.  The cost  evaluation segment is con-
 cluded by a statement that characterizes the  economic feasibility.

 Specified Parameters —

     Values for the  following parameters must be postulated and entered
 in the appropriate space near the top of Table 7.

      Interest (Discount) Rate -- The value used can vary  widely depend-
 ing mainly on the variation of  the prime lending rate and the financial
 expectations in the  industry  of application.  The subject is reviewed in
 Appendix G.  For an  organization existing for profit, this rate is
 generally higher than the  commercial lending or debt rate.  Figures of
 10 and 15% are common.   For a regulated industry, rates near 10% prevail
 at present.  For the electric utility example in Appendix E it is about
 10%.   This interest rate is not the same as that used for interest on
 construction which corresponds to the commercial lending or debt rate
 and therefore would be less.

     Facility Life and Depreciation Period — The plant life covers the
period from start-up until the facility is shut down and dismantled.
The depreciation life is usually less and for estimating purposes is
 generally determined from  IRS guidelines;  e.g., for a steam-power plant,
plant life may be 30 years, and depreciation life, 22 years.  The
 second example in Appendix E   illustrates this.  Ordinarily, the straight-
 line method is used.

     Construction Time -- This varies with the size and complexity of
the project;  e.g.,  construction of a small chemical plant or a retrofit
pollution control facility might extend over 2 years,  but a large
                                   -22-

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               TABLE 7.  SUMMARY OF ECONOMIC EVALUATION
                       -- COST ANALYSIS SEGMENT
FACILITY DESCRIPTION
Plant Location --
CAPACITY RATING
DISCOUNT RATE 	%; FACILITY LIFE 	YRS; DEPRECIATION PERIOD 	YRS;

CONSTRUCTION TIME 	;  REFERENCE UNIT FOR PROCESS COST	;

REF. YR FOR COSTS 	; COST INDEX 	; INFLAT'N RATE (if appl.) 	.
CAPITAL INVESTMENT ESTIMATION (see Appendix A for detailed information)

Schedules A to G are used for Total plant cost; schedule H is for
Total capital investment.  See Table 8 for guidance.
Schedule A.  Chilton method.  Factored costs of sum of major plant
             items (MPIs), EE, delivered.  Corresponds somewhat to
             Table 2.

                                                Operating    Cost
             Item                       Factor      On     of  Item

1.  Sum of major plant items
    (MPIs), EE, delivered21
2.  Installed, erected equipment cost               #1
3.  Piping (includes insulation)                    #2
4.  Instrumentation                                 #2
5.  Buildings and site development                  #2
6.  Auxiliaries (electric, steam, etc.)             #2
7.  Other                                           #2

    11.  Total physical cost  (Direct cost), DC
         (sum of 2 to 7)

Use Schedule C to get the Total plant cost, item 31.
     aSame as FOB job site.
                                     -23-

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 Table 7 (Continued).   Summary of Economic Evaluation — Cost Analysis
                       Segment
 Schedule B.   Guthrie method.   Sum of each MPI  (this includes adjuncts,
              such as solids handling facilities,  site development,
              industrial  buildings, off-site facilities).

 1.   MPIs,  purchased* EE
 2.   Direct (field)  material,  m
 3.   Direct (field)  labor,  L
     11.   Sum  of direct  costs,  (Total physical
          cost)  DC,  for  each MPI  and adjunct

 Use  Schedule  C  to get Total plant  cost,  item 31.
Schedule C.  Calculation of  total plant  cost using direct cost from
             schedule A or B

11. Total physical cost (Direct cost) DC
12. Indirect cost  (20 to 50% of DC,  avg
    34%), 1C
    21.  Total bare module cost, BMC

22. Contingency  (10 to 50% of BMC; avg
    15%)
23. Contractor's fee  (about 3% of BMC)

    31.  Total plant cost (Total module
         cost),  I
Schedule D.  Lang method

Use equation:                 Ip = ZE X L

where:   !„ = total plant cost (total module cost; fixed capital in-
              vestment for equipment, buildings, site development);
         IE = the same as item 1 in schedule A;
         L  = Lang factor.  See Appendix A.
     aSame as FOB; i.e., free on board, at vendor's plant.
                                    -24-

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Table 7 (Continued).   Summary of Economic Evaluation -- Cost Analysis
                      Segment
Schedule E.  ICARUS method

8.  Sum of installed costs for MPIs - includes
    indirect costs associated with each item
9.  Total of special items which correspond
    to adjuncts under schedule B
    21.  Base plant cost  (Total bare
         module cost), BMC

22. Contingency (see schedule C)
23. Contractor's fee (see schedule C)
27. Retrofit increment (if applicable)

    31.  Total plant cost, Ip


Schedule F.  Sum of unit process modules

    Process module identification                     Total Cost

1.  Process module No. I  -
2.  Process module No. II -
3.  Process module No. Ill -
4.  Process module No. IV -
5.  Process module No. V  -
6.  Process module No. VI -
etc.  -
     31.  Total plant  cost,  I_


 Schedule G.  Total plant  cost  from typical  definitive estimates

                                                 Process Modules
                                            I     II    III    etc,
 1.   Equipment cost, purchased  ZE
 2.   Direct  (field) materials,  m
       Piping
       Concrete
       Steel
       Instrumentation
       Electrical
       Insulation
       Paint
         Total  IE  + m for  each module
                                    -25-

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Table 7 (Continued].  Summary of Economic Evaluation -- Cost Analysis
                      Segment
3.  Direct (field) labor, L
4.  Adjunct facilities, etc.
    11.  Direct cost (Total physical cost),
         (ZE-Hn) + L, for all process modules
         and adjunct facilities

12. Indirect cost
      Freight, insurance, sales tax, etc.
      Construction overhead
      Engineering, etc.

    21.  Base plant cost  (Total bare
         module cost),  BMC

22. Contingency
23. Contractor's  fee

    31.  Total plant cost  (Total module
         cost), IF

NOTE:  From data  for schedules F and G,  representative
       Guthrie factors  can usually  be  calculated.
Schedule H.  Total capital investment

31. Total plant cost, Ip, from schedule C,
    D, E, F, or G
32. Interest during construction,  if
    applicable, and capitalized
33. Modification of the facilities and
    start-up costs, if capitalized
    35.  Total depreciable investment

36. Land
37. Working capital

    41.  Total capital investment
                                  -26-

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Table 7 (Continued).   Summary of Economic Evaluation -- Cost Analysis
                      Segment
ANNUAL OPERATING EXPENSE SUMMARY
(From the subtotals in Table 9.  Annual Operating Expense Estimate
an<* Table 10.  General Expense Estimate^)

53. Raw materials
70. Processing
74. Plant overhead, control lab and technical
76, 77. Fixed charges less depreciation
78. Depreciation
87. General  expense
     90.   Total operating costs
 PROFIT AND CASH FLOW (ANNUAL) SUMMARY

 91. Revenue including value of byproducts
 92. Gross profit  (Revenue - annual operating expense)
 93. Net profit,  (Gross profit - income tax)
 94. Ca&k F£ow,  (Net profit + depreciation) or
     (Depreciation - net operating expense corrected
     for income tax)
 FEASIBILITY EVALUATION SUMMARY

 Privately Financed Mode

 101. ROI
 102. Payout time
 103. IROR
 104. Revenue requirement given IROR = _ %
 105. Equiv. annual cost; this is Uniform annual
      cost for privately financed projects; see
                                                                   /yr
      o
       Applies only to facilities that produce independent revenue.

