EPA-440/2-81-026
December 1981
ECONOMIC IMPACT ANALYSIS
FOR
CONTROLLING WATER POLLUTION
IN THE
PAINT MANUFACTURING INDUSTRY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Analysis and Evaluation
Office of Water
Washington, D.C. 20460
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EPA-440/2-81-026
ECONOMIC ANALYSIS FOR
CONTROLLING WATER POLLUTION IN
THE PAINT MANUFACTURING INDUSTRY
Prepared for
OFFICE OF ANALYSIS AND EVALUATION
OFFICE OF WATER
ENVIRONMENTAL PROTECTION AGENCY
Washington, D.C. 20460
under
Contract No. 68-01-4466
Arthur D Little Inc
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PREFACE
This document is the result of a study of the paint manufacturing industry
prepared by the Economic Analysis Staff of the Environmental Protection Agency
(EPA). It will serve as guidance for State and local authorities in controlling the
discharge of pollutants by plants within the paint manufacturing industry as the
Agency has exempted the industry from regulation under Paragraph 8(a)(iv) of the
Settlement Agreement.
An economic analysis of the paint manufacturng industry has been conducted
by EPA to examine the economic impact of various options suggested for the control
of wastewater from paint manufacturing plants. The results of the analysis indicate
that a large proportion of plants within the industry are indirect dischargers, many
of which are small, single-location plants discharging less than 100 gallons per day.
The analysis also indicates that these small plants would be most seriously im-
pacted by the control costs they would be required to incur and unemployment is
likely to result.
n
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TABLE OF CONTENTS
Page
List of Tables v
List of Figures vii
I. EXECUTIVE SUMMARY 1
A. PURPOSE AND SCOPE 1
B. METHODOLOGY 1
C. PRESENT ECONOMIC CONDITIONS 1
D. SUMMARY OF ECONOMIC IMPACT 2
E. LIMITS OF THE ANALYSIS 2
II. METHODOLOGY 5
A. INDUSTRY SEGMENTS AND MODEL PLANTS 5
B. PRELIMINARY DETERMINATION OF IMPACT 5
C. ECONOMIC IMPACTS 5
D. SENSITIVITY 6
III. PRE-STUDY INDUSTRY CONDITIONS 7
A. INDUSTRY CHARACTERISTICS 7
B. INDUSTRY SEGMENTATION 10
IV. CONTROL COSTS 19
A. OPTIONS 19
B. APPLICATION OF COSTS 19
V. ECONOMIC IMPACT 23
A. IMPACT SCREENING 23
B. IMPACT ANALYSIS OF SELECTED OPTIONS 26
C. EFFECT OF EXEMPTING SMALL DISCHARGERS 31
D. IMPACT OF RCRA COSTS 31
m
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TABLE OF CONTENTS (Continued)
Page
VI. LIMITS OF THE ANALYSIS 36
A. MODEL PLANTS 36
B. CONTROL COSTS 36
C. AMOUNT OF EFFLUENT 36
D. CAPITAL AVAILABILITY 36
E. PRICE INCREASE 36
F. CONTRACT HAULING COSTS 37
G. CAPITAL INVESTMENT PAYBACK 38
H. WASTEWATER/PRODUCT RATIO 39
I. DISCOUNTED CASH FLOW VS. PLANT SALVAGE VALUE 42
VII. REFERENCES 44
IV
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LIST OF TABLES
Table No.
