United States Industrial Environmental Research EPA-600/8-79-018b
Environmental Protection Laboratory June 1979
Agency Research Triangle Park NC 27711
Research and Development
<>EPA A Standard Procedure
for Cost Analysis of
Pollution Control
Operations; Volume II.
Appendices
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EPA-600/8-79-018b
June 1979
A Standard Procedure for Cost Analysis
of Pollution Control Operations;
Volume II. Appendices
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
US. 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 Coih F£ow) 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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CONTENTS
Page
Appendix
A. Capital Investment Estimation A-i
B. Annual Expense Estimate B-i
C. The Ccu>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
111
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APPENDIX A
CAPITAL INVESTMENT ESTIMATION
CONTENTS
Fixed Capital Requirement A-l
Estimation Methods for Buildings and Equipment ..... A-l
Order of Magnitude Estimates A-2
Study and Preliminary Estimates A-3
Interest During Construction A-13
Modification of the Facilities and Start-Up. A-14
Land A-14
Working Capital A-15
Summary of Total Capital Investment A-16
Selected References A-17
TABLES
A-l. Sources of Equipment Costs with Relevant
Information A-4
A-2. Equipment Cost Multiplier Systems for Capital Cost
Estimation A-6
A-3. Lang Single Factors A-6
A-4. Chilton Factors for Estimating Total Plant Costs . A-7
A-5. Example of the Use of Chilton Factors for Capital
Cost Estimation of a Fluid-Process Plant A-8
A-6. Typical Increases in Capital Costs with Various
Retrofit Requirements A-13
A-7. Typical Project Expenditure Schedules A-14
A-8. Start-Up Costs A-15
A-9. Schedules for Estimating Working Capital A-16
A-i
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APPENDIX A
CAPITAL INVESTMENT ESTIMATION
Fixed capital represents the funds invested in land, equipment, and
buildings to manufacture or process materials. It is comprised of the
funds required to design, build, and bring the facility to acceptable
operation. In addition, working capital is needed to operate it.
Several methods for the estimation of both types of capital will be
presented.
FIXED CAPITAL REQUIREMENT
Fixed capital is comprised of outlays for:
Land.
Buildings and equipment (physical plant).
In addition, the following may contribute to the fixed capital:
Spare parts and special tools.
Interest during construction (allowance for funds during construc-
tion (AFDC)).
Cost of modification of the facilities and start-up of the operation.
Note that the investment of all the fixed capital, except land, is
depreciated.
ESTIMATION METHODS FOR BUILDINGS AND EQUIPMENT
The methods which are of special concern for our purposes are
termed "Study" and "Preliminary" types (see Table 1, Section 2 in
Volume I). However, the rapid but very approximate Order of Magnitude
procedures are useful for a "ball park" figure early in the study; later
they can provide a check on the result prepared by more detailed methods.
The Definitive and Detailed types of estimates are undertaken for fac-
ilities to be or being built and sometimes for budget authorization;
they call for detailed information from an engineering design and
A-l
-------
require both an experienced estimating organization and a substantial
monetary outlay.
Order of Magnitude Estimates
Three methods used for making order of magnitude (back-of-the-
envelope) capital investment estimates are delineated below.
1. Investment is estimated from average fixed capital per unit of
annual capacity. Examples of annual capacity include kWhr of elec-
tricity, tons of a product chemical, tons of steel billets, and
quantities of manufactured items. If such investment figures are
available, an approximation of the capital cost is found from:
IF = iF ra (A-l)
where:
= total plant cost;
ip = total plant cost per unit of annual production capacity;
and
r = annual capacity (consistent units) .
3.
2. Investment is estimated by scaling a known investment for a plant
of different size (A-l), according to the relation:
where:
Ip, = fixed-capital investment of plant b;
IP = fixed-capital investment of plant a;
r. = capacity of plant b; and
r = capacity of plant a.
a
For a typical chemical process, the exponent, n, will be 0.7. For
very small installations or for processes employing extreme condi-
tions of temperature or pressure, the exponent is 0.3 to 0.5. And
for plants achieving higher capacities by using several units
rather than large equipment, the exponent is 0.8 to 0.9. Note that
an exponent of 1 gives the relation of the first method.
3. Investment is calculated from turnover ratio (A-l, A-2), the annual
revenue divided by the total plant investment. The fixed invest-
ment by this method is:
!F = s VT (A-3)
A-2
-------
where:
S = market value per unit of production;
r = annual production rate; and
a
T = turnover ratio.
Values of turnover ratio for the manufacture of various chemicals
range from 0.2 to 8 (A-l, A-3, A-4, A-5). Values of less than 1
are generally found in large volume, capital-intensive industries
utilizing basic raw materials, such as steelmaking and power gener-
ation.
In all cases, investment data applying to one date can be corrected to
another date by using an inflation index such as the Engineering New
Record (ENR) indices or the Chemical Engineering magazine Plant Cost
Index; see Appendix F.
Study and Preliminary Estimates
For guidance in research and development activities and engineering
studies, the preliminary and study estimates (often called conceptual
estimates) are appropriate. Both entail at least a preliminary process
design with material balances, energy budget, and a list of sized equip-
ment. In addition, the preliminary estimate includes, as distinct from
the study type, surveys and some engineering of foundations, trans-
portation facilities, buildings, structures, lighting, electrical equip-
ment, and control instruments. The engineering requirements for these
two types of estimates are outlined in Figure 2 in Section 2 of Vol-
ume I.
Ordinarily the study estimate is either a factored estimate or a
unit-process estimate; the designation depends mainly on the kind of
construction and the nature of the available correlations of cost data.
A discussion of these two types of study estimates follows.
Factor Methods (First Form of Study Estimate) --
The factored approach is commonly used when the major plant items
(MPIs) are shop fabricated. Examples are chemical plants, petroleum
refineries, and facilities in power plants for flue gas desulfurization.
This method calls for the costs of the MPIs, also termed the major
equipment items.
The costs of the critical items of equipment should be secured from
vendors and checked against experience, the quotations of other vendors,
or literature sources. The cost of less important items can be approx-
imated from literature sources. But checks should be secured for all
figures as a regular procedure. Literature sources for equipment cost
information are listed in Table A-l.
Methods are also required to adjust available cost data for one or
several sizes to that required for the process. This is generally done
A-3
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TABLE A-l. SOURCES OF EQUIPMENT COSTS WITH RELEVANT INFORMATION
Source
Perry §
Chilton
Chi Item
et al.
Popper
et al.
Aries §
Newton
Reference
A- 6
A- 7
A-8
A-l
Basisa
Various
Varies with
articles
Varies with
articles
Delivered
Suggested
Reference Comment
Time
Vary To locate cost data,
see under equipment
type in index.
Vary
Vary
1954
Bauman
Woods
Guthrie
Kinkley
Neveril
A-9
A-2
A-10
A-ll
Purchased or
erected as
specified
Varies as stated
Purchased
1961
A-12 Purchased
1970
1968
1975
Installation costs
provided separately.
A good general
reference.
Extensive tabulation.
These data are also
well summarized in
Baasel (A-13).
For the following
air pollution con-
trol devices and
auxiliaries: elec-
trostatic precipita-
tors, venturi scrub-
bers, fabric filters,
thermal and cataly-
tic incinerators,
absorbers, and
ductwork.
Purchased (same as FOB (free on board) vendor plant), delivered
(same as FOB job site, or freight allowed), and erected (same as in-
stalled) . Note that freight runs 1 to 5% of the purchase cost of equip-
ment. For an average, use 3%.
A-4
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by a relation of the form of equation A-2 except that, whenever plant is
mentioned, the term for equipment, E, is substituted, or
Eb= WV" (A-4)
See reference A-6, p. 25-16, 17. The exponent n varies from 0.4 to 0.9,
but a good average is 0.6; this is the reason that scaling costs this
way is termed: use of "the six-tenths factor."
Of the many schemes which have been evolved for finding the total
plant cost, I-, three -- Lang, Chilton, and Guthrie -- will be singled
out. Their salient features are listed in Table A.-2. Variants of the
Guthrie method are also discussed briefly.
J_L Lan§ Method -- The Lang method should only be used for check-
ing; it indicates roughly the magnitude of the lumped factor that
generates the total plant cost from the sum of the delivered equipment
costs.
2^_ Chilton Method -- This scheme was delineated with illustrative
factors" in Table 2 in Section 2 of Volume I. For the range of factors
suggested by Chilton (A-15) for widely different conditions, Table A-4
should be consulted. Other sources, such as Peters and Timmerhaus (A-
17), provide similar schedules. Judgment and experience are required to
select the value of the Chilton factors from the ranges found in the
literature. Data from definitive and detailed capital cost estimates
can be used to develop factors for generic processes.
In Table A-5, the Lang factor is figured for a fluid process plant
using typical Chilton factors. Since some off-battery-limits items
(such as buildings, auxiliaries, and outside lines) are included, it is
reasonable that the Lang factor will be higher than the 4.7 shown in
Table A-3 for a battery-limits fluid process plant.
3^ Guthrie Method -- The Guthrie scheme is the most complicated of
the factor methods and should yield more reliable results because of a
sounder basis for the installation charges. But the types of equipment
for which the necessary cost data are correlated are limited.
The total module cost is comprised of the sum of the direct mater-
ial cost, M (as purchased equipment items, E, and as material for field
installation, m), and field labor costs, L, for each MPI, then com-
pounded to the total module cost by factors which account for the in-
directs. To find the total fixed capital investment, the extra cost for
adjuncts and auxiliaries is added to the sum of the total module costs.
These costs and the procedures are delineated below.
A-5
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TABLE A-2. EQUIPMENT COST MULTIPLIER SYSTEMS FOR CAPITAL COST ESTIMATION
Name
Nature
Comment
Reference
Lang One multiplying factor for
the sura, £E, of the costs
of the MPIs.
Chi1ton One factor for each of the
cost contributions applied
to ZE, the sum of the MPIs.
Guthrie Factors for both (field)
material and labor are
applied separately to the
cost for each item of
equipment, to give the
bare module cost. When
factors are applied to the
sum of bare module costs,
to account for so-called
indirects (e.g., insurance,
sales tax), one gets the
total module cost.
See Table A-3
for values. Good
for checking.
See Table A-4
for range of
values. Excel.
for checking.
Use is restricted
because of
limited data.
Lang (A-14)
Woods (A-2,
p. 181)
Chilton (A-15)
Aries § Newton
(A-l, p. 5)
Guthrie (A-10,
A-ll, A-16)
Baasel (A-13,
pp. 254, 460)
TABLE A-3. LANG SINGLE FACTORS (A-l, A-14)
(To Apply to the Sum of the Costs of Major Plant Items for Capital
Cost Estimates - Battery Limits Plants)
Delivered
Equipment
Cost
3.1 for solid process plants
X 3.6. for solid/fluid plants
4.7 for fluid process plants
Total
= Estimated
Plant Cost
NOTE: A more detailed schedule can be found in Woods (A-2, p. 181)
for grass-roots, as distinct from battery limits, plants;
also, the Woods schedule shows that from 1947 to 1963 the Lang
factors increased because installation costs increased much
more than the costs of major plant items.
A-6
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TABLE A-4. CHILTON FACTORS FOR ESTIMATING
TOTAL PLANT COSTS
Item
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Item
Delivered Equipment Cost
Installed Equipment Cost
Process Piping
Type of Plant - Solid
Solid/Fluid
Fluid
Instrumentation
Amount - None
Some
Extensive
Buildings and Site Development
Type of Plant - Outdoor
Outdoor/ Indoor
Indoor
Auxiliaries (Electrical Item Power)
Extent - Minor Addition
Major Addition
New Facilities
Other
Total Physical Plant Costs (Z Cost
of items 2 through 7)
Engineering and Construction
Complexity - Simple
Difficult
Contingency § Contractor's Fee
Process - Firm
Subject to Change
Speculative
Total Plant Cost (E Cost of items
8, 9, and 10)
Multiplying
Factor
1'° a
1.43a
0.07-0.10
0.10-0.30
0.30-0.60
0.03-0.05
0.05-0.12
0.12-0.20
0.10-0.30
0.20-0.60
0.60-1.00
0 -0.05
0.05-0.75
0.25-1.00
0 -0.50
0.20-0.35
0.35-0.50
0.10-0.20
0.20-0.30
0.30-0.50
Operating
on Item No.
1
1
2
2
2
2
2
2
2
2
2
2
2
2
2
8
8
8
8
8
Aries and Newton (A-l) give the average installed equipment cost
as 1.43 times the equipment cost delivered; this was for the early
1950s. Now Woods (A-2) advises using a factor of 1.40 to 2.20.
A-7
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TABLE A-5. EXAMPLE OF THE USE OF CHILTON FACTORS
FOR CAPITAL COST ESTIMATION OF A FLUID-PROCESS PLANT
Item
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Multiplying Operating Cost of
Item Factor on Item No. Item
Equipment Costs, delivered
Installed Equipment Cost, IE
Piping (Includes Insulation)
Instrumentation
Buildings and Site Development
Auxiliaries (Elec. § Stm. Power)
Outside Lines and Site Development
Total Physical Cost (items 2
through 7)
Engineering and Construction
Contingencies and Contractor's Fee
Size Factor
Total Plant Cost (items 8
through 11)
1.0
1.60
0.40
0.10
0.30
0.15
0.15
0.35
0.20
0
1 11
1 1
2 0
2 0
2 0
2 0
2 0
3
8 1
8 0
8 0
5
: a
.60 EED
.64 EED
.16 ZEQ
.48 ZED
.24 EED
.24 ZED
.36 EED
.18 EED
.67 ZED
.21 ZE b
Q
Sum of the delivered major plant items.
For this plant, the Lang factor is 4.83.
A_8
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The schedule for the Guthrie method is developed from these seven
cost elements (some represent the sum of items above in the list):
Equipment cost, FOB
Direct (field) material
Direct (field) labor
Direct M and L costs (E+m)
Indirect costs
Bare module costs
Total module costs
1C
M
or M + L
BMC
DC
The direct (field) material, m, consists of:
Piping
Concrete
Steel
Instrumentation
Electrical
Insulation
Paint
[m ranges from 40% to 125% of E
or a norm of 62%. Multiply E by
1.40 to 2.25 to get M, the total
of all direct material costs (A-10,
A-ll).]
The direct (field) labor, L, applies to:
Material erection
Equipment setting
[L ranges from 50% to 70% of E
or a norm of 58% (A-10, A-ll).]
The sum of M + L comprises the total direct costs or total physical cost
which is Item 8 in Table A-5. Then to the sum of the values of M + L
for all the major plant items, indirect factors are applied to account
for these three items:
Freight, insurance,
sales tax
Construction overhead
Engineering
[Indirect cost ranges from 25% to
45% of (M + L) (A-l, A-18); multiply
(M + L) by 1.34 to get bare module
cost (A-10, A-ll).]
This yields the so-called "bare module cost." The "total module cost"
is found by applying factors for these two items:
Contingency [8 to 20% of [Multiply bare module cost by
bare module cost (A-17), 1.18 to give "total module cost"
or a norm of 15% (A-10, (A-10, A-ll).]
A-ll)
Contractor's fee [2 to 7%
of bare module cost (A-17),
or a norm of 3% (A-10, A-ll)]
If adjuncts or auxiliaries such as:
A-9
-------
Solids handling facilities
Site development
Industrial buildings
Offsite facilities
apply, the extra investment for them needs to be added. In the calcu-
lation of these extra investments, one must allow for indirects: engi-
neering, contractor's fee, etc.
The Guthrie references (A-10, A-ll, A-16) provide values for FOB
equipment costs, E, and the factors to compute material, M, and field
labor cost, L. The equipment for which these data are available include
process furnaces, heat exchangers, process vessels, pumps, and com-
pressors. For equipment for which this information cannot be found in
the literature, the factors can be back-calculated from detailed cost
estimates or from the records of jobs actually constructed.
The contingency, for which 15 percent is allowed on the average by
the Guthrie method, covers two shortcomings of the estimating procedure.
One is ignorance: the failure to include items, generally minor but
cumulatively significant, which escape accounting in a conceptual level
estimate. These average about 10 percent of the fixed capital invest-
ment. The second shortcoming of the estimating procedure is the in-
ability to predict many factors which affect the final cost; e.g.,
business conditions, weather, labor strife, and legislation.
This is a good place to illustrate the wide range of productivity,
construction, labor wages, and (hence) field construction cost. Infor-
mation from the experience of one contractor, Pullman Kellogg (formerly
M. W. Kellogg), dated 1973, (A-19) shows that field construction labor
costs vary as follows with those for a Gulf coast location:
Houston 1.00
Kansas City 1.37
Cincinnati 1.53
Detroit 1.73
St. Louis 2.01
£._ Guthrie Method Variants -- Two variations of the Guthrie method
are worthy of note because of their utility and as possible harbingers.
One is the reduction of the number of major plant items to a few general
classifications based on the variables which significantly affect the
size of the equipment. Pullman Kellogg (A-19) did this for flue gas
desulfurization by the wet limestone process. For this process, the
factors to apply to major plant items were all related to one or the
other of two basic process parameters; viz., the flue gas flow rate and
the rate of sulfur removal from the fuel. The factors were:
Chemical process (size governed by M = 1.80 E
the flue gas flow rate) IT = 0.60 E^
A-10
-------
Solids handling (size governed by M = 1.40 Eg
the rate of sulfur removal) L^ = 0.40 Eg
where M, L, and E have their prior meaning and the subscripts C and S
refer to chemical process and solids handling operations, respectively.
The other variant devised by the ICARUS Corporation is really a
simplification of the Guthrie method. Correlations (A-20, A-21) are
available for the contribution to the total module cost of a wide range
of process equipment modules. Simply, the sum of these contributions
gives the base plant cost (total bare module cost) to which only con-
tingency and contractor's fees need to be added to get the total plant
cost, I .
Unit Process Method (Second Form of Study Estimate) --
For this method, the unit processes to be carried out in the plant
are identified and their capacity determined. Then the contribution to
the total plant cost for each unit process is found from correlations.
This procedure seems to be particularly suited to installations con-
structed in the field, such as municipal sewage plants. A substantial
amount of information for both the identification, sizing, and costing
of the unit process elements for liquid waste treatment facilities is
available (A-22, A-23, A-24).
The unit process technique is similar to the ICARUS method (A-20,
A-21) for which the elements are MPIs instead of unit processes. The
unit process approach seems to be suited for other large facilities
which are:
To be field installed.
Well established processes for which considerable reliable cost
data are available.
Essentially similar in the numbers and kinds of treatment steps.
This approach has been attempted for fluid process operations (A-
25, A-26) but, because of the wide range of possible process modules,
there are insufficient suitable data. At present this method seems
applicable only to liquid waste treatment where the facilities are
analogous to large sewage treatment works.
Retrofit Versus New Plant --
Often the process will constitute an add-on to a basic facility,
such as a power plant. When the addition is made to an existing plant,
it is termed a retrofit and the cost is more than for the addition to a
new plant. Besides the knotty design problems, there is also the physi-
cal difficulty of interposing and tieing in the retrofit unit on the
plant site. Some of the factors that contribute to the additional
costs, as discussed by Kinkley and Neveril (A-12), are as follows:
Plant Age - May require structural modifications to plant and process
alterations.
A-ll
-------
Available Space - May require extensive steel support construction and
site preparation. Existing equipment may require removal and
relocation. New equipment may require custom design to meet space
allocations.
Utilities^ - Electrical, water supply, and waste removal and disposal
facilities may require expansion.
Production Shut-down - Loss of production during retrofit must be in-
eluded in overall costs.
Direct (field) Labor - If retrofitting is accomplished during normal
plant operations, installation time and labor hours will be in-
creased. If installation occurs during off-hours, overtime wages
may be necessary.
Engineering - Increased engineering costs to integrate control system
into existing process.
Most information for retrofit is from flue gas desulfurization
(FGD) units added to coal-fired utility boilers. McGlamery ejt al_. (A-
27, p. 80) adjust the labor portion of the new investment for existing
units by multiplying the projected labor requirements for a new unit by
a retrofit difficulty factor of 1.25. This corresponds to an assumed
labor efficiency of 80 percent for retrofit installations.
A detailed estimate of the extra cost for retrofits of the wet
limestone scrubbing process by Pullman Kellogg (A-28) shows that the
overall cost is about 25 percent more than for new plant installations.
This study was for eight power plants in Ohio for which the capacity
ranged from 250 MW to 2250 MW. Ponder et. alL (A-29, p. 5-5) also pro-
vide information on the increase in capital costs with retrofit
requirements.
Information developed by Ponder et_ al. is presented in Table A-6;
it illustrates the wide range of costs possible for a retrofit
installation.
As a rule of thumb, a retrofit cost should be increased from 25 to
40 percent over that for constructing a new facility.
Multiple Train Savings Factor --
When there are multiple units (as for scrubber trains for flue gas
desulfurization), the fixed capital cost is less than a simple multiple
of the cost for the installation of one train. There is information to
suggest that the second and third trains would be 95 and 90 percent of
the first train cost, respectively. (This corresponds to an exponent n
of 0.90 in Equation (A-2).) This reduction in cost per unit results
from the common series of engineering, purchasing, supervision, and
administration of construction for the multiple train facility.
A-12
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TABLE A-6. TYPICAL INCREASES IN CAPITAL COSTS
WITH VARIOUS RETROFIT REQUIREMENTS (A-29)
Retrofit Requirements Capital Cost
Increase, %
Long duct runs 4-7
Tight space 1-18
Delayed construction (1 year delay) 5-15
Hilly terrain 0-10
New stack 6-20
Overall 16-70
INTEREST 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 eng-
ineering/construction firms. This is generally long before the capital
is available from bond or stock issues. Accordingly, loans are arranged
on which interest is paid until the project is "capitalized." An allow-
ance for this financial service is "interest during construction."
The proper estimation of the amount for this interest requires two
kinds of information:
The applicable interest rate.
The loan schedule.
The interest rate, generally the prime rate, varies but has been 8
to 12 percent in recent years. It is generally less than the return
that a business enterprise anticipates from its invested capital. See
Appendix G.
For simplicity, the loan schedule is sometimes assumed to be linear
with time; however, this is far from representative. Generally the
required payments are larger during the latter part of the plant con-
struction. Examples of schedules used in some estimates are given in
Table A-7.
Note that the total interest charge can be significant. For the
McGlamery et^ al_. schedule, using 8 percent discrete interest with payments
effective at the beginning of the year (the most severe case), the
A-13
-------
TABLE A-7. TYPICAL PROJECT EXPENDITURE SCHEDULES
Years before
Start-up
4
3
2
1
Adapted from
Ponder et al.
CA-29)
11
25
64
Adapted from
McGlamery et al.
(A-27, p. 26)
._
25
50
25
Unpublished
Source
10
15
50
25
100% 100% 100%
interest would accumulate to a 16 percent surcharge on the fixed capital
investment. For projects of longer duration, such as a nuclear power
plant over 7 years, this surcharge would increase the fixed capital by
30 to 40 percent.
MODIFICATION OF THE FACILITIES AND START-UP
For new processes, the possible increase in the capital investment
because of equipment modifications needs to be recognized; the amount
allowed for this purpose is related to the vague yardstick of "stage of
development." For "first-of-a-kind" processes, and especially for
plants built with insufficient or no piloting, these modification costs
can represent a substantial portion of the total capital requirement.
In any case, it is difficult to specify a figure or a range. For a well
established operation, a few percent of the fixed capital is sufficient
for modifications needed during start-up; sometimes no outlays are
called for.
Some figures on start-up costs are given in Table A-8.
LAND
Generally land represents a minor portion of the investment; often
it is neglected or covered by the contingency. For rough estimates it
can be taken as 3 percent of the fixed capital.
The land area required to accommodate the facilities can be deter-
mined from the land needed for similar installations. In the absence of
A-14
-------
TABLE A-8. START-UP COSTS
McGlamery et_ al^. Baasel (A-13, p. 363) Peters and
(A-27, p. 26) for for chemical processes Timmerhaus (A-17,
flue gas desulfur- p. 116)
ization processes
10% of IF 5-20% Ip 8-10% Ip
for regenerable
processes
8% of I
for throw-away
processes
other information, use 5 acres* per million dollars of fixed capital
investment. However, the land area can be relatively large for certain
pollution abatement operation; e.g., the land area acreage needed for
ponding residues from "throw-away" flue gas desulfurization processes.
Cost figures found in the literature are:
Cost/Acre Location Time Reference
$1000 U.S. 1976 A-24, p. H-6
$2000 Average for U.S. Feb 1973 A-22, pp. 111-2
$3000 Midwest mid-1972 A-27, p. 25
$150 to 20,000 U.S. 1961-1969 A-13, p. 41
For evaluating technical feasibility and preliminary cost comparison, a
figure of $5000/acre ($1.235/m ) is suggested. This includes the cost
of the land and land rights, legal fees, and other special expenses
incurred by its acquisition.
WORKING CAPITAL
Working capital may be defined as the funds necessary for the nor-
mal conduct of business. In general it is 10 to 15 percent of the fixed
Although EPA policy involves use of metric units, acres are used
here for simplicity. Readers more familiar with metric units should
multiply the acreage figures by 4047 to convert to m .
A-15
-------
capital investment or 15 to 35 percent of revenue. These funds cover
the raw material stocks, in-process inventory, product inventory, extended
credit to customers (accounts receivable), and current obligations for
employees' wages and other services. Some schedules for making a more
refined estimate are in Table A-9.
TABLE A-9. SCHEDULES FOR ESTIMATING WORKING CAPITAL
General.
Aries § Newton
(A-l)
For Flue Gas
Desulfurization.
McGlamery et^ al.
[A-27, p. 29)
Raw material stocks
In-process inventory
Product inventory
Extended credit
to customers
Operating expense
30 days
depends on process
30 days
60 days
30 days
21 days
49 days
SUMMARY OF TOTAL CAPITAL INVESTMENT
Various schedules in Table 7 in Volume i were prepared to facil-
itate the organization of the total capital cost estimate. For the
several procedures in use for plant cost estimation, Schedules A to G in
Table 7 were developed. Schedule H in Table 7 takes the total plant
cost from Schedule C, D, E, F, or G, and finds the total capital in-
vestment by adding the land value, working capital and, if applicable,
interest during construction, and the cost of plant modification and
start-up.
The total capital costs are generally reduced to some basis common
to the technology to provide index values for ready comparison. Ex-
amples of such bases are $/kW, $/10 (Btu/yr),* $/100,000 bbl** of crude
oil run/day.
* Multiply $/(10 Btu/yr)/ by 0.95 to convert values to $/(GJ/yr).
*Multiply $/100,000 bbl by 6.29 X 10"5 to convert values to $/m3.
A-16
-------
SELECTED REFERENCES
A-l. Aries, R. S., and R. D. Newton. Chemical Engineering Cost Esti-
mation. McGraw-Hill Book Co., Inc., New York, NY. 1955. 263 pp.
A-2. Woods, D. R. Financial Decision Making in the Process Industry.
Prentice-Hall, Inc., Englewood Cliffs, NJ. 1975. 324 pp.
A-3. Schweyer, H. C. Capital Ratios Analyzed. Chem. Eng., 59(1):
164 (1952).
A-4. Lynn, L., and R. F. Howland. Use Capital Ratio, in Popper, H.
Modern Cost Engineering Techniques, p. 367, McGraw-Hill Book Co.,
New York, NY. 1970.
A-5. Kiddoo, G. Turnover Ratios Analyzed. Chem. Eng., 58(10):145
(1951).
A-6. Perry, R. H., and C. H. Chilton, ed. Chemical Engineers' Hand-
book. 5e. McGraw-Hill Book Company, New York, NY. 1973.
A-7. Chilton, C. H., and the Staff of Chemical Engineering. Cost
Engineering in the Process Industries. McGraw-Hill Book Company,
New York, NY. 1960. 475 pp.
A-8. Popper, H., and the Staff of Chemical Engineering. Modern Cost-
Engineering Techniques. McGraw-Hill Book Company, New York, NY.
1970. 538 pp.
A-9. Bauman, H. C. Fundamentals of Cost Engineering in the Chemical
Industry. Reinhold Publishing Corp., New York, NY. 1964. 364 pp.
A-10. Guthrie, K. M. Data and Techniques for Complete Capital Cost
Estimating. Chem. Eng., 76^(6): 114 (1969).
A-ll. Guthrie, K. M. Process Plant Estimating, Evaluation and Control.
Craftsman Book Company of America, Solana Beach, CA. 1974. 606 pp.
A-12. Kinkley, M. L., and R. B. Neveril. CARD, Inc. Capital and
Operating Costs of Selected Air Pollution Control Systems. EPA-
450/3-76-041; NTIS PB 281 273. Prepared for EPA, Office of Air
Quality, Planning and Standards, Research Triangle Park, NC. May
1976. 208 pp.