       Applies both to plants which produce independent revenue, such
 as a power plant or smelter, and to modifications in facilities such
 as the addition of pollution control equipment which involves no or
 only incremental changes in revenue.  Consult Appendix C for a devel-
 opment of this matter.
                                  -27-

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Table 7  (Continued).  Summary of Economic Evaluation -- Cost Analysis
                      Segment
Public Utility  (Regulated) Financed Mode
106. Equiv. annual cost; this is annualized
     cost for regulated mode projects; see
     Eq. E-l, E-2
107. Revenue requirement/unit of output
     -- using lifetime average costs  (Eq. E-4)
108. Revenue requirement/unit of output — by
     levelized costs using typical utility
     approach (Eq. E-5)
109. Revenue requirement/unit of output --by
     levelized costs using METREK approach
     (Eq. E-6)

Publicly Financed Mode

110. Equiv. annual cost; this is equivalent
     annual value for government projects;
     see Eq. E-3
111. Total resource costs/unit of service

General
112. Total capital cost/unit of capacity
113. Operating expense/unit of output
         $
/yr
      _/unit output


      _/unit output


      _/unit output
$	/unit output
$	/unit output
Descriptive appraisal of the financial merit of the venture:
                                  -28-

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                             TABLE 8.   CAPITAL COST ESTIMATING ALTERNATIVES FROM TABLE 7

                                   (Letters A to H refer to Schedules in Table 7)
Cost Items
Direct Cost
.«_
Indirects
Contingency Fee
Construction Interest
Modification and
Start-up Expense
Land
Working Capital
Total Capital
Investment
Start at Top
A
Chilton
+
C

B
Guthrie
4-
C

D
Langa

E
ICARUS

F
Unit
Process

G
Defin-
.^ . a
itive

4- 4- 4- + 4- 4-
H
(gives total capital investment)


Other
Methods



I

N>

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              TABLE 9.   ANNUAL OPERATING EXPENSE ESTIMATE
                            Name of Process
        (Brief Description of Process and Product (if any) and
   Pertinent Information on Size.  Put added details in footnotes.)
Basic Unit of Capacity or Production 	.  Total Plant Cost, I  _
Depreciable Investment 	.   Stream time 	hr/yr.

Unit
Units
/Year
Value
$/Unit
Units/Basic
Unit of
Production
Total Costs
$/Basic
Unit
M$/yr
51. Raw Materials
52. By-Product Credit:
    53. Subtotal Raw
        Materials
56. Operating
    (Direct) Labor
57. Direct Supervision
58. Maintenance Labor
59. Maintenance Material
60. Operating Supplies
61. Labor Additives
62. Steam              1
63. Electricity
64. Compressed Air
65. Water
66. Fuel
67. Effluent Treat-
    ment § Disposal
68. Preparation for
    Shipping
69. Other
    70. Subtotal Processing
                          hr
                          hr
                        (T Ib
                        ktfhr
                             a
                         3
                       10
                       10;
                       106 Btuv
     'Viltiply 103 Ib by 454 to convert values to kg.
     V\           *Z                                   T
      Multiply 10  cf by 28.32 to convert values to m .

     cMultiply 10  gal by 3.785 to convert values to m3.

     Multiply 106 Btu by 1.055 X 106 to convert values  to kJ.
                                   -30-

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Table 9 (Continued).   Annual Operating Expense Estimate
71. Plant Overhead
72. Control Laboratory
73. Technical and Engineering
    74. Subtotal Overhead

76. Insurance § Property Taxes
77. Royalty
78. Depreciation
    79. Subtotal Fixed Charges

80. Total Manufacturing Cost

                           Adapted from Perry and Chilton (6, p. 25-28)
                  TABLE  10.  GENERAL EXPENSE ESTIMATE
                  35. Depreciable  Investment __
                  41. Total Capital  Investment
                  91. Sales Revenue
 81.  Administration,    %  of Capital  Investment  or Sales   K$

 82.  Selling  Expense,   % of  Sales-  ----------
 83.  Corporate Research,    % of  Capital  Investment  or
     Sales-  ---------------------
 84.  Interest on Debt

 85.  Other	
     87. General Expense- ---------------    K$
                                   -31-

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petroleum refinery complex might require 4 years.  Where special regu-
lations apply and official approvals must be secured, the construction
time might be of even  longer duration; e.g., nuclear power plants for
which  7 or more years  is not unusual.

     Reference Unit for Process Cost -- For characterization and ready
comparison,  costs should be reduced to a basis typical for the tech-
nology.  Examples are  cents/kWhr for a power plant, $/1000 gal. (13.8
cu. meters)ftof feed for a waste treatment plant, and S/million Btu
(1.055 x 10  joules) for a coal cleaning plant.

     Reference Year for Costs -- This is generally taken as the year
that the facility started up, which usually corresponds to the year that
construction was completed.

     Cost Index -- The selection of the index to be used to correct
costs  from previous time to the reference year may either be specified
by the requestor or decided by the estimator.  In either case, it should
be one that  is in common use and appropriate to the technology.  The
various cost indices are listed in Appendix F.

     Inflation Rate -- This item is to be provided only if inflation is
to be accounted for in the cost analysis.  Projected values for infla-
tion vary depending on the source.  Also, for a given operating entity
(e.g., fuel  oil), a different rate may be conjectured than for general
inflation, which is considered to correspond with the cost index for the
Gross National Product.  Costs which take into account inflation are
corrected to constant worth dollars evaluated at the reference time,
usually the  start-up of the facility.

Cost Estimate --

     This represents the major portion of Table 7 and includes:
(1) capital  investment, (2) annual expenses, and (3) profit and CdA/i
ILOW.  Alternative schemes are given for the determination of the cap-
ital investment.