1 Summary of Economic Impact of P/C Pretreatment
on the Paint Industry 2
2 Summary of Economic Impact of Zero Discharge
on the Paint Industry 3
3 Paint Plants by Corporate Organization 11
4 Plant Distribution by Site Status 11
5 Average Number of Employees Per Paint Plant 12
6 Distribution of Paint Plants by Age of Operation 12
7 Average Paint Plant Production Last Five Years 13
8 Distribution of Trade Sales as a Percent of Total
Paint Produced 13
9 Distribution of Chemical Coatings as a Percent of
Total Paint Produced 14
10 Distibution of Allied Products as a Percent of Total
Paint Produced 14
11 Distribution of Water-Thinned Paints as a Percent
of Total 15
12 Distribution of Solvent-Thinned Paints as a Percent
of Total 15
13 Financial Profiles of Model Paint Plants 17
14 Physical/Chemical Pretreatment Costs 20
15 Physical/Chemical Pretreatment With Biological
Treatment Costs 20
16 Wastewater Recycle With Contract Hauling Costs 20
17 Wastewater Recycle With Physical/Chemical
Pretreatment Costs 21
18 Wastewater Recycle With Physical/Chemical
Pretreatment and Biological Treatment Costs 21
19 Contract Hauling Costs 21
20 Manually Operated Physical/Chemical Pretreatment
Costs 22
21 Impact of Physical/Chemical Pretreatment Costs 23
22 Impact of Physical/Chemical Pretreatment With
Biological Treatment Costs 23
23 Impact of Wastewater Recycle With Contract
Hauling Costs 24
24 Impact of Wastewater Recycle With Physical/Chemical
Pretreatment Costs 24
25 Impact of Wastewater Recycle With Physical/Chemical
Pretreatment and Biological Treatment Costs 25
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LIST OF TABLES (Continued)
Table No. Page
26 Impact of Contract Hauling Costs 25
27 Impact of Manually Operated Physical/Chemical
Pretreatment Costs 26
28 Average Price Increase to Maintain ROI Physical/
Chemical Pretreatment 27
29 Industry Control Costs for Option 1 Physical/
Chemical Pretreatment 27
30 Industry Costs for Option 2 — Zero Discharge 28
31 Effect of 2i Price Increase 28
32 Profit Before Tax After Treatment Per Gallon
Product 29
33 Wastewater Discharge Practice 30
34 Average Daily Wastewater Discharge VS. Plant Size 31
35 Contract Hauling Costs Due to RCRA 34
36 Physical/Chemical Pretreatment Costs Due to RCRA 34
37 Impact of Contract Hauling Costs Including RCRA Costs 35
38 Impact of Physical/Chemical Pretreatment Costs
Including RCRA Costs 35
39 Sensitivity of Contract Hauling Costs on Physical/
Chemical Pretreatment Costs 37
40 Sensitivity of Contract Hauling Costs on Wastewater
Recycle Costs 37
41 Sensitivity of Contract Hauling Costs on Manually
Operated Physical/Chemical Treatment Costs 38
42 Sensitivity of Contract Hauling Costs on Contract
Hauling 38
43 Effect of Payback Period for Manually Operated
Physical/Chemical Treatment Investment 39
44 Effect of Payback Period for Contract Hauling
Investment 40
45 Effect of Increased Wastewater/Product Ratio 41
46 Cost for Reduction of Wastewater From 0.2/Gal to
0.04 Gal/Gal Via High Pressure Rinsing With Contract
Hauling 41
47 Impact of Wastewater Reduction With Contract
Hauling Costs 42
48 Discounted Cash Flow Vs. Salvage Value 43
VI
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LIST OF FIGURES
Figure No. Page
1 Geographical Distribution of Paint Manufacturing Sites 8
2 Percentage of Total Plants by Segment Vs. Percentage
of Total Production by Segment 18
3 Number of Plants Discharging Vs. Percent Return on
Investment by Average Daily Discharge Volume 32
4 Control Investment Percent of Fixed Assets Versus
Daily Flow Rate 33
vn
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I. EXECUTIVE SUMMARY
A. PURPOSE AND SCOPE
The work covered in this report was authorized by the Environmental Pro-
tection Agency under contract number 68-01-4466. Its purpose is to identify the
effect of various control options and their associated costs on the financial structure
of segments of the paint manufacturing industry. Two control options have been
selected for detailed analysis and the economic impact for each option has been
examined to provide an estimate of the costs paint plants would likely incur had
regulations been imposed on the industry.
Technical data concerning costs for various control options, numbers and sizes
of plants, and their respective wastewater discharge characteristics were furnished
by the technical contractor to the Effluent Guidelines Division. Other information
and data were obtained from the National Pamt and Coatings Association, Robert
Morris Associates, Kline Guide to the Paint Industry, various trade journals, U.S.
Government data, and Arthur D. Little, Inc., estimates.
Although this document has no binding regulatory effect, it may be used by
State and local authorities as guidance for the control of wastewater discharged
directly or indirectly by plants in the paint manufacturing industry. It must be
remembered, when using this document, that the conclusions are based on data
collected in 1976 and that some control option costs prepared by the Effluent
Guidelines Division were felt to be too low m the opinion of iflfktst-ry representa-
tives. However, the principles involved in determining the effect of imposing con-
trols on paint plants can still be used with current data.