A-13. Baasel, W. D. Preliminary Chemical Engineering Plant Design.
Elsevier Publishing Co., Inc. New York, NY. 1976. 490 pp.
A-14. Lang, H. J. Simplified Approach to Preliminary Cost Estimates.
Chem. Eng., 55(6):112 (1948).
A-15. Chilton, C. H. Cost Data Correlated. Chem. Eng., 56(6):97
(1949).
A-17
-------
A-16. Guthrie, K. M. Costs in a Complete Guide to Liquid Handling.
Chem. Eng., 76(8):210 (1969).
A-17. Peters, M. S., and K. D. Timmerhaus. Plant Design and Economics
for Chemical Engineers. 2e. McGraw-Hill Book Company, New York,
NY. 1968. 850 pp.
A-18. Happel, J., and D. G. Jordan. Chemical Process Economics. 3e.
Marcel Dekker, Inc., New York, NY. 1975. 511 pp.
A-19. Shore, D., J. J. O'Donnell, and F. K. Chan. M. W. Kellogg.
Evaluation of R§D Investment Alternatives for SO Air Pollution
Control Processes. EPA-650/2-74-098; NTIS PB 23§ 263. EPA,
Industrial Environmental Research Laboratory, Research Triangle
Park, NC. September 1974. 270 pp.
A-20. Blecker, H. G., and T. W. Cadman. ICARUS Corporation. Capital
and Operating Costs of Pollution Control Equipment Modules - Vol.
I - User Guide. EPA-R5-73-023a; NTIS PB 227 804. Prepared for
Office of Research and Monitoring, U.S. Environmental Protection
Agency. Washington, DC. July 1973. 255 pp.
A-21. Blecker, H. G., and T. M. Nichols. ICARUS Corporation. Capital
and Operating Costs of Pollution Control Equipment Modules - Vol.
II - Data Manual. EPA-R5-73-023b; NTIS PB 224 536. Prepared for
Office of Research and Monitoring, U.S. Environmental Protection
Agency. Washington, DC. July 1973. 183 pp.
A-22. Van Note, R. H., P. V. Herbert, R. M. Patel, C. Chupek, and
L. Feldman. Bechtel, Inc. A Guide to the Selection of Cost-
Effective Waste-water Treatment Systems. EPA-430/9-75-002; NTIS PB
244 417. Office of Water Programs Operations, U.S. Environmental
Protection Agency, Washington, DC. July 1975.
A-23. Patterson, W. L., and R. F. Banker. Black and Veach, Engineers.
Estimating Costs and Manpower Requirements for Conventional Waste-
water Treatment Facilities. EPA-17090-DAN; NTIS PB 211 132.
September 1971. 250 pp.
A-24. 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. HERL. U.S. Environmental
Protection Agency, Cincinnati, OH. July 1976.
A-25. Hensley, E. F. The Unit Operation Approach. A paper presented
at the Annual Meeting of the American Association of Cost Engi-
neers. 1967.
A-26. Zevnik, F. C., and R. L. Buchanan. Generalized Correlations of
Process Investment. Chem. Eng. Progress, 59(2):70 (1963).
A-18
-------
A-27. 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. Prepared
for EPA, Industrial Environmental Research Laboratory. Research
Triangle Park, NC. January 1975. 417 pp.
A-28. Pullman Kellogg Company. Evaluation of the Controllability of
Power Plants Having a Significant Impact on Air Quality Standards.
EPA-450/3-74-002; NTIS PB 229 706. Office of Air and Water Pro-
grams, OAQPS, U.S. Environmental Protection Agency. February 1974.
154 pp.
A-29. Ponder, T. C., Jr., L. V. Yerino, V. Katari, Y. Shah, and T. W.
Devitt. PEDCo. Simplified Procedures for Estimating Flue Gas
Desulfurization System Costs. EPA-600/2-76-150; NTIS PB 255 978.
Prepared for EPA, Industrial Environmental Research Laboratory,
Research Triangle Park, NC. June 1976. 208 pp.
A-19
-------
APPENDIX B
ANNUAL EXPENSE ESTIMATE
CONTENTS
The Operating Cost Model B-l
Computation of Annual Operating Expenses B-3
Raw Materials B-4
Operating Labor B-4
Direct Supervision B-5
Maintenance Labor and Materials B-6
Operating Supplies B-6
Labor Additives B-6
Utilities B-6
Effluent Treatment and Disposal B-6
Preparation for Shipping B-7
Plant Overhead B-7
Control Laboratory B-8
Technical and Engineering B-8
Insurance and Taxes B-8
Royalties B-8
Depreciation B-8
Estimation of General Expenses B-10
Summary of Annual Expenses B-10
Selected References B-ll
FIGURE
B-l. Fixed, variable, and regulated costs plotted
versus production rate. .... B-2
TABLES
B-l. Average Hourly Earnings of Chemical Workers .... B-5
B-2. Typical Utility and Fuel Costs B-7
B-i
-------
APPENDIX B
ANNUAL EXPENSE ESTIMATE
The total of all the continuing costs incurred in and related to
the manufacture of a product or the carrying out of a function is
called "total annual expense." It includes operating costs (also termed
manufacturing or production costs) and general expense (also termed home
office overhead, and "downtown" costs) . The items which comprise these
costs are listed in Tables 3 and 4 in Section 2 of Volume I.
With one exception, all the components of operating costs are
transferred (paid) to entities outside the operating organization. This
exception is depreciation which is handled as a book transfer of funds.
For certain fields of technology (e.g., the treatment of sewage and
industrial liquid wastes), the day-to-day costs of operation are desig-
nated as operating and maintenance costs (0£M), See references B-l, B-
2, and B-3. Note that these 0£M expenditures represent only a portion
of the total operating costs, whereas, the total operating costs used in
this work are just that and, of course, include "general expense."
It is essential that the estimator have several insights. He must
realize that the schemes for estimating the components of operating
costs are crude; unless there are actual costs from working plants to
calibrate the technique, the results are suspect and may be greatly in
error. However, in the absence of more definitive information, the
procedure outlined in this section -- the factored expense estimate --
appears to be the best available.
The estimator should also perceive the various items as variables
with values that depend on the level of capacity at which the plant is
operating. Then one can envision a comprehensive model used widely in
business for breakeven analysis and such. This model is particularly
helpful in sensitivity analysis, which is treated in Appendix I.
THE OPERATING COST MODEL
A simple operating cost model is presented graphically in Figure B-
1, Below are listed the three categories which describe how component
costs can vary with the production rate. Each component is placed in
the category that most closely represents its behavior.
B-l
-------
ee
iU
o.
CO
cc
a
o
PRODUCTION RATE
Figure B-1. Fixed, vnrinblo, and regulated costs plotted versus production rate.
B-2
-------
Category Component
1. Fixed costs Depreciation
(constant at all production Property taxes
levels) Insurance
2. Variable costs Raw materials
(directly proportional to Utilities
the production rate) Packaging
Shipping
3. Regulated costs Operating labor
(never zero; generally taken to Plant overhead
vary linearly with production Supervision
rate) Maintenance
General expenses
For other purposes it is useful to designate annual expenses as either
direct or indirect. The classification of expense items under this
scheme is described below.
1. Direct costs; i.e., those directly associated with the product or
plant operation. Examples are raw materials, operating labor,
maintenance.
2. Indirect costs; i.e., those not directly related to the operation.
Examples are depreciation, taxes, administration. These are allo-
cated costs; usually they persist whether the facility is operating
or not.
COMPUTATION OF ANNUAL OPERATING EXPENSES
For an estimate of the operating costs, it is essential to have
information from the mass and energy balance, an estimate of direct
(operating) labor, and the estimated total plant cost. Below, there is
a discussion of the procedures for arriving at an estimate for each ele-
ment of the operating cost. For a survey of the items comprising oper-
ating costs, Table 3 in Section 2 of Volume I should be consulted.
The mass and energy balances are necessary to determine the quan-
tities of raw materials and the utility duties. The total plant invest-
ment, I , provides a basis for the fixed charges. The fourth item
needed is the direct (operating) labor. Although it is usually a rough
estimate, several items are factored from this labor figure. Thus the
operating costs are either the direct or the factored values of these
four items: raw materials, utilities, direct operating labor, and plant
investment.
Now it will be shown how each element of the operating costs (such
as listed in Table 3 in Section 2 of Volume I) can be estimated.
B-3
-------
Raw Materials
For large quantities, purchases of raw materials for the long term
would be by negotiated contract. Accordingly, quotations from suppliers
and advice from marketing people are desirable for the dominant items.
However, published prices (e.g., from the Chemical Marketing Reporter
(B-4)) serve as a check and also as a source of original price data for
materials needed in small quantities.
Price quotations will be expressed as FOB the supplier's plant, or
some other basing point. One should check that freight charges are
included; otherwise it should be estimated (B-5) and added to prices
that are FOB the supplier's plant.
Transferred raw materials are those diverted from another operating
entity within the company. The "transfer price" is established by
internal policy; it could be the current market price or the manufac-
turing cost plus transportation. If it is the latter, an allocated
portion of the investment for the transferred material must be added to
the investment of the plant being scrutinized.
"Raw materials" are credited with the value of any by-products.
The prices of by-products can be estimated from the market price less
the cost of further processing, packaging, selling, and transportation.
Operating Labor
Requirements for operating labor requirements (also termed just
labor or direct labor) can be estimated by preparing a schedule of the
jobs and functions to be carried out. Then with data from Haines (B-6),
which gives likely time segments for most of the work items performed in
the course of a day for a process plant operator, one can build up the
total operating man-hour requirements.
Another approach is provided by the following equation from Wessel
(B-7). Direct labor requirements can be approximated from the number of
processing steps (very arbitrary), the production rate, and the nature
of the operation from this relation:
operating man-hours _ ,,
tons of product
no. of process steps
,0.76
(B-l)
(capacity in tons/day)'
where f is determined by the kind of process and has values as follows:
23 for batch operations with a maximum of labor,
17 for operations with average labor requirements,
10 for well-instrumented, continuous process operations.
These sources only roughly indicate the operating labor needs; a know-
ledge of similar operations is more valuable.
B-4
-------
Typical current labor rates are given in Table B-l. Note that they
vary with location. Also wages for labor have escalated more than other
costs. As a check, one can use an average from the annual earnings
range of $12,000 - 15,000 per man-year; this includes shift differential
and overtime.
TABLE B-l. AVERAGE HOURLY EARNINGS OF CHEMICAL WORKERS
Louisiana
Texas
Oklahoma
Michigan
New Jersey
Indiana
Alabama
Illinois
Ohio
Massachusetts
Connecticut
New York
Pennsylvania
Avg Hrly
Earnings
Aug 1977
8.18
8.07
7.95
7.35
6.77
6.62
6.57
6.39
6.38
6.21
6.17
6.11
6.01
Avg Hrly
Earnings
1976
7.28
7.18
7.21
6.55
6,19
6.28
5.78
6.06
5.87
5.61
5.61
5.62
5.73
% 1976 Earnings
Increased Over
1971 Earnings
54.6
58.5
68.1
46.2
49.5
46.7
57.5
46.7
40.8
39.2
39.9
45.6
53.6
SOURCE: Chemical Week (B-5).
Although the actual wages for direct labor represent a small
proportion of the manufacturing costs, many other items are estimated by
multiplying the amount for direct labor by a factor. Accordingly the
figure used should be as reliable as possible; more than one evaluation
method is advisable.
Direct Supervision
This is taken as 10 to 25 percent of operating labor (B-8, p. 162);
the percentage depends on the complexity of the operation and the qual-
ity of the personnel. For larger operations or situations where the
actual number of positions can be identified, actual salaries might be
used. Thus four shift foremen at $21,000/yr would be $84,000/yr.
B-5
-------
Maintenance Labor and Materials
For a preliminary estimate, maintenance costs (labor and materials)
are usually based on the total plant cost. Aries and Newton (B-8,
p. 164) give factors from 4 to 10 percent; the actual value depends on
the complexity of the process and the severity of the operating condi-
tions. The factors are higher for rotating equipment. The material
portion is of the order of 35 to 50 percent of the total. More detailed
methods are in use. Supervision of maintenance is generally included in
plant overhead.
Operating Supplies
Operating supplies are materials other than raw materials consumed
in the operation. There are several ways of allowing for these run-of-
the-mill items: one is to take 6 percent of operating labor (B-9,
p.155); another is to take 15 percent of maintenance costs (B-8, p.
168). The cost of special supplies should be added to the figure for
run-of-the-mill items. Catalysts are frequently listed separately.
Labor Additives
Amounts set aside for pensions, vacations, group insurance, dis-
ability pay, social security, unemployment taxes, etc., are termed
fringes, labor additives, or payroll overhead. They can be estimated as
25-50 percent of the direct labor cost (B-10).
Utilities
The quantities required are generated by the mass and energy
balances. As a check, one can use the tabulations of utility require-
ments which are available for many processes. Typical utility and
related fuel costs are presented in Table B-2.
For a grass roots plant, the capital costs and operating costs of
the utilities may be included with those of the facility. Similarly,
for a battery limits unit, a portion of the utility capital cost may be
allocated to an operation as well as the corresponding fraction of the
operating expenses. However, for economic studies of pollution abate-
ment processes it is more likely that direct utility charges (such as
given in Table B-2) will be used.
Effluent Treatment and Disposal
Residues from many processes, including pollution control opera-
tions, must be disposed of by impounding (e.g., precipitates from "throw-
away" FGD processes), by hauling to industrial dumps (e.g., residue from
electroplating operations), and by dumping far at sea. The expense of
disposal is handled either as another processing operation, in which
case it is included in the operating expense, or as a service charge for
hauling and further processing by another organization, if this is
required.
B-6
-------
TABLE B-2. TYPICAL UTILITY AND FUEL COSTS
(from various sources)
High Pressure Steam
400 psi
Low Pressure Steam
40 psi
Electricity
Coal
No. 6 Fuel Oil
Distillate Fuel Oil
Natural Gas
Cooling Water
Process Water
$1.00 -
$0.75 -
$0.015 -
$1.00 -
$1.50 -
$1.80 -
$1.00 -
$0.03 -
$0.15 -
7
1.50/10J Ib
1.25/103 Ib
0.05/kWhr
2.00/106 Btu
2.50/106 Btu
2.80/106 Btu
2.50/106 Btu
0.10/103 gal.
0.50/103 gal.
($2.20 -
($1.65 -
($0.95 -
($1.42 -
($1.70 -
($0.95 -
(0.01 -
(0.04 -
3.30/Mg)
2.75/Mg)
1.90/GJ)
2.40/GJ)
2.65/GJ)
2.40/GJ)
0.03/ra3)
0.13/m3)
Costs for landfilling or ponding of untreated sludge from FGD units
were estimated in 1976 to range from $3.50* per dry ton for natural
clay-lined ponds to $7.80* for Hypalon-lined ponds depending on the land
costs and the ancillary equipment used (B-ll). Treatment and disposal
is more costly; estimates in 1976 dollars range from $7.50 to $11.40*
per ton on a dry basis (B-12).
Preparation for Shipping
This item covers the work to transfer the product to the container
in which-it leaves the plant. Freight costs are not added here. If the
product is sold on a delivered basis, freight costs should be subtracted
from the gross sales price to get a net sales figure.
Plant Overhead
Plant overhead or general works expense is the cost of providing
service functions required by the productive unit. It covers plant
Multiply by 1.1 to convert from $ per (U.S. short) ton to $ per
metric ton. Note that a metric ton corresponds to Mg.
B-7
-------
management, general supervision of maintenance, personnel, plant pro-
tection, storerooms, accounting, purchasing, traffic, and other similar
service*items. It also includes the depreciation, operation, and main-
tenance costs of railroads, roads, sewers, parking lots, cafeterias, and
other general facilities which serve the operating units.
This item may be estimated in several ways. It is often taken as
50-100 percent of operating and maintenance labor, or as a percentage of
operating labor (e.g., 50 percent) plus a percentage of maintenance
(e.g., 25 percent). Hackney (B-9, p. 157) proposes that overhead
charges be calculated from proportions of both labor (45-50 percent) and
investment (1-5 percent).
Control Laboratory
These costs depend on the nature of the process and the difficulty
of maintaining quality control. The number of analysts or technicians
can be estimated and multiplied by $40,000 to $50,000 per year per man.
An alternate method for a complex process is to take 10 to 20 percent of
the operating labor cost (B-9, p. 155).
Technical and Engineering
This should he handled in the same way as the Control Laboratory;
i.e., $40,000 to $50,000 per year per man. This includes overhead and
the salaries of supervisors, technicians, and secretaries.
Note that this also includes plant followup or technical service
which can prove to be a substantial expense for a new pollution control
process, particuarly during the early years of operation.
Insurance and Taxes
These items are ordinarily taken as 1 and 2 percent of the fixed
capital investment, respectively.
Royalties
Royalties may range from substantial to negligible, depending on
the specific situation. Agreements generally provide a schedule of
payment that is related to either the nominal plant capacity or the
production per royalty period.
Depreciation
For profitability calculation and financial reporting, depreciation
is customarily calculated by the straight line method. Accelerated
methods, such as the sum of digits or double declining balance, are
commonly used for income tax determination.
B-8
-------
The straight line depreciation factor (or rate) is 1/n when n is
the years of useful life as provided in the Internal Revenue Service
(IRS) guidelines (B-13). Typical guideline lives are 11 years for a
chemical plant, 16 years for a petroleum refinery, and 28 years for a
steam electric utility. The annual depreciation is the total depre-
ciable investment multiplied by the factor. Here the total depreciable
investment is either the total plant cost or the plant cost less antici-
pated salvage. (It can also include interest during construction,
modification of facilities, and start-up costs. See item 35, Schedule
H, Table 7, Section 3 of Volume I.) Thus, for straight line depre-
ciation, complete recovery of depreciable investment is provided in
equal annual increments over the depreciation life of the plant.
Accelerated methods provide for a higher rate of recovery of cap-
ital during the early years of plant operation and therefore lead to
lower income taxes during these early years; this is considered desir-
able. By far, the most widely used accelerated depreciation methods are
the sum of the digits and the double declining balance.
In the double declining balance method, the depreciation factor
for, say, an 11-year life is 2/11 (i.e., twice the straight line fac-
tor); but it is applied in a given year to the book value, which is the
original depreciable investment less accumulated depreciation. No
account is taken of salvage. However accounting techniques are avail-
able to make an end-of-depreciation-period adjustment.
For the sum of the digits method, the depreciation rate, d, for a
given year, r, where n is the depreciation life in years, can be found
from
2(n-r+l)
n(n-t-l) ~
Then for the case where the depreciation life is 11 years, the depre-
ciation rates are: for the first year --
, 2(11-1+1) .n
1 " 11(12) ~ 66 ;
for the second year --
d - 2(11-2+1) _ 10 .
2 11(12)66 ' etc<
As with the straight line method, these factors are applied to the total
depreciable investment less any anticipated salvage.
Because the sum of digits method gives a linearly decreasing de-
preciation flow, for cost analyses it is generally preferred to the
B-9
-------
double declining balance method. On the other hand, accountants prefer
the double declining balance; it requires fewer accounts!
Frequently special rules apply to pollution abatement equipment;
for example, depreciation may be allowed over a shorter time (in some
cases as little as 5 years). The rule is described in Appendix B of
reference B-14 as follows.
If the facility was placed in service before 1975, and is associ-
ated with a plant placed in operation before 1969 and the remaining
life is IS years or less, the pollution control project can be
written off over a 5-year period. If the remaining life exceeds 15
years, the amount of the 5-year write-off is adjusted by the ratio
of 15 to the remaining life in years. If the plant was installed
after 1969, the life for tax depreciation is the same as the plant
itself.
ESTIMATION OF GENERAL EXPENSES
For a preliminary estimate, the general expenses can be estimated
as a percentage of either sales or the depreciable investment. Typical
values are:
Administration 2-3 percent of sales or investment.
Sales expense -- 2-6 percent of sales (up to 30 percent for spec-
ialty items).
Corporate research -- 2-5 percent of sales or investment.
Finance (largely bond interest) -- this depends on the amount of
debt.
For administration and research costs, investment is preferred as the
basis by some. Sales expenses vary widely depending on the nature of
the product or service. Finance costs generally include just the bond
interest; the costs of administering the financial program are included
under administration along with legal, accounting, and other services.
SUMMARY OF ANNUAL EXPENSES
The annual cost for each element is entered directly into Tables 9
and 10 in Section 3 of Volume I. Values for the annual charges for
operating and general expenses are computed separately, and then added
to find the total annual expense.
For pollution abatement activities the total annual expenses are
customarily reduced to unit costs for either the output of the base
B-10
-------
plant or the recovered pollution material. Examples are $/kWhr for a
power plant, $/ton* of sulfur for a unit cost for FGD unit, and $/10
Btu** for a coal cleaning plant. This practice reduces costs to a basis
common for a given technology.
SELECTED REFERENCES
B-l. Patterson, W. L., and R. F. Banker. Black and Veach, Engineers.
Estimating Costs and Manpower Requirements for Conventional Waste-
water Treatment Facilities. EPA-17090-DAN; NTIS PB 211 132.
September 1971. 250 pp.
B-2. Van Note, R. H., P. V. Herbert, R. M. Patel, C. Chupek, and
L. Feldman. Bechtel, Inc. A Guide to the Selection of Cost-
Effactive Wastewater Treatment Systems. EPA-430/9-75-002; NTIS PB
244 417. Office of Water Programs Operations, U.S. Environmental
Protection Agency, Washington, DC. July 1975.
B-3. 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. HERL. U.S. Environmental
Protection Agency, Cincinnati, OH. July 1976.
B-4. Chemical Marketing Reporter. Schnell Publishing Co., Inc., 100
Church St., New York, NY. Current issue.
B-5. Anon. Plant Sites 1978: Chemical Week. pp. 49-60. Dec. 14,
1977.
B-6. Haines, T. B. Direct Operating Labor Requirements for Chemical
Processes. Chem. Eng. Progress, 45:556 (1957).
B-7. Wessel, H. E. New Graph Correlates Operating Labor Data for
Chemical Processes. Chem. Eng., 59_(7):209-210 (1952).
B-8. Aries, R. S., and R. D. Newton. Chemical Engineering Cost Esti-
mation. McGraw-Hill Book Company, New York, NY. 1955. 263 pp.
B-9. Hackney, J. W. Control and Management of Capital Projects. John
Wiley and Sons, Inc., New York, NY. 1965. 305 pp.
B-10. Anon. Plant Sites 1977: It's North's Move. Chemical Week.
p. 35. Nov. 10, 1976.
Multiply $/(U.S. short) ton by 1.1 to convert values to $/Mg,
** 6
Multiply $/10 Btu by 0.95 to convert values to $/GJ.
B-ll
-------
B-ll. Rossoff, J., and R. C. Rossi. Disposal of By-Products from Non-
Regenerable Flue Gas Desulfurization Systems: Initial Report.
EPA-650/2-74-037a; NTIS PB 237 114. May 1974.
B-12. Anon. Information to be Presented at the New York Public Service
Commission's Generic Proceeding on the Comparative Economics of
Fossil Fueled and Nuclear Generating Facilities, p. 2-31. Office
of Energy, Minerals and Industry. U.S. EPA, Washington, DC.
February 10, 1977.
B-13. Internal Revenue Service. Tax Information on Depreciation.
Publication 534. Department of the Treasury. 1978 Edition.
B-14. PEDCo - Environmental Specialists. Flue Gas Desulfurization Pro-
cess Cost Assessment. Contract No. 68-01-3151 Technical Services
Area 4, Task No. 2. Prepared for Office of Planning and Evalua-
tion, U.S. Environmental Protection Agency. Washington, DC. May
1975.
B-12
-------
APPENDIX C
THE CASH FLOfA! CONCEPT
CONTENTS
Selected Reference.
FIGURES
C-l. Money flow diagram C-3
C-2. Use of money flow diagram to define ca&k $£ou) . . . C-5
C-3. Cumulative cash position chart C-6
C-i
-------
APPENDIX C
THE CASK FL0W CONCEPT
For an engineering cost analysis of a project or venture, it is
necessary to identify the sources and represent the expected flow and
disposition of the monies involved. To elucidate the money flow process
for a going operation, a diagram will be used that is analogous to a
process flow diagram showing the input of raw materials, the various
processing steps and the flows, recycle and hold-up of intermediate
material within the process, and finally the output of product. This
way of looking at money transfers is readily grasped by technical
people. A money stream particularly useful in the cost analysis of
projects is caAk ££ow, the sum of depreciation and net profit.
For such an analysis the flow of money is idealized. It can be
considered one-time; i.e., a lump sum at an instant such as the purchase
of land or of equipment and the allocation of working capital to a new
project. The alternative situation is regular payments (as for wages,
raw materials, and services) where the money flow is generally con-
sidered as continuous. Other regular schedules are sometimes employed,
such as continuous but linearly decreasing or increasing costs. These
idealized flows permit the use of simple models to describe the money
flows for a project to be evaluated.
The various items of money flow will be looked at in more detail
for the case of a going manufacturing business. The primary source of
income necessary to maintain the health of the business is revenue from
the sale of products. A large part of this income flows out of the
company as expense. Using the proposed analogy, just as we have a flow
diagram for materials in a process, viz.,
Raw Materials
Operations
Finished Products
we can also have a similar chart for the flow of funds in a going oper-
ation:
Revenue
Operations
Net Annual Expense
Operating Income
C-l
-------
Net Annual Expense includes all payments except capital investment,
income taxes, stock dividends, depreciation, and repayment of borrowed
funds. Note that interest on borrowed funds is an item of net annual
expense.
It is necessary to have a supply of funds, called working capital,
to meet demands for current expenses (e.g., raw materials, wages, sal-
aries) while waiting for receipts from the sale of products or services.
Obviously, it is desirable to keep the amount of capital tied up this
way to as low a figure as is practical. Thus we have:
Working Capital
Revenue
Operations
Net Annual Expense ^
Operating Income
Over the long run the net flow of working capital into and out of the
operations is zero, and none finds it way into net annual expense or
operating income.
Now we will consider the complete money flow diagram, Figure C-l.
The excess of revenue over net annual expense is termed operating in-
come. From this stream, depreciation is diverted, leaving gross profit.
The amount diverted is determined by depreciation accounting, the stand-
ard procedure used in business of charging for capital expenditures on a
regular schedule over the period during which assets are in use. How-
ever, depreciation is handled as an item of annual expense and appears
on operating expense sheets. Note, however, that it is an internal cost
and is returned to the business. This is the reason depreciation is
shown in the money flow diagram as separate from the net annual expense
which represents dollars leaving the company. Depletion is handled in a
similar way: it takes into account the consumption of assets which are
exhaustible resources, such as the products of mines, forests, and oil
and gas fields.
The gross profit remaining after the diversion of depreciation and
depletion is subject to federal and state income taxes. After these
taxes are deducted, the net profit remaining together with depreciation
and depletion is shown in the money flow diagram, Figure C-l, as stream-
ing into the firm's hypothetical bank. This combined stream is termed
the
Cash transfers to and from the company (other than the revenues,
net annual expense, and income taxes, considered previously) are made
C-2
-------
EQUITY CAPITAL
(SALES OF STOCK)
BORROWED CAPITAL
(LOANS, BONDS)
CASH FLOW
DIVIDENDS TO
STOCKHOLDERS
INCOME FROM PATENTS,
ENGINEERING, R&D,
OTHER SERVICES FOR
OUTSIDE FIRMS
INVESTMENTS
OUTSIDE FIRM
NEW PROJECTS
OTHER EXISTING
PROJECTS
DIRECT INVESTMENT
AUXILIARY INVESTMENT
WORKING CAPITAL
J t_
REVENUE »- OPERATIONS
DEPRECIATION
DEPLETION
»«
OPERATING
GROSS PROF
NET ANNUAL EXPENSES
NET PROFIT
^-INCOME TAX
Figure C-1. Money flow diagram (this demonstrates the source of cash flow).
C-3
-------
directly to and from the bank. Funds in the bank are used to repay
borrowed capital, loans, and bonds, and to pay dividends on preferred
and common stock. All of the net profit belongs to the owners (common
stock shareholders) and, therefore, could be distributed as dividends.
However, in most businesses roughly half of the net income is retained
and (together with depreciation) helps to meet the continuing capital
needs of the firm. This retained net profit (termed retained earnings)
obviously increases the value of each owner's share of the enterprise
(owner's equity) .
In the previous discussion, we assumed a going operation for which
the investment in plant facilities had already been made. Now we
perceive that this investment and the necessary working capital were
provided by the firm's bank, and that the depreciation and retained
earnings from the project are now available for new projects and other
capital requirements. The complete money flow diagram (Figure C-l)
shows the recycle of funds, the flow of funds into new projects, and
other flows associated with the various activities of the the firm's
bank with outside entities. For example, the sale or leasing of patents
and process know-how may be a very important source of funds.