     Capital Investment -- The entries should be tabulated if at all
possible according to the sample schedules in Table 7.  Schedules A to G
are for Total plant cost;  Total capital investment is found by the use
of Schedule H.   A guide for the proper combination of the several sched-
ules to use for a given capital cost estimating alternative is delin-
eated in Table 8.  If unique data sources or special circumstances
obviate the exploitation of any of the schemes embraced by Table 7, a
custom tabulation can be designed; however, it is suggested that the
schedules in Table 7 be used as a model insofar as they apply.

     A numbering system has been devised to keep track of the several
entries of the cost estimate.  The significance of the numbers used for
capital cost items in Table 7 is explained below.
                                     -32-

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 •  1, 2, 3, ... identify direct cost items.

 •  11 is always for Total Physical Cost.

 •  12,  13,  ... indicate indirect cost elements.

 •  21 is always for the Total Bare Module Cost  (Base Plant Cost).

 •  22 is always for the Contingency.

 •  23 is always for the Contractor's Fee.

 •  27 is always the Retrofit  Increment,  if  applicable.

 •  31 is always for the Total Plant Cost (Guthrie uses  Total  Module
    Cost).

 •  32,  33,  ... apply  to capital  cost items  other than those  related  to
    the  Total  Plant Cost;  e.g.,  land  (always number 36), and  working
    capital  (always number 37).

 •   35  identifies  the  Total Depreciable  Investment.

 •   41  is  always  the Total Capital  Investment.

For any estimate,  the  identifying numbers will not be consecutive.

     Annual  Expenses — The tabulation in Table 7 entitled Annual
Operating Expense  Summary is made up of subtotals from Table 9.Annual
Operating Expense  Estimate, and the total from Table 10.   General
Expense Estimate.   The  composition of these tables has been reviewed in
Section 2,  particularly under Tables 3 and 4.  The basis  for the num-
bering system used in Tables 9 and 10 should be readily apparent.

     Profit and Co&fr flow — This is also tabulated in Table 7.  The
only new item is "revenue"  which applies for profit generating projects.
The values generated are used in the feasibility evaluation discussed
directly below.

Feasibility Evaluation --

     The measures of merit tabulated in Table 7 under Feasibility
Evaluation Summary are computed from cost and other data listed above
and from relations described in Section 2, and explained in detail in
Appendix E.  Note that the summary in Table 7 provides for a descriptive
appraisal of the financial merit of the venture.

Reliability Assessment Segment

     A sensitivity and/or an uncertainty analysis  can be required.  At
least an opinion of the reliability of the estimate is demanded based on
experience and existing correlations.  The results  for a sensitivity

                                    -33-

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study can be illustrated graphically or tabularly.  The uncertainty
investigation is generally prescribed in graphical form using a cumu-
lative frequency distribution for the measure of merit.  The form to be
used is open.  For some examples see Appendices H, I, J, and K.
GUIDELINES

     Guidelines help decide among the available approaches and thereby
serve to establish the level of effort appropriate for the project at
hand.  Also they facilitate the selection of values for the financial
and operating factors needed in the analysis; e.g., discount rates.
Table 11 lists the guideline information which must be provided and aids
in its determination.  Additional comment is offered below for certain
items.

Capital Investment Estimate

     The type of capital investment estimate (see Table 1) essentially
determines the level of effort for the entire cost analysis.  The two
major concerns are:  (a) that the detail requested is consistent with
the technical information (e.g., an expensive definitive estimate would
be wasteful for a conceptual process); and (b) that the cost analysis
can be executed within the budget.  Table 12 provides guidance for the
cost of the capital cost estimate.

     Many schemes have been evolved for finding physical plant cost.
Their form varies with different technologies.  The method to be used
should be appropriate for the project, namely that for which the best
information is available.  For chemical and petroleum processes the
factored estimate, with refinements, is in wide use.  Also, for some
chemical operations and liquid waste treatment plants, the unit process
method is well established.  The various schemes available are explored
in Appendix A.

     Estimation methods for the other portions of the capital investment
are straightforward.  These include interest on construction costs (if
money is borrowed), start-up costs (these can also be charged as annual
expenses),  land, and working capital.

Annua1 Exp en se E s t imat e

     The total annual expense is comprised of the operating costs plus
the general expense.  For the comparison of different processes, often
only the annual operating and maintenance (0§M) expenditures are con-
sidered.   This is the practice for some technologies such as the treat-
ment of liquid wastes (government sector) and electric power generation
(regulated sector).  Here the 0$M is considered to represent the portion
of the annual expenses that varies from one process to another or with
different levels of operation.   Actually this is not always the case;
usually some overhead items vary with the specific process or the level
of production.

                                    -34-

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          TABLE 11.   INFORMATION TO BE PROVIDED BY GUIDELINES
DESCRIPTIVE SEGMENT

  Facility Description

    Plant Location
    Index for area con-
    struction labor
    costs
  Capacity Rating

  Abstract of Scope
  Performance Specs.
This is usually a geographical region (not
site-specific); e.g., Gulf Coast, St. Louis
area.
There are a number of indices for this
purpose, but most are proprietary.  For
assistance consult the paragraph on
construction labor efficiency in Appendix A.

Known.

Several factors should be stipulated that
affect the scope:  terrain, soil conditions,
extent of spares, retrofit or not, elabor-
ateness of facility.

Specify the regulation which governs pol-
lution control or otherwise qualify  the
expected performance.
   Stage of Development   Known.
 COST EVALUATION  SEGMENT

   Specified  Parameters

     Interest (Discount)
     Rate
     Facility Life and
     Depreciation Period
     Construction Time
 This  represents  the return to be expected
 from  the investment; it is also termed the
 cost  of capital, or the discount rate.
 Usually 10 to 15% is used.  Consult
 Appendix G.
 Generally these  two time intervals are taken
 as the same.   For first cut, 10 years is
 used.  Where refinement is called for, either
 experience or IRS Publication 534 (10) is
 used.  Sometimes, as for electric utilities,
 the facility life is taken as somewhat
 longer than the  depreciation period; e.g.,
 the utility example in Appendix E.
 State or, if to  be developed, so note.
                                    -35-

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Table 11 (Continued).  Information To Be Provided by Guidelines
    Reference Year
    for Costs
    Reference Unit
    Process Cost
    Cost Index
    Inflation Rate
                       This is generally taken as scheduled start-up
                       time which generally corresponds with comple-
                       tion of construction.  Consider that many
                       recent generalized cost studies related to
                       energy and pollution control use mid-1975
                       as the reference time.
                 for   These are basic units typical for the
                       technology.
                       This should be a commonly used index; it
                       can be specified or decided by estimator.
                       See Appendix F.
                       If inflation is to be taken into account,
                       its expected rate needs to be stated.
                       Sometimes more than one rate is postulated;
                       e.g., general inflation and specific
                       escalation of certain cost components.
                       See Appendix F.