B. METHODOLOGY
The paint manufacturing industry was characterized in a general way by
reviewing Bureau of Census data, the Paint Industry Redbook, Kline's Guide to the
Paint Industry, the EPA 308 Survey, and Arthur D. Little, Inc., estimates. Using
this data, the industry was segmented by plant production size. Financial models for
plants in each segment were prepared to correspond with available financial data. A
preliminary determination of impact was prepared using the control costs furnished •
by EPA. Before-tax return on investment was selected as the screening criterion,
since there was little difference in thTs value on the basis of plant size. On the basis
of the screening analysis, two segments — very small, and small — were deter-
mined to be potentially impacted. For these segments detailed impact evaluations
were made for two control options — zero discharge by contract hauling and
physical/chemical pretreatment. Price effects, plant closures, production effects, and
employment effects were calculated. In addition, total industry costs for investment
and annual operating costs were calculated.
C. PRESENT ECONOMIC CONDITIONS
The paint industry comprises some 1500 plants. About 65 percent of these
plants fall in the smallest plant size segments. For the most part, they are single-
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location, privately owned firms with less than 20 employees, less than $1 million in
sales, and with manufacturing facilities more than 30 years old.* Together these
plants account for only about 11% of the total paint production. Some 35% of the
plants account for about 90% of the U.S. paint production. Sales range from less
than $250,000 for the smallest plants to more than $50 million for the very larg-
est."1 •• Return on investments before tax has been estimated to range from 14-20%.
D. SUMMARY OF ECONOMIC IMPACT
An examination of the economic impact of control costs on model plant profit-
ability indicates that the smallest plants would be the most seriously affected if the
industry were to be regulated. While the Effluent Guidelines Division presented
costs for several control options, two were selected for detailed analysis Option 1
involves physical/chemical pretreatment and Option 2 provides for zero discharge
by the most economical method. In the case of Option 1, the total industry costs are
expected to be in the order of $7.6 million, which will be partly offset by an expected
price increase of about 2.00 gallon. Closures of 155 very small plants can be expected
on the basis of economic impact. Total industry costs for plants to comply with
Option 2 are about $11 million. In this case, 232 very small plants can be expected to
close because of economic impact, as shown in Tablejf^ajj(h2. Table 1 summarizes
the impact of Option 1 — Physical/Chemical Pretreatment. Table 2 shows the
impact for Option 2 — Zero Discharge by the most economical means (contract
hauling for very small, small, and medium plants; wastewater recycle with contract
hauling for the rest).
TABLE 1
SUMMARY OF ECONOMIC IMPACT OF P/C PRETREATMENT ON THE PAINT INDUSTRY
($000)
Segment VS S M L VL Total
No. Plants 469 513 296 111 111 1500
Plants in Compliance 314 344 199 74 74 1005
Balance 155 169 97 37 37 495
Total Investment to Comply* 2945 3211 3016.7 1639.1 2516 13327.8
Total Annual Cost* 1503.5 1639.3 1746 947.2 1783.4 7619.4
Predicted Closures 155 0 0 0 0 155
Unemployment Estimate 775 0000 775
E. LIMITS OF THE ANALYSIS
There are several critical assumptions which have a bearing on the accuracy of
the analysis.
1. Model Plants
Since about 75% of the paint plants are privately owned, it is impossible to
establish control-cost effects on a plant-by-plant basis. Model plants, therefore, were
*308 survey figures adjusted for plants not responding to questionnaire
"Kline Guide to the Paint Industry
2
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TABLE 2
SUMMARY OF ECONOMIC IMPACT OF ZERO DISCHARGE ON THE PAINT INDUSTRY
($000)
Segment VS S M L VL Total**
No. Plants 469 513 296 111 111 1500
Plants in Compliance 237 259 150 56 56 758
Balance 232 254 146 55 55 742
Total Investment to Comply* 881.6 965.2 1591.4 2805 4565 10808.2
Total Annual Cost* 1020.8 1778 3518.6 1848 2816 10981.4
Predicted Closures 232 0 0 0 0 232
Unemployment Estimate 1160 0 0 0 0 1160
*The total investment and total annual cost for each segment was obtained by multiplying the estimated
single plant investment and/or annual costs for the number of plants estimated to require installation
and operation of the equipment necessary for this option. Total industry costs is the sum of the costs
for each segment. (See Tables 14-21.)
**Contract hauling for VS, S and M wastewater recycle with contract hauling for L and VL.
established by using general industry data from several sources. The most impor-
tant source was the "Operating Cost Survey, 1976" of the National Paint and
Coatings Association. Average financial data for several plant sizes are presented.
In the smallest segment, these data were supplemented by data from Robert Morris
Associates. As in any model presentation, it is assumed that all plants in each
segment are identical to the estimated financial model. Any gross variation in
profitability ratios from the 1976 estimates could produce a major change in the
effect of these control costs on these plant segments.