We mentioned that the firm's bank disburses and receives funds
other than those connected directly with operations. We can also look
at the bank as the part of the firm that makes financial decisions
concerning investments, expansions, and the like. This activity is
similar to that of a commercial bank because it provides and allocates
funds to competing projects. It decides what projects to approve and
provides the necessary capitalization. All net profit and depreciation
(i.e., ca&h. &£ouf) from the capitalized projects then return to the bank.
An examination of the lower portion of Figure C-l, now given with
symbols in Figure C-2, shows that the Ca&h Flow for the year can be
found from:
CF = D + (1-t) (S-C-D) (C-la)
= tD + (l-t)S - (l-t)C (C-lb)
where
CF = CaAk
D = depreciation
S = revenue
C = net annual expenses
t = income tax rate.
Thus tD is the contribution to coifo £lou) due to depreciation; (1
t)S, the contribution due to revenue; and -(l-t)C, the negative con-
tribution due to exense.
C-4
-------
CASH FLOW. CF
1
REVENUE, S-
DEPRECIATION,D
OPERATIONS
NET PROFIT. (1-t)(S-C-D)
NET ANNUAL
EXPENSES, C
OPERATING INCOME,S-C
GROSS PROFIT, S-C-D
INCOME TAX
t(S-C-D)
Figure C-2. Use of money flow diagram to define Cd&k
When a comparison is made between a candidate case and a base case,
it is helpful to use the difference form of the foregoing equation:
ACF = tAD + (l-t)AS - (l-t)AC
(C-2)
where AC = C2 - C , expense of the candidate case less expense of the
base case. If the revenue is not affected by the process change then
AS = zero, and would have no effect on the c.dt>h £low. The addition of
an incremental investment (e.g., pollution abatement facilities) to an
existing plant is an example of a situation where the foregoing differ-
ence equation would apply. In non-profit projects such as public works,
over a period of time, revenues balance total annual expenses (which
include depreciation) and there is no income tax since there is no
profit. In this instance, depreciation is the only element of (M»h
filou). Many of the activities of the bank do not apply; the borrowing
and repayment of capital are essentially the only transactions. De-
preciation is used to pay back the bondholders; it may be paid regularly
or held in a sinking fund for later disbursement. Interest on the
outstanding bonds is an item of annual expense.
Generally, attention is focused on a given project and not the
entire enterprise. The flow of funds into and out of a project during
its life may be shown in a "cumulative cash position chart," Figure C-3.
Zero time can be taken as the time when the plant first produces
salable products or provides service. Prior to this, at a negative
time, after the decision was made that the project should be undertak n,
the firm's bank secures the necessary capital and makes it available to
the project as needed for purchase of land, procurement and installation
C-5
-------
80
FNSTRUCTION
PERIOD-*.
EARNING LIFE.
FINAL CASH.
POSITION
RECOVERY OF
LAND. WORKING CAPITAL
AND SALVAGE
60
I
40
e
r 20
.8
a.
20
40
.60
DEPRECIABLE
INVESTMENT
TIME, years
Figure C-3. Cumulative cash position chart (derived from (C-D).
C-6
-------
of equipment, investment in auxiliary facilities, and working capital.
After time zero, the revenues should exceed the annual expenses and the
project should begin to generate operating income. The cumulative ca&h
£tou) is plotted throughout the life of the project and, at shutdown,
adjustments are made for the recovery of land, working capital, and
salvage value, if any. All the foregoing items, together with their
timing, appear on the cumulative cash position chart. Fixed capital and
other initial expenditures are shown below the horizontal base (zero)
line in the negative region. Since CO4/1 ££OM> is positive, it accumu-
lates in the positive direction and after a period of time shows a
positive cash position. Figure C-3 indicates that the cumulative
jj-dow first retires the investment. Profit appears only after the
investment is completely paid off.
SELECTED REFERENCE
C-l. Perry, R. H., and C. H. Chilton, ed., "Chemical Engineers' Hand-
book," Fig. 2£-9, McGraw-Hill (1973).
C-7
-------
APPENDIX D
DISCRETE AND CONTINUOUS INTEREST FACTORS
CONTENTS
Page
Selected References D-6
TABLE
D-l. Factors for Continuous Discounting D-2
D-i
-------
APPENDIX D
DISCRETE AND CONTINUOUS INTEREST FACTORS
One should be conversant with both discrete and continuous interest
to select and use discounting and compounding factors needed in the
computation of several of the measures of merit (see Appendix E).
Because discrete interest has been in common use and is explained con-
sistently in a great number of texts both for business finance and engi-
neering economy, this subject will not be developed here. For refer-
ence, Grant et_ aK (D-l) is particularly recommended. This work also
contains complete discrete interest tables; however, these tables can be
found in many other texts and reference works.
Continuous interest has not been as widely used; however, because
it proves to be better suited to the evaluation of cash flow processes
where some of the flows are more or less continuous, such as c.at>h jj£ow
and construction costs, its use is growing: it is the standard in
certain industries. However, because satisfactory instructions for the
use of continuous interest tables can only be found in a few sources,
sufficient background in this subject is provided here for the com-
putation of measures of merit that use interest factors.
The explanation will be centered on the selection and modification
of the table of continuous discounting factors from Hirschmann and
Brauweiler (D-2) which are reproduced as Table D-l. Examples will be
given to illustrate the use of this simple table for essential opera-
tions. Note the three panels that provide factors for some cash flows
which occur at other than zero time:
Instantaneous Factors for cash flows that occur at a point in time
after time zero;
Uniform Factors for cash flows that occur uniformly over a period
of years, starting at time zero; and
Years-Digits Factors for cash flows declining to time zero at a
constant rate over a period of years, starting at time zero.
Note that the interest factors are all for discounting, which means that
they correct future flows against the calender to some earlier date such
as a reference time zero. To identify the factor for a specific cash
D-l
-------
TABLE D-la. FACTORS FOR CONTINUOUS DISCOUNTING (D-2, p. 73)
Excerpted by special permission from CHEMICAL ENGINEERING, July 19, 1965.
Copyright 1965 by McGraw-Hill, Inc., New York, NY, 10020
I
ln*lQnlan4toui
*<*> to Co* Ift*** Ik«i O«o» «l
A P*M hi TbM Aflw MM l«l*r*M* f«4M.
IXTO I 1 1 4 5 4 7 t
0 t.OOOO 0.9*01 09*0) 0.9704 0.9401 0.9112 O.*4ll 0.9)34 0.9711 0.911*
10 0*041 0.1*11 0.114* 01711 0.14*4 01607 0.1)21 0.1417 0.1)1) 0.1270
20 Oil 17 0.1104 0102) 0.794) 0.7144 0.7711 0.7711 0.74)4 0.7)11 0.741)
10 0.7401 0.7)34 0.7241 0.7119 0.7111 0.7047 0.4*77 0.4907 0.411* 0.4771
40 0.4701 0.4417 0.4170 0.4)0) 0.4440 0.4)74 0.4111 042)0 0.41 II 0.4174
10 0.404) 0.400) 0.5941 0.1114 0.5137 0.1770 0.5717 0.1451 0.))** 0 3)43
40 0.)4M 0.1434 0.5379 0.5)74 0.177) O.)220 0.1149 01117 0)044 0.5014
70 0.4944 0.4914 0.4141 0.4119 0.4771 0.4724 0.4477 0.44)0 0.4)14 0.4)11
0 0.4491 0.444* 0.4404 0.4140 0.4117 0.4274 0.4212 0.4190 0.4141 0.4107
90 0.4044 0.402) 0.3981 0.1*44 0.3904 0.)I47 0.3129 0.1791 0.17)1 0.1714
100 0.1479 0.1447 0.1404 0.1)70 0.1))] 0.149* 0.1441 0.1410 0.11*4 0.1)42
110 0.1)79 0.1794 0.174) 0.12)0 0.1191 0.1144 O.lll) 0.1104 0.107) 0.1047
170 0.1017 0.7911 0.2912 0.2921 0.2194 0.2141 0.2117 0.2101 0.2710 0.27)1
110 0.272) 0.2691 0.2471 0.264) 0.2611 0.2192 0.2)47 0.2)41 0.2)14 0.2491
140 0.2464 0.2441 02417 0.2)91 0.2149 0.2146 0.2177 0.7799 0.7774 0 2 J14
1)0 0.7711 0.7209 0.21 »7 0214) 0.7144 0.2122 0.2101 0.2010 0.2040 02019
140 0.7019 O.I9V9 0.1979 0.1919 0.1940 0.1921 0.1901 0.1112 0.1164 0.114]
170 0 1177 0.1109 0 1791 01771 0.171) 0.1711 0.1710 0.1701 0.1414 01470
110 0.14)1 0.1417 0.1470 0.1404 0.1)11 0.1172 0.15)7 0.1)41 0.1)24 0.1)11
190 0.1494 0.1411 0.1444 0.14)1 0.14)7 0.1421 0.1409 0.1191 O.llll KI147
700 0.11)) 0.1140 0.1177 O.llll 0.1100 0.1217 0.1171 0.1247 0.124* 0.1217
210 0 1771 0.1212 01200 O.llll 0.1177 0.114) 0.11)1 0.1141 0.1110 0.1119
220 O.I 101 01097 0.1014 0.1071 0.104] 0.10)4 0.1044 0.1011 0.1021 0.1011
210 0.1001 0.0991 0.0911 0.0971 0.0941 0.09)4 0.0*44 0.091) 0.0*24 00914
240 0.0907 0.0191 0.0119 09110 0.0172 0.014) 0.0114 0.0144 0.0117 0.0129
210 0.0121 0.0*11 00191 0.0797 0.0719 0.0711 0.077) 0.0741 0.0751 0.0710
240 0.074) 0071) 00721 00721 0.0714 0.0707 0049* 0.049) 00416 0047*
270 0.0471 0044) 0.04)* 0.94)2 0.0444 0.04)9 0.04)1 0.0417 0.0410 0.0414
210 0.0401 0.0402 0.0196 0.0)90 0.0)14 0.0)71 0.0)7) 0.0)47 0.0)41 0.01)4
290 0.05)0 0.0)4) 00539 005)4 0.012* 0.0)1) 0.0111 0.011) 0.0)01 0.0)0)
300 0.0491 0049) 00411 0041) 0.0471 0.0474 0.044* 0.0464 0.0440 0.04)1
110 0.04)0 0.0444 0.0447 0.04)7 0.0411 0.042* 0.0424 0.0420 0.0414 0.0412
120 0.0401 0.0404 0.0400 0.0194 0.0197 0.0111 0.0114 0.0110 0.0174 0.0171
110 0.0149 0.016) 0.0342 0.0111 0.01)4 0.01)1 0.0)47 0.0144 0.0140 0.0)17
340 0.0114 0.0110 0.0177 0.0174 0.0121 0.0117 0.0114 00311 0.0101 0.0101
110 0.0)01 0.0799 0.0794 0.079) 0.0790 0.0717 0.0714 0.0717 0.027* 0.0774
160 0.0171 0.0771 0.0241 0.076) 0.074) 0.0760 0.0717 0.07)) 0.0712 0.02)0
170 0.0247 0.014) 0.0242 0.0240 0.02)1 0.0335 0.02)1 0.0211 0.0121 0.0224
110 0.0224 0.0221 0.021* 0.0217 0.021) 0.021} 0.0211 0.020* 0.0207 00204
190 0.0202 0.0700 0.0191 0.0194 0.0194 0.0191 0.01*1 00119 0.0117 00115
400 0.01*1 OOIII 0.0140 0.0171 0.0174 0.0IT4 0.0177 00171 0.014* 0.0147
410 00164 0.0164 0.0167 0.0141 0.0119 00151 0.0154 0.0115 0.015) 0.0151
420 0.0150 0.0141 0.0147 0.0144 0.0144 0.0141 0.0141 0.0140 00131 0.0117
4)0 0.01)4 00114 0.0111 0.0117 0.0110 0.0129 0.0121 0.0177 0.01}) 0.0174
440 0.0121 0.0122 0.0120 0.011* 0.01 II 0.0117 0.0114 0.0114 0.01 II 0.0112
410 0.01 II 0.0110 0.010* 0.0101 0.0107 0.0104 0.010) 0.0104 0.0101 00102
460 00101 0.0100 0.0099 0.0091 0.00*7 0.00*4 0.0095 0.00*4 0.00*1 0.00*2
470 0.0091 0.0090 0.0019 0.0011 0.0017 0.0017 0.0014 0.0011 0.0014 0.0011
410 0.0012 0.0011 0.0011 0.0010 0.007* 0.0071 0.0071 0.0077 0.0074 0.007)
490 0.0074 0.0074 0.0071 0.0071 0.0072 0.0071 0.0070 0.0049 0.006* 0.0041
I I X T 0 10 20 10 40 50 40 70 10 90
500 0.0047 0.0041 0.0055 0.0050 0.0045 0.0041 0.0017 0.001) 0.0010 0.0027
400 0.0021 0.0027 0.0070 0.0011 0.0017 0.0015 0.0014 0.001} 0.0011 0.0010
700 0.000* 0.0001 0.0007 0.0007 0.0004 0.0004 0.0005 0.0005 0.0004 0.0004
100 0.000) 0.0001 0.000) 0.0007 0.0007 0.000} 0.0002 0.000} 0.0002 0.0001
900 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
1000 0.0000
R X T = ANNUAL INTEREST RATE X NUMBER
OF YEARS IN TIME PERIOD INVOLVED
D-2
-------
TABLE D-1b. FACTORS FOR CONTINUOUS DISCOUNTING (D-2, p. 73)
Excerpted by special permission from CHEMICAL ENGINEERING, July 19,1965.
Copyright 1965 by McGraw-Hill, Inc., New York, NY, 10020
Uniform
»!>« WM !> I*
|lXT 0 I 1 ) 4 5 4 7 I 9
0 1.0000 0.9930 09901 09131 0.9101 0.97)4 0.9704 0.9431 0.9410 0954)
I ) 0.9514 0.9470 0.94)) 0.9)77 0.9))] 09)14 0.9241 0.9194 0.915) 0.9107
20 0.904) 0.90)0 0.1974 0.19)) 0.1191 0.1141 0.1104 0.1744 0.17)) 0.1*11
)0 Ol«)» 0.1591 01551 0 1517 0.1477 014)1 01)91 0.1)59 0.1)19 0.1)11
40 0.1)4) 0.1)04 0.1144 0.1121 0.1090 0.105) 0.1014 0.7979 0.7942 0.7904
10 07149 0.71)) 0.7791 0.774) 0.77)7 0.7492 0.7457 07422 0.7511 0.7554
40 0.7520 0.7414 0.7452 0.7419 0.7)1* 0.7)5) 0.7)20 3.7211 0.7254 0.7224
70 0.719) 0.7140 0.7121 0.7097 0.704* 0.70)5 0.7004 0.6974 0.4944 0.491)
10 0.411) 0.4154 0.4124 0.4795 0.4745 0.6734 0.4707 0.4479 0.4450 0.4422
90 0.4594 0.4544 0.45)7 0.4510 0.441) 0.4455 0.4411 0.4401 0.4174 0.4141
100 0*331 0.4295 0.4249 0.424) 0.4217 0.4191 0.4144 0.4140 0.411} 0.4090
110 0.4045 0.4040 0.4014 0.5991 0.5947 0.5942 0.5911 0.5194 0.5171 0.5147
120 0.512) 0.5100 0.5777 0.5754 0.57)1 0.5701 0.5415 0.544) 0.5441 0.5411
1)0 0.559* 0.5574 0.555) 0.55)0 0.5509 0.5417 0.5464 0 5444 0.54)4 0.5402
140 0.5)11 0.53*1 0.3)40 0.5)10 0.5199 0.5179 0.5)59 0.51)9 0.5)19 0.5I9«
150 0.5179 0.5140 0.5140 0.5111 0.5101 0.5011 0.5044 0.5044 0.5014 0.5007
140 0.4911 0.4970 0.4951 0.49)) 0.4915 0.4197 04179 0.4141 0.414) 0.4125
170 04101 04790 0.477) 04754 0.47)9 0.4721 0.4704 04417 0.4471 0.4454
110 0.44)7 0.4421 04405 0.4511 0.4371 0.4355 0.4540 0.452) 0.4501 0.4491
190 0.4474 0.4440 0.444) 0.44)9 0.4414 0.4)99 0.4)1) 04361 0.4)54 0.4331
200 0.4))) 0.4301 0.4)94 0.4279 0.4245 0.4)50 0.42)4 0.4221 0.4207 0.419)
210 0.4179 0.414) 0.4151 0.41)7 0.412) 0.4109 04094 0.401) 0.40*9 0.405}
1)0 0.404) 0.40)9 0.401) 0.4002 03919 0.397* 0.394) 0.3930 0.3937 0)925
1)0 0.1913 0.3199 0.3117 0.3174 0.3163 0.3149 0.3137 0.3113 0.311) 0.3101
340 0.3719 0.3777 0.3765 0)75) 0.3741 0.3729 03711 03704 0.3693 0.1*1)
350 0.3672 0.3640 0.3449 0.3431 0.34)7 0.3411 0.3404 0359) 0.3511 0.1571
140 0.1)40 0.1)30 0.1519 0.1311 0.1517 0.1507 0.1494 0.3414 0.1474 0.1445
170 0.1435 0.1445 0.1414 0.1414 0.1414 0.1404 01)9) 03314 0.3374 0)1*4
110 03)54 03344 0.333} 0.337} 0.3)13 0.3)04 0.)294 03217 0.3777 0.1)41
190 0.1259 0.3249 0.1)40 0.3131 03221 0.3212 0.3203 0.3194 0.1115 0.3174
100 0.1147 0.1151 0.1150 0.1141 0.1112 0.1121 0.111) 0.1104 0.1091 0.1019
110 0.1010 0.1072 0)044 0105) 0.1047 0.1019 01010 0.1011 0.1014 0.1004
110 0.1991 0.1990 0.1911 0.1974 0.1944 0.1911 0.1950 0.194) 0 29)4 0.2914
330 0.2919 0.1911 3.1901 0.1194 O.llll 0.3180 0.217) 0.3145 0.1151 0.1150
340 0.1*43 0.11)4 0.1121 0.2121 0.2114 0.2107 0.2799 0.2791 0.1713 0.2771
350 0.1771 03764 0.2757 0.2750 0274) 0.2714 02719 0.2711 0.1715 0.2709
140 0.2702 0.2*95 0.2*11 0.2612 0.2475 0.1449 0.2442 0.2455 0.2449 0.2442
170 0.2414 0.2*29 0.242) 0.2*17 0.2410 0.2404 0.2591 03591 0.1515 03579
310 0.257) 0.2547 0.2540 0.2554 0.2541 0.2542 0.25)4 025)0 02574 07511
390 0.2512 0.2504 0.2500 0.2495 0.2419 0.241) 0.2477 0.2471 0.24*4 0.2440
400 0.2454 0.2449 0.2443 0.24)7 0.24)3 0.3434 O.)4)l 0.3415 0.3410 0.3404
410 0.2)99 0.2)9) 0.2311 03313 0.3377 0.3)72 0.21*4 0.1)41 0.1)34 0.1350
410 0.1)45 0.1)40 0.23)3 03330 0.2)13 0.1)19 03314 0.3309 0.3304 0.1199
4)0 0.1194 0.1119 0.2214 0.2279 0.227* 0.2249 0.2244 0.2259 0.2255 0.2250
440 0.2245 0.2240 0.2235 0.22)0 0.2224 0.22)1 0.2214 0.3212 0.2207 0.2202
450 0.)I9I 0.)I9> 0.21II 02114 0.2179 0.3173 0.1170 0.11*4 0.1141 0.1137
440 0113} 0.2141 0.114) 0.11)9 0.11)4 0.21)0 0.11)4 O.llll 0.1117 0111)
470 0 2101 02104 0.3100 0.3094 0.3091 0.2017 0.201) 0.1079 0.3074 0.1070
410 0 304* 0.304) 0.2051 0.2054 0.2050 0.2044 0.204} 0.20)1 0.2034 0.20)0
490 0.2024 0.3033 0.3011 0.1014 0.1010 0.1004 0.300) 0.1991 0,1994 0.1990
*'
I X T 0 10 20 30 40 SO 40 70 10 90
500 0.1917 0.1949 0.1912 0.1177 0.114) O.IIII 0.1779 0.1749 0.1719 0.1490
400 0.1441 0.14)4 0.1410 0.1514 0.1540 0.15)4 0.1511 0.1491 0.14*9 0.1441
700 0.1427 0.1407 0.1311 0.1149 0.1)51 O.llll 0.1)15 0.1)91 0.1)12 0.1245
100 0.1250 0.1214 0.1)19 0.1)0* 0.1190 0.1174 0.1163 0.1149 0.1114 0.111)
900 0.1 III 0.1099 0.1017 0.1075 0.1044 0.105) 0.104) 0,10)1 0.10)0 0.1010
1000 0.1000 0.0990 0.0910' 0.0971 0.094) 0.095] 0.094) 0.091) 0.09)4 0.0917
1100 00909 0.0901 0.019) 0.0115 0.0177 0.0149 0.014} 0.0155 0.0147 0.0140
1200 0.01)) 0.0124 0.0120 0.011) 0.0104 0.0100 0.0794 0.0717 0.0711 0.0775
1)00 0.0749 0.074) 0.0751 0.0752 0.0744 0.0741 0.07)5 0.07)0 0.0725 0.0719
1400 0.0714 0.0709 0.0704 0.0499 0.0494 0.0490 0.041} 0.0410 0.0474 0.0471
1500 0.0*47 0.04*2 0.0451 0.0454 0.0449 0.0445 0.0441 0.0637 0.043) 0.0429
1400 0.0425 0.0421 0.0417 0.041) 0.0410 0.0404 0.0(01 0.0399 0.0595 0.059)
1700 0.0511 0.0513 0.0311 0.0571 0.0575 0.0571 0.03*1 0.0543 0.0542 0.0559
1100 0.0554 0.0552 0.0549 0.0544 0.054) 0.05*1 0.05)1 0.05)5 0.05)2 0.05)9
1900 0.05)4 0.05)4 0.05)1 0.0511 0.0515 0.0511 0.0510 0.0501 0.0305 0.050)
R X T = ANNUAL INTEREST RATE X NUMBER
OF YEARS IN TIME PERIOD INVOLVED
D-3
-------
TABLE D-1c. FACTORS FOR CONTINUOUS DISCOUNTING (D-2, p. 73)
Excerpted by special permission from CHEMICAL ENGINEERING, July 19, 1965.
Copyright 1965 by McGraw-Hill, Inc., New York, NY, 10020
Yvort-Olglli
.* C«i4) fM*<*i DvdinlAf to Ztw« «t
O»«x f*>U4 * ₯» S>a»>>( WMi «M I««W«K* P»-l.
^IXT 013)45471*
0 1.0000 0.9947 0.9*34 0.9901 09*46 0.9635 0.960) 0.9771 09719 0.9707
10 09*71 0.964) 0.9412 0.91*0 0.954* 0.9)16 0*4*7 094)7 0.94)4 09394
30 0.9)41 0933) 0.9301 0.937) 09)44 0.9)1* 09167 0.91)6 0.913* 0*100
30 0.9071 09043 0.9013 0.6961 06917 0.69)* 06901 0617) 0.664) 0.6116
40 0.67*0 0.6761 0.67)4 0.6706 0.6462 0.66)1 0.6416 0.640) 0.6171 0.6)4*
10 0151) 0.64*7 0.6471 0644) 0141* 0.61*4 061*6 0614] 0.6117 0.67*)
tO 0.1)47 0.6)4) 0.1)16 OJI9) 0.1169 0.1144 OIITO 01094 0.907} Ofitt
70 0.10)4 06000 07976 0.79)) 079)0 0.7906 071161 07160 0.71)7 0711 4
10 07791 0.7769 0.7746 0.77)4 0.7701 0.7*79 ,7657 07*1) 07*1) 97591
90 0.7)70 0.7541 0.7577 0.710) 0.7414 0.74*; 37441 0.7470 0.7199 07)76
100 07)11 0.7117 0.7)16 0.719) 0.7)7) 0.77)5 0773) 0.7315 0719) 0717)
110 0.7155 0.71)1 0.7115 0.709) 0.707* 0.70)7 07017 3 70) I 04999 04910
1)0 0.4941 04941 06933 0*904 O.*6l) 041*7 3»l4l 361)0 IJSI) 0*794
1)0 0.4774 0.47)1 04740 0.67)) 0.6704 3.4*14 34J46 04450 3*5)7 0*61)
140 0.4591 0.6560 0.654) 0.6546 0.6539 0.4)1) 0.6495 0.4476 06441 0.6444
150 0.6476 0.6411 0.6)94 0.4177 0.4141 0.414) 0*129 04)13 04)97 06)61
160 0.4)4) 0.4)49 0.47)) 0.4717 0.4701 0.4166 04170 041)4 0.41)9 0.41)4
170 04109 0.409) 0.4076 0.6041 0.4046 04011 04016 0*001 0.1966 0)97)
160 059)9 0.5944 0)979 0)914 0.5900 05886 05171 0)9)4 05142 0.5176
1*0 05114 0.5600 0.571* 0.577} 0.5756 0.574) 0)7)1 0.5717 0570) 0.5690
200 0.5477 0.544) 0.5449 0.5434 0.547) 05410 0.5)94 0.5)63 0)570 0)557
2IC 0.3544 0.5531 0.5)16 0.150) 0.1493 0.5460 0.5447 05454 05441 0.542*
2)0 0.1417 0.1404 0.1191 0.5179 0.1147 0.5351 05)43 0.51)0 01)1* 0.5106
730 0.1794 0.5717 01770 0.57)8 01744 0)7)4 05233 0)710 0)191 05167
740 0.1174 0.5164 0.515) 0.5)41 0.51)0 0.5119 0.5107 0.5096 0.506) 0.5074
250 0.5043 0.5052 0.5041 0.50)0 0.501* 0.500* 049*7 04916 0.497) 0.4944
240 0.495) 0.4*42 0.4931 0.4920 0.4910 04900 0.4*19 04176 04641 041)1
770 0.4141 0.4137 0.4677 04117 0.4107 0.4797 0.4717 0.4777 0.4747 0.47)7
710 0.4747 0.4737 0.4777 0.4717 0.4707 0.4691 04411 04474 044*6 04*36
7*0 0.4*4* 0.463* 0.4*7* 0.4670 0.4411 0.4*02 0.4)92 0.4)6) 0.4)7) 04564
300 0.4515 0.4541 0.4536 0.4377 0.4)11 0430* 04500 0.44*1 04467 0.4473
310 0.4464 0.4455 0.4446 0.44)7 0.44)6 0.4419 0.4410 0.4401 0.4)97 0.4)64
370 0.4374 0.4347 0.4)56 0.4)49 0.4)40 0.4))) 04334 0.4)16 0.4304 0.4300
330 0.4792 0.4)63 0.4374 0.4766 0.47)8 0.47)0 0.474} 0.4)14 0.4774 04716
340 0.4710 0.4707 0.41*4 0.41*4 0.4171 0.4170 0.416) 0.4114 0.4146 0.41)1
350 0.4111 0.4))) 0.4115 0.4107 0.40** 0.40*1 0.401) 0.4076 0.4069 0.406)
160 0.4055 0.4047 0.401* 0.4011 0.40)1 0.4016 0.400* 0.400) 03995 0 3981
370 O.ltll 0.397>0.)96) 0.3958 0.39)1 0 3944 0.39)7 0.19)0 0.3971 0.3916
HO 0.1909 0)90) 0.1891 01666 0.1181 0.3674 0.3867 0.3660 0.1853 0.3846
390 0.1440 0.1611 0.16)4 03819 0.3113 0)601 0.1796 0.1791 0.1761 0.177*
400 0.1773 0)764 0.371* 0.375) 0)74) 03734 0373) 037)4 0)7)0 0.1714
410 0.3708 0)70) 0.3*94 0.1617 0)481 0)673 0)64* 03663 0)6)7 03*51
420 J1645 0.1416 0)632 0.1476 0)620 0)414 0)406 0.360) 0)394 0)590
4)0 0)514 03V78 0.157) 0.)5«4 03540 0)554 0))'6 03542 03)14 03530
440 0)))) 0.1)19 0.3513 03)07 0.1501 0.3495 0.34*9 0.346) 0)478 0)47)
430 0.3466 0.346) 0.3436 0.34)0 0.3444 0.34)6 0.343) 0.3477 0.34)) 0)417
460 0)413 0.340* 0)400 0.3)94 03)16 0)3(3 03)76 0)171 031*6 0116)
470 0.3)51 0.1117 0.1)44 0.1)41 0.1)14 0.1)11 0.1)74 0.1171 0.1114 OHM
460 03304 0.3300 03294 0.3289 0)214 0.3379 0.3)74 0.3269 01)44 03259
490 0.33)4 0.3)49 0.3244 0.3)39 0.3)34 0.373* 0.32)4 0.3719 0.3214 0.330*
I I XT 0 10 20 30 40 50 40 70 60 90
100 0.3305 0.3157 O.llll 0.3065 0.1020 0.7*71 0.7*34 0.7195 0.7*54 0.7117
400 0.277* 0.2742 0.2707 0.2677 0.7637 0.2604 0.7)72 0.2540 0250* 0.247*
700 0.744* 0.2420 0.23*2 0.2364 0.2337 0.2311 03213 02260 02731 0.3312
100 0.7111 0.2165 0.2143 02131 0.20*1 02076 0.7056 070)4 07016 0.1*95
900 0.1971 0.1*17 0.1*1* 0.1*20 0.1*02 0 1184 0.1647 0.16)0 0.1634 0.1117
1000 0.1100 0.1714 0.174* 0.1753 0.1731 0.1731 0170* 0.16*4 0.1410 0.1447
1100 0.1453 0.143* 0.1474 0.141) 0.1401 0.1568 0.1574 0154) 0 11)1 015)?