Cost Estimate - Capital Investment

  Types of Capital     Specify whether established scheme is called
  Investment Estimates for or if another basis may be used.  The
  (more than one may   established schemes are favored and their
  be specified)        order of preference, presuming that data
                       are available, ordinarily is:
                         Study type  - Guthrie
                                       ICARUS
                                       Unit process
                                       Chilton
                         Preliminary - Only if above do not
                                       apply or greater accuracy
                                       is needed.  Preliminary
                                       estimates can cost about
                                       3 times as much as a
                                       study type.
                         Definitive  - Ordinarily only if detailed
                                       engineering has been done
                                       and can be used.  Defini-
                                       tive estimates cost about 5
                                       times as much as the study
                                       type.
                         Study Type  - Lang; only to check factors.
                         Order-of-   - Only for preliminary "ball-
                          Magnitude    park" value and/or as a
                                       check.
                       NOTE:  The type of the capital cost estimate
                       as indicated in Table 12 determines largely
                       the cost of the total economic study.
                                   -36-

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Table 11 (Continued).   Information To Be Provided by Guidelines
    Allowance for Funds
    During Construction
    Modification of
    Facilities and
    Start-up
Specify the interest rate.  It may be less
than the interest (discount)  rate specified
above for return on the investment.  Regu-
lated industries and government bodies gen-
erally capitalize the interest paid on funds
for construction, private sector firms tend
to expense using funds generated from cur-
rent operations (depreciation plus retained
profits).
Private sector firms tend to expense; reg-
ulated industries and government bodies will
capitalize as a rule.
  Cost Estimate - Operating Expense
    Total Operating
    Expenses vs.
    Only 0§M

    Stream Time
    Pre-production
    Expenses
    Direct  (Operating)
    Labor Rate
    Depreciation
Total annual operating expenses should be
determined except when alternative projects
are to be compared, in which case only 0§M
expenses may be used.
It can vary over the life of the facility;
e.g., as in the utility example in Appen-
dix E.  Also time must be allowed for per-
iodic maintenance and overhaul of facility.
Expressed as hr/yr or percentage level of
operation.
Note if pre-production expenses are to be
included.
The direct labor rate varies with the
regional location within the U.S.  See
Appendix B.  For private and regulated
sector only.  Generally use straight-line
method.
  Cost  Estimate  - Profit and Ca&k Flow
                          If facility generates profit or revenue
                          (as from byproduct), provide details to
                          compute the net benefits; viz., savings or
                          profits.  State applicable  income  tax rate,
   Feasibility  Evaluation

    Modes  of Cost
    Analysis
 State  whether  privately financed,  public
 utility (regulated),  or publicly funded
 mode is to  be  followed.
                                    -37-

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Table  11  (Continued).  Information To Be Provided by Guidelines
    Measure of Merit     For private sector, if revenue is generated
                         specify IROR and also ROI and Payout.  If the
                         choice is between alternatives that do not
                         yield profit, use uniform annual cost.  For
                         utility (regulated industry) financing, use
                         annualized cost for revenue requirement or
                         levelized cost; for the latter specify if
                         typical utility or METREK approach is to be
                         followed.  For public funded works use
                         version of equivalent annual cost termed
                         "equivalent annual value" or "total resource
                         cost/unit of service."

    Computation Features These features must be established; the fin-
                         ancial sector largely determines the choice
                         as illustrated by the schedule below.
                         Discounting
                         Revenue
                         Investment
                         Recovery

                         Accounting
                         for Inflat.

                         Annual Exp.
  Private   Regulated

Yes except  Preferred
for ROI and
payout
Yes except  Yes; need
for choice  cost of
between     capital
alternatives
           Public

           Always
Yes'
Yes
                                                      a
Optional    Preferred
             No
No
             No
                         Interest
All when    Total       0§M
there is
revenue;
otherwise
0§M

Trend is    Discrete   Discrete
to continuous
     rt
      Investment recovery is generally by straight-line depreciation.
However, accelerated depreciation methods or a combination can be used,
as in the second public utility example in Appendix E:  straight-line
depreciation is used for capital recovery (paid to investors) and sum-
of-the-digits depreciation is used for income-tax computation.
                                   -38-

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Table 11 (Continued).   Information To Be Provided by Guidelines
RELIABILITY ASSESSMENT SEGMENT
    Sensitivity-
    Analysis
    Uncertainty
    Analysis
The factors considered to vary enough to
affect markedly the measure of merit should
be identified.  Also the form described for
depicting the sensitivity analysis (e.g.,
Strauss chart) should be specified.
The mode should be identified:  opinion or
statistical; e.g., Monte Carlo technique.
If a method such as the Monte Carlo is
specified, information concerning the ranges
of the critical variable and the kinds of
probability distributions is required.
                     TABLE  12.  TYPICAL COST  RANGES
                  FOR PRODUCING CAPITAL COST  ESTIMATES
                            a
Type of
Estimate
Total Plant Cost, I
Less than
$2 million
$2 million to
$10 million
$10 million to
$100 million
Order-of -Magnitude
Study
Preliminary
Definitive
$ 2,000 -
10,000
$ 4,000 -
12,000
$12,000 -
30,000
$20,000 -
50,000
" $ 5,000 -
20,000
$10,000 -
24,000
$24,000 -
50,000
$ 50,000 -
100,000
$ 8,000 -
25,000
$16,000 -
32,000
$40,000 -
80,000
$ 90,000 -
200,000

           figures, based on a schedule in Bauman (11) are intended only
 as a rough guide.  The range of activities covered by these costs can be
 considerable; depending on the type of estimate, it can include engi-
 neering, drafting, surveys, travel, copying, communication, office
 overhead, besides the actual cost analysis.
                                    -39-

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     There are two ways to fashion an estimate of annual expenses.  The
most reliable is to resort to accounting records for similar operations;
however, often these are difficult to obtain or interpret.  The second
is to follow Tables 9 and 10 using factors such as suggested in Section
2  (Table 3) and discussed in Appendix B.  The estimator should base the
estimate on actual cost data if at all possible.

Feasibility Evaluation

     Often with privately financed facilities, only the efficacy of a
part of the operating unit (such as a flue gas desulfurization unit) is
to be evaluated.  This involves the comparison of several alternative
retrofits or add-ons.  In such cases uniform annual costs are employed
but without seeking or needing the revenue requirement.  An example of
such a calculation is given as the third illustration under the pri-
vately financed examples in Appendix E.