2. Control Costs
An examination of the control costs indicated that no serious changes in impact
occurred if operating costs were underestimated for the largest segments. However,
if initial investment and annual capital costs are underestimated, then a much
larger portion of the small segment and part of the medium segment might become
potential closure candidates. (See Tables 14-27.)
3. Amount of Effluent Discharged
A major variable concerns the ratio of wastewater discharged to the number of
paint gallons produced. The 308 Survey indicated a wide range of values. If this
ratio is much larger than estimated, the impact will be more serious because of both
the increased investment cost and increased operating and maintenance costs to
handle a larger volume. (See Table 45.)
4. Capital Availability
For the economic analysis, capital was assumed borrowable on a 5-year direct
reduction annual payback note at 12% interest. While the interest rate sensitivity is
an important factor in the overall cost, the payback period has greater sensitivity.
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For instance, in the case of very small and small plants where financing might be
difficult at best, a negative cash flow would result on paybacks of three years or less
(see Table 44). In addition, the amount of capital required is a large percentage of
plant fixed assets for very small and small plants. In this case, any loan would
probably have to be self-financed or secured by a second mortgage on the owner's
home, etc., at much higher interest rates. This was corroborated by interviews with
two financial institutions and several small paint manufacturers.
5. Contract Hauling Costs
In some sections of the country, contract hauling costs are reported higher than
those furnished. The analysis shows that contract hauling costs are highly sensitive
and will further reduce profits over those estimated resulting in a larger impact.
Four factors contributing to control costs were found to be very sensitive in
terms of their effect on closure probability. One is the cost for contract hauling of
wastewater. If these costs are greater than those presented, a negative cash flow
may result for all of the very small plants and for some of the small plants. Second,
the cost of capital and, particularly, its payback period are important. Any require-
ment for capital investment for non-productive equipment is extremely difficult for
small plants to manage, particularly on a short-term payback basis. Third is the
ratio of water-thinned production to total paint production. Any increase in the
ratio provided by EPA will result in a comparable increase in costs and reduced
profits. Fourth, and perhaps most important, is the amount of wastewater dis-
charged per unit of production. For the smaller plants, even a slight increase in this
ratio will reduce profits to zero. Since about 20% of the industry responses to the 308
Survey indicated ratios as much as five times higher than the ratio selected by the
technical contractor, the actual number of closures may be higher than that
estimated.
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II. METHODOLOGY
A. INDUSTRY SEGMENTS AND MODEL PLANTS
After the paint industry was characterized in a general way, the plants were
segmented by size in terms of sales/production Sizes were selected to correspond
with available financial data. For each segment, a model statement of revenues
minus total costs was prepared. The major item from which control costs were to be
subtracted is profit before tax. Other features such as plant fixed assets, working
capital, etc., were also calculated. Recent return on investment before tax was
selected as a key financial indicator because there is little difference in this value
for each of the model plant segments. It therefore offers the opportunity of compar-
ing the impact of various control costs regardless of plant size by applying a single
criterion for evaluating the impacts.
B. PRELIMINARY DETERMINATION OF IMPACT
Applying costs for control to the profit before tax for each model results in an
estimated profit before tax after treatment. This value divided by the total plant
investment (net fixed assets plus working capital) resulted in a Before Tax Return
on Investment after Treatment.
For purposes of screening, it was assumed that any plant having a Before Tax
Return on Investment after Treatment of 10% or less would be in the highly
impacted category since almost any other investment opportunity would yield a
greater return. For plants whose Before Tax Return on Investment after Treatment
was significantly above this value, no further detailed analyses were made.
However, the cost for compliance for those plants was calculated and included in the
total industry costs. In addition, any control option whose investment cost was
greater than 25% of plant fixed assets was also considered to be highly impacted.
C. ECONOMIC IMPACTS
Before Tax Return on Investment was selected as the closure criterion since it
is relatively independent of plant size, it is easily understood by the small plant
investors, and it is a reasonable test for a plant owner to judge whether he should
keep his money in the paint business or place it elsewhere. Ten percent was selected
as a lower limit because this rate of return is readily obtainable from a variety of
sources which suggests that a return at a lower rate would create an incentive to
close the plant and re-invest in some other fashion.
It is recognized that many small plants will stay in operation despite an
unfavorable return vis-a-vis alternative investment opportunities. Nevertheless, in
conducting an impact analysis one must utilize the data available and closure
predictions must be made on the basis of financial judgments, not emotional
judgments.
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D. SENSITIVITY
Those plants in the highly impacted category, as determined by the initial
screening, were further examined by determining the sensitivity to variables such
as contract hauling costs, capital payback periods, ratio of wastewater to product,
etc.