1)00 0.15)6 0.1516 a 1)0) 0.14*4 0.146) 0.147) 0.146) 0.14)1 0.1441 0.14)0
1)00 0.14)0 0.1410 0.1401 0.1)90 0.1)62 0.1)7) 0.116) 0 1354 0.1)4) 0.1)34
1400 0.1)27 0.1)11 0.1)0* 0.1101 0.12*7 0.12*4 0.1276 0.1241 0.1740 0.12)2
1500 0.1244 0.12)4 0.123* 0.1221 0.1214 0.1207 0.1700 01193 0.1166 0117*
1600 O.M72 0.1165 0.1156 0.11)1 0.114) 0.113* 01131 01176 0 II 70 O.llll
1700 0.1107 O.IIOI 0.1093 0.1089 0.1064 0.1076 0.1077 0.1064 01040 010)4
1800 0.1049 0.1014 0.101* 0.1011 0.1026 0 1021 0 1016 0 1012 0 1007 0 1007
1*00 0.0*97 0.0992 0.0967 0.0962 0.0971 0.0*71 0.096* 0.0941 0.09)9 0.0955
R X T = ANNUAL INTEREST RATE X NUMBER
OF YEARS IN TIME PERIOD INVOLVED
D-4
-------
flow, it is necessary to specify the annual interest rate*, R, in per-
cent and the number of years in the time period involved, T. The value
of the product RXT is used to find the appropriate discounting factor.
Five examples of the use of this table follow.
1. To find the present worth at the start of a uniform Ca&h
of $150,000 per year over a 5 year period, at 15 percent interest, one
first figures that RXT = 15 X 5 = 75. In Table D-lb, one goes down the
left-hand RXT column to 70 and to the right to 5 for 75 and reads a
discounting factor of 0.7035. For this case, the present worth is
150,000 X 5 X 0.7035 = $527,625.
2. Next the present worth will be found for a Ccu>h F£ow) of $50,000
that occurs during the fifth year (4 to 5) of a project. The nominal
discounting rate of interest is 12 percent. The discounting of this sum
to time zero requires two discounting steps. First the sum which flows
continuously from year 4 to year 5 is discounted to year 4 (this is the
beginning of the 1-year period). For this operation R = 12, T = 1, or
RXT = 12 X 1 = 12, for which the discounting factor from Table D-lb is
0.9423. Then this sum is discounted from year 4 to year zero using RXT
= 12 X 4 = 48, using the factor 0.6188 from Table D-la. The present
worth calculation is: $50,000 X 0.9423 X 0.6188 = $29,155.
3. An extra operation is also needed to compound an amount of
money. For an instantaneous cash effect, use the reciprocal of the
discounting factor. An example would be the compounding of M$ 1,000 for
land from 3 years before plant start-up (year -3) to start-up (year
zero) using 16 percent interest. Hence, to compound, the reciprocal of
the discounting factor for RXT = 16 X 3 = 48 or 0.6188 would be used.
Using the reciprocal, the present worth is M$ 1,000 * 0.6188 = M$l,616.
4. For a uniform cash flow (e.g., for capital construction costs)
the calculation is more involved: first the cash flow must be dis-
counted to the time it started; then this instantaneous value is com-
pounded to a future value using the reciprocal of the instantaneous
discounting factor as in Example 3. As an illustration, the present
worth is sought for construction costs of M$10,000 occurring uniformly
over 2 years before start-up (year -2) to start-up (year zero). Inter-
est is 13 percent. The uniform discount factor for RXT =13X2= 26 is
0.8806; the instantaneous compounding factor, from the discounting
factor for RXT = 13 X 2 = 26 of 0.7711, is 1/0.7711. Then the present
worth is M$10,000 X 0.8806 f 0.7711 = M$ll,420.
5. Determine the present worth of maintenance charges that in-
crease continuously from zero to M$100 per year over a 10-year period.
k
This is nominal interest, as distinguished from the effective rate,
D-5
-------
Interest is 15 percent. For this problem, the years-digits factors in
Table D-lc, so-termed because they directly handle charges for sum-of-
the-digits depreciation, facilitate the computation. The present worth
is found by discounting M$100 per year for 10 years and subtracting from
this the discounted value of M$100 per year at year zero declining at a
constant rate over 10 years. RXT = 15 X 10 = 150; uniform factor =
0.5179; years-digits factor = 0.6428. Total maintenance costs = M$100 X
10 T 2 = $500. Then, the present worth of M$100/year for 10 years is
M$100 X 10 X 0.5179 = M$518 minus the present worth of $100/year declin-
ing to zero over 10 years M$500 X 0.6428 = M$321, giving a net present
worth of M$197.
By operations similar to above, one can carry out most of the
calculations needed to take continuous interest into account. For other
situations, the appropriate factors can be calculated using formulas
which can be found in a number of standard sources (D-l, D-2, D-3).
Also Perry and Chilton (D-4) include a copy of the Gregory table which
is very useful for directly carrying out certain operations such as
those requiring two steps in Examples 2 and 4, above.
The two tables mentioned above (viz., Table D-l and the Gregory
table (D-4)) give nominal continuous interest factors; these were used
first and continue to be used in many industries. However, it should be
realized that there are also effective continuous interest tables in use
(see Grant e_t a^. (D-l)); these give present worth values equivalent to
those calculated by discrete interest rates. The designation for a
nominal rate is always slightly less than its effective interest equiv-
alent; e.g., the effective interest equivalent is 10.52 percent for a
nominal interest rate of 10 percent. A number of examples of the use of
continuous interest factors are in Appendices E and K.
SELECTED REFERENCES
D-l. 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.
D-2. Hirschmann, W. B., and J. R. Brauweiler. Continuous Discounting
for Realistic Investment Analysis. Chem. Eng. Part II, 72(17):134
(1965). ~
D-3. Jelen, F. C., ed. Cost and Optimization Engineering. McGraw-Hill
Book Co., New York, NY. 1970. 490 pp.
D-4. Perry, R. H., and C. H. Chilton, ed. Chemical Engineers' Handbook.
Table 25-35, McGraw-Hill, New York, NY. 1973.
D-6
-------
APPENDIX E
MEASURES OF MERIT
CONTENTS
Criteria for Evaluation E-l
Definitions E-l
Effect of Inflation on Measures of Merit E-7
Choices in Computation of Measures of Merit E-8
Computation Features E-8
Modes of Cost Analysis E-9
Examples of Calculation of Measures of Merit E-ll
Private (Investor) Financing Examples E-12
Public Utility (Regulated) Financing Example E-17
Selected References E-29
FIGURE
E-l. Comparison of approaches to levelized cost .... E-7
TABLES
E-l. Financial Factors for Revenue Requirement Analysis E-18
E-2. Input Data Assumption for Computation of Revenue
Requirements E-19
E-3. Life Cycle Costs for Nominal 1 kW Power Plant. . . E-20
E-i
-------
APPENDIX E
MEASURES OF MERIT
The economic feasibility of a project is indicated by one or sev-
eral relations involving both annual operating expense and investment
cost. The application of these relations corresponds to life cycle cost
analysis. These relations yield indices which have several general
designations, such as measures of merit, figures of merit, and feasi-
bility criteria. The commonly used criteria will be named and described.
The applicability of the appropriate measures of merit to the three
financial sectors, private, regulated, and public, will be delineated.
Several examples of the computation of measures of merit are illus-
trated: three for privately financed facilities; one for a project in a
regulated industry. Because of the simplicity of the method, it was not
deemed necessary to illustrate by example the calculation of measures of
merit for public sector projects.
CRITERIA FOR EVALUATION
The following will be considered:
1. Return on investment (ROI).
2. Internal rate of return (IROR).
3. Payout time.
4. Equivalent annual cost.
5. Unit costs.
Present value, or present worth, is also a common criteria but, since it
can be computed as a step in the determination of IROR, equivalent
annual cost, and certain unit costs, it is not specifically considered
in this procedure.
Definitions
Return on Investment (ROI) --
Average annual net profit divided by total capital investment
(including land and working capital) gives return on original investment
(ROI). This is a widely used criterion for profitability.
E-l
-------
Internal Rate of Return (IROR) --
Internal rate of return (IROR) -- also known as Interest Rate of
Return, Discounted Cash Flow, and Profitability Index -- is another
useful criterion. It is used when revenue is associated with the oper-
ation and profit is generated. It is the discount rate which gives a
present value of zero for the sum of the cash flows occurring during the
project lifetime: cat>h filow, capital outlays, and end-of-life recov-
eries. Inputs are positive O) and outlays negative (-). The procedure
takes into account the timing of the cash effects and whether they are
continuous over a period of time or are discrete (instantaneous) trans-
actions. The calculation of IROR is by trial and error; computer pro-
grams are available for this purpose.
Note that the IROR technique can be used to determine revenue
requirements when the internal rate of return is specified.
Payout Time
Payout time or just payout is the time in years required, after
start of operations, for the accumulation of Ca&k F£ow> (net profit plus
depreciation -- see Appendix C) to equal the depreciable investment.
Although it is frequently mentioned, it is actually only of secondary
importance.
Equivalent Annual Cost --
In this treatment "equivalent annual cost" will be used as a gen-
eric term to describe equivalent annual cash flows. Equivalent annual
costs can be obtained by calculation, first of the present value of the
cash flows of concern* by discounting at an assigned rate. As with the
IROR procedure, the timing over the life of the project and the nature
of cash flows (instantaneous or continuous) must be taken into account.
This present value is then converted (at the same discount rate) to an
equivalent annual cost over the life of the project. It can be calcu-
lated either as a uniform end-of-year value by using discrete interest
factors, or a continuous flow throughout each year using continuous
interest factors. The former corresponds to "equivalent uniform cash
flow" as used by Grant ejt a^. (E-l, p. 64) and UNACOST as defined by
Jelen (E-2, p. 25). However, an "equivalent annual cost" for continuous
flow throughout the year is often preferred.
A general expression for "equivalent annual cost or cash flow" is:
Note that the "cash flows of concern" depend on the nature of the
equivalent annual cost to be calculated; e.g., revenue requirement,
uniform annual cost, or equivalent annual value. These are developed
immediately below.
E-2
-------
=i n=n
I E C.
i i ci i
Equivalent Uniform = 1=1 n=1 - ^^ - . . . (E-l)
n~
n=l
Cash Flow n~
where:
C. = cost component i at the end of n years evaluated at con-
in stant dollars when n = 1, where 1 designates the end of
the first year of operation. Examples are operating
expenses, interest on debt, equity dividends, income
tax. For certain circumstances, investment items and
capital recoveries at the project shutdown are included.
Since investment charges mainly occur at times before
startup (n = zero), the accommodation of these outlays
requires extension of the n limits of Equation E-l to minus
n years.
s. = escalation rate of cost component i (some costs such as bond
1 interest and depreciation charges do not respond to inflation;
these have values of s. = zero).
r =
discount rate reflecting expected return, or cost of capital.
n = year after start-up time (n = zero) during which or at the
end of which the cash flow occurs.
Note that the discount rates used in Equation E-l are discrete; con-
tinuous interest factors are more likely to be used for private sector
analyses, particularly if some of the cash flows are continuous. Note
that the term
n=n .,
£
n=l (l+r)n
in the denominator corresponds to the "uniform annual series present
worth factor" (E-l). The numerator in Equation E-l is the "present
value."
A number of "equivalent annual costs" in common use will now be
described.
,L_ Annualized Cost -- This is a standard measure of merit for cost
analysis of public utility (regulated industry) projects. All outlays
that contribute to expected revenue are included: total operating
expenses (including depreciation), interest on debt, income tax, and
equity dividends. Capital outlays are reflected indirectly as depreci-
ation charges, interest on debt, and equity dividends. Equation E-l is
E-3
-------
applied. An example of this computation is given in the example at the
end of this appendix. A simplified procedure often-used is
Annual Cost = (Net Annual Expense) - (Debt Interest*)
+ (Capital Charge Factor) X (Capital Investment) ... (E-2)
The capital charge factor for electric utilities ranges from 0.15 to
0.20. It includes the depreciation charge, additional capital invest-
ment, average interest on debt, average equity dividends, and income
tax. This procedure requires that output is constant and inflation is
neglected. In Appendix J a comparison is made of the annualized cost
calculated by both the detailed method that applies Equation E-l and the
simplified procedure based on Equation E-2.
2^_ Uniform Annual Cost (UAC) -- The computation of this value is
described in texts on engineering economy (E-l, E-2). It is in common
use in the private sector for determining the actual cost of a change in
or addition to facilities. It also provides a basis for choice between
alternatives. The candidate with the least negative UAC is preferred;
this represents the minimum cost. Here c.CL&k ££0M>, capital outlays, and
end-of-life-recoveries are taken into account, an acceptable discount
rate specified, and the procedures of depreciation accounting followed
as elucidated by Equation C-2 and Figure C-2. The computation scheme is
illustrated later in this appendix; see Third Private Financing Illus-
tration. For some comparisons of alternatives, only the costs which
vary from one alternative to the other need to be taken into account;
this greatly reduces the computation effort and generates incremental
UACs that highlight the difference in cost between the candidates.
3_._ Equivalent Annual Value -- This version of "equivalent annual
cost" is used in evaluating public sector projects. It is found from
., . , . . , Total Capital Cost
Equivalent Annual = *-
., , n=n ,
Value 1
n-l
+ Annual 0§M Expenses ... (E-3)
A particular use is in Cost-Effective Analysis for the selection of the
preferred waste treatment system in connection with the EPA construction
grants program (E-3). Details are provided under Publicly Financed
Works Mode, below.
The Debt Interest is subtracted from the first term to obviate
double counting; it is included in the last term.
E-4
-------
Unit Costs --
Unit costs are costs per unit of product, service, or output. Four
kinds in wide use are:
Operating expense per unit of output.
Capital investment per unit rate of output or capacity.
Unit cost for cost-effectiveness analyses (total resource costs per
unit of service).
Revenue requirement per unit of output (when discounted costs and
"discounted" outputs are used this is termed "levelized cost").
The first three unit costs listed are straightforward and readily
computed. However, the revenue requirement per unit of output offers
some difficulties: there are several variants, each of which needs to
be carefully defined, and some are tedious to calculate.
!_._ Operating Expense Per Unit of_ Output -- This is simply the
Average or Lifetime Operating Expense per Unit of Output. Here the
Total Operating Expense or 0$M may be used but the particular annual
expense used should be identified. An example of units is mills/kWhr
for a power plant.
jU_ Capital Investment Per Rate of Output -- This is merely the
CapitaT Investment divided by the Capacity or Rate of Output. An ex-
ample is $/kW for a power plant.
3_._ Unit Cost for Cost-Effectiveness Analysis -- This is the
"equivalent annual value" divided by the annual output. It is used in
the EPA construction grants program to identify the most cost-effective
wastewater treatment management system (E-3, E-4). Results would be in
$/l,000 gal.* of liquid waste treated. For details on this and "equiv-
alent annual value," see Publicly Financed Works Mode, below.
£._ Revenue Requirement Per Unit of_ Output -- This can be deter-
mined without discounting, in which case it is based on "lifetime aver-
age" costs. If both costs and output units are discounted, the revenue
requirement per unit of output is called a "levelized cost." Two level-
ized cost procedures will be described: the Typical Utility Approach
where only costs can be escalated; and the METREK Approach where the
value of the output is also escalated. Illustrations of the calculation
of all three of these unit costs are provided under Public Utility
(Regulated) Financing Example, at the end of this Appendix.
*
Multiply $/1000 gal. by 0.264 to convert values to $/cubic meter,
E-5
-------
The revenue requirement using lifetime average costs, or UC , is
described by this expression:
i=i n=n ,
E E C. (1+s.)
. . , in ^ i/
where P = the output units during year n. Note that, as for annual i zed
costs, nC. consists of cost items that contribute to the total revenue.
This methoa was used by McGlamery et_ al . (E-5, p. 83) to get lifetime
average unit operating cost; it has also been both delineated and illus-
trated by the well-known National Gas Survey publication of the Federal
Power Commission (E-6) .
For levelized cost, the most common procedure, the so-called
"typical utility approach" CE-7), gives a value, LC , as described by
this equation: u
LCu =
Z
n=n (1
y r
n=l in (
n=n
y P
, n ,
n=l (
+ si)
1
(E-5)
This was the approach used by McGlamery et^ al_. (E-5, p. 83) to compute
the levelized operating cost; for their study s. equalled zero (infla-
tion was not accounted for). In this approach, 1the revenue value placed
on a unit of output is constant. This scheme serves to overstate the
revenue requirement per unit of output in the early years and understate
them in later years as shown in Figure E-l and explained in detail in
the last example in this appendix.
A modification of the "typical utility approach," which takes
into account the anticipated growth in the value of the output, was sug-
gested by Goudarzi et_ aJL (E-7) and used in an ERDA report (E-8) . This
modification, called the "METREK approach," is represented by this
relation where only the denominator term differs from that in Equation
E-5:
i=i n=n (l+s.)11'1
EEC.
in
p
n=l
E-6
-------
where s = the general inflation rate per year. Accordingly, in this
METREK approach, the levelized cost is on a basis that approaches that
of constant worth dollars. This results in revenue requirements in
then-current dollars as shown in Figure E-l that vary with predicted
general inflation and are therefore more realistic. This matter is
discussed further in the last example in this appendix.
Effect of Inflation on Measures of Merit
In the application of any measure of merit, the decision must be
made between the use of then-current and constant worth dollars. For a
general inflation rate applied across the board, each use will give the
same value for present worth, but different values for a particular
_l O
<««
SS
TYPICAL -7
METREK -
LEGEND:
FIRST YEAR OF
COMMERCIAL
OPERATION
SYSTEM LIFETIME
Y+N
TIME, year
THERE ARE SOME IMPORTANT ITEMS TO NOTE:
BOTH METHODS ESTIMATE THE TOTAL REVENUE REQUIREMENTS
IN A COMPARABLE FASHION AND THEREFORE RESULT IN THE
SAME ESTIMATE FOR TOTAL REVENUE REQUIREMENTS.
THE METREK APPROACH ATTEMPTS TO PROVIDE THE INDEX IN A
MANNER WHICH CLOSELY RESEMBLES THE ANTICIPATED GROWTH
IN COSTS.
THE TYPICAL APPROACH SIGNIFICANTLY OVERSTATES THE COST
IN THE EARLY YEARS AND UNDERSTATES COSTS IN LATER
YEARS.
Figure E-1. Comparison of approaches to levelized cost (E-7).
E-7
-------
measure of merit. This means that the evaluator must recognize accept-
able values using then-current or constant worth dollars and the rela-
tionship between the two.
For the relationship between i1, the minimum acceptable IROR using
constant worth dollars, and i, the minimum acceptable IROR using then-
current dollars, with a general inflation rate, s, Stermole (E-9) gives
For example, if i = 20 percent, and s = 8 percent,
This example also emphasizes that the values of i' for constant worth
dollars are less, and by potentially substantial margins, than i for
then-current dollars.
Note that the use of this relation assumes that all expenses and
allocations escalate; actually charges for depreciation and debt inter
est do not respond to inflation.
CHOICES IN COMPUTATION OF MEASURES OF MERIT
Custom dictates that certain measures of merit be used to analyze
projects for a given financial sector. Also, different modes of com-
putation are followed for each financial sector. In addition there are
several possible values or decisions for a number of computational
features; the choice is generally influenced by practice. Necessary
information about these modes and features are given below.
Computation Features
Selections must be made for these computation features: discount-
ing, revenue requirement, recovering the investment, accounting for
inflation, pertinent annual expenses, and types of interest factors.
Revenue Requirement -- Profit from revenue must be demonstrated for
the evaluation of undertakings in regulated industries. It is certainly
desirable for privately financed facilities; but if a loss is involved
an evaluation can be executed if the tax relief is noted.
Pertinent Annual Expenses -- It is essential that all the net
operating expenses be included for cases where revenue (private sector
study) or revenue requirement (regulated sector study) is involved.
only is used for public sector projects and may be used for choice
between alternatives where insufficient or no revenue is involved.
E-8
-------
Discounting -- Discounted costs and revenues are always used for
publicly financed works, but not always for privately financed and
regulated industry projects.
Investment Recovery -- Undertakings in both the private and the
regulated sectors~~return ("write off") the original investment as depre-
ciation or end of project recoveries such as land and working capital.*
For publicly financed projects, as for the EPA construction grants
program, there is no investment recovery; the only return shown is
defined by law and corresponds to Federal lending rates (see Appen-
dix G).
Accounting for Inflation -- For public projects, inflation is not
taken into account; the basis is the prices prevailing at the time of
the analysis (E-3). The private and regulated sectors may or may not
take inflation into account; both paths offer difficulties and benefits.
In this connection, see Effect of_ Inflation on_ Measures of_ Merit,
above.
Interest Factors -- Discrete interest factors are customarily used
as discounting rates in regulated and public sector studies. Cost
analyses of privately financed projects employ either discrete or con-
tinuous interest factors with a trend toward the latter.
Modes of Cost Analysis
The mode of analysis associated with each of the financial sectors
is described below. As a part of the discussion, the likely computation
features for each are also listed.
Privately Financed Project Mode -- This mode takes into account
only cou>k {ftow, capital outlays, and end-of-project recoveries. It fol-
lows the conventions of depreciation accounting. The effects of income
tax are registered either as decreased ccu>h ^£ow if revenue is taken
into account, or as improved c.cu>h ^£ow from reduced losses if it is not.
The methods are expounded both in engineering economy texts (E-l, E-2)
and books on financial analysis (E-10).
It has also been used for energy cost studies (DCF method in Refer-
ence E-6). The likely computation features, with an indication of those
chosen for the private sector examples to follow, are:
*
Some procedures for engineering cost analysis recover the original
investment by the sinking fund method. This is more likely for utili-
ties; the method is given in texts in engineering economy (E-l). The
current practice is to follow the business convention of recovering the
nominal dollars invested.
E-9
-------
Computation Feature
Likely Practice
Used in Examples for
Private Inv. Financ.
Revenue Requirement Needed for IROR, ROI,
Payout.
Not available when cal-
culations for revenue
required.
Not available when cal-
culating "uniform
annual cost."
Pertinent Annual
Expense
Discounting
Need net annual expense
for calculation of
IROR, ROI, Payout, and
also revenue required.
Need only use 0§M items
and related overheads
that vary from case to
case for calculation
of "uniform annual
cost."
Yes
Investment Recovery Recoup by depreciation
charges and end-of-
life recoveries.
Accounting for
Inflation
Interest Factors
Yes, for 1st example
Yes, for 2nd example
Yes, for 3rd example
Used in 1st and 2nd
examples
Applicable to 3rd
example
Yes
Same
No preference
Trend to continuous
interest
No
Continuous interest
Public Utility (Regulated) Financed Mod(? This follows the level-
ized cost methodologies for determining the revenue requirement used in
the electric utilities industry (E-7, E-8). In this procedure, the
return to investors declines from year to year because it is computed on
the book value of the depreciable investment. The likely computation
features, with an indication of those chosen for the regulated sector
example to follow, are:
E-10
-------
Computation Feature
Likely Practice
Used in Example for
Public Utility Fin.
Revenue Requirement
Annual Expense
Discounting
Investment Recovery
Accounting for
Inflation
Interest Factors
Calculated as annualized
cost or levelized cost
using appropriate dis-
count factor (see
Appendix G).
Use net annual expense
Yes
Recoup by depreciation
charges and end-of-
life recoveries.
Likely
Discrete interest
Same
Same
Yes
Same
Yes
Same
Publicly Financed Works Mode -- The procedure is simple; it is
delineated under Equivalent Annual Costs (Equation E-3) and Unit Costs,
above. Accordingly, no example of a computation is provided. The
various components of cost are calculated on the basis of prices pre-
vailing at the time of the cost-effectiveness analysis. The other
customary features are: discounting, np_ revenue requirement, n
-------
Private (Investor) Financing Examples
Three kinds of computations are made for the private sector mode:
1. IROR, ROI, and Payout are found for the case where the expected
revenue is furnished.
2. Revenue requirement is found where a discount factor is given (it
generally corresponds to MARR, minimum acceptable rate of return).
3. "Uniform annual cost" where a choice is to be made between alter-
natives for a change or addition to a facility where the resulting
revenue change is zero, cannot be identified, or is insufficient to
show a profit.
The computation features selected for each are given in the sub-
section directly above.
First Private Financing Illustration - Revenue Known --
Since inflation is to be neglected, constant dollars, corresponding
to then-current at the time of the analysis, will be used to calculate
ROI, Payout, and IROR. A similar calculation is made for the Example in
Appendix K.
Information follows for the project to be evaluated:
Items related t£ investment
Land (1 yr before start-up) K$l,000
Fixed investment (uniform expenditure
over 1 yr before start-up) 53,000
Working capital (at start-up) 7,000
Net salvage value (at shut-down) 3,000
Recovered nominal land value (at shut-down) 1,000
Recovered working capital (at shut-down) 7,000
Life of plant 5 years
Income statement items, on annual basis (assume uniform and con-
tinuous, year to year):
Revenue K$100,000
Net operating expenses (excludes
depreciation charges) 60,000
Depreciation (straight-line) 10,000
Income tax rate 50%
Net profit K$15,000
C(U>k flow (net profit plus depreciation) 25,000
Annual depreciation by the straight-line method can be determined two
ways.
E-12
-------
1. Allow for the net salvage value, then:
Annual depreciation = 53>00° ^ 3)QO° = K$10,000 .
This method is used in this example; it is preferred.
2. When there is no basis for estimating a net salvage value or
the accounting procedures completely "enter to costs" all
investments, then:
Annual depreciation = 55^000 = K$10,600 .
In the second instance, any net salvage which might arise represents
extra gross profit and is therefore subject to the 50 percent income
tax; if the estimated net salvage value is realized, the additional net
profit would be K$ 1,500.
The cash flows over the life of the project can be effectively
depicted in a cumulative cash position chart similar to Figure C-3.
Return on_ Investment--
R01 " 1,000 + ll:l + 7.000 X 10° = 24'6%
Payout Time -- If the Annual Depreciation of K$10,000/year is used
from the preferred first way, the codJt j$£0M> is K$25,000. Then:
Payout Time - ' =2.0 years .
Interest Rate of_ Return -- The interest rate of return is calcu-
lated from the schedule on the next page. The net profit is (1 - income
tax rate) (Revenue - Net Operating Expenses - Depreciation) . For this
case it is (1 - 0.5) (100,000 - 60,000 - 10,000) or (0.5) (30,000) .
Since the same discount factor applies to both the depreciation and the
net profit, ccu>h fiiow, which is their sum, could have been substituted
in the tabulation on the next page. Also note that values of IROR
(28.3 percent) always exceed ROI (24.6 percent) by up to 50 percent.
Second Private Financing Illustration - Revenue To Be Determined --
The purpose here is to compute the required revenue to cover the
cost of the investment charge and annual operating expenses. This in-
cludes a return on investment which is handled by the discount rate; in
this case it will correspond to a MARR of 15 percent. The same cash
flows and financial factors will be used as in the first example, above,
except for the revenue which now must be determined. The solution is
E-13
-------
Time,
Years
Item
Cash Flow,
K$
First Trial
Factor
at 25%
Present
Worth
Second Trial
Factor
at 30%
Present
Worth
-1 Land Allocation -1,000 1.2907
-1 to 0 Fixed Investment -53,000 1.1420*
0(start-up) Working Capital -7,000 1.0000
b
0 to 5
0 to 5
5
5
5(10,000)" 0.5708
b
Depreciation
Net Profit 5(15,000)" 0.5708
Net Salvage Value 3,000 0.2865
Recovered Working 7,000 0.2865
Capital
Recovered Nominal
Land Value
1,000 0.2865
This gives IROR (by linear interpolation) of
25'° +
-1,290
-60,526
-7,000
28,540
42,810
860
2,000
286
K$5,680
1.3499
1.1662
1.0000
0.5179
0.5179
0.2231
0.2231
0.2231
-1,350
-61,809
-7,000
25,895
38,843
669
1,562
223
-K$2,967
Calculated from two factors in Table D-l: 0.8848 from the Uniform
table for RXT = 25 X 1 = 25 (which discounts the uniform flow from -1 to
zero to an instantaneous value at year -1); and 0.7748 from the Instan-
taneous table for RXT = 25 (the reciprocal of which compounds from an
instant at year -1 to an instant at year zero). The desired combined
factor is 0.8848 T 0.7748 or 1.1420.