     For publicly funded works the version of equivalent annual cost
termed "equivalent annual value" involves only the resources of initial
capital and 0§M.  See Appendix E.

Reliability Assessment

     The recommended assessments are of two kinds:  the limited sensi-
tivity analysis, and the comprehensive uncertainty analysis.  Either one
or both can be called for.

     When reliability is assessed, either opinion or a formal uncer-
tainty analysis (such as the Monte Carlo technique) is to be used.  The
Monte Carlo technique requires that a suitable computer program be
available either in-house or by one of several organizations that pro-
vide this software system service.

     The form tc^ b_£ used i.s_ open.
                                   -40-

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                               SECTION 4

                  SOME GENERAL COMMENTS AND CAUTIONS
     A background in technical economics and reliable sources for cost
data should provide more thoughtful, thorough, and hence accurate econ-
omic evaluations of pollution abatement operations.  Also in the prepa-
ration of the analysis, several cautions should be observed.
BACKGROUND IN TECHNICAL ECONOMICS

     If the standard procedure is routinely followed, the estimator
should be assured of a complete and appropriately detailed cost anal-
ysis.  Also, the estimator should be confident that the rationale out-
lined by the specification is consistent with current accepted practice
in both financial and engineering circles for the cost evaluation of
capital projects.  However, persons requesting and carrying out this
kind of work would do well to become conversant with both the nuances
and the development of the subject known variously as, engineering
economy, financial analysis of capital projects, and technical econ-
omics.  It is believed that the methodology can be readily grasped by
one having an understanding of the material in Appendices C, D, and E.
For further instruction, from the vast amount of literature on this
subject, the reader is particularly referred to Grant et_ al_.  (12),
Canada  (13), Taylor (14), Ostwald  (15) and Helfert  (16).
 SOURCES FOR COST DATA

     The building blocks  for any  economic  study  are  the  cost data.  The
 sources are various  and often  should  be ussd  for checking.  For  capital
 cost data  for  large  items,  the estimator should  resort to vendors;
 however, checks from experience and literature correlations are  strongly
 advised.   Similarly, information  on operation should be  drawn  from  a
 variety of authorities.
 QUALITY OF  COST  ANALYSES

      The quality (i.e., the reliability of a cost analysis)  depends on
 the competence of the  people involved and the adequacy of the cost
 information.   Feedback and review are important for enhancing the skill
                                    -41-

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of cost analysts and improving the quality of the data.  Comparisons
with similar estimates also serve these purposes.
CAUTIONS

     These several cautions should be observed in preparing cost esti-
mates and the more comprehensive economic evaluations.

  •  The procedures outlined are intended to render evaluations for a
     generalized case.

  •  The cost evaluation cannot improve on shoddy technical work and
     poor experimental data.

  •  The detail in the economic evaluation should be consistent with the
     level of the technical effort.

  •  The results should be in a form which can be readily apprehended
     and used.

  •  All costs (capital and operating) should be included for evaluation
     of a grass roots unit; all costs that are likely to vary from one
     alternative to another must be accounted for in the case of a
     retrofit or add-on facility.

  •  The peculiarities of a particular technology must be understood and
     taken into account.

  •  The measures of economic feasibility must be in terms that are
     familiar and that have significance.

  t  Both the estimating team and the requestor should give serious
     attention to the question of the reliability of the cost analysis.

  •  Results should be arrived at by two or more different methods to
     provide checks, particularly if the evaluator is relatively in-
     experienced.

  •  Computers save time and make for more comprehensive studies, but
     they are no substitute for experience or wisdom.

For Generalized Cases

     The standard procedure can serve as a guide for costing site-
specific projects,  but it should never be used directly for this pur-
pose.  Wide cost variations are caused by factors unique to any given
project;  e.g., site conditions, local deviations in material, and labor
costs.   The prime purpose of this standard procedure is to develop a
cost analysis for generalized cases.
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     For actual estimates of site-specific projects,  either preliminary
(budget authorization)  or definitive estimates are required.  Their
scope is described in Table 1 and Figure 2.  More information on these
types of estimates can be found in Appendix A.

Adequate Technical Effort

     An estimate should be based on good process design, sound labor-
atory data, or well-executed pilot plant work.  The technical data
should be up-to-date and reflect up-to-date technological advances.
There are no specific rules for excellence in design and R§D work, but
competence is eventually recognized in the results.

Estimate in Harmony with Technical Effort

     Often comprehensive cost estimates of the definitive type are
carried out for conceptual processes, ones for which there may be  little
data or no experience.  For the economic evaluation to be in balance
with the technical effort, it would be more proper to base  it on a study
type of capital cost estimate.  Inconsistencies of this kind betray poor
judgment on the part of the requestor of the  cost analysis, and they  can
result in unnecessarily high estimate charges.

Acceptable Form

     Any technical or evaluation  effort is unsatisfactory  if  it is not
easily understood and in a form which can  be  directly used  and compared
with other related evaluations.   The specification format was developed
with these purposes  in mind.

Inclusion  of All Pertinent Costs

     Many  cost estimates prove to be confusing because  they do not con-
sider all  the  capital costs, or the operating cost may  not  include
overheads, or  general expenses.   For ready apprehension, it is desirable
for  a  system that is intended  for different  economic realms (viz.,
private sector, regulated  industry, and municipalities)  to  follow  the
same form.  For revenue producing operations  this means the inclusion of
all  costs, and for add-on  facilities, all  costs  that are likely to vary
from one alternative to  another.

Peculiarities  of Particular  Technologies

     Examples  of  this as  it  applies to different  technologies relate  to
the manner in  which  certain  disbursements  are handled.   Although util-
ities  capitalize  interest  on construction costs,  private industry  may
expense this at the  end  of the first year of operations.   Also, pro-
ductivity  drops off  sharply  with  plant age for utilities,  whereas  pro-
duction for a  private sector plant  depends on the market or profits.
                                    -43-

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 Measures  of Economic  Feasibility

     Three  difficulties  are  encountered with respect  to  the measures of
 merit  of  economic  feasibility.   One  is the plethora of measures used
 with the  same  or almost  the  same identification.  Examples are rate of
 return (it  can be  ROI, IROR, or  others) and annualized cost  (it can be
 on  a number of different bases).  These distinctions  need to be appreci-
 ated and, when one of these  criteria  is used,  its basis  must be care-
 fully  defined.

     Another difficulty  is the failure of many decision  makers to appre-
 hend the  criteria  for feasibility.  This is the reason such measures
 must be simple and in common use, and follow consistent  standards.