1. Price Effects
Since one method of recovering costs would be to raise prices, the average cost
per gallon of product was calculated for each segment to maintain its Before Tax
Return on Investment before Treatment. From these data, an average price increase
was calculated by dividing industry costs by gallons produced.
On the assumption of an average price increase, Before Tax Return on In-
vestment after Treatment was again determined and capital availability estimated
to see if those plants previously impacted could recover sufficiently to be removed
from the potential closure category.
2. Capital Costs and Availability
On the assumption that the necessary capital must be raised from outside
financial assistance, capital costs were calculated for two long- and two short-term
payback periods. These costs were used in determining Before Tax Return on
Investment after Treatment for each of the segments determined as highly im-
pacted in the screening analysis.
3. Discounted Cash Flow Analysis
Another method for determining potential plant closures is to examine the net
present value of future revenues by discounted cash flow after treatment equipment
is installed vs. plant salvage value. In the paint industry discounted cash flow
analyses are not used as investment criteria, except perhaps by the largest plants
and are certainly not used as a criterion for closure. Salvage value of paint plants
would be very difficult to estimate with any degree of accuracy.
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I. PRE-STUDY INDUSTRY CONDITIONS
A. INDUSTRY CHARACTERISTICS
The paint industry comprises about 1200 companies operating 1500 manufac-
turing plants distributed throughout the United States (Figure 1). For the most
part, the industry is dominated by a large number of very small companies which
sell their products on a local or regional basis. This structure has come about partly
because of high distribution costs and partly because it takes very little capital and
little sophistication to enter this business. The large majority of paint plants blend
the raw materials together according to formulae that have been handed down
through the family or are readily available from one of their raw material suppliers.
Only the very large plants manufacture some of their own materials and do the
research and development required for new products.
An overview of the types of plants in this industry responding to the EPA
Survey, Department of Commerce data and Arthur D. Little, Inc., estimates shows
that 67% are single-location operations, 74% are privately owned, 63% have fewer
than 20 employees, 84% produce less than 1 million gallons of product annually,
50% are over 20 years old, 61% have annual sales of less than $1 million, and 30%
ship their product less than 100 miles.
1. Description of the Products
The paint industry manufactures a wide variety of proucts generally sold in
two classifications: trade sales and chemical coatings. It manufactures a few allied
products, such as putty, shellac, etc., that are outside these categories, but they
represent a very minor portion of the total industry. Companies and/ or plants in the
trade sales segment of the industry manufacture products sold directly to profes-
sional painters or to the public through company-owned and operated stores,
hardware stores, retail stores and discount stores. The products are sold under
nationally known brand names, private labels, and local or regional brand names.
Chemical coatings, on the other hand, are generally sold directly to an industrial
finisher, or manufactured and used in-house, and in a few cases, sold to the public.
Some companies manufacture only trade sales paints, others manufacture only
chemical coatings, and still others manufacture only allied products. Most of the
companies, however, manufacture products in more than one category. According to
the 308 Survey, Tables 14-16 and data from sources previously described, about 35%
of the industry manufactures no trade sales paints, 20% manufactures no chemical
coatings, and 75% manufactures no allied products. At the other end of the scale,
14% manufactures only trade sales paints, 26% manufactures only chemical coat-
ings, and about 4% manufactures only allied products. More than 50% of the
production of 42% of the plants is for trade sales; more than 50% of the production of
46% of the plants is for chemical coatings; and more than 50% of the production of
about 7% of the plants is for allied products.
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00
Hawaii
Puerto Rico &
Virgin Islands
Source: 308 Survey.
FIGURE 1 GEOGRAPHICAL DISTRIBUTION OF PAINT MANUFACTURING SITES
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2. Industry Pricing
The paint industry, with few exceptions, is extremely competitive; prices are
very frequently established to meet those of the competition. Some companies will
calculate the lowest possible break-even selling price and try to establish their
actual selling price somewhere between that price and one that provides a reason-
able profit. Sometimes, small paint companies will sell at break-even or below,
simply to keep their equipment running and their personnel busy.
In inflationary times, labor costs tend to rise rapidly. To maintain some profit,
the increased labor costs must be offset by higher selling prices, increased produc-
tivity, or lower raw material costs. Between 1960 and 1967, however, labor costs in
the paint industry rose approximately 3.7% annually. At the same time, prices were
increased approximately 1.2%, with an actual decline in raw material costs of about
1.6%. An increase in productivity of 1.9% coupled with the differential between
rising labor costs and lower raw material costs provided relatively good profitability
for the industry. Since 1967, however, gains in productivity have not offset the
spread. The annual labor rate has been rising about twice as fast as in the 1960-67
period and raw material costs have also increased. This created a situation where
profit margins declined considerably. The drastic increases in the cost of raw
materials in 1973 and 1974, were coupled with a rather large increase in selling
price that arrested this decline and put the paint industry back to the average
profitability that it enjoyed in the 1960-67 period. Unfortunately, however, the
industry is again facing the same conditions that if faced in 1967-74, and it is
inevitable that industry profits will decline.