Both the depreciation and annual profit for 1 year are multiplied
by 5 to give these values for the life cycle.
analogous to that for IROR. Again, the cuiA/i fitou) will be broken into
its components for convenience. Required revenue or revenue increment
is AS to correspond with the symbol used in Equation C-2. The solution
is organized below. If an interest rate of 28.3 percent (corresponding
to the IROR calculation) had been used, the solved value of AS would
have been K$100,000 to correspond to the annual revenue given in the
IROR example.
E-14
-------
Time,
years
Item
Cash Flow,
K$
Discount
Factor
at 15%
Present
Worth,
K$
-1
Land Purchase
or Allocation
-1,000
-1 to 0 Fixed Investment -53,000
0 Working Capital -7,000
0 to 5 Depreciation
0 to 5 Net Profit
5 Recoveries
(5)(10,000)
0.5(5)(AS-70,000)
11,000
TOTALS
Since Present Worth = 0,
1.162
1.079
1.00
0.7035
0.7035
0.4702
-148,093 + 1.759AS = 0
-1,162
-57,187
-7,000
35,176
-123,112+1.759AS
5,192
-148,093+1.759AS
or, required revenue or revenue increment, AS = K$84,194.
Third Private Financing Illustration - Uniform Annual Cost --
Uniform annual cost is a technique for determining the actual cost
of a change in or addition to facilities; it is widely used for making a
choice between alternatives (E-l, E-2). For the solution, the same cash
flows and financial factors will be used. It can be assumed that these
apply to a plant addition for pollution abatement.
Now the "uniform annual cost," UAC, is found from the Total Present
Worth by this relation:
UAC =
Total Present Worth
(No. of yrs of operation)(Uniform continuous interest factor)
(E-8)
which corresponds to Equation (E-l), Here, the number of years of oper-
ation is 5, and the Uniform continuous interest factor, used in the
table below, is 0.7035; therefore,
UAC =
- -148,094 _
5(0.7035)
= -K$42,102
E-15
-------
Time,
year
-1
-1 to 0
0
0 to 5
Item
Land
Fixed Investment
Working Capital
Contribution to Ccu>h T&ow
Cash Flow,
K$
-1,000
-53,000
-7,000
Discount
Factor
at 15%
1.162
1.079
1.00
Present
Worth
K$
-1,162
-57,187
-7,000
from Depreciation 0.5(5X10,000)S 0.7035 17,588
0 to 5 Contribution to Ch flow
from Net Operating
Expenses -0.5(5)(60,000) 0.7035 -105,525
5 Capital Recoveries 11,000 0.4702 5,192
TOTAL -148,094
Q
Consultation of Figure C-2 and Equation C-2 will elucidate the
source of these two cash flows. Their sum constitutes the effect on
total
Summary Remarks --
The basic model has considerable flexibility; it can accommodate
capital outlays at later dates, variable revenue, fluctuating operating
expenses, price escalation, etc.
The effect of neglecting inflation corresponds to the use of then-
current dollars at time zero for all outlays and revenues; this is
tantamount to the application of constant dollars, which would be de-
flated from then-current dollars at later times. The significant result
is that the measures of merit (e.g., ROI, IROR, Payout) appear less fav-
orable than if then-current dollars had been used. The difference for
IROR can be approximated for the above example from Equation (E-7)
rearranged, or
i = (1+f) (1+i') - 1
where i1 (or IROR with no inflation) = 28.7 percent; and f (general
inflation) = 7 percent. Then,
i = (1+0.07) (1+0.287) - 1
= 0.377 or 37.7%.
E-16
-------
Actually i would work out to be somewhat more because some cash
flows (e.g., depreciation) do not respond to inflation.
Appendix K presents another example of cost analysis of a privately
financed project which neglects inflation.
Public Utility (Regulated) Financing Example
This example, taken directly from Reference E-8, follows the level-
ized cost methodologies for determining the revenue requirement used in
the electric utilities industry (E-5, E-6). In this procedure the
return to investors declines from year to year because it is computed on
the book value of the fixed investment.
For utility financing the measures of merit are:
Equivalent annual cost -- specifically annualized cost.
Unit costs for revenue requirement, which can be on different
bases. The ones considered in this section are: lifetime average
unit costs, levelized cost by the typical utility approach, and
levelized cost by the METREK procedure.
The computation features have been given for this case in the subsection
preceding the examples.
The example is concerned with a coal-fueled power plant and its
flue gas desulfurization (FGD) unit. For the cost analysis, a unit
capacity of 1 kW was used because it provides investment and costs
independent of plant size. All calculations will have a basis of 1 kW
and 1 year; therefore, investments will be in $/kW, costs in $/kW-yr,
and net energy output in kWhr/kW-yr; i.e., the annual output of a 1 kW
plant is in kWhr.
Cost Information --
The major input assumptions are presented in Tables E-l and E-2.
.Construction takes place over 6 years (1975-1980) with start-up in 1981.
The plant operates for 30 years.
Table E-3 contains details of the cost elements over the life of
the plant. Sample calculations are given to show the development of the
table based principally on the data in Tables E-l and E-2.
Capital Cost of Plant -- The cost of the plant is given as $421/kW
if built at 1975 prices; but, since it is built over a period of years,
each year inflation increases expenditures by 5 percent. These yearly
inflated expenditures are shown in Table E-3; it can be shown that the
sum of the capital outlays is $497.08/kW. It is assumed that the outlay
for construction during a given year is made available at the beginning
of that year.
E-17
-------
TABLE E-l. FINANCIAL FACTORS
FOR REVENUE REQUIREMENT ANALYSIS
(Public Utility Financing Example)
Capital Structure
Debt
Preferred Equity
Common Equity
Cost of Capital
Interest on Debt
Dividends on Preferred Equity
Dividends on Common Equity
53%
12%
35%
100%
8.0%
8.5%
14.0%
Weighted Cost of Capital 10.16%£
Taxes
State Income Tax 4.0%
Federal Income Tax 48-°b
Combined Rate - Income Tax 50.0
Gross Receipts and Sales Taxes 2.0
Investment Tax Credit (1st yr) 8.0
Property Tax 1.4
Depreciation
Financial 30-yr life
(straight-line) 3.3%
For income-tax purposes
20-yr life (sum of digits)
Escalation Nominal
GNP Deflator 5.0%
O&M 5.0
Weighted cost of capital = (0.53) (0.08) + (0.12) (0.085)
bonds preferred stock
+ (0.35) (0.14) = 0.1016 or 10.16%.
common stock
The combined rate of 50% (state 4%, Federal 48%) is obtained in
this manner: combined tax rate = (1 - 0.04) (0.48) + 0.04 = 0.5008 or
50.0%. This is the result because Federal tax laws permit counting
state income tax as a deductible expense.
E-18
-------
TABLE E-2. INPUT DATA ASSUMPTION
FOR COMPUTATION OF REVENUE REQUIREMENTS
(Public Utility Financing Example)
Start of Operation 1981
Construction Period 6 years (1975-1980)
t Capital Cost (1975 Dollars) $421/kW
0$M Cost (1975 Dollars) 2.6 mills/kWhr
Tax Life 20 years (sum of digits)
Economic Life 30 years (straight-line)
Average Capacity Factor3 60 percent
o
The capacity factor varies from year to year; this is explained
in the text.
E-19
-------
TABLE E-3. LIFE CYCLE COSTS FOR NOMINAL 1 kW POWER PLANT (Basis: 1 kW and 1 year)
Year
1975
1976
1977
1978
1979
1980
1981
1982
1983
1999
2000
2001
2008
2009
2010
TOTAL
p.v.a
Constr.
Cash
Flow
8.42
30.94
51.06
141.33
173.99
91.34
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
497.08
641.13
Tax
Deprec .
61.06
58.01
54.95
6.11
3.05
0.00
0.00
0.00
0.00
641.13
347.93
Debt
Inter.
27.18
26.28
25.37
10.87
9.97
9.06
2.72
1.81
0.91
184.59
Pref.
Equity
Dvdnds
6.54
6.32
6.10
2.62
2.40
2.18
0.65
0.44
0.22
44.41
Common
Equity
Dvdnds
31.42
30.37
29.32
12.57
11.52
10.47
3.14
2.09
1.05
213.33
Income
Tax
-53.02
0.05
1.84
30.45
32.23
34.02
25.17
23.90
22.64
62.05
Finan.
Deprec .
21.37
21.37
21.37
21.37
21.37
21.37
21.37
21.37
21.37
Fuel
Expen .
68.67
78.12
88.34
161.47
165.21
169.43
161.53
153.05
141.49
641.13
197.63 1044.61
OSM
18.31
20.83
23.56
43.06
44.05
44.91
43.07
40.81
37.73
278.53
Gross
Receipts
Tax
2.64
3.92
4.18
5.95
6.04
6.11
5.44
5.15
4.78
Rev en.
Req'd
132.08
196.24
209.06
297.32
301.76
305.54
272.07
257.60
239.15
7781.33
43.06 2152.87
Net
Energy
Output ,
P
n
5255
5694
6132
5135
5003
4858
3311
2988
2631
152664
79941°
Capacity
Factor
0.600
0.650
0.700
0.586
0.571
0.555
0.378
0.341
0.300
NOTES: All costs are in then-current dollars. Net energy output per year for a 1 kW plant is in kWhr.
A constant annual cost item not shown above is property tax (641.13) (0.014) = 8.98.
aThe reference point for present value (P.V.) calculations is plant start-up (beginning of 1981).
The P.V. for the Net Energy Output is obtained from the denominator of Equation (E-6). This
discounts and corrects for general inflation.
-------
Each year as funds become available they must carry an interest
charge for the remaining construction years. The compounded values are:
First year outlays
Second year outlays
8.42 X (1.1016)° = $ 15.05/kW (1975)
30.94 X (1.1016) = 50.20 (1976)
Sixth year outlays 91.34 X (1.1016) = 100.62 (1980)
$641.13/kW
Hence $641.13/kW is the capital cost of the plant at start-up time in
1981, with allowance for interest and escalation during construction.
The interest rate used is 10.16 percent, which is the same as the
weighted cost of capital from Table E-l. Actually a different interest
rate (reflecting the charges for a short-term loan) should be used.
Note that the calculated value of the plant cost is also the present
value shown in Table E-3.
Plant start-up costs were not specifically mentioned, although they
might have been included in construction costs; plant start-up costs are
customarily capitalized for a regulated industry. This ERDA example
does not include working capital. Normally it would be required at
plant start-up and would be added to construction costs to give total
investment,
Net Energy Output -- The capacity factor schedule selected is
representative of plant experience. The initial factor is 0.60 which
increases to 0.70 over a 2-year period then declines exponentially to
0.3 by the end of the 30-year life.
Net energy output is based on the capacity factor. Accordingly,
the annual net energy output of a 1 kW plant is:
For example:
in 1981,
in 1982,
1 kW X (24) (365) X capacity factor, kWhr
1 kW X 8760 hrs/yr X 0.60 = 5255 kWhr; and
1 kW X 8760 hrs/yr X 0.65 = 5694 kWhr.
Q§M (Operating and Maintenance) Cost -- The basic operating and
maintenance expense is given as 2.6 mills/kWhr (1975 dollars). Total
annual expenses are considered to vary with energy output and inflation.
For example, in 1983 when the capacity is 6132 kWhr:
Annual 0 § M costs = 0.0026 X (1.05)8 X 6132 = $23.56*
Then-current dollars.
E-21
-------
Fuel Costs -- As with 0§M costs, the price of fuel is subject to
yearly inflation and the consumption is proportional to net energy out-
put. Here, however, the basic information on price and heating value of
fuel, efficiency of combustion, etc. is not available, so the cost for
each succeeding year is calculated from the fuel cost for the first
year, $68.67, or:
1981 - first year fuel cost $68.67 for 5255 kWhr net power output
1982 - second year fuel cost 68.67 X | X 1.05 = $78.12 for
5694 kWhr
1983 - third year fuel cost 68.67 X |||| X (1.05)2 = $88.34 for
6132 kWhr; etc.
Tax Depreciation The depreciation for income tax is calculated
by the sum- of - the- digits method for a 20-year period:
= 210
20
1981 - first year tax depreciation = 641.13 X -~ = $61.06
19
1982 - second year tax depreciation = 641.13 X = $58.01, etc.
The use of sum-of-the-digits depreciation and for 20 years, the
minimum allowed, serves to reduce the tax in earlier years as compared
with the use of straight-line depreciation for this purpose.
Financial Depreciation -- Straight-line depreciation over the 30-
year life is used for the depreciation charges involved in the compu-
tation of the revenue required. Hence,
Financial depreciation = ~ = $21.37 per year.
The use of straight- line depreciation is used to reduce the book value
each year as shown.
Book value beginning of first year 1981 $641.13
Book value beginning of second year 1982 $641.13 - 21.37 = $619.76
Book value beginning of third year 1983 $641.13 - 2(21.37) = $598.39,
etc.
Return t£ Investors -- Each year the three classes of investors
will receive interest and dividends as called for in the schedule in
Table E-l, based on the book value. In addition, investors receive the
straight- line depreciation each year, allocated as to type of holding.
E-22
-------
The following table illustrates these points.
Debt (Bonds) 53% of total capital
Interest 1st yr
2nd yr
3rd yr
(641.13) (0.53) (0.08) = 27.18 (1981)
(619.76) (0.53) (0.08) = 26.28 (1982)
(598.39) (0.53) (0.08) = 25.37, etc. (1983)
Return of Capital
(straight-line depreciation) (21.37) (0.53) = 11.33/yr
Preferred Equity 12% of total capital
Dividends 1st yr
2nd yr
3rd yr
(641.13) (0.12) (0.085) = 6.54
(619.76) (0.12) (0.085) = 6.32
(598.39) (0.12) (0.085) = 6.10, etc.
Return of Capital
(straight-line depreciation) (21.37) (0.12) = 2.56/yr
Common Equity 35% of total capital
Dividend 1st yr (641.13) (0.35) (0.14) = 31.42
2nd yr (619.76) (0.35) (0.14) = 30.37
3rd yr (598.39) (0.35) (0.14) = 29.32, etc.
Return of Capital
(straight-line depreciation) (21.37) (0.35) = 7.48/yr
Income Tax --To determine the income tax, the Gross Profit is
found by subtracting net annual expenses, C, plus tax depreciation, D ,
from revenue, R, as shown in the cash flow diagram (below), which is t
patterned after Figure C-2. This Gross Profit is subject to income tax
rate, t. However, since revenues are not known, to calculate income tax
and then revenue, it is necessary to start with the known values of CoAh
F£ow, which are the sum of Equity Dividends, E,, and Financial Deprecia-
tion, D_, the capital return to investors. Note that debt interest is
an annual expense.
E-23
-------
Ccu>h flow
(Ed + Df)
Revenue
OPERATIONS
D
Tax Depreciation
(Ed * Df - Dt)
Net Annual Expenses
(R - C), Operating Income
(R - C - Dt), Gross Profit
Net Profit
Income Tax
+ Df - D
From this diagram it is seen that
Net Profit =
from which it follows that
Gross Profit = ^ (Ed + Df - D )
and that income tax is t times the gross income or
Income Tax =
+ D
Since in this example t = 0.5 and = r- = 1, the income tax for each year
can now be determined, or in
1982 income tax = 6.32 + 30.37 + 21.37 - 58.01 = 0.05
Equity Dividends D. D
The year 1981 is a special case because of an investment tax credit of
8 percent for the first year. First the income tax is computed as
above, or
1981 income tax = 6.54 + 31.42 + 21.37 - 61.06 = -1.73
From this is deducted the tax credit of
641.13 X 0.08 = 51.29 ,
which results in a tax of
(-1.73) - (51.29) = -53.02 .
Total Revenue, R -- By a balance of the input and output items of
the cash flow diagram, it follows that:
R = C + income tax + E. + D^
a f
All cost elements are now known except the gross receipts tax which is
2 percent of R. Then if one lets
E-24
-------
C = C* + 0.02 R ,
where C* includes all costs except gross receipts tax (i.e., 0£M, fuel,
property tax* and debt interest),
0.98 R = C + income tax + E , + D,, ,
or R = - * [C + income tax + E + D^.]
Property insurance which should be included as a cost item was neglected
in this ERDA example. Therefore, for 1982:
R = L- [20.83 + 78.12 + 26.28 + 8.98 + 0.05
0§M Fuel Debt int. Prop, tax Income tax
+ 6.32 + 30.37 + 21.37] = 196.24
Equity Dividends Financ. Dep.
The gross receipts tax = (0.02) (196.24) = 3.92,
Now that the values for the cash flows are developed (see Table
E-3), the various values for annualized cost and other measures of merit
can be computed.
Present Value Calculations --
To calculate the annualized and levelized costs, it is necessary to
determine the total P.V. of the Revenue Required. Also, for inflation
and to provide a check, the present value of each of the cash flow
streams is shown at the bottom of each column in Table E-3. The values
in Table E-3 are discrete year-end expenditures, except for construction
expenditures which are at the beginning of each year. The reference
point is plant start-up at the beginning of 1981. Recall that the
discounting rate is the average cost of capital, 10.16 percent.
A sample present value calculation for 0§M expenses follows:
D v 18.31 20.83 23.56 37.73 tf._0 CT
r . V . - =, -, , + ^- + + . . . + r-r- - SZ/O . 35
Annualized Cost --
This is the same as the annual revenue requirement and is formed by
the application of Equation (E-l). The value in the numerator is the
present value of the revenue required, or $2,152.87 from Table E-3. The
*(641.13) (0.014) = $8.98/yr.
E-25
-------
denominator for discrete interest is the "uniform series present worth
factor,"
" * which for 10.16% interest = - ^-1016j - = 9. 3025 .
r(l+r)n 0. 1016(1.
Therefore,
Annual ized Cost = gQ = $231.43 .
Unit Costs --
For this example, which follows the utility financed mode, unit
costs will only be calculated for the revenue requirement per unit of
output which is $/kWhr, but is done on three bases: (1) lifetime
average unit costs; (2) levelized cost by typical utility approach; and
(3) levelized costs by METREK approach.
Lifetime Average Unit Cost This is found from Equation E-3, or
The lifetime sums for the Revenue Required (the numerator) and the Net
Energy Output (the denominator) are both found in the Total line in
Table E-3.
Levelized Cost bv_ Typical Utility Approach -- Utilities desire a
constant levelized cost which will provide revenues over the years and
give the same present value as that of the revenue requirements. Since
the annual revenue for year n is LC x P , for this example:
u n' r
LC x5255 LC x5694 LC x2631
P.V. = 2152.87 = -" + ~ + .. . +
(1.1016)2 (1.1016)30
= LC f 525S + 5694 . . 2631
(1.1016)2 (1.1016)30
LCu [52,274]
or LC = = $0.041 18/kWhr or 41.2 mil Is/kWhr.
u
Note that, after LC is factored out of the above expression, there
remains a sum of terms called, because of similarity of the series, the
"present value of the energy output." The above relations correspond to
Equation E-5!
E-26
-------
The schedule below demonstrates how the revenues calculated from
LC xP also total the P.V. of the Revenue Requirement from Table E-3.
This schedule also points out that by this levelized cost, the revenue
received is more than required in the earlier years and less than in
later years. The excess revenue in the early years is presumed to be
invested at the discount rate, 10.16 percent, to yield needed funds in
the later years.
Year LC x P
u n
(P.V. of Level- P.V. of Rev. Req.
ized Cost) from Table E-3
1
2
(0.04118)
(0.04118)
(5255)
(5694)
216.40
234.48
vs.
vs .
132.08
196.24
30 (0.04118) (2631)
TOTAL
108.34 vs. 239.15
2152.87 equals 2152.87
Levelized Cost by_ METREK Approach -- For the comparison of tech-
nologies for generating electricity, Goudarzi £t al. (E-7) have proposed
a levelized cost, LCM, as defined by Equation E-6. The values for
energy output are substituted in this equation and rearranged in the
same form used for the analysis above, or
P.V. = LC
'M
5255
(1.05)
1.1016
0
5694
Cl-05)1 f
(1.1016)2
2Q "
ci.osry
" 30
(1.1016)-
«
where 1.05 is 1.0 plus the general inflation rate per year. Since the
value of the terms within the brackets is 79,941,
71^7 R7
79>'941
= $0.0269/kWhr or 26.9 mills/kWhr.
It will be noted that LCMx(1.05) " equals the unit cost of power,
$/kWhr, for the nth year in then-current dollars. It will also be
observed that the revenue received, LC (1.05) P , during the nth year
closely corresponds to the required revenue as tabulated in Table E-3
because inflation is accounted for. In any case, the present value (as
shown in the numerator in the expression immediately above) again equals
$2152.87. M
E-27
-------
Summary of_ Unit Costs -- A recapitulation of the preceding cal-
culations and results with comments is presented here.
Levelized
Cost
Equation
Used
Numerical
Calculation
Comment
Lifetime
average unit
cost, DC,
u
(E-4)
Typical utility (E-5)
approach, LC
METREK (E-6)
approach, LCM
7781.33X1000
152,664
51.0 mills/kWhr
2152.87X1000 =
52,274
41.2 mills/kWhr
2152.87X1000
79,941
26.9 mills/kWhr
High; for rough
indication
In common use in
electric utility
industry
Preferred method;
most meaningful;
revenue increased
per LC 1.05)n.
Summary Remarks --
The public utility method should be followed only when it is called
for. Here, a capital structure must be specified that is the distri-
bution of capital sources between equity sources and debt.
The preceding example included many details that can be disregarded
in most cost analyses. These refinements with comments are:
1.
2.
3.
4.
5.
Price inflation
Variable output rate
Include for long range projects.
Take into account if more than +_20%
of the average.
Variable operating expenses; Generally vary only if output rate
e.g., for increased changes considerably and inflation
maintenance is accounted for.
Discounting of cash flows
Discounting of output units
Always needed.
Needed for levelized costs!
E-28
-------
6. Escalation of output value Needed for METREK levelized cost
which is preferable.
7. Tax depreciation for income Always needed.
tax computation
8. Financial depreciation to Generally keep the same as tax
determine funds annually depreciation.
due investors
In addition, capital outlays at later dates and other features could
have been accommodated. Because of the completeness of the model used
in the example, it serves as a good basis for setting up procedures for
particular studies.
For another, but simplified, example of the public utility approach,
see Appendix J for the cost analysis of a retrofit flue gas desulfuriza-
tion facility.
SELECTED REFERENCES
E-l. Grant, E. L., W. G. Ireson, and R. S. Leavenworth. Principles of
Engineering Economy. 6ed. The Ronald Press Company, New York, NY.
1976. 624 pp.
E-2. Jelen, F. C., editor. Cost and Optimization Engineering. McGraw-
Hill Book Company, New York, NY. 1970. 490 pp.
E-3. Appendix A - Cost-Effectiveness Analysis. Federal Register, Vol.
38, No. 174. pp. 24639, 24640, Monday, September 10, 1973.
E-4. Van Note, R. H., P. V. Herbert, R. M. Patel, C. Chupek, and L.
Feldman. Bechtel, Inc. A Guide to the Selection of Cost-Effective
Wastewater Treatment Systems. EPA-430/9-75-002; NTIS PB 244 417.
Office of Water Programs Operations, U.S. Environmental Protection
Agency, Washington, DC. July 1975.
E-5. 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. Prepared
for EPA, Industrial Environmental Research Laboratory. Research
Triangle Park, NC. January 1975. 417 pp.
E-6. 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.
E-29
-------
E-7. Goudarzi, L., R. Gilbert, R. Kuehnel, and B. Buswell. The MITRE
Corp./METREK Div. Analysis of Benefits Associated with the Intro-
duction of Advanced Generating Technologies. MITRE Technical
Report 7388. Sponsored by ERDA, Contract No. EX-77-C-0042, Project
No. 2810, Dept. W-51. March 1977.
E-8. ERDA. Comparing New Technologies for the Electric Utilities.
ERDA 76-141 (Discussion Draft 1), December 9, 1976.
E-9. Stermole, J. Economic Evaluation and Investment Decision Methods,
2ed. Investment Evaluations Corp., Golden, CO. 1974. 449 pp.
5-10. Helfert, E. A. Techniques of Financial Analysis, rev. ed. Dow
Jones-Irwin, Homewood, IL. 1967. 291 pp.
E-30
-------
APPENDIX F
COST INDICES AND INFLATION FACTORS
CONTENTS
F-i
Page
Inflation Factors F-3
Selected References F-4
FIGURE
F-l. CE Plant Cost Index to 1977 F-3
TABLE
F-l. Plant Construction Cost Indices F-2
-------
APPENDIX F
COST INDICES AND INFLATION FACTORS
In economic analyses, cost indices are used to correct historical
cost data to a present or recent reference time. To adjust cash flows
to future dates, these data need to be corrected by inflation factors.
In some cases these factors are obtained by extrapolating recent cost
indices; however, for the long term (e.g., 20 or 30 years), the esti-
mated inflation rates attempt to take into account the various factors
expected to affect prices.
Note that inflation as used in cost analysis refers to the rise in
general prices corrected for an increase in productivity. Escalation
corresponds in meaning to inflation; however, it pertains only to a
specific commodity or service (F-l).
Several compilations of past representative costs for construction
for different industries are published. These typical costs are reduced
to indices with 100 as the base for a reference time. Examples of such
indices are given in Table F-l. Note that the growth rates vary con-
siderably from one index to another. These have been particularly
marked since 1973 as can be seen from the plot of the Chemical Engi-
neering magazine Plant Cost Index (solid line) given for illustrative
purposes in Figure F-l. However, some engineering-construction firms
feel that all the indices have not adequately reflected the marked
escalation in plant costs since 1973. Brief descriptions of the first
five indices listed are given in Peters and Timmerhaus (F-10). The
Sewage Plant Index is described in reference (F-8).
Indices for other items have also been developed. Examples with
growth rate data for 1967-72 (F-9) are:
Wholesale commodity prices 3.5%/year
Industrial chemicals prices 0.2
Plant maintenance 5.4
Chemical and allied products payroll 5.6
Fringe benefits 3.5
F-l
-------
TABLE F-l. PLANT CONSTRUCTION COST INDICES
Index Title
Field of Application
Ref.
Yr for Base
Value - 100
Growth
rates, %
yr. 67-72
Engineering News
Record-Building
Engineering News
Rec.-Construction
Chemical Engi-
neering-Plant
Cost
Nelson Refinery
Industrial buildings (F-2) 1967C
Marshall and
Swift --Process
Industry Equipm't
Sewage Treatment
Plant Construc-
tion Cost
Process plants
Petroleum refineries
and petrochemical
plants
Process plants
(F-3,
F-4)
1957-
1959
(F-5) 1946
(F-6) 1926
Sewage treatment
plants
(F-7,
F-8)
1957-
1959
9.1 (F-9)
General construction (F-2) 1967 10.1 (F-9)
4.7 (F-9)
9.0°
9.3 (F-9)
5.0 (F-9)
7.6 (F-8)
9.5°
a
Engineering News Record Indices set base earlier at 100 in 1913
1926, and 1949.
bFor 1972-77.
Q
Formerly Marshall and Stevens.
F-2
-------
1000
BASE PERIOD
1957-1959 = 100
I960
1970
1980
1990
YEAR
Figure F-1. CE Plant Cost Index to 1977 is indicated by the solid line. Extrapolations are shown by
dotted lines for index escalated for escalation rates of 4. 6, and 8 percent/year.
INFLATION FACTORS
Sometimes the effect of inflation is ignored; this is common for
projects up to a 10-year life. Some cost analyses require that the
prices for future investments and expenses be reckoned. Where inflation
rates are considered, a general rate or specific rates (escalation) must
be selected. The rates specified can vary for different periods.
Two
sets of rates used in 30-year projects are listed below:
from Doane et_ al_. (F-ll)
Rate of General Inflation
Escalation Rate for Capital Costs
Escalation Rate for Operating Costs
Escalation Rate for Maintenance Costs
5%
6%
6%
F-3
-------
from ERDA report (F-12)
0§M 5%
Gross National Product 5%
These rates are judged to be conservative, at least for fuel costs.
Some fluctuation should be expected over a long-range period (such as 30
years) because of recessions, OPEC price increases, and similar factors.