     The  third is  the effect on  the measures of merit from the manner of
 handling  inflation.   The use of  both  then-current and constant worth
 dollars is  acceptable, but each  results in a different value of the
 various measures of merit.   As a rule then-current dollars result in
 higher calculated  values of  the  measures of merit; this  must be ap-
 preciated.

     Measures  that are solely in dollars, such as annualized cost, are
 not satisfactory.  Much  to be preferred are percentages, ratios, or
 dollars per  some basic unit  identified with a  technology.  Examples of
 the latter unit costs, as they apply  to utilities, are $/kW capacity for
 capital costs  and mills/kWhr for operating costs.

 Assessing the Reliability of the Cost Analysis

     The technical group doing the work, such  as a contractor, should
 make an appropriate assessment of reliability.  The project director or
 project officer should also  consider  this matter.

 Using Checks

     In certain costing  and  evaluation procedures, several methods are
 in common use.   Also,  there  are  rules of thumb, such  as  turnover ratios
and Lang factors, which provide  quick verification.   Such checks using
available approaches  should be used, particularly by  less experienced
evaluators,  and also  in  review by management.

Computer Programs

     Computer programs can be invaluable in connection with economic
evaluations; examples  are for uncertainty analyses, sensitivity anal-
yses,  and internal-rate-of-return calculations.  However, the reams of
paper they generate can be deceptive; the results can only be as good as
the quality of the data provided.  The results need to be boiled down to
a significant figure or two and accompanied by a cogent commentary.
                                  -44-

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                              SECTION 5

                             REFERENCES
1.  The Ralph M. Parsons Company.  Guideline for Uniform Presentation
  •  of Desalting Cost Estimates.  NTIS PB 178 531.  July 1967.

2.  NUS Corporation.  Guide for Economic Evaluation of Nuclear Reactor
    Plant Designs.  NUS-531.  January 1969.

3.  Synthetic Gas-Coal Task Force.  Final Report -- The Supply-Technical
    Advisory Task Force -- Synthetic Gas-Coal.  Prepared for Supply-
    Technical Advisory Committee, National Gas Survey.  Federal Power
    Commission.  April 1973.

4.  Municipal Environmental Research Laboratory.  Areawide Assessment
    Procedures Manual, Vol. III.  Appendix H-Point Source Control
    Alternatives:  Performance and Cost.  EPA-600/9-76-014; NTIS PB
    271-866.  Wastewater Research Division.  MERL, U.S. Environmental
    Protection Agency, Cincinnati, OH.  July 1976.

5.  Gorey, J. M.  Estimate Types.  American Association of Cost Engi-
    neers.  Bulletin  1  (1):12-13.  1959.

6.  Perry, R. H., and C. H. Chilton, ed.  Chemical Engineers' Handbook.
    5e.  McGraw-Hill  Book Company, New York, NY.  1973.

7.  Chilton, C. H.  Cost Data Correlated.  Chem. Eng., 56(6):97 (1949).

8.  Chemical Marketing Reporter.  Schnell Publishing Co., Inc., 100
    Church St., New York, NY.  Current  Issue.

9.  McGlamery,  G. G., R. L. Torstrick, W. J. Broadfoot, J. P. Simpson,
    L.  J. Henson, S.  V. Tomlinson, and J. F. Young.  Tennessee Valley
    Authority.  Detailed Cost Estimates for Advanced Effluent Desul-
    •furization  Processes.   EPA-600/2-75-006; NTIS PB 242 541.  January
     1975.  417  pp.

10.   Internal Revenue  Service.  Tax Information on Depreciation.
    Publication 534.  Department of  the Treasury.   1978 Edition.

11.   Bauman, H.  C.   Fundamentals  of Cost Engineering  in the Chemical
     Industry.   Reinhold Publishing Corp.,  New York,  NY.   1964.  364  pp.
                                  -45-

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12.  Grant,  E.  L.,  W.  G.  Ireson,  and R.  S.  Leavenworth.   Principles of
     Engineering Economy.   6e.   The Ronald  Press Company,  New York, NY.
     1976.   624 pp.

13.  Canada,  J. R.   Intermediate Economic Analysis for Management and
     Engineering.  Prentice-Hall, Inc.,  Englewood Cliffs,  NJ.  1971.
     430 pp.

14.  Taylor,  G. A.   Managerial  and Engineering Economy.   D.  Van Nostrand
     Company, Inc., New York,  NY.  1964.  487 pp.

15.  Ostwald, P. F.  Cost  Engineering for Engineering and Management.
     Prentice-Hall, Inc.,  Englewood Cliffs,  NJ.   1974.  493  pp.

16.  Helfert, E. A.  Techniques of Financial Analysis,  rev. ed.  Dow
     Jones-Irwin, Homewood,  IL.  1977.
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                               SECTION 6

                               GLOSSARY
     The meanings of most of the terms specific to engineering cost
analysis and in particular those used in this procedure can be com-
prehended from their general-use connotation.  But occasional expres-
sions may require a refined explanation to obviate confusion.  Words
that seem likely to cause such difficulties are defined below.  Refer-
ences 6-1 and 6-2 are provided for a number of glossaries for further
evaluation of the plethora of terms peculiar to this field.

add-on:  Two meanings:  charges in addition to the base investment  (see
     Table 6); and a retrofit added to the base plant as for pollution
     abatement.

AFDC:  allowance for funds during construction  (which see).

allowance for funds during construction  (AFDC):   Interest on funds  from
     loans paid to engineering-construction firm  during the progress of
     building; usually capitalized.

annual expense:  All expense payments for the year; see expenses.

annualized cost:  The equivalent annual  cost equal to the revenue re-
     quirement.  See Equation E-l.

battery  limits plant:  The part of the plant within the geographic
     boundary around all  the process  equipment, but excluding storage,
     utilities, administration buildings, or auxiliary facilities.

"best guess" estimate:   Same as most  likely  estimate.

book value:  Current investment value as recorded in the accounts cal-
     culated as the original total plant cost  less depreciation accruals,

capital, working  (I ):   Funds in reserve necessary for the normal con-
     duct of business.

capital  investment:   Investment for  long-term  use (over a  year), which
     is  therefore capitalized.

capital  structure:  The  proportionate portions  of capital  from  sources
     such as common stock equity, preferred  stock equity,  and debt
      (bonds).