One of the key issues in looking at the economic impact of the control regu-
lations on this industry is to determine whether prices will increase because of the
regulations. This, of course, is extremely difficult to determine until the regulations
are actually established. On the basis of previous studies, it may be expected that
many plants will have treatment facilities already installed, so any wastewater
effluent will meet the regulations. No price increase would be required on the
products sold by these companies, which account for approximately 70% of industry
sales.
3. Seasonally
Companies manufacturing predominantly trade sales paints have a marked
seasonal pattern. According to the Kline Industry Marketing Guide,* sales gener-
ally rise through the first half of the year, cool off through the summer months, and
then decline steadily until they reach a minimum in December and January.
Chemical coatings do not reflect the same seasonal pattern as the trade sales
products, although they do reach a peak during the middle of the year and then tend
to drop off again in the December-January period. Sales of trade sales paints tend to
increase during times of unemployment because workers then can spend their idle
time repainting their homes.
'See references
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The years 1974 and 1975 were not good for the paint industry, primarily
because of general economic conditions and the extreme shortage of some essential
raw materials. Trade sales paints showed about an 18% increase in dollar volume,
but only a 4% increase in production over 1973. Sales of chemical coatings increased
by more than 20%, but production actually declined over the same period. Growth in
the industry has historically been somewhat slower than that of the gross national
product and shows seasonality, particularly in architectural paints, which tend to
peak in the summer and to correspond with housing starts. Chemical coatings
generally tend to correspond with sales of the automotive and appliance industries
and show less seasonality. The total value of shipments by the industry in 1974 was
some $3.7 billion for about 900 million gallons.
B. INDUSTRY SEGMENTATION
In order to look at the impact of control regulations on individual plants it
would be necessary to have financial data on each individual plant. For the "large"
and "very large" segments, financial data on companies are available, as most of
these are publicly owned and are required to provide such data to stockholders and
other interested parties. There is a problem, however, because the financial data for
these multi-plant companies are presented for the company as a whole and not on a
plant by plant basis. At the other end of the scale, for single-plant companies, such
detailed financial information is not generally available and one has to make
assumptions about the financial profile of such companies. Models showing the
financial profiles of typical plants within each segment of the industry have been
constructed using data provided by the National Paint and Coatings Association in
its publication "Operating Cost Survey 1976"; Kline Guide to the Paint Industry,
1975; Annual Statement Studies, 1976 Robert Morris Associates; and Arthur D.
Little, Inc., estimates.
1. Types of Plants
The EPA's 308 Survey of the industry, the previous economic study, company
annual reports, private economic studies of the paint industry, government data,
data made available from the National Paint and Coatings Association, and Arthur
D. Little, Inc., estimates indicate the distribution of these plants by various char-
acteristics. The overwhelming majority is under private ownership (Table 3) and
about two-thirds of the plants represent a single-plant company (Table 4). Ten
plants are in the "captive" category, but for the most part these are owned by
automotive or appliance manufacturers. Most of the plants have fewer than 10
employees (Table 5), which is not surprising in an industry that is composed of so
very many small companies. Almost one-half of the plants are more than 30 years
old (Table 6). Table 7 shows the average production by plant size. Tables 8,9 and 10
show the distribution of plants versus the percentage of product type produced —
trade sales, chemical coatings and allied products. Tables 11 and 12 show the
distribution by plant of the percentage of water-thinned and solvent-thinned paints,
respectively. There are 136 plants that use thinner other than water or organic
solvent for at least a portion of their production, and 112 plants that manufacture
resin.
10
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TABLE 3
PAINT PLANTS BY CORPORATE ORGANIZATION
No. %
Public 301 20.0
Private 1111 74.1
Partnership 22 1.5
Proprietorship 61 4.1
Cooperative 5 0.3
100.0
Source: 308 Survey conducted by Effluent Guidelines Division,
and Arthur D. Little, Inc., estimates.
TABLE 4
PLANT DISTRIBUTION BY SITE STATUS
No. %
Single-plant Company 1004 66.9
Branch 311 20.7
Division 175 11.7
Captive 10 0.7
100.0
Source: 308 Survey conducted by Effluent Guidelines Division,
and Arthur D. Little, Inc., estimates.