However, the indication from historical data (F-13, F-14) is that,
without heretofore unimposed controls, inflation will continue for
several decades. Some exacerbating factors are population growth,
shrinking natural resources, public spending, and national budget
deficits.
SELECTED REFERENCES
F-l. Stermole, F. J. Economic Evaluation and Investment Decision
Methods. 2 ed. Investment Evaluations Corp., Golden, CO.
1974. 449 pp.
F-2. Anon. EMR Building Construction Cost Index Histories. Eng.
News-Record. March 22, 1973. p. 79 (history in March issue each
year).
F-3. Arnold, T. H., and C. H. Chilton. New Index Shows Plant Cost
Trends. Chem. Eng. 70(4):143 (1963).
F-4. Ricci, L. J. C. E. Cost Indexes Accelerate 10-Year Climb. Chem.
Eng. 8£(9):117 (1975).
F-5. Nelson, W. L. Where to Find Yearly Indices. Oil Gas J. 63(27):
117117 (1965).
F-6. Stevens, R. W. Equipment Cost Indexes for Process Industries.
Chem. Eng. 54_(11):124 (1947).
F-7. U.S. Environmental Protection Agency. Construction Cost In-
dices --1st Quarter Final (CY-1977). Minipart Construction Div-
ision. Office of Water Program Operations. Washington, DC.
F-8. Anon. EPA Creates New Sewer and Plant Indexes. Eng. News-
Record. June 19, 1975. p. 73.
F-9. Perry, R. H., and C. H. Chilton. Chemical Engineers' Handbook.
5 ed. Table 25-3, McGraw-Hill Book Company, New York, NY, 1973.
F-10. Peters, M. S., and K. D. Timmerhaus. Plant Design and Economics
for Chemical Engineers. 2 ed. McGraw-Hill Book Co., New York NY
1968.
F-4
-------
F-ll. Doane, J. W., et_ a]L The Cost of Energy from Utility-Owned Sales
Electric Systems; A Required Revenue Methodology from ERDA/EPRI
Evaluations. JPL Report No. 5040-29 (ERDA/JPL-1012-76/3). Pasa-
dena, CA. June 1976. 82 pp.
F-12. ERDA. Comparing New Technologies for Electric Utilities. ERDA
76-141 (Discussion Draft 1). December 9, 1976.
F-13. Harris, M. Cannibals and Kings -- The Origin of Cultures.
p. 188. Random House, New York, NY. 1977.
F-14. Warsh, D., and L. Minard, Inflation is Now too Serious a Matter
to Leave to Economists. Forbes. November 15, 1976.
F-5
-------
APPENDIX G
RATES OF RETURN AND INTEREST RATES
CONTENTS
Page
Rates of Return G-l
Privately Financed Projects G-l
Regulated Industries G-3
Public Projects G-3
Interest Rates G-4
Selected References G-5
G-i
-------
APPENDIX G
RATES OF RETURN AND INTEREST RATES
The nature of a specific rate of return must be defined. In
Appendix E. Measures of_ Merit, both return on investment (ROI) and
internal-rate-of-return (IROR) were described because of their utility
for cost analysis; other rates of return are also in use. For some
studies a minimum acceptable rate of return (MARR) must be specified
either to provide a criterion, or to compute required revenue; such
MARRs are discussed below. Note that it is not the same as the cost of
capital; a MARR should be somewhat higher (G-l) .
Interest specifically refers to charges for borrowed money; e.g.,
short term loans to underwrite construction, and long term debt such as
bonds as a source of investment capital.
RATES OF RETURN
For the different sectors the rates of return (based on total
capital investment) vary in character and magnitude. For private investments
the expected return ranges from 5 to 25 percent after taxes; from corpo-
rate annual reports one can deduce that it averages much less, about
5 percent. For utilities, as an example of a regulated industry, the
composite return to bondholders and stockholders at present is about
10 percent after taxes as shown in Table E-l. Of course on public
projects the discount rate has generally corresponded to the cost of
government borrowing; however, there is presently an inclination to
raise this figure to 10 percent which is considered to be the current
opportunity cost of capital (G-2).
Privately Financed Projects
A return figure for private sector facilities has several uses.
Where revenue is generated, a minimum acceptable rate of return (MARR)
will indicate if the project appears attractive. Conversely, for a
required pollution abatement facility, it will indicate the true cost of
meeting the regulations; such a true cost would include a reasonable
return on investment.
The returns that companies expect depend both on the type of indus-
try and (for the industry in question) the degree of risk operational
or commercial. This table from Aries and Newton (G-3) is valid for
illustrating these points.
G-l
-------
Industry
Industrial chemicals
Petroleum
Pulp and paper
Pharmaceuticals
Metals
Paints
Fermentation
products
Minimum acceptable ROI before taxes, %
Low Risk
11
16
18
24
8
21
10
High Risk
44
39
40
56
24
44
49
A TVA report (G-4) states that a rough consensus appears to be 7 percent
for ROI and 12 to 15 percent for IROR.
It must also be realized that business firms will accept or allo-
cate a lower return from essential or cost-reducing projects than from
those for production expansion or new projects, a view Happel and Jordan
(G-5) support with these figures:
Degree of Minimum Acceptable
Type of Project Risk ROI after Taxes, %
Cost reducing; Low 10 to 15
pollution abating
Capacity expansion; up- Moderate 15 to 25
grading production facilities
New facilities for a new High 20 to 50 or more
product
Note that for a given situation the IROR ranges from about the same
value to 50 percent higher than the ROI; the particular increase depends
on both the life of the project and the ratio of depreciation to net
profit.
G-2
-------
Regulated Industries^
Both an ERDA report (G-6) and Doane et^ al. (G-7) showed how a
roughly 10 percent return was calculated for projects considered for
regulated industry. The data and calculated weighted costs of capital
follow. The basis here is an attractive return (viz., 14 and 12 per-
cent) to holders of common stock.
Electric Solar Electric
Type of Facility Utility (G-6) Systems (G-7)
Capital Structure, %
Debt (bonds)
Preferred equity
Common equity
Cost of Capital, %
Interest on debt
Dividends on preferred equity
Dividends on common equity
Weighted Cost of Capital, %
53
12
35
8.0
8.5
14.0
10.16a
50
10
40
8
8
12
9.6
E-l.
For the computation of this value, see footnote (a) to Table
From the manner of calculation for the public utility example in
Appendix E, it is apparent that the return to the bondholders, an item
of annual expense, is made each year before income taxes are paid. The
dividend return to stockholders, preferred and common, constitutes
profit to the "owners;" it is therefore after income taxes.
Public Projects
Two philosophies are current for fixing discount factors used in
evaluating government-funded projects; e.g., Cost-Effectiveness Anal-
ysis. The first, which has prevailed at least since 1952, holds that
the discount rate should correspond to the average rate of interest
payable by the U.S. Treasury on marketable securities. Recently, a
strong case was developed for the use of the opportunity cost of cap-
ital.
Discount Rate Corresponding to Interest Rate on Government Obligations --
The position, that the Government's investment decisions are re-
lated to the cost of Federal borrowing, has been represented by a series
G-3
-------
of laws and regulations that have promulgated discount factors to be
used for Federally funded water and related land programs (G-8). These
discount rates now designated by the Water Resources Council, under its
"Principles and Standards," have increased from 2.50 percent in 1957 to
6-5/8 percent in April 1978. When it published its Cost-Effectiveness
Guidelines in 1973 (G-9), EPA adopted these interest rates even though
its Construction Grants Program is not covered by the Water Resources
Council's "Principles and Standards."
Current WRC discount rates can be obtained from the Water Resources
Council, 2120 L Street, NW, Washington, DC 20037.
Discount Rate Corresponding to Opportunity Cost of Capital --
This concept suggests that the proper discount rate to use for
public investment projects should be based on the rate of return to
private sector investment. The rationale advanced is that resources
used for public investment have alternative uses in the production of
private commodities which society foregoes for the sake of public in-
vestment (G-2).
For this rate of return to private sector investment, called oppor-
tunity cost of capital, 10 percent is being suggested. This rate was
cited in the Office of Management and Budget's circular A-94 (G-10) for
use in agency programs not covered by the WRC "Principles and Standards."
INTEREST RATES
For project evaluation the two common uses of interest rates are to
estimate the cost of short-term loans and long-term debt. Short-term
loans are invariably for allowance for funds during construction. For
regulated industries these interest charges are customarily included in
the capital investment; see the public utility examples in Appendices E
and J. For privately financed projects, where construction loans are
required, such interest charges are expensed, generally at the end of
the first year of operation. These short-term loans call for commercial
interest rates which are higher than the rates on bonds. The interest
rates on construction loans vary from 8 to 12 percent; McGlamery e_t al.
(G-ll) used 8 percent.
Interest rates on bonds currently run 6 to 10 percent. Customarily
they are introduced only in the evaluation of projects for either the
regulated or public sector, despite the use of bonds to provide some
capital for private enterprises.
For simplicity and convenience in some project evaluations, the
same interest rate is used both for allowance for funds during construc-
tion and for debt. This was done in the examples for the public utility
in Appendix E and the flue gas desulfurization retrofit in Appendix J.
G-4
-------
SELECTED REFERENCES
G-l. Stermole, F. J. Economic Evaluation and Investment Decision
Methods. 2 ed. p. 64. Investment Evaluation Corp., Golden,
CO. 1974. 449 pp.
G-2. Interim Regulations Implementing Clean Water Act of 1977; The
Discount (Interest) Rate. Federal Register, Vol. 43, No. 80,
p. 17702, Tuesday, April 25, 1978.
G-3. Aries, R. S., and R. D. Newton. Chemical Engineering Cost Esti-
mation, p. 193. McGraw-Hill Book Company, New York, NY. 1955.
263 pp.
G-4. Tennessee Valley Authority. Sulfur Oxide Removal from Power
Plant Stack Gas -- Ammonia Scrubbing: Production of Ammonium
Sulfate and Use as an Intermediate in Phosphate Fertilizer Manu-
facture. NAPCA (EPA) No. APTD 0615; NTIS PB 196-804, 1970. 322
pp.
G-5. Happel, J., and D. G. Jordan. Chemical Process Economics. 2 ed.
p. 260. Marcel Dekker, Inc., New York, NY. 1975. 511 pp.
G-6. ERDA. Comparing New Technologies for Electric Utilities. ERDA
76-141 (Discussion Draft 1), December 9, 1976.
G-7. Doane, J. W., ejt aj_. The Cost of Energy from Utility-Owned Solar
Electric Systems; A Required Revenue Methodology from ERDA/EPRI
Evaluations. JPL Report No. 5040-29; ERDA/JPL-1012-76B. Pasadena,
CA. June 1976. 82 pp.
G-8. Anon. Supplementary Information: Compilation of Discount
(Interest) Rate Provisions by Department - Agency; Part 8G from:
Planning and Cost Sharing Policy Options for Water and Related Land
Programs. U.S. Water Resources Council, Washington, DC. November
1975. 12 pp.
G-9. Appendix A - Cost-Effectiveness Analysis. Federal Register, Vol.
38, No. 174. pp. 24639, 24640, Monday, Sept. 10, 1973.
G-10. Circular A-94. Office of Management and Budget.
G-ll. 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, p. 26. EPA-600/2-75-006; NTIS PB 242 541.
Prepared for EPA, Industrial Environmental Research Laboratory.
Research Triangle Park, NC. January 1975. 417 pp.
G-5
-------
APPENDIX H
METHODS OF RELIABILITY ASSESSMENT
CONTENTS
Factors Affecting Accuracy H-l
Accuracy of Capital Investment from Available
Correlations H-l
Procedures for Assessing the Reliability of a Measure of
Merit H-2
Opinion-Based Mode H-4
Statistical Mode H-6
Selected References H-7
FIGURE
H-l. Percent deviation from actual cost of various
estimate types based on a study by Bauman H-3
H-i
-------
APPENDIX H
METHODS OF RELIABILITY ASSESSMENT
Cost estimates are at best only approximately correct, and they
vary widely in reliability. Both the estimator and those using the
results should be aware of these limitations. Accordingly some indi-
cation of reliability is an essential aspect of any cost estimate; it
certainly ensures that the measures of merit based on best-guess cost
information do not become cast in concrete. Also, a reliability assess-
ment, where alternatives are being judged, serves notice that the relia-
bility of the comparisqn is no better than that of the candidate with
the lowest reliability.
FACTORS AFFECTING ACCURACY
Although desirable, it is difficult to determine the accuracy of a
cost estimate. Factors such as stage of development, extent of the
engineering, definition of scope, quality of the cost data, and ex-
pertise of the estimator must be considered. In addition, uncertainties
about future events (e.g., business conditions, weather, and the actual
organization used to erect the plant) may greatly influence actual
costs.
ACCURACY OF CAPITAL INVESTMENT FROM AVAILABLE CORRELATIONS
In Figure 1 in Section 1 and Table 1 in Section 2, both in Vol-
ume I, the accuracy for the capital cost of the plant is exhibited as a
function of only one of the above factors, namely, the extent of the
engineering. Also, the error range for the plant capital cost is illus-
trated by a so-called "envelope of variability" in Figure 2 in Section
2, also in Volume I.
A graphic support for this envelope of variability is presented in
Figure H-l taken from Bauman (H-l). It is based on a study of the
results from 48 actual projects for each of which several types of
estimates of increasing accuracy were prepared. A breakdown by type and
cost is:
H-l
-------
Range.of Cost
Type No. of Plants (10 $)
Fluid 16 0.5-38
Fluid/solid 6 0.1-26
Solid 8 1.0-6
Auxiliary facilities 9 0.5-5
Laboratories 9 0.5-2.5
The plotted points of Figure H-l represent the percent deviation of the
estimated costs of specific projects from the actual cost. The various
estimate types are represented; in fact, the data serve to indicate the
improvement in the accuracy with increasing information. Almost all the
order-of-magnitude estimates were lower than the costs of the final
project for which they were prepared. Preliminary estimates, which were
based on more information, were more equally distributed over and under
their actual project costs. The definitive estimates show a narrower
range of variation with a larger percentage exceeding their respective
project costs. Of the 48 projects only 35 were approved by management
on the basis of a definitive estimate. The authority to construct the
remaining was based on estimates of lesser accuracy to save time in
bringing a product to market.
These guidelines set forth by Bauman are supported by several
substantial, but less complete, investigations by Tyler (H-2) and (in
particular) Hirsch and Glazier (H-3). Tyler's comparison of many esti-
mates with the actual construction costs shows that half the overruns
were caused by circumstances such as inflation and delays beyond the
influence of management while the other half were caused by factors
within its control. Tyler also emphasizes the marked effect of the
capabilities and ingenuity of the construction superintendents upon the
cost of the actual plant installation.
PROCEDURES FOR ASSESSING THE RELIABILITY OF A MEASURE OF MERIT
Note that only the accuracy of one element of a cost estimate has
been considered above; viz., the capital cost of the plant. However, an
indication of the accuracy of a feasibility measure, such as ROI, must
also take into account the error range of the other cash flows (e.g.,
revenue, total operating costs) and factors such as plant life, income
tax rate, and rate of inflation. For an assessment of accuracy, gen-
erally only the dominant cash flows and the factors likely to change in
value need to be taken into account.
H-2
-------
ORDER OF
MAGNITUDE
PRELIMINARY
DEFINITIVE
DETAILED
ESTIMATES
ENVELOPE OF VARIABILITY
25 20 15 10
PERCENT ESTIMATE WAS LESS
THAN ACTUAL COST
5 10 15 20 25
PERCENT ESTIMATE WAS GREATER
THAN ACTUAL COST
Figure H-1. Percent deviation from actual cost of various estimate types based on a study by
Bauman (H-1). (Note that the percent deviation in this figure corresponds with the reliability
figures in Table 1 in Volume I.)
For the purposes of this standard procedure, two modes will be
reviewed:
Opinion based on experience and correlations.
Uncertainty analysis by statistical methods including the Monte
Carlo technique.
Most cost estimates are presented using the mean 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 delineated
below. The statistical approach requires a notion of the distribution
H-3
-------
of errors of the major cash flows and factors. A disadvantage of sta-
tistical methods is that they are presented in a form (cumulative
frequency distribution) and use terms (standard deviation, variance)
that are not familiar to many users. More information about these modes
is given below.
Opinion-Based Mode
The opinion-based mode will be developed in some detail but only as
it applies to the capital cost of facilities. Figure H-l shows that the
"envelope of variability" can be presented as a function of the degree
of completeness of an engineering design. Other dominant aspects that
affect the accuracy are reviewed below:
Stage of_ Development - If the process is new, and a preliminary
design is based on a conceptual process, the error range will be
broader than for an operation for which there are results from
successful pilot plant operation.
Definition of_ Scope - By its nature this is vague and general for
an order-of-magnitude estimate; but, for a preliminary estimate it
can range from being indefinite to being fairly specific as illus-
trated in Table 6 in Section 3 of Volume I and the examples in
Appendices J and K.
Quality of_ Cost Data - This varies widely. As stated in Appen-
dix A, costs of the critical equipment items need to be secured
from vendors and checked against experience, other vendors, or the
literature. An equipment specification can be important here.
Expertis^ of_ the Estimator - The estimator should either be exper-
ienced or assemble his cost data with great care; in any case, he
should possess good judgment. Care, experience, and discernment
determine to a large extent the quality of a cost estimate.
Based on his assessment of these factors, the estimator should modify
the error range found from Table 1 in Section 2 (also, see Figure 1 in
Section 1 and Figure 2 in Section 2), all in Volume I.
An example of the use of the opinion mode for capital cost of
facilities is given below for a conceptual process for which a pre-
liminary* process design has been carried out by a contractor.
A preliminary process design generally calls for a "study" esti-
mate. A "preliminary" or "budget authorization" capital cost estimate
requires more detailed engineering; Figure 2 in Section 2 (Volume I)
clarifies this distinction.
H-4
-------
a. The accuracy based on a preliminary process design can
be found either from Figure 1 or Table 1 (Volume I)
for a so-called "study" estimate to be +_ 30%
(With further engineering study the estimate would have
been termed "preliminary" or "budget authorization" and
rated at +_ 20% accuracy.)
b. The fact that the process is conceptual and that no
pilot plant results are available affects the range
of accuracy. It could be more, but use +_ 50%
(Such estimates tend to be low, not high, because the
complexity of a real process is usually not fully
comprehended at this stage. See Figure H-l.)
c. The definition of scope is assumed to be consistent
with the preliminary process design, so that there is
no effect. At best, the range is still +_ 50%
d. The quality of the cost data could be good if suf-
ficient care were taken in delineating the equipment
list and in defining the characteristics of the oper-
ation. Note that the excellent quality of cost data
only serves to maintain the estimate within the previous
range, not to constrict the range of accuracy. It
remains, at best +_ 50%
e. The lack of expertise of the estimator can now serve
to broaden the range further. If it can be assumed
that the person in charge of the cost estimate had
experience with an engineering-construction firm in
both process design and cost estimation, this can
then at best maintain the range at +_ 50%
This means that the error range for the capital cost estimate is judged
to be +_ 50 percent by the project officer.
If the capital cost estimate were a preliminary type, the degree of
accuracy would first be judged to be +_ 20 percent; but because the pilot
plant data are inconclusive, the value might be increased to +_ 30 percent,
Of course, in addition to the factors above, there is the effect of
outside influences; e.g., business conditions, topography, climate, and
availability of a competent organization for plant installation.
It must be realized that the error range of the other cash flows
and factors must be taken into account in appraising the accuracy of the
feasibility measures. It is virtually impossible to do this by the
opinion mode. Accordingly, it may be advisable to invoke a statistical
method.
H-5
-------
Statistical Mode
This mode recognizes that each element of a cost estimate is a
statistical concept characterized by a mean value and some measure of
the probability distribution of the value. For example, if the dis-
tribution is normal, the standard deviation is sufficient to character-
ize the distribution. Such information, if available for the dominant
cost elements (e.g., investment, operating costs, selling price), can be
combined to calculate the distribution of various calculated results,
such as return on investment.
For cases where the dominant cost elements can be assumed to have
normal distributions, the method of calculation is outlined and illus-
trated by Ferencz (H-4). An example is also given by Hirsch and Glazier
(H-3).
In other situations, some of the distributions are not normal.
Also, there are software systems firms, such as McDonnell Douglas
Automation Co., St. Louis, and Bonner and Moore Associates, Inc.,
Houston, that perform such calculations on a service basis.
In Appendix K, the reliability assessment segment includes an un-
certainty analysis generated by the application of the Monte Carlo
technique. Estimates of the expected range and the most likely values
of the significant cost inputs are tabulated. The result is a cumu-
lative frequency distribution plot for the ROI. One procedure for
generating the probability distribution of the cost elements is crude
but practical: a source with some knowledge about one element provides
a most likely value, an optimistic value, and a pessimistic value. For
example, a sales manager could furnish figures for the selling price and
the market volume; a production manager could supply production costs;
and the engineering department could work up the capital investment
costs. This approach lends itself to establishing a probability dis-
tribution for each of the variables in question. The modified-beta
probability is often used; however, other probability distributions can
be and are used. For the applicable elements, the Monte Carlo technique
can be used to obtain a probability distribution of the measure of
merit; e.g., ROI. The information derived allows for better decisions
than from the one-value best-estimate method. It is particularly
helpful in deciding between alternatives; sometimes the choice is not
the best-guess candidate, but the one with the most favorable proba-
bility situation. This entire subject, as it applies to facility feas-
ibility, is briefly explained by Ross (H-S). There is extensive liter-
ature on this mode and programs can be purchased; e.g., from Decision
Sciences Corp., St. Louis.
H-6
-------
SELECTED REFERENCES
H-l. Bauman, H. C. Fundamentals of Cost Engineering in the Chemical
Industry, p. 35. Reinhold Publishing Corp., New York, NY, 1964.
364 pp.
H-2. Tyler, C. Where Cost Estimates Go Sour. Chem. Eng. 60(1):198
(1953).
H-3. Hirsch, J. H., and E. M. Glazier. Estimating Plant Investment
Costs. Chem. Eng. Progress, ,56(12) :37 (1960).
H-4. Ferencz, P. Statistics Can Put More Meaning into Your Cost Esti-
mates. Chem. Eng., 5£(4):143 (1952).
H-5. Ross, R. C. Uncertainty Analysis Helps in Making Business Decis-
ions. Chem. Eng., 78 (38):149 (1971).
H-7
-------
APPENDIX I
SENSITIVITY ANALYSIS
CONTENTS
Page
Definition of Sensitivity 1-1
Methods of Sensitivity Analyses 1-1
Suggested Sensitivity Evaluations 1-2
Selected References 1-4
FIGURES
1-1. Sensitivity analysis of maintenance charges for
wet limestone process FGD unit for the example in
Appendix J 1-2
1-2. Strauss Chart for sensitivity analysis of CC1.
price and handling tolls for residues on ROI for
chlorolysis unit 1-3
I-i
-------
APPENDIX I
SENSITIVITY ANALYSIS
The modes for reliability assessment described in Appendix H yield
an indication of the overall accuracy of the cost evaluation. However,
these modes do not answer the question, "How sensitive are estimates to
variations of a specific factor?" Or more to the point, they do not set
at rest the issue, "Is there some probability that the original decision
based on the best-guess estimate might be reversed because of the
variation of a specific factor?" The answers are provided by a sensi-
tivity analysis.
DEFINITION OF SENSITIVITY
Sensitivity relates to the extent of the change in a cost analysis
resulting from a variation in one or more elements of the cost estimate.
More particularly, a sensitivity analysis shows the influence of pos-
sible changes of the significant variables and identifies those that
have a critical effect on the measures of merit. The analysis is
especially concerned with factors that could bring about a change in
the decision with only a small change in the value of the factors.
METHODS OF SENSITIVITY ANALYSES
The usual practice is to make a number of computations of measures
of merit by varying each significant cost or financial factor over its
likely range. Because of the many calculations that may be needed, a
computer often proves helpful in executing a sensitivity study. In some
situations mapping a space by changing one variable at a time requires a
substantial effort; this may be markedly reduced by application of
response surface techniques.
In response surface analysis each significant element is changed in
accordance with an appropriate scheme; for example, a factorial design
(1-1, 1-2). The advantage of this method is that it determines the
points (or other interfaces at which changes in decision may be re-
quired) with fewer calculations, and it provides information on the
nature of the response in the vicinity of the critical areas.
1-1
-------
SUGGESTED SENSITIVITY EVALUATIONS
Because of the rough nature of much of the information for a study
or preliminary type estimate, a sophisticated sensitivity analysis (such
as by response surface techniques) is generally not required. However,
thought needs to be given to costs or other values that could vary
considerably and thereby have a critical effect. Also, the sensitivity
analyses need to be presented effectively.
A minimum procedure is to single out the dominant variables and
demonstrate their effect on a measure of merit. In Figure 1-1, the
effect of relative maintenance charges is shown on the relatively
uniform annual cost for the example of the FGD retrofit in Appendix J.
This follows the relative profitability approach of Agarwal and Klumpar
(1-3); it is well suited to this example.
Figure 1-2 demonstrates the Strauss Chart (1-4). Usually a measure
of merit is the ordinate. and the abscissa accounts for the over- or
under-estimation of a significant parameter. The slope indicates the
+20
a
UJ
UJ CO
(9 <
S 0
o
4
UJ
CJ
GC
10
10
20
MAINTENANCE CHARGES AS PERCENTAGE
OF TOTAL PLANT COST, If
Figure 1-1. Sensitivity analysis of maintenance charges for wet limestone process
FGD unit for the example in Appendix J. (This corresponds to the relative profit-
ability approach described by Agarwal and Klumpar (1-3)).
1-2
-------
SELLING PRICE FOR CCI4
PERCENT CHANGE
INROI
TOLL CHARGES FOR WASTES
PERCENT CHANGE IN VARIABLE
Figure 1-2. Strauss Chart (1-4) for sensitivity analysis of CC^ price and handling
tolls for residues on ROI for chlorolysis unit (for example in Appendix K).
1-3
-------
degree of change in the measure of merit with an assumed percentage
change in a parameter. The length of the line represents the range of
sensitivity of the parameter. Arbitrarily, Strauss assigned positive
slopes to revenue variables and negative slopes to operating expense
variables. The illustrative chart (Figure 1-2) depicts the effect of
carbon tetrachloride (CC1.) market price and handling tolls for residues
on the return on investment (ROI) for the chlorolysis unit example in
Appendix K. This chart demonstrates graphically that profitability is
only moderately affected by changes in the residue handling tolls that
can be exacted, but is very sensitive to the market price of CC1.. In
fact, the chart dramatically shows that a drop of over 20 to 30 percent
in the expected price of CC1. would render the proposed process
infeasible.
SELECTED REFERENCES
1-1. Baasel, W. D. Exploring Response Surfaces to Establish Optimum
Conditions. Chem. Eng., 72^22):147 (1965).
1-2. Davies, 0. L., ed. The Design and Analysis of Industrial Experi-
ments. 2e. Haffner Publishing Co., New York, NY. 1967.
1-3. Agarwal, J. C., and I. V. Klumpar. Profitability, Sensitivity and
Risk Analysis for Project Economics. Chem. Eng., 82:(20):66 (1975).
1-4. Strauss, R. The Sensitivity Chart - Giving Meaning to Shaky Esti-
mates. Chem. Eng., 75(12) :112 (1968).
1-4
-------
APPENDIX J
EXAMPLE I -- COST ANALYSIS OF FLUE GAS
DESULFURIZATION (FGD) RETROFIT FACILITY
CONTENTS
Statement of Problem J-l
Source of Process and Cost Data J-l
Guideline Information J-l
Specification J-l
Descriptive Segment J-l
Cost Analysis Segment J-16
Reliability Assessment Segment J-20
Overall Assessment J-20
Selected References J-22
FIGURE
J-l. Wet limestone FGD process flowsheet J-6
TABLES
J-l. Guideline Information for Example I ... J-2
J-2. Summary of Economic Evaluation for Example I --
Descriptive Segment J-5
J-3. Summary of Economic Evaluation for Example I
Cost Analysis Segment J-7
J-4. Analysis of Capital Investment Data for Limestone
Slurry FGD Unit (New) J-ll
J-5. Annual Operating Expense Estimate for Example I --
Wet Limestone FGD Process (Retrofit) J-12
J-6. Average General Expense Estimate for Example I
Wet Limestone FGD Process (Retrofit). j_14
J-7. Life Cycle Costs for Example I -- Public Utility
Mode of Evaluation J-15
J-8. Summary of Economic Evaluation for Example I
Reliability Assessment Segment J-21
J-i
-------
APPENDIX J
EXAMPLE I -- COST ANALYSIS OF FLUE GAS
DESULFURIZATION (FGD) RETROFIT FACILITY
The mode of cost analysis for public utilities will be demonstrated
by this evaluation.
