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
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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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RELATIVE TIME, ywn
Figure 1. Effect of various factors on projected and actual capital costs.
IH7
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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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-------
.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.
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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
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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
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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.
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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
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TABLE 5. SUMMARY OF ECONOMIC EVALUATION
DESCRIPTIVE SEGMENT
FACILITY DESCRIPTION
CAPACITY RATING
ABSTRACT OF SCOPE
PERFORMANCE SPECIFICATION
STAGE OF DEVELOPMENT
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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
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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
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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.
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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.
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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
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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.
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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:
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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.
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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$
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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).
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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).
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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.
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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.
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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.
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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.
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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)
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