2. Model Plant Development
On the basis of the industry segmentation, model plants were constructed to
represent typical financial operating data for representative plants in each seg-
ment. In the construction of these models certain assumptions were necessary. Some
assumptions were established by the EPA's technical contractor; i.e., wastewater
flow ratios of 0.2 gal/gal waterbased paint, and 50% of production is waterbased
paint. This study assumes that the financial condition of all plants in the segment is
the same as the model plant. Owner's salary and other considerations to small plant
owners are shown as normal profit before tax just as if the small individually owned
plant were a part of a large corporation and would use equivalent financial report-
ing techniques.
11
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TABLE 5
AVERAGE NUMBER OF EMPLOYEES PER PAINT PLANT
(1349 plant base)*
No. %
Less than 10 562 41.7
11-20 286 21.2
21-30 134 9.9
31-40 64 4.7
41-50 66 4.9
51-60 49 3.6
61-70 30 2.2
71-80 15 1.1
81-90 19 1.4
91-100 19 1.4
101-150 52 3.8
Over 150 53 3.9
'These numbers refer to the number of plants responding to
this particular question on the survey.
Source: 308 Survey conducted by Effluent Guidelines Division.
TABLE 6
DISTRIBUTION OF PAINT PLANTS
BY AGE OF OPERATION
(1352 plant base)
No. %
Less than 3 years 67 4.9
3-5 102 7.5
6-10 168 12.4
11-20 321 23.7
21-30 268 19.8
Over 30 426 31.5
Source: 308 Survey conducted by Effluent Guidelines Division
12
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TABLE 7
AVERAGE PAINT PLANT PRODUCTION
LAST FIVE YEARS (GALLONS)
(1327 plant base)
No. %
Less than 50.000 373 28.1
50,001-200.000 359 27.0
200,000-1,000,000 387 29.2
1,00,000-5,000.000 181 13.6
More than 5,000,000 27 2.0
Source: 308 Survey conducted by Effluent Guidelines Division
TABLE 8
DISTRIBUTION OF TRADE SALES AS A PERCENT
OF TOTAL PAINT PRODUCED
(1312 Plant Bate)
Percent Trade Sales No. Plants %
0 464 35.4
1-10 125 9.5
11-20 39 3.0
21-30 44 3.4
31-40 39 3.0
41-50 58 4.4
51-60 34 2.6
61-70 47 3.6
71-80 43 3.3
81-90 77 5.9
91-100 160 12.2
100 182 13.9
Source: 308 Survey conducted by Effluent Guidelines Division
13
-------
TABLE 9
DISTRIBUTION OF CHEMICAL COATINGS AS A PERCENT
OF TOTAL PAINT PRODUCED
(1305 Plant Base)
Percent Chemical
Coatings No. Plants %
0 295 22.6
1-10 190 14.6
11-20 62 4.8
21-30 56 4.3
31-40 38 2.9
41-50 66 5.1
51-60 26 2.0
61-70 33 2.5
71-80 44 3.4
81-90 44 3.4
91-100 111 8.5
100 340 26.0
Source: 308 Survey conducted by Effluent Guidelines Division
TABLE 10
DISTRIBUTION OF ALLIED PRODUCTS AS A PERCENT
OF TOTAL PAINT PRODUCED
(1252 Plant Base)
Percent of Allied
Products No. Hants %
0 919 73.4
1-10 170 13.6
11-20 22 1.8
21-30 17 1.4
31-40 22 1.8
41-50 15 1.2
51-60 6 0.5
61-70 4 0.3
71-80 7 0.6
81-90 8 0.6
91-100 25 2.0
100 37 3.0
Source: 308 Survey conducted by Effluent Guidelines Division
14
-------
TABLE 11
DISTRIBUTION OF WATER-THINNED PAINTS AS A
PERCENT OF TOTAL
(1304 Rant Base)
Percent Water-Thinned No. Planti %
0 345 26.4
MO 274 21.0
11-20 86 6.6
21-30 53 4.1
31-40 52 4.0
41-50 63 4.8
51-60 83 6.4
61-70 99 7.6
71-80 79 6.1
81-90 61 4.7
91-100 54 4.1
100 55 4.2
Source: 308 Survey conducted by Effluent Guidelines Division
TABLE 12
DISTRIBUTION OF SOLVENT-THINNED PAINTS AS
A PERCENT OF TOTAL
(1308 Rant Base)
Percent Solvent
Thinned No. Plants %
0 135 10.3
1-10 98 7.5
11-20 66 5.0
21-30 100 7.6
31-40 78 6.0
41-50 114 8.7
51-60 60 4.6
61-70 50 3.8
71-80 51 3.9
81-90 97 7.4
91-100 229 17.5
100 230 17.6
Source: 308 Survey conducted by Effluent Guidelines Division
15
-------
Financial profiles of the model plants are shown in Table 13. Other data used
in the construction of the models came from NPCA Operating Highlights, Robert
Morris Associates studies, and Arthur D. Little, estimates. The industry can be
segmented into five categories on the basis of sales as follows:
• Very large plants — sales over $10 million. Plants in this category are
in multi-plant companies which manufacture some of their own res-
ins and some of their own pigments, have nationwide distribution
through a large number of retail stores or are producing directly for
large nationwide distributors. While this segment contains 111
plants it represents only about eight companies.