STATEMENT OF PROBLEM
An engineering cost analysis is required for a retrofit to a 500 MW
coal-fired power station for the removal of S02 from the flue gases.
The wet limestone process will be used.
SOURCE OF PROCESS AND COST DATA
The primary source of the process and cost data is an engineering
study made by Catalytic, Inc. (J-l) for the limestone slurry scrubbing
of flue gas. This complete cost study was further qualified as an
example because of its later scrutiny by Pullman Kellogg (J-2) . Except
for the comprehensive study by TVA (J-3), few evaluations were found in
EPA reports which proved satisfactory to demonstrate a cost evaluation.
GUIDELINE INFORMATION
The required guideline information, as outlined in Table 11 in
Section 3 of Volume I, is developed in Table J-l.
SPECIFICATION
The data required as indicated by Tables 5 and 7 in Section 3 of
Volume I are provided in Tables J-2 and J-3; these are supplemented by
the information in Tables J-4 through J-7. Some pertinent comments
are given below.
Descriptive Segment
See Table J-2. Note the process flowsheet, Figure J-l.
J-l
-------
TABLE J-l. GUIDELINE INFORMATION FOR EXAMPLE I
DESCRIPTIVE SEGMENT
Facility Description
Plant Location
Index for area con-
struction labor costs
Capacity Rating
Abstract of Scot
Performance Specifications
Stagg £f Development
Midwest area.
Stated as Cincinnati. Index not spec-
if ically declared in Catalytic
report (J-l) .
To reduce SO- content from flue gas
from 500 MW coal-fired power
station burning 3-1/2% S coal.
Gas train - venturi and three-stage
turbulent contact absorbers (TCA).
To cover all equipment from boiler
breeching to boiler stack. Processing
areas to be included in the design are:
1. Limestone storage and processing.
2. Slurry scrubbing system with stack
gas reheater and accessories.
3. Spent limestone slurry settling
system and water recovery.
The cost of the electrostatic pre-
cipitators associated with the boiler
is not to be included in this
estimate.
The boiler system with wet limestone
scrubbing is to meet EPA standards
for S02 emissions of 1.2 Ib of S0?
per million Btu (0.52 mg of SO /kJ)
heat input.
Detailed design of system is based on
incomplete pilot plant work by
TVA's Office of Agricultural and
Chemical Development.
J-2
-------
Table J-l (Continued). Guideline Information for Example I
COST EVALUATION SEGMENT
Specified Parameters
Interest (Discount) Rate
Facility Life and
Depreciation Period
Construction Time
Reference Year for Costs
Reference Units for
Process Costs
Cost Index
Inflation Rate
Use
Use
11%.
15 years
for both.
Three years.
1977.
For capital -- $/kW; for operating
expense -- mills/kWhr.
Chemical Engineering (CE).
N.A. See under Feasibility Evaluation,
below.
Cost Estimate - Capital Investment
Types of Capital
Investment Estimates
Allowance for Funds
During Construction
Modification of Facil-
ities and Start-up
Definitive, only because definitive
estimate is available. Also, use
Chilton and Lang methods as checks
and to demonstrate these techniques.
Capitalize. Schedule for funds: 25%
3 years before start-up, 50% 2 years
before, and 25% 1 year before.
Use 8% interest rate.
Capitalize. Use 8% of I_.
F
Cost Estimate - Operating Expense
Total Operating Expenses Use total operating expenses.
vs. only 0§M
Stream Time 7,000 hr/yr
Pre-production Expenses N.A.
Direct (operating) $7/hr
Labor Rate
Depreciation Use straight-line method.
Cost Estimate - Profit and Ca^k
Revenue (if any)
Income Tax Rate
Calculate revenue requirement.
50%.
J-3
-------
Table J-l (Continued). Guideline Information for Example I
Feasibility Evaluation
Mode of Cost Analysis
Measures of Merit
Computation Features
Utility financing.
Annualized cost, levelized cost, unit
capital investment, and unit operating
expense. The two unit costs are cus-
tomary for economic analyses of FGD
units.
Use discounting, calculate revenue
requirement (inherent in annualized
and levelized cost), recover
investment (by depreciation), do not
account for inflation, use total
annual expenses, use discrete
interest factors.
RELIABILITY ASSESSMENT SEGMENT
Sensitivity Analysis
Uncertainty Analysis
Investigate the sensitivity of the
annualized cost for revenue require-
ment for annual maintenance charges
from 2 to 20% of I . The process
does not seem to be sensitive to
other variables. Use "relative
profitability" approach to depict
sensitivity analysis.
Use only opinion mode.
J-4
-------
TABLE J-2. SUMMARY OF ECONOMIC EVALUATION
FOR EXAMPLE I -- DESCRIPTIVE SEGMENT
FACILITY DESCRIPTION. Wet limestone process for flue gas desulfuriza-
tion. 500 MW coal-fired power station retrofit. See flow diagram,
Figure J-l. Location: midwest area. Cincinnati construction labor
rates should apply.
CAPACITY RATING. For retrofit to 500 MW coal-fired power station.
1.54 X 10 acfm (43,600 m /min) of flue gas to venturi. Sulfur flow rate
of 13,200 Ib/hr (1.66 kg/s) (3-1/2% S coal).
ABSTRACT OF SCOPE. Fuel - coal with 3-1/2% S. Gas train - venturi and
three-stage turbulent contact absorbers (TCA). Slurry flowrate: to
3 33
venturi, 18 gpm/Macfm (2.41 m slurry/10 m inlet gas); to TCA, 40
gpm/Macfm (5.36 m3 slurry/103 m3 inlet gas). Total AP = 18 in. (0.46 m)
w.c. Covers all equipment from boiler breeching to boiler stack.
Processing areas included in the design are:
1. Limestone storage and processing.
2. Slurry scrubbing system with stack gas reheater and accessories.
3. Spent limestone slurry settling system and water recovery.
The cost of the electrostatic precipitators associated with the
boiler is not included in this estimate.
PERFORMANCE SPECIFICATION. The boiler system with wet limestone scrub-
bing will meet EPA standards for S09 emissions of 1.2 Ib of SO per
million Btu (0.52 mg/kJ) heat input.
STAGE OF DEVELOPMENT. Detailed design of system is based on incomplete
pilot plant work by TVA's Office of Agricultural and Chemical
Development (J-l).
J-5
-------
FUEL OIL
STORAGE
AND PUMPS
INDUCTION
FANS AND
MOTORS
DIRECT FIRED
REHEATER
DUCTWORK
AND DAMPERS
HORIZONTAL
2STAGE
ENTRAPMENT
SEPARATOR
RECIRCULATION
TANKS AND
PUMPS
FLU EGAS-
SECTION I
LIMESTONE
UNLOADING
30 DAY
STOCKPILE
AND CONVEYOR
TUBE MILL
SURGE TANK
LIMESTONE
SLURRY TANKS
AND PUMPS
SECTION II I SECTION III
Figure J-t. Wet limestone FGD process flowsheet, adapted from Shore et al. (J-2).
-------
TABLE J-3. SUMMARY OF ECONOMIC EVALUATION
FOR EXAMPLE I -- COST ANALYSIS SEGMENT
FACILITY DESCRIPTION. Wet limestone pro-
cess for flue gas desulfurization. 500
MW coal-fired power station - retrofit
See flow diagram, Figure J-l.
Plant Location -- Midwest area.
CAPACITY RATING. For
retrofit to 500 MW coal-
fired power station,
3-1/2% S Coal.
DISCOUNT RATE, U_%; FACILITY LIFE, L5 YRS; DEPRECIATION PERIOD, 15 YRS;
CONSTRUCTION TIME, 5 years; REFERENCE UNIT FOR PROCESS COST, kW, kWhr;
REFERENCE YEAR FOR COSTS, 1977; COST INDEX, CE; INFLATION RATE, N.A.
CAPITAL INVESTMENT ESTIMATION
Schedule A. Chilton method. Factored costs of sum of major plant
items (MPIs).
Item
1. Sum of major plant items
(MPIs), ZE, delivered
2. Installed, erected equipment cost
3. Piping (includes insulation)
4. Instrumentation
5. Buildings and site development
6. Auxiliaries (electric, steam, etc.)
7. Other
Operating
On Cost of
Factor Item No. Item, K$
1.43
0.30
0.10
0.60
0.20
1
2
2
2
2
4,041
5,779
1,734
578
3,467
1,156
11. Total physical cost (Direct cost), DC
(sum of 2 to 7)
Use Schedule C to get the Total plant cost, item 31.
12,714
J-7
-------
Table J-3 (Continued). Summary of Economic Evaluation for Example I
Cost Analysis Segment
Schedule C. Calculation of total plant cost using direct cost from
Schedule A
11. Total physical cost (Direct cost) DC K$12,714
12. Indirect cost (34% of DC), 1C 4,323
21. Total bare module cost, BMC 17,037
22. Contingency (15% of BMC) 2,555
23. Contractor's fee (3% of BMC) 511
Total new plant cost K$20,103
27. Retrofit Increment (30% of new I ) 6,031
31. Total retrofit plant cost (Total K$26,134
module cost), I_
Schedule D. Lang method
Use Ip = ZE X L X (1 + RF)
where EE = K$4,041 from item 1, Schedule A
L = 3.63 is the Lang factor for a solid/fluid plant
from Table A-3.
RF = Retrofit Increment, 0.30 for this case.
Then I_ = K$4,041 (3.63) (1 + 0.30) = K$19,070.
J-8
-------
Table J-3 (Continued). Summary of Economic Evaluation for Example I
Cost Analysis Segment
Schedule G. Total plant cost from typical definitive estimates
Table J-4 is a source of Schedule G type information. However, these
data are for a new facility; whereas, the desired installation is a
retrofit.
Total new plant cost from Table J-4 K$20,153
27. Retrofit Increment, 30% of new I 6,046
31. Total retrofit plant cost K$26,199
(Total module cost), I
Because data from Schedule G are more detailed, they will be used.
Note that they are 1972 costs.
Definitive Total Plant Cost Adjusted to 1977 Costs. Item 31, the
Total Retrofit Plant Cost, will be corrected from 1972 to 1977 costs
using the CE Plant Index (see Figure F-l), or
I = K$26,199 ( ) = K$38,680 .
r1
Schedule H. Total capital investment
31. Total plant cost, I , from Schedule G and K$38,680
and adjusted to 1977
32. Interest during construction -- 0.1680 I 6,498
33. Modification of the facilities and 3,094
start-up costs, 8% of I
F
35. Total depreciable investment, DI 48,272
36. Land, 600 acres (2.43 x 106 m2) at
$2,000/acre (K$494/10 m ) 1,200
37. Working capital, 10% of DI 4,827
41. Total capital investment K$54,299
J-9
-------
Table J-3 (Continued). Summary of Economic Evaluation for Example I
Cost Analysis Segment
ANNUAL OPERATING EXPENSE SUMMARY (from the subtotals in Table J-5,
Operating Expense, and Table J-6, Average General Expense)
53. Raw materials K$ 1,364
70. Processing 5,875
74. Plant overhead, control lab and technical 1,206
76, 77. Other fixed charges (insurance, 1,160
property taxes, royalties)
78. Depreciation 3,218
87. Average general expense 2,224
90. Average total annual expense K$15,047
PROFIT AND CASH FLOW (ANNUAL) SUMMARY
91. Revenue including value of byproducts To be calculated
92. Gross profit (revenue - annual Varies each year; see
operating expense) Table J-7
93. Net profit (gross profit - income tax) Varies each year; see
Table J-7
94. Ccu>h £&W (depreciation + equity Varies each year; see
dividends) Table J-7
FEASIBILITY EVALUATION SUMMARY
104. Annualized cost for revenue requirement by K$19,880
simplified procedure, Equation E-2a
Annualized cost for revenue requirement by K$21,303
detailed method following Equation E-l
see Table J-7 for calculation
108. Levelized cost using typical utility approach 6.09 mills/kWhr
112. Total capital cost/kW = ' = $108.60/kW
113. Operating expense/kWhr = * 4'3° mills/kwhr
Descriptive appraisal of the financial merit of the venture: the
costs are in line with those for operating installations.
aSee p. J-16 for calculation.
Includes average interest on debt of K$l,017. In this connection
see footnote b on p. J-13.
J-10
-------
TABLF. J-4. ANALYSIS OF CAPITA!, INVF.STMMNT DATA FOR LIMESTONE SLURRY FGD UNIT - 500 MW, 3.5% S Coal, NEW (J-l)
I
l.imc'stone
Unit Handling
Unit
Equip. Coi-t-FOB, E 57,05t)
Field Mat' ls,C ta 17,840
Mi root Mat 'I, M 74,890
(M/li) (1.31)
Direct rid. lab. I, 66,550
(L/M) (1-17)
Direct Cost, Mr,!. 141,440
(M+L/R) (2.48)
Indirect Cost
(Indirect Factor)
. _ . _
'includes 90?. of Contract (
i,
Mostly breeching.
cPiping, concrete, steel, i
' includes Piping for Group
cSite Specific Items
Tankage 76,000
Site I'ev.
Fire Trot.
II III IV V
Slurry Scrubbing Flue Gas Reheat
Preparation System Discharge System
Unit Unit
617,400 l,796,00()a l,335,000b 156,770
49,940 1,775,410 257,360 59,610
667,340 3,571,410d 1,592,360 216,380
(1.08) (1-97) (1.19) (1.38)
145,570 1,114,460 395,000 72,650
(0.24) (0.62) (0.30) (0.46)
812,910 4,685,870 1,987,360 289,030
fl.32) (2.61) (1.49) (1.84)
lost for Scrubbers and Untrainmrnt Separators.
.nstruments, electrical, insulation, paint.
[V.
46,300 .360,000 68,500
3.3,000
. .,. 18,321,040(1 * 0.10)
VI VII VIII IX
Ammonia Waste Entrainment Major
Unit Disposal Separator Elect.
Equip.
30,000 37,990 30,900
9,770 374,280 91,950 301,000
19,770 412,270 122,850 301,000
(1.97) (10.85) (3.98) (-)
16,730 453,870 80,310 29,200
(1.67) (11.95) (2.60) (-)
26,500 866,140 203,160 330,200
(2.65) (22.80) (6.57) (-)
Total Bare Module Cost
Site Specific Items
Base Plant Cost
Contingency 10%
Total New Plant Cost, I_
28,500
3,694,000
Site Specific Items
. . -r-
Summary
4,041,310
2,936,960
6,978,270
(1.7.3)
2,374,340
(0.59)
9,352,610
(2.31)
4,657,130
(1-50)
14,009,740
4,311,300e
18,321,040
1 ,832,100
20,153,140
579,300
3,727,000
5,000
4,311,300
Avg Case;
See
Guthrie
(,I-4, J-5)
(1.62)
(0.59)
(2.20)
(1.34)
4.99ff3.81)
1,041,31 0
-------
TABLE J-5. ANNUAL OPERATING EXPENSE ESTIMATE FOR EXAMPLE I
WET LIMESTONE FGD PROCESS, 500 MW -- RETROFIT
Total Plant Cost, I_: K$38,680; Depreciable Investment: K$48,272
Stream Hours: 7,00u hr/yr; Basic Unit of Capacity or Production: kWhr
51. Raw materials
Limestone
Ammonia
Unil
Unit YCE
;s/ Value Unit-
ir $/Unit /kWl
;X103 Total Costs
ir mills/kWhr
tona 223.3X1015 $6/ton 0.06381 0.383 ]
tona 200 $120/ton 0.00006 0.007
K$/yr
L,340
24
52. Byproduct credit;
Ingredients
53. Subtotal
(none) (none)
56. Operating labor, man-
L, 4 men/ shift
57. Direct super-
vision, 25% L
0.390 ]
u
hour 33,600 $7/man-hr 0.0096 0.067
0.017
L,364
V,
235b
59
58, 59. Maintenance, In
no.
0-6
60. Operating
supplies
61. Labor addi-
tives, 35% L
62. Steam
63. Electricity
64. Compressed air
65. Water
66. Fuel
i
15%
Main.
103 lbc
kWhr, 79.
103 cf e
0.882 3,094
__
0.133
0.023
IxlO6 0.01/kWh 22.6 0.226
i
10f gal, 168,000 0.30/10" gal. 0.048 0.014
10 Btu 667,000 1.50/10 Btu 0.19 0.286 ]
464
82
_
791
--
50
1,000
67. Effluent trtmt
and disposal
0.028
100
Multiply ton by 908 to convert to kg.
For 8400 hr/yr operation.
°Multiply 10 Ib by 454 to convert values to kg.
(Tiultiply 10 cf by 28.32 to convert values to m .
e 3 3
Multiply 10 gal by 3.785 to convert values to m .
Multiply 106 Btu by 1.055 X 106 to convert values to kJ,
J-12
-------
Table J-5 (Continued). Annual Operating Expense Estimate for Example I
Wet Limestone FGD Process, 500 MW -- Retrofit
Unit
Units/
Year
Value
$/Unit
UnitsXIO3
/kWhr
Total Cosf
mills/kWhr
K$/yr
68. Preparation for
shipping
69. Other
71.
72.
73.
76.
77.
78.
80.
70. Subtotal processing
Plant overhead, 50% operating labor
+ 25% maintenance
Control laboratory, 4 analysts
Technical and engineering, 3 engineers,
plant follow-up
74. Subtotal overhead
Insurance and property taxes, 3% I
Royalty
Depreciation, straight- line
79. Subtotal fixed charges
TOTAL MANUFACTURING COST
1.676
0.255
0.051
0.039
0.345
0.331
0.919
1.250
3.681
5,875
891
180
135
1,206
1,160
3,218
4,378
12,823
J-13
-------
TABLE J-6. AVERAGE GENERAL EXPENSE ESTIMATE FOR EXAMPLE I
WET LIMESTONE FGD PROCESS, 500 MW -- RETROFIT
Depreciable Investment: K$48,272
Total Capital Investment: K$54,299
81. Administration, 1/2% of depreciable investment ----- K$ 241
83. Corporate research, 1% of depreciable investment - - - - 483
84. Average interest on debt, 8% of 40% of average book
value of total capital- ---------------- 1,017
85. Other, 1% of investment ---------------- 483
87. Average general expense -------------- K$2,224
calculation is 0.08 X 0.40 of the average book value of [(1 +
1/15) (48,272/2) + 54,299 - 48,272)]. Here K$48,272 is item 35, Total
depreciable investment, and K$54,299 is item 41, Total capital invest-
ment in Table J-3. The above relation yields K$l,017 as shown. The (1
+ 1/15) factor takes account of the shift of average book values from
the beginning of each year to the end of each year when interest obli-
gation is discharged. This can be seen clearly from the "Debt Inter-
est" column in Table J-7.
This is an Average general expense. For the utility financing
mode, it decreases from the first year to the last because of dimin-
ishing values for debt interest. For this example the debt interest
ranges from K$1,738 for the first year linearly to K$296 for the 15th
year. See "Debt Interest" column in Table J-7.
J-14
-------
TABLE J-7. LIFE CYCLE COSTS FOR EXAMPLE 1 -- PUBLIC UTILITY MODI; OF EVALUATION
Al1 values are in K$
Kef.
Year
Capital Cost3
Item
Value
Total Ann.
F.xp. Less
Debt Int.
Peprcc .
Book
Value
Debt
irs«*
Equity
Dividends
at mB'a
Income
Tax6
Required
Revenue
W°i Present
(Worth) Value
Factor
P.V. of
Required
Revenue
-3 Land 1,200
-3 25'. construction 9,670
-2 SO* construction 19,340
-1 25** construction 9,670
0(1977) Interest on const. 6,498
0 Start-up cost 3,094
0
1
2
3
<|
5
6
7
8
9
Ml
11
12
13
14
15
15
Annua
Working capital 4,827
14,030
14.030
14,030
14,030
14,030
14,03(1
14,030
14,030
14,030
14,030
14,030
14,030
14,030
14,030
14,03(1
Recovery of land
and working capital3 6,027 14,030
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3,218
3 , 218
3,218
i-fd fo-t for Rcauircd Revenue0 - Present Value of
M Uniform Annual
Scries
54,299
51,081
47,8(>3
44,645
41,426
38 , 208
34 , 990
31,772
28,554
25,336
22,118
18,900
15,681
12,463
9,245
0
Required Revenue
,738
,635
,532
,429
,326
,223
,120
,017
914
811
708
605
502
399
296
Present Worth Factor
4,561
4,291
4,020
3,750
3,480
3,209
2,939
2,669
2,399
2,128
1,858
1,588
1,317
1,047
777
Total Present
162,032 j,,,
7.606 *
6,758
6,307
5,857
5,407
4.956
4,505
4,055
3,604
3,154
2,703
2,253
1,802
1,352
901
450
Value of
,303
24,890
24,247
23,602
22,959
22,316
21,671
21,028
20,385
19,742
19,097
18,454
17,811
1 7 , 1 66
16,523
15,880
-6,027
Required
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
0.3505
0.3186
0.2897
0.2633
0.2394
0.2394
Revenue
22,627
20,038
17,732
15,681
13,856
12,233
10,792
9,510
8,373
7,362
6,468
5,675
4,973
4,351
3,802
-1,443
162,032
aThe value of Land and Working capital, recovered at the end of the 15th year, is credited to the required revenue and, properly
discounted, is credited to the Present Value of Required Revenue.
The sun of these four items equals the required revenue for the year.
cDcbt comprises 40* of the total capital investment.
Equity (capital) comprises 60"s of the total capital investment.
Calculated from Equation F-l.
-------
Cost Analysis Segment
Cost Estimate - Capital Investment --
Most of the cost data for the example are taken from Calvin (J-l),
but other sources are also used as needed. Capital cost can be esti-
mated in several ways because of the completeness of the data which are
for a definitive estimate. In Table J-3, Schedules A, C, D, and G are
completed to yield three values of the 1972 Total Plant Cost.
The factors used in the Chilton method (Schedule A) are arbitrary;
their selection was guided by definitive cost data in Table J-4.
Note that the indirects are 50 percent of the total direct cost for
Table J-4 items I to IX, but 34 percent of the sum of these plus the
Site Specific Items. This 34 percent factor for indirects compares with
the 35 percent average for engineering and construction in Table A-4 for
typical Chilton factors. Also, the Guthrie scheme gives an average for
this factor of 34 percent. Calvin showed only 10 percent for Contin-
gency and no Contractor's Fee. The estimate herein contains a 15 per-
cent Contingency and a 3 percent Contractor's Fee.
Generally retrofit increments increase the cost 25 to 40 percent
over that for a new plant. The actual increment is very sensitive to
site considerations. In this example, a 30 percent retrofit increment
was used arbitrarily. The total retrofit plant cost from Schedule G,
was escalated from 1972 to 1977 costs using the CE Plant Cost Index.
The interest charge for funds for construction using 8 percent
interest, a 3-year construction period, and the schedule declared under
the Guidelines is calculated as follows:
Project Interest Factor Weighted
Years Before Expenditure at 8% Discrete Interest
Start-up Schedule Interest Factor
Third (-3 to -2) 25% X 1.260 = 0.3150
Second (-2 to -1) 50% X 1.166 = 0.5830
First (-1 to 0) 25% X 1.080 = 0.2700
1.1680
This means that 0.1680 times the construction cost is due for interest
payments at start-up (time zero).
For Modification of Facilities and Start-up, the recommendation in
Table A-8 taken from McGlamery et al_. (J-3) will be followed. This
charge is estimated at 8 percent of the Total Depreciable Investment.
For Land, it is estimated that 600 acres (2.43 x 10 m ) is required and
that the cost per acre is $2,000 (K$494/10 m ) from the table under
J-16
-------
Land in Appendix A. The Working Capital will be taken as 10 percent of
the Total Depreciable Investment.
An extra feature of Table J-4 is Guthrie factors which were calcu-
lated from the data for each of the process modules and for the summary;
they are given in parentheses. The average values for the Guthrie
factors are also given in the last column; these are taken from refer-
ences J-4 and J-5. These compare well with the summary values. This is
a good place to note that a definitive estimate is necessary to secure
Guthrie factors for equipment not available in the literature.
Cost Estimate - Annual Expense --
For the conditions of the example, Tables J-5 and J-6 are completed
Tables 9 and 10 in Volume I. Some changes made to the data taken from
reference J-l are:
Four plant operators were used instead of two.
8 percent of I was shown for maintenance instead of 4 percent.
Four analysts and three engineers were added for technical work
related to the operation of the FGD facility.
Cost Estimate - Feasibility Evaluation --
The guidelines call for the determination of the annualized cost
(for revenue requirement), levelized cost, unit capital investment, and
unit operating expense. Recourse is made to the utility financing mode
in determining annualized and levelized costs. The annualized cost is
calculated first by the simplified procedure, Equation E-2, and then by
the detailed method following Equation E-l. Because inflation is not to
be accounted for, levelized cost by both the typical utility and the
METREK approaches is the same.
Annualized Cost -- First the annualized cost is found by the simp-
lified procedure; it can be used here because average net annual expense
is constant from year to year. This approach applies to Equation E-2,
which is rewritten for this exercise as follows:
Annualized Cost = (Average Net Annual Expense
- Average Debt Interest)
+ (Capital Charge) (Total Capital Investment)
Avg Net Ann. Exp. = Average Total Annual Expense - Depreciation
= K$12,823 + K$2,224 - K$3,218
Mfg Cost Avg Gen. Exp. Depreciation
= K$ll,829
J-17
-------
Capital Charge is a fraction which represents the depreciation, average
debt interest, average equity dividends, average income tax, and later
capital chargesj if any. For this case:
.«. . 1 0.08x0.4 0.14x0.6 0.14x0.6
Capital » -^ + ^ + 2 * 2 °
Charge Deprec< Avg Debt Avg Equity Avg Income Later Cap.
Interest Dividends Tax Charges
= 0.067 + 0.016 + 0.042 + 0.042 + 0
= 0.167.
Note that the three factors that operate on the "book value" are all
divided by 2 to give an average because in the simplified procedure the
"book value" is assumed to vary from the total depreciable capital to
zero over the life of the operation. (Actually the book value varies
from K$54,299 at the beginning of year 1 to zero at the end of year 15,
after Land and Working Capital have been recovered. See Table J-7.)
Accordingly,
Annualized = K$l1,829 - K$1,017 + (0.167) (K$54,299)
Cost Avg Net Ann. Avg Debt Capital Total Cap.
Expense Interest Charge Investment
= K$19,880.
Next the annualized cost is found by the detailed method. This
solution is similar to the Public Utility Financing Example in Appen-
dix E, except that many simplifications were introduced. The annualized
cost for revenue requirement was computed by the use of Equation E-l
from the total of the present values of the yearly revenue requirements
as displayed in Table J-7. For the actual calculation see the bottom of
Table J-7.
It will be noted from Table J-7 that the revenue requirement for a
given year is the sum of four items:
Average Total Annual Expense (Item 90, Table J-3) less Average Debt
Interest (Item 84, Table J-6);
Debt Interest;
Equity Dividends;
Income Tax.
These are equivalent in value to the four cash flow streams leaving the
Cash Flow Diagram. This will be demonstrated by considering the calcu-
lation of the Revenue, R, for the first year of operation. All figures
are in K$. For this illustration, the Net Annual Expense for the first
year is worked out below.
J-18
-------
Net Annual Expense for the First Year
= 12,823 + 2,224
Mfg Cost Avg Gen.
Expense
1,017 + 1,738 - 3,218
Avg Debt Debt Int. Deprec,
Interest for 1st yr
= 12,550.
The Cash Flow Diagram for the first year is:
flow
Depreciation 3,218
Equity Div. 4,561
7,779
R
Revenue
3,218
OPERATIONS
Depreciation
4,561
12,550
Net Annual Expense
R-12,550
Operating Income
R-12,550 - 3,218
Gross Profit
4,561
= R-15,768
Net Profit
(Equity Dividends)
Income Tax
The Revenue, R, for the first year can be found from the Cash Flow
Diagram above by working down from the OPERATIONS box to the expression
for Gross Profit, R-15,768, and then equating this to the sum of the Net
Profit, 4,561 and the Income Tax, 4,561. Then solving
R-15,768 = 4,561 + 4,561
R = 24,890.
The Revenue, R, for each year, can also be found by summing the four
terms in the columns marked with footnote b in Table J-7. This is
because an overall balance in the Cash Flow Diagram gives
R = Net Annual Expense + Income Tax + Ca&h ftow ,
which corresponds to
R = (Annual Expense less Debt Interest) + Debt Interest
+ Equity Dividends + Income Tax
where the terms on the right side of the equation correspond to the
terms in the four columns marked with footnote b in Table J-7.
J-19
-------
It is to be noted that the annualized cost by the simplified pro-
cedure (K$19,880) is about 7 percent lower than that by the detailed
method (K$21,303).