                                   -47-

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 capitalize:  To  consider  as  an  investment;  it  can  either be depreciated
      (buildings  and  equipment)  or recovered (land  or working capital).

 caAk {fiow.  Annual cash receipts in  the  form of net profit  (after  taxes)
      plus  the  depreciation charge; also  called cash inflow and cash
      flowback.   For  comparisons of alternatives with the same revenue,
      it  can be the depreciation charge plus net saving  or minus  extra
      net operating charge adjusted for income  taxes.

 cash flows:  The various  sources and outlays for funds  in an active
      project.

 cash flow  diagram:   Same  as  money flow diagram; see Figures C-l  and C-2.

 conceptual estimate:  An  estimate for a  new process or  operation,  one
      that  has  not been built or operated to date.

 constant worth dollars:   [Then-current dollars] X  [1 +  annual inflation
      rate]     ,  where n is the  number of years from the year in  question
      to  the reference year.  Sometimes these are termed constant dol-
      lars, real  dollars,  or  deflated dollars.  For an example calcula-
      tion, see footnote *.

 cost analysis  segment:  The  major of the three segments of the economic
      evaluation; see The  Specification in Section  3.

 cost effectiveness:  A term  often used in lieu of  cost-benefit studies.
      Cost  effective analysis is called for  by  the  EPA construction grant
      program but at present  it  only  takes actual costs  into account.
      (References E-3, E-4.)

 cumulative frequency distribution:   The  probability of  the occurrence of
      a given value or less from a set of values; e.g.,  ROI.  See Figure
      K-2.

depreciation:   The allocation in a systematic  and  rational manner  of the
      cost of fixed capital assets less salvage (if any), over the  esti-
     mated useful life of the facility.

descriptive segment:   The first of the three segments of the economic
     evaluation;  see The Specification in Section  3.

discount rate:   The interest rate used either  to discount future cash
     flows  to  a reference time  (zero) or to compound past cash flows to
     the same  reference time.
     *
      It is desired to convert the value of an investment of $3,000,000 in
1982 to 1975 constant worth dollars.   The inflation rate is estimated at
8% per year.  The 1975 value = [$3,000,000]  X [1 + 0.08]~7+1 = $1,891,000
(1975 constant worth dollars)  (then-current  dollars).
                                   -48-

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discounted cash flow rate of return:  See internal rate of_ return.

engineering cost analyses:  The application of techniques to the ex-
     pected capital investments, annual operating expenses, and other
     cash flows to ascertain the economic feasibility of a project by
     computing measures of merit.

enter to costs:  An accounting term -- accrual of depreciation charges;
     the process of recovering capital invested.

envelope of variability:  The curves that bound the upper  and  lower per-
     centage accuracy for cost estimates of increasing quality;  for
     example in Figure 2, see the  inset to the left.

equivalent annual  cost:  A  generic term to describe equivalent cash
     flows; it can be calculated either as an uniform  end-of-year  value,
     or a uniform  continuous flow  throughout the  year.

equivalent annual  value:  A version of equivalent annual cost  used in
     evaluating public sector projects.  An example is described by
     Equation E-3  for the EPA construction grants program.

equivalent uniform cash  flow or  cost:  Corresponds to  equivalent annual
     cash flow  (or cost)  when it is calculated as a uniform end-of-year
     value.  See Grant et al.  (E-l).

escalation:   Inflation in the cost of  a particular item  in contradis-
     tinction  to general inflation.

expense:  Net  expenses are  all  payments  transferred  (paid) to  entities
     outside  the operating  organization  for  costs incurred for and
     related  to the  plant operation; total  expenses  include depreciation
     charges  in addition to the above.

expensed:   The accounting operation in which an outlay is  classified as
     an expense  (which see) and included in an account of  expenses,
     generally classified by type; e.g.,  operating labor,  maintenance
     materials.

factored estimate:  A form  of capital  cost estimate;  usually it is a
     form of study estimate.

figures of merit:   See measures of_ merit.

 financial factors:  Percentages and ratios set by policy which pertain
      to sources  of funds and their rate of recovery.

 fixed  capital:   Corresponds to depreciable investment (buildings and
      equipment)  plus land;  excludes working capital.

 general expense:   An indirectly attributable expense for administration,
      sales,  research, and financing activities.


                                    -49-

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grass roots plant:  A complete plant erected on a virgin site; the
     investment includes all costs of site preparation, battery limits
     units, and auxiliary facilities.

I  :  Symbol to denote total plant cost; usually equivalent to the de-
 F   preciable investment; corresponds to total module cost.

I  :  See capital, working.
 w       -—*	  	
inflation index:  Also termed cost index; the relative value of the
     dollar at a point in time in a particular segment of the economy as
     compared to its value at an earlier reference time when it is
     arbitrarily given a value of 100.

interest, continuous:  Interest computed by assuming an instantaneous
     time period for compounding; generally expressed as a nominal
     interest rate per year.  This nominal interest rate works out to be
     less than the effective interest rate for the year.

interest, discrete:  Also termed simple interest; interest on the prin-
     cipal for the period (usually 1 year).

interest rate of return:  See internal rate of_ return.

internal rate of return:  (IROR) Rate of interest at which outstanding
     investment is repaid by proceeds of a project to achieve a zero
     present worth; also, called interest rate of return, discounted
     cash flow rate of return, and profitability index.

IROR:  Symbol for internal rate of return (which see), and equivalent
     measures of merit.

K:   One thousand (1000), when used in connection with dollars.

learning curve:  A graphical relation that demonstrates or predicts the
     improvement in productivity or costs of production with time
     because of tidying up,  bottleneck elimination, and fine tuning.

levelized cost:  A form of unit cost equal to the revenue requirement;
     annualized cost per unit of output where this unit of output is
     usually discounted in the same fashion as the cost.

life-cycle analyses:  The systematic analytical process of evaluating
     various alternative courses of action over the entire life of the
     venture to ascertain the most economical.

major plant items:   (MPIs) Synonymous with major equipment items;
     excludes process piping, insulation, electric switchgear, instru-
     mentation, and components for erection such as foundations, walk-
     ways,  structural supports.
                                   -50-

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MARR:  See minimum acceptable rate of_ return.

measures of merit:  Also termed figures of merit, criteria for evalu-
     ation, feasibility criteria; ratios, percentages, and other indices
     that characterize the economic feasibility of a project; e.g.,
     return on original investment (ROI), payout time, internal rate of
     return (IROR), annualized cost.

minimum acceptable rate of return:  CMARR) This is the lowest return
     that will be considered attractive  for  the investment of new capi-
     tal; it is often taken as the average current return on investment
     capital; it is not to be confused with  the cost of capital and
     should be somewhat higher.  Note that the kind of return  (e.g., ROI
     or IROR) needs to be specified.

module:  The MPI with appurtenant equipment  that carries out either  a
     unit operation  (e.g., heat  transfer, distillation, solids  separa-
     tion) or a unit process  (e.g., biodegradation of liquid wastes).

MPI:   See major plant items.
 O&M:   Direct  operating  and maintenance  costs;  represent  only a fraction
      of the total  annual  expense.

 payout time:   The  time  in years  to  recoup the  fixed (depreciable)  capi-
      tal from C£L&h ££ou>;  also  called payback time or period.
 present value:   Same as  present  worth (which see) .

 present worth:   The sum  of the discounted (and compounded)  values of the
      cash flows for a given project or operation.   The discount rate
      must be specified.

 private sector:  Refers  to projects financed by private capital and for
      which the  price of  the output is set by the market.

 profitability index:  See internal rate of return .

 R§D:   Research  and development.

 regulated sector:  Refers to projects financed by  private capital, but
      for which  the price of the  output is regulated by law or a gov-
      ernment body.  Examples are electric utilities, the telephone
      company, public carriers.

 reliability assessment segment:   The last of the three segments of the
      economic evaluation; deals  with uncertainty and risk measures; see
      The Specification in Section 3.

 resources requirement:  Refers to financial means  required to support
      public sector projects; viz., original capital, interest on cap-
      ital, and  operating expenses.

                                     -51-

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retrofit:  The construction or the actual facility appended to an oper-
     able process for some purpose such as to abate pollution.  See
     add-on.

retrofit increment:  The extra or added cost required.for a retrofit
     facility above that for the basic plant.

return on original investment:  (ROI) Net profit divided by total capi-
     tal investment.

ROI:  Return on original investment  (which see), a measure of merit.

scope:  A description of the essential features and extent of the
     physical installation.

sensitivity analysis:  A cost analysis that demonstrates the effect on a
     measure of merit of varying, one at a time, the major cash flows
     within expected limits.

specification:  In this standard procedure, the format for organizing
     and presenting the engineering cost analysis.

standard deviation:  A measure of variability of values about their
     mean.

standard procedure:  The method of economic evaluation outlined in this
     report.

then-current dollars:  Real dollars which vary in relative value with
     time because of inflation; sometimes these are termed nominal
     dollars, current dollars, inflated dollars, or escalated dollars.

UAC:  Uniform annual cost  (which see).

UNACOST:  Same as equivalent uniform cost.  See Jelen (E-2, p. 25).

uncertainty analysis:  The computation of a probability distribution of
     a measure of merit from projected probable values of the major
     elements of cash flows.

uniform annual cost:  An equivalent annual cost that takes into account
     cash flow, capital outlays, and end-of-life recoveries.  See the
     Third Private Financing Example in Appendix E.

unit cost:  As applied to fixed investment - cost divided by an appro-
     priate output per year; as applied to annual expenses - total
     expenses divided by output per year; as applied to annualized
     cost - required revenue divided by annual output.  For the latter
     case the output may be "discounted" and escalated in the same
     fashion as the costs.
                                   -52-

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variance:  The arithmetic mean of the sum of the squared deviations of a
     set of values; the same as the square of the standard deviation.

working capital:  See capital, working.


SELECTED REFERENCES

6-1.  Woods, D. R.  Financial Decision Making in the Process Industry.
     pp. 260-270.  Prentice-Hall, Inc., Englewood Cliffs, NJ.  1975.

6-2.  Perry, R. H., and C. H. Chilton, ed.  Chemical Engineers' Hand-
     book.  5e., p. 25-44 to  47.  McGraw-Hill Book Company, New York,
     NY.   1973.
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TECHNICAL REPORT DATA
(Please read Instructions on the reverse before completing)
1. REPORT NO.
EPA-600/8-79-018a
2.
4. TITLE AND SUBTITLE
A Standard Procedure for Cost Analysis of Pollution
Control Operations; Volume I. User Guide
7. AUTHOR(S)
Vincent W. Uhl
9, PERFORMING ORGANIZATION NAME AND ADDRESS
See Block 12 , below.

12. SPONSORING AGENCY NAME AND ADDRESS
EPA, Office of Research and Development
Industrial Environmental Research Laboratory
Research Triangle Park, NC 27711
3. RECIPIENT'S ACCESSION- NO.
5. REPORT DATE
June 1979
6. PERFORMING ORGANIZATION CODE
8. PERFORMING ORGANIZATION REPORT NO.
10. PROGRAM ELEMENT NO.
INE624A
11. CONTRACT/GRANT NO.
NA
13. TYPE OF REPORT AND PERIOD COVERED
Inhouse; 10/77 - 5/79
14. SPONSORING AGENCY CODE
EPA/600/13
is. SUPPLEMENTARY NOTES Author Uhl is on loan , under provisions of the Intergovernmental
Personnel Act of 1970, from the Department of Chemical Engineering, the University
of Virginia, Charlottesville, VA 22904.
16. ABSTRACT y0iume j jg a user guide for 2i standard procedure for the engineering cost
analysis of pollution abatement operations and processes. The procedure applies to
projects in various economic sectors: private, regulated, and public. The models
are consistent with cost evaluation practices in engineering economy and financial
analysis. It presents a recommended format, termed the Specification, that should
not exceed eight pages when executed. The guidelines facilitate the choice of proce-
dures open to the estimator and the establishment of factors to be used in the eval-
uation. The Specification has three segments: descriptive, cost analysis, and relia-
bility assessment. Volume U, the bulk of the document, contains 11 appendices (pro-
viding detailed background material) and 2 comprehensive examples. Appendix sub-
jects are: Capital Investment Estimation, Annual Expense Estimate, The Cash Flow
Concept, Discrete and Continuous Interest Factors, Measures of Merit, Cost Indices
and Inflation Factors , Rates of Return and Interest Rates , Methods of Reliability
Assessment, Sensitivity Analysis, Example I--Cost Analysis of Flue Gas Desulfur-
ization (FGD) Retrofit Facility, and Example II- -Cost Analysis of Chlorolysis Plant.
The Measures of Merit appendix considers: return on investment, internal rate of
return, payout time, equivalent annual cost, and unit costs. A glossary is provided.
17.
a. DESCRIPTORS
KEY WORDS AND DOCUMENT ANALYSIS
b. IDENTIFIERS/OPEN ENDED TERMS
Pollution Cash Flow Pollution Control
Cost Analysis Interest Stationary Sources
Cost Estimates Inflation Measures of Merit
Reliability Rates of Return
Fixed Investment Sensitivity Analysis
Operating Costs
IS. DISTRIBUTION STATEMENT
Release to Public
19. SECURITY CLASS (This Report)
Unclassified
20. SECURITY CLASS (This page)
Unclassified

c. COSATI Field/Group
13 B
14A
05A
14D
05C
21. NO. OF PAGES
62
22. PRICE
EPA Form 2220-1 (9-73)
                                                               -54-

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