Leyelized Cost -- Because inflation is not taken into account in
this example, Equation E-5 for the typical utility and Equation E-6 for
the METREK approach both reduce to the same expression. Equation E-5 is
now written in the form below to facilitate the calculation of levelized
cost, LC
LC =
u
Present Value of Required Revenue
'u Production Units (Uniform Annual Series Present Worth Factor)
The "present value of the required revenue" is found on the bottom line
of Table J-7; the "production units are energy output of 500 MW for 7000
hours per year; and the "uniform annual series present worth factor" is
for a discount factor of 10 percent over 15 years. Therefore,
c _ K$162,050
u " (500 x 7000) (7.606)
= $6.09/MWhr or 6.09 mills/kWhr .
Unit Capital Investment -- This is readily calculated from avail-
able data. See item 112 in Feasibility Evaluation Summary, Table J-3.
Unit Operating Expense -- This is also simple to determine. Con-
sult item 113 in Feasibility Evaluation Summary, Table J-3.
RELIABILITY ASSESSMENT SEGMENT
An open form is used for this segment. The information in Table
J-8 is self explanatory.
OVERALL ASSESSMENT
The costs generated by this cost analysis are higher than those
resulting from other studies and more in line with actual costs. This
is particularly evident from these unit cost figures:
Capital Cost $109/kW
Operating Expense 4.30 mills/kWhr
The reason for this is that the procedure takes into account capital
costs and expenses that were neglected by other procedures and past
studies.
J-20
-------
TABLE J-8. SUMMARY OF ECONOMIC EVALUATION
FOR EXAMPLE I RELIABILITY ASSESSMENT SEGMENT
SENSITIVITY ANALYSIS
The percentage effect on the annualized cost of varying the maintenance
charges from 2 percent to 20 percent of I is shown in Figure 1-1. For
the base case the maintenance charges are 8 percent of I . This serves
to show that variation in maintenance charges can have a marked effect
on annualized cost, from almost minus 10 percent to nearly plus
20 percent.
UNCERTAINTY ANALYSIS
Based on opinion-mode, the range of accuracy of the feasibility measures
is +^ 20 percent. This is essentially governed by the reliability of the
capital cost estimate. The value of +_ 20 percent for the capital cost
estimate is developed as follows:
From available information, for a definitive
estimate +_ 10%
Stage of development - pilot plant data
available, but inconclusive - broadens range + 20%
Definition of scope - adequate no change
Quality of cost data - judged to be good no change
Expertise of the estimator - considered competent no change
J-21
-------
SELECTED REFERENCES
J-l. Calvin, E. L. Catalytic, Inc. A Process Cost Estimate for Lime-
stone Slurry Scrubbing of Flue Gas. EPA-R2-73-148a; NTIS PB 219
016. EPA, Industrial Environmental Research Laboratory, Research
Triangle Park, NC. January 1973. 95 pp., Part I.
J-2. Shore, D., J. J. O'Donnell, and F. K. Chan. M. W. Kellogg. Eval-
uation of R£D Investment Alternatives for SO Air Pollution Control
Processes. EPA-650/2-74-098; NTIS PB 238 26$. EPA, Industrial
Environmental Research Laboratory, Research Triangle Park, NC.
September 1974. 270 pp.
J-3. 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. Prepared
for EPA, Industrial Environmental Research Laboratory. Research
Triangle Park, NC. January 1975. 417 pp.
J-4. Guthrie, K. M. Data and Techniques for Complete Capital Cost Esti-
mating. Chem. Eng., 76^(6): 118 (1969).
J-5. Guthrie, K. M. Process Plant Estimating, Evaluation and Control.
Craftsman Book Company of America, Solana Beach, CA. 1974.
606 pp.
J-22
-------
APPENDIX K
EXAMPLE II -- COST ANALYSIS OF CHLOROLYSIS PLANT
CONTENTS
Page
Statement of Problem K-l
Source of Process and Cost Data K-l
Guideline Information K-2
Specification K-2
Descriptive Segment K-2
Cost Analysis Segment K-2
Reliability Assessment Segment K-2
Sensitivity Analysis K-15
Uncertainty Analysis K-15
Overall Assessment K-15
Selected References K-19
FIGURES
K-l. Block flow diagram of chlorolysis plant K-7
K-2. Cumulative frequency distribution plot showing the
probability that ROI would be less than stated
value K-18
TABLES
K-l. Guideline Information for Example II K-3
K-2. Summary of Economic Evaluation for Example II --
Descriptive Segment K-6
K-3. Summary of Economic Evaluation for Example II --
Cost Analysis Segment K-8
K-4. Annual Operating Expense Estimate for Example II. . K-13
K-5. General Expense Estimate for Example II K-14
K-6. Summary of Economic Evaluation for Example II --
Reliability Assessment Segment K-16
K-i
-------
APPENDIX K
EXAMPLE II -- COST ANALYSIS OF CHLOROLYSIS PLANT
This example illustrates the cost analysis of a plant for the
manufacture of carbon tetrachloride (CC1 ) from waste chlorocarbon
residues. The chlorolysis process not only has the merit of consuming
toxic chlorocarbon residues, but compared to the current process for
making CC1. it also conserves methane and chlorine supplies and elec-
trical energy.
The well established mode of cost analysis for private sector
projects will be employed. This mode conforms to depreciation account-
ing used in business; also, it is direct and relatively simple.
STATEMENT OF PROBLEM
The evaluation is for a "grass roots," regional plant which would
process 25,000 mt*/yr or about 30 percent of the total chlorocarbon
wastes now produced in the U.S. The expected production of 75,000 mt/yr
(82,672 U.S. ton/yr) of CC14 from a plant of this capacity would be
about 30 percent of a projected stabilized market.
The estimate is based on a selling price for CC1. of $300/mt, for
by-product HC1 of $27/mt, and a processing toll of $125/mt of chloro-
carbon residues delivered. It is assumed that it would take 2 years to
construct the plant.
SOURCE OF PROCESS AND COST DATA
Data for process engineering, capital cost, and operating expense
are available from a report prepared by the Hoechst-Uhde Corporation (K-
1), and one prepared for them by the Foster Wheeler Energy Corporation
(K-2).
*Note that metric ton corresponds to Mg,
K-l
-------
GUIDELINE INFORMATION
The guideline information required as outlined in Table 11 of
Volume I is developed in Table K-l.
SPECIFICATION
The data required as indicated by Tables 5 and 7 of Volume I are
provided in Tables K-2 and K-3. Some pertinent comments are given
below.
Descriptive Segment
See Table K-2. Note the process flowsheet, Figure K-l.
Cost Analysis Segment
Cost Estimate - Capital Investment --
Although cost data are available from a definitive cost estimate
(K-2), the plant investment will also be found by two other procedures
which are based on the sum of the costs of the major plant items (MPIs).
These are the Chilton method (Schedules A and C) and the Lang method
(Schedule D).
From Reference K-2, it is found that the sum of the cost of the
MPIs, £E, is K$5,438. These are 1977 costs. Although it was not spec-
ifically stated, it is assumed that this figure includes freight (deliv-
ered basis).
Cost Estimate - Annual Expense --
For the conditions of Example II, Tables K-4 and K-5 were com-
pleted. Cost figures from the Hoechst-Uhde Corporation (K-l) were used
as a basis for annual expenses.
Note that Start-up Costs will be expensed; this is common practice
in the private sector.
Cost Estimate - Feasibility Evaluation
Straight-forward calculations are made for ROI and Payout Time
at the end of Table K-3, items 101 and 102. The IROR is readily cal-
culated; see Table K-3, item 103.
RELIABILITY ASSESSMENT SEGMENT
An open form is used for this segment. The information in Table
K-6 is self explanatory. Note that the sensitivity analysis chart was
taken directly from an illustration for this example in Appendix I.
K-2
-------
TABLE K-l. GUIDELINE INFORMATION FOR EXAMPLE II
DESCRIPTIVE SEGMENT
Facility Description
Plant Location
Index for Area Con-
struction Labor
Costs
Capacity Rating
Abstract of Scot
Performance Specifications
of Development
Gulf Coast.
Index not specifically developed by
Foster Wheeler in capital cost esti-
mate prepared for Hoechst-Uhde (K-l).
A feed of 25,000 mt/yr of chlorocarbon
residues to produce 75,000 mt (82,672
U.S. tons) per yr of CC14-
Conventional "grass roots" chemical
plant. Clear and level site. Founda-
tions: conventional spread footings.
No pumping station needed to provide
cooling water. Require pretreatment
of feed waste to remove particulates
and moisture.
Feed residues must be chlorolyzed to
CC1. in an environmentally accept-
able manner.
Research and development: (1) Bench-
scale tests by Hoechst-Uhde (K-l);
(2) Supporting bench-scale studies by
Diamond Shamrock (K-3); (3) Com-
mercial installations by Hoechst in
West Germany. Design: Detailed
process design (K-2).
COST EVALUATION SEGMENT
Specified Parameters^
Interest (Discount) Rate
Facility Life and
Depreciation Period
Construction Time
Reference Units for
Process Costs
Reference Year for Costs
Cost Index
Inflation Rate
N.A.
For both,
use 10 years.
2 years.
1 metric ton CC1 per year.
1977.
Chemical Engineering (CE); if required.
N.A. See under Feasibility Evaluation,
below.
K-3
-------
Table K-l (Continued). Guideline Information for Example II
Cost Estimate - Capital Estimate
Types of Capital Invest-
ment Estimates
Allowance for Funds
During Construction
Modification of Facil-
ities and Start-up
Definitive, only because it is avail-
able. Also, use Chilton and Lang
methods as checks and to demonstrate
these techniques.
See under Operating Expense, below.
See under Operating Expense, below.
Cost Estimate - Operating Expense
Total Operating Expense
vs. only 0§M
Stream Time
Pre-production Expenses
Allowance for Funds
During Construction
Modifications of Facil-
ities and Start-Up
Direct (Operating)
Labor Rate
Depreciation
Use total operating expenses.
8,000 hr/yr.
N.A.
None. The construction is assumed to
be internally financed.
Assumed to be 8% of I 6% during the
first year of operation (zero to 1),
and 2% during the second year
(1 to 2).
$8.65/hr.
Use straight-line method.
Cost Estimate - Profit and C&6k flow
Revenue
Income Tax Rate
Feasibility Evaluation
Mode of Cost Analysis
Measures of Merit
Computation Features
From sales of CC14 and HC1 and handling
tolls for chlorocarbon residues used
as a feed stream. Use $300/mt for
CC14, $27/mt for HC1, and $125/mt of
chlorocarbon residues delivered.
Use 50%.
Private sector.
IROR, ROI, and Payout Time.
Use discounting, revenue; recoup
investment by depreciation charges
and end-of-life recoveries for
land and working capital; do not
account for inflation; use total
annual expense; employ continuous
interest factors. Minimum accept-
able ROI is 10%.
K-4
-------
Table K-l (Continued). Guideline Information for Example II
RELIABILITY ASSESSMENT SEGMENT
Sensitivity Analysis Investigate sensitivity of CC1
market price (+_ 10%) and chloro-
carbon residues handling toll
($50 to $200). Use Strauss chart.
Uncertainty Analysis Investigate uncertainty of ROI using
a statistical method, in particular,
the Monte Carlo technique. Use
judgment in ascertaining the dominant
cost elements and their expected
variability.
K-5
-------
TABLE K-2. SUMMARY OF ECONOMIC EVALUATION
FOR EXAMPLE II -- DESCRIPTIVE SEGMENT
FACILITY DESCRIPTION. Chlorolysis plant to convert 25,000 mt/yr of
chlorocarbon residues to 75,000 mt/yr (82,672 U.S. ton/yr) of carbon
tetrachloride (CC1J. Block Flow Diagram - Figure K-l. Gulf Coast
location.
CAPACITY RATING. A feed of 25,000 mt/yr of chlorocarbon residues, 60%
VCMa waste, and 40% solvent waste would produce 75,000 mt (82,672 U.S.
tons) CCl./yr. The stoichiometric balance that applies is:
1 kg residue + 2.734 kg C\2 > 3.010 kg CC14
+ 0.723 kg HC1 + 0.001 kg Br2 .
Note that this relation is for an average situation; the proportions
will vary in practice with changes in the composition of the chloro-
carbon residue.
ABSTRACT OF SCOPE. Conventional chemical plant. Identified waste
pretreated to remove particulates and moisture. Includes conventional
incineration unit.
PERFORMANCE SPECIFICATION. The chlorocarbon residues must be chlor-
olyzed to CC1 in an environmentally acceptable manner.
STAGE OF DEVELOPMENT. Research and development: (1) Successful bench
scale tests on typical VCM wastes and HO by Hoechst-Uhde Corp. (K-l);
(2) Independent supporting bench scale investigations by Diamond
Shamrock (under EPA contract 68-01-0457) (K-3); (3) Commercial instal-
lations incorporating the chlorolysis process by Hoechst AG in
West Germany (8,000 and 50,000 mt CC1 /yr), and in USSR (38,000 mt
CCl4/yr). Design: Detailed process design (K-2).
vCM is vinylchloride monomer.
HO is Herbicide Orange.
K-6
-------
Cl,
LIGHT
ENDS
VCM
RESIDUES
SOLVENT
DRYING
FALLING FILM EVAP.
RESIDUES
FALLING FILM EVAP.
UNCONVERTED RESIDUES
PLUS RECYCLE Cl,
REACTION
HCI ABSORPTION
MURIATIC
ACID
DISTILLATION
CCI4
INCINERATION
NEUTR.
WATER
Figure K-1. Block flow diagram of chlorolysis plant, from (K-1)
-------
TABLE K-3. SUMMARY OF ECONOMIC EVALUATION
FOR EXAMPLE II COST ANALYSIS SEGMENT
FACILITY DESCRIPTION. Chlorolysis plant
to convert 25,000 mt/yr of chlorocarbon
residues to 75,000 mt (82,672 U.S. ton) of
CCl.. Block flow diagram - Figure K-l.
Plant Location -- Gulf Coast
CAPACITY RATING. A feed
of 25,000 mt/yr of chloro-
carbon residues would
produce 75,000 mt CCl /yr.
DISCOUNT RATE, _%; FACILITY LIFE, W_ YRS; DEPRECIATION PERIOD, .lp_ YRS;
CONSTRUCTION TIME, 2 YRS; REFERENCE UNIT FOR PROCESS COST, mt of CCl,;
~"~ 4
REFERENCE YEAR FOR COSTS, 1977; COST INDEX, CE; INFLATION RATE, N.A.
CAPITAL INVESTMENT ESTIMATION
Schedule A. Chilton method. Factored costs of sum of major plant
items (MPIs).
Item
1. Sum of major plant items
(MPIs), EE, delivered1*
2. Installed, erected equipment cost
3. Piping (includes insulation)
4. Instrumentation
5. Buildings and site development
6. Auxiliaries (electric, steam, etc.)
7. Other
11. Total Physical Cost (Direct
Cost), DC (Sum of 2 to 7)
Use Schedule C to get the Total Plant Cost, Item 31.
Operating
On Cost
Factor Item No. of Item
1.43
0.60
0.15
0.35
0.10
1
2
2
2
2
2
K$ 5,438
7,776
4,666
1,166
2,722
777
K$17,107
no discount rate is listed because IROR is computed,
Same as FOB job site.
K-8
-------
Table K-3 (Continued). Summary of Economic Evaluation for Example II
-- Cost Analysis Segment
Schedule C. Calculation of Total Plant Cost Using Direct Cost from
Schedule A.
11. Total Physical Cost (Direct Cost) DC K$17,107
12. Indirect Cost (34% of DC), 1C 5,816
21. Total Bare Module Cost, BMC 22,923
22. Contingency (15% of BMC) 3,428
23. Contractor's Fee (3% of BMC) 688
31. Total Plant Cost (Total Module Cost), I K$27,039
Schedule D. Lang method
Use Ip = EE X L
where EE = K$5,438 from Reference K-l.
L = 4.74 is the Lang factor for a. fluid process plant from
Table A-3.
Then Ip = K$5,438 X 4.74 = K$25,776.
Schedule G. Total Plant Cost from Typical Definitive Estimates.
Reference K-l provides a definitive estimate of the Total Plant Cost;
1977 costs were used. Therefore,
31. Total Plant Cost from Reference K-l, I K$25,497
This figure will be used. Note that it is fairly close to the value
of I by the Chilton and Lang factor methods. The reason for this
is that the same figure for Item 1, Sum of major plant items (MPIs),
EE, delivered, was used for all three estimates.
K-9
-------
Table K-3 (Continued). Summary of Economic Evaluation for Example II
-- Cost Analysis Segment
Schedule H. Total Capital Investment
31. Total Plant Cost, Ip, from Schedule C K$25,49?a
32. Interest during Construction, if Applicable NA
and Capitalized ,
33. Modification of Facilities and Start-up Costs, NA
if Capitalized
35. Total Depreciable Investment K$25,497
2
36. Land, 20 acres (80,900 m ) at $5,000/acre
($1,240/10 m ) 100
37. Working Capital 5,990
41. Total Capital Investment K$31,587
ANNUAL OPERATING EXPENSE SUMMARY (from the subtotals in Table K-4,
Operating Expense, and Table K-5, General Expense)
53. Raw Materials K$10,154
70. Processing 2,766
74. Plant Overhead, Control Lab, and Technical 1,145
76, 77. Fixed Charges Less Depreciation 382
78. Depreciation 2,500
87. General Expense 3,006
90. Total Operating Costs K$19,953
a
Common practice for the private sector is to charge interest on
construction as an operating expense at the end of the first year of
operation. However, since most of the project would be internally
financed, interest is charged on only the fraction of the construction
cost that corresponds to the debt fraction of the total capitalization
for the company. This is generally 20 to 40%.
For private sector companies, this item is generally expensed.
Q
Working capital is computed as follows:
Inventories; raw material for 1 month, 10,154/12 = K$ 846
Finished product for 1 month, 19,953/12 1,663
Accounts receivable for 1 month, 27,326/12 2,277
Cash for 1 month expense less general expense and
depreciation (19,953 - 3,006 - 2,500)/12 1,204
TOTAL Working Capital K$ 5,990
K-10
-------
Table K-3 (Continued). Summary of Economic Evaluation for Example II
-- Cost Analysis Segment
PROFIT AND CASH FLOW SUMMARY
91. Revenue
Toll for Handling wastes 25,000 mt @ $125/mt = K$ 3,125
CC14 75,000 mt/yr @ $300/mt = 22,500
HC1 (31% solution) 63,000 mt/yr @ $27/mta = 1,701
K$27,326
92. Gross Profit (Revenue - Annual Operating Expense) 7,373
93. Net Profit (Gross Profit - Income Tax ) 3,687
94. CcU>k Flow (Net Profit + Depreciation) 6,187
The market price would be about 50% higher, but a lower price
might apply because of impurities.
Use 50% income tax.
K-ll
-------
Table K-3 (Continued). Summary of Economic Evaluation for Example II Cost Analysis Segment
FEASIBILITY EVALUATION SUMMARY
5,687
102. Payout Tiae * |'^7 « 4.1 years
103. Internal Rate of Return - Figures are in K$
Tine,
year
-2
-2 to 0
0 '
0 to 1
1* to 2
0 to 10
10
10
10
103.
Itea
Land
Investment
Depreciable Investment
Working Capital
Modification of
Start-up, 6%
Modification of
Start-up, 2%
C
-------
TABLE K-4. ANNUAL OPERATING EXPENSE ESTIMATE FOR EXAMPLE II
Chlorolysis Plant, 75,000 mt [82,672 U.S. toiO/yr of CC1
Stream Hours: 8,000 hr/yr
Basic Unit of Capacity or Production: metric ton of CC1
51.
Una
Unit /Yt
Raw Materials
.ts Value Units/Basic
;ar $/Unit Unit of
Production
Chlorine mt 68,123 140 0.9083
Caustic Soda(20%) rat 14,500 24 0.1933
Methane 10 cfa 134,500 2 1.7933
56.
57.
58,
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
53. Subtotal Ingredients
Operating Labor man-
10 men/ shift hour 88
Direct Supervision man-
1 man/ shift hour 8
59. Maintenance,
4%, I
Operating Supplies
Labor Additives 30%
Labor + Supervision
Steam 10 lb 115
Electricity kWhr 25
Compressed Air 10 cfa
Water 10 gal. J 3
Fuel 10 Btu
Effluent Trtmt
and Disposal
Preparation for
Shipping
Other
70. Subtotal Processing
,000 8.65 1.1730
,000 11.0 0.1176
,000 1.81 1.53
.5X10 0.015 340
f.
.9X10 0.01 52
Total
$/mt of
rn
^U14
127.16
4.64
3.59
135.39
10.15
1.29
13.60
3.44
2.77
5.11
--
0.52
--
--
36.88
Costs
K$/yr
9,537
348
269
10,154
761
97
1,020
258
208
383
--
39
--
--
2,766
a 3
Multiply 10 lb by 454 to convert values to kg.
V* "? 1
Multiply 10 cf by 28.32 to convert values to m .
c 3 3
Multiply 10 gal. by 3.785 to convert values to m .
Multiply 10 Btu by 1.055 X 10 to convert values to kJ.
K-13
-------
Table K-4 (Continued). Annual Operating Expense Estimate for Example II
71. Plant Overhead, 50% Operating Labor
+ 3% Total Plant Cost 15.27 1,145
72. Control Laboratory } includec[ £n lant Overhead "
73. Technical and Engineering
74. Subtotal Overhead 15.27 1,145
76. Insurance § Property Taxes, 1.5% Ip 5.10 382
77. Royalty
78. Depreciation, Straight-line: 10% Buildings and
Equipment and 5% Off-sites 33.33 2,500
79. Subtotal Fixed Charges 38.43 2,882
80. TOTAL MANUFACTURING COST 225.97 16,947
ft
Capital investment in off-sites is estimated at K$1,000 of the
total depreciable investment.
TABLE K-5. GENERAL EXPENSE ESTIMATE FOR EXAMPLE II
Chlorolysis Plant - 75,000 mt/yr of CC1.
81. Administration, 3% of Revenuea ------------ K$ 820
82. Selling Expense, 5% of Revenue3 -------- 1,366
83. Corporate Research, 3% of Revenuea ---------- 820
84. Finance-
85. Other -
87. General Expense - ----- - ----- -- --- K$3,006
aFor revenue, see Item 91 in Table K-3 -- Profit and Ca&k
Summary .
K-14
-------
SENSITIVITY ANALYSIS
The sensitivity of the ROI to both the CC14 sales price and the
chlorocarbon residue handling toll is depicted graphically using a
Strauss chart (see Appendix I). A variation of +_ 10 percent from the
most likely price of $300/mt is considered likely. At present, it is
problematical what disposal practices will be eventually favored for
cost or other reasons. This strong uncertainty is expressed by a range
for the residue handling tolls from $50 to $200/mt.
UNCERTAINTY ANALYSIS
An uncertainty analysis was carried out using the Monte Carlo tech-
nique described in Appendix I. Ten dominant cost elements were con-
sidered to vary between limits on either side of the target value, e.g.,
Most Likely Minimum Maximum % Variation
Chlorine price, $/mt 140 126 154 +_ 10%
Maintenance, % of I 4 3 6 - 25%; + 50%
The calculations generated a table of the probability that the ROI
would be less than the values shown.
The degree of uncertainty could be lessened by reducing the range
of the cost elements in Table K-6, particularly those (such as CC1
price) that have such a marked effect on profitability.
OVERALL ASSESSMENT
The economic analysis calls for either a better market situation
for CC1. or stringent environmental regulation which would support a
handling toll in excess of $150/mt. If the figures used in the estimate
obtained (viz., a handling toll of $125/mt of chlorocarbon residue
delivered and a market price of $300/mt of CC1.), private sector invest-
ment appears unlikely. However, with some government subsidy for cap-
ital investment, it is possible that some chemical companies could be
interested in building and operating such a chlorolysis plant.
K-15
-------
TABLE K-6. SUMMARY OF ECONOMIC EVALUATION FOR EXAMPLE II
RELIABILITY ASSESSMENT SEGMENT
SENSITIVITY ANALYSIS
The percentage effect on ROI from varying the price of CC14 +_ 10%
(from $270 to $330/mt) and from varying the residue handling toll
+_ 60% (from $50 to $200/mt) is depicted in Figure 1-2 in a Strauss
chart. This analysis shows that a 5% drop in CC1 price to $285/mt
or a 45% drop in the base handling toll of $125 to about $70/mt would
reduce the ROI to 10%. The analysis also discloses that the economic
feasibility is extremely sensitive to the CC1 market price, but only
slightly sensitive to the figure for the residue handling toll.
UNCERTAINTY ANALYSIS
An uncertainty analysis, executed by the Monte Carlo technique, showed
the probability that ROI would be less than stated values. In this
analysis, 10 dominant cost elements were taken into account. They are
listed with their considered variations below:
Most Percentage
Cost Element Unit Likely Minimum Maximum Variation
Chlorine price $/mt 140 126 154 +_ 10
Operating labor force men/shift 10 9 11 +_ 10
Maintenance, % I -- 4 3 6 - 25; + 50
IP K$ 25,497 20,398 30,596 + 20
r -z
Residual waste 10 rat 25 18 30 - 28; + 20
Residual waste price $/mt 125 50 200 + 60
CC14 production mt/yr 75,000 63,750 86,250 +_ 15
CC14 price $/mt 300 270 330 +_ 10
HC1 production mt/yr 63,000 53,550 72,450 + 15
HC1 price $/mt 27.00 22.50 31.50 + 17
The resulting analysis showed:
% ROI -0.25 5 10 12 14 16 18 20 24
Prob. of obtaining
less than the ROI
shown 0.001 0.03 0.3 0.52 0.68 0.83 0.92 0.97 0.999
K-16
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Table K-6 (Continued). Summary of Economic Evaluation for Example II
-- Reliability Assessment Segment
These results are shown in Figure K-2 with a cumulative frequency dis-
tribution plot for ROI. The results indicate that the most likely
ROI is 11.8% (the value of ROI at 50% probability). This value com-
pares with the value of 11.67% shown in Table K-3. The difference is
due to the fact that a few of the cost element distributions are not
symmetrical. Figure K-2 also points out that there is a 70% prob-
ability of attaining the Minimum Acceptable Rate of Return (MARR) of
10% or higher.
K-17
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1.00
00
I
ROI,%
Figure K-2. Cumulative frequency distribution plot showing the probability
that ROI would be less than stated value.
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SELECTED REFERENCES
K-l. Shannahan, C. E., et. al^. Hoechst-Uhde Corporation. Chlorolysis
Applied to the Conversion of Chlorocarbon Residues. EPA-600/2-78-
146; NTIS PB 285 783. Prepared for EPA, Industrial Environmental
Research Laboratory, Research Triangle Park, NC. July 1977.
K-2. Foster Wheeler Energy Corporation. Chlorolysis Plant for Waste
Conversion. F,W,E,C 11-2321. Prepared under subcontract from
Hoechst-Uhde Corporation. Contract No. 68-03-2380, EPA, Industrial
Environmental Research Laboratory, Research Triangle Park, NC.
April 15, 1977. (This constitutes Vol. II -- Process Equipment and
Flowsheets, and Vol. Ill -- Offsites, Cost Estimates, and Standards,
of reference K-l).
K-3. Lavergne, E. A. Study of Feasibility of Herbicide Orange Chlor-
inolysis. EPA-600/2-74-006; NTIS PB 286-705. Prepared for EPA,
Office of Research and Development, Washington, DC. July 1974.
67 pp.
K-19
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TECHNICAL REPORT DATA
(Please read Instructions on the reverse before completing)
1. REPORT NO.
2.
3. RECIPIENT'S ACCESSION NO.
4. TITLE AND SUBTITLE
6. REPORT DATE
A Standard Procedure for Cost Analysis of Pollution
Control Operations; Volume n. Appendices
6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
Vincent W. Uhl
B. PERFORMING ORGANIZATION REPORT NO.
9. PERFORMING ORGANIZATION NAME AND ADDRESS
10. PROGRAM ELEMENT NO.
INE624A
See Block 12, below.
11. CONTRACT/GRANT NO.
NA
12. SPONSORING AGENCY NAME AND ADDRESS
EPA, Office of Research and Development
Industrial Environmental Research Laboratory
Research Triangle Park, NC 27711
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 provis ions 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 a 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 n, 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 H--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.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b.lOENTIFIERS/OPEN ENDED TERMS
c. COSATI Field/Group
Pollution
Cost Analysis
Cost Estimates
Reliability
Fixed Investment
Operating Costs
Cash Flow
Interest
Inflation
Pollution Control
Stationary Sources
Measures of Merit
Rates of Return
Sensitivity Analysis
13B
14A
05A
14D
05C
13. DISTRIBUTION STATEMENT
Release to Public
19. SECURITY CLASS (ThisReport)
Unclassified
21. NO. OF PAGES
150
20. SECURITY CLASS (This page)
Unclassified
22. PRICE
EPA Form 2220-1 (1-73)
K-20
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