• Large plants — sales between $5-10 million. Plants in this category
are very much like those in the very large category in that they are
part of multi-plant companies, but the individual plants generally are
smaller. The major distinction in this group is that very few, if any,
manufacture any of their own raw materials. There are about 50
companies in this category.
• Medium-sized plants — sales between $1 -5 million. In this category
are plants that are owned by 150-200 companies, most of which have
branch plant operations. These plants, however, are more like the
smaller plants in the categories that follow than they are like those in
the largest sales categories. The data indicate that these plants may
be the most efficient in the industry in terms of size of plant for the
market served. Some of the most profitable plants in the industry are
in this category.
• Small plants — sales between $250,000-$! million. (See following
category.)
• Very small plants — sales less than $250,000. Plants in this and the
previous category are all single-company, single-plant locations, are
privately owned, and account for a relatively small percentage of the
total dollar volume of paint and coatings produced. These companies
range in size from those with only two employees to some with 30 or
more. Distribution of products from these plants is usually limited;
products are sold through local hardware stores, home improvement
centers, etc., generally at a lower retail price than the nationally
known brands. Some companies in these categories, however, produce
specialized products and are undoubtedly very profitable.
The distribution of the number of plants and their production by segments
(Figure 2) show that the very small plant segment has the largest number of plants
and the smallest production.
16
-------
TABLE 13
FINANCIAL PROFILES OF MODEL PAINT PLANTS
($000)
Segment
No. Plants
Annual Sales
Approx. No. Employees
Annual Production
(000 gallons)
Plant Profit Before Tax
Plant Net Worth
Plant Working Capital
Rant Total Assets
Plant Fixed Assets
Plant Total Investment
Before Tax Return on
Investment (%)
Very
Small
469
200
5
50
6.8
48.8
27.7
71.9
21.6
49.3
Small
513
600
12
150
27
152
111
189
40.4
151.4
Medium
296
2400
42
600
140
562
404
1106
289
693
Large
111
5000
80
1250
293
1726
1310
2549
732
2042
Very
Large
111
15,000
280
3,750
1,260
4,348
3,928
10,332
2,851
6,779
13.8
17.8
20.2
14.3
18.6
Source: Arthur D. Little, Inc., estimates.
17
-------
100
90
80
70
60
50
40
30
20
10
0
Legend:
I I Plantt per Segment
Production per Segment
Very Small
Small
Medium
Large
Very Large
Source: Arthur D. Little, Inc., estimates.
FIGURE 2 PERCENTAGE OF TOTAL PLANTS BY SEGMENT VS.
PERCENTAGE OF TOTAL PRODUCTION BY SEGMENT
18
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IV. CONTROL COSTS
A. OPTIONS
The EPA studied seven alternative methods for controlling pollution from
wastewater discharge by the paint industry:
1. Physical/Chemical Pretreatment.
2. Physical/Chemical Pretreatment with Biological Treatment.
3. Wastewater Recycle with Contract Hauling.
4. Wastewater Recycle with Physical/Chemical Pretreatment.
5. Wastewater Recycle with Physical/Chemical Pretreatment, and Bio-
logical Treatment.
6. Contract Hauling.
7. Manually Operated Physical/Chemical Pretreatment.
Investment and operating costs have been provided for various size plants.
These costs are presented in detail in the Development Document and are also
summarized in Tables 14-20. The costs in the Development Document have been
deflated by a factor of 0.835 to reduce them to 1976 dollars, the base year for the
data presented. This factor was provided by EPA using a reference from ENR, 12,
21, 78 page 69 showing construction costs for 20 cities 1976-1978. Total investment,
annual capital costs, annual operating costs and total annual costs were calculated
using these data. The investment capital is assumed to be borrowed at a five year
direct reduction annual payback at 12% interest. Depreciation figures shown in the
Development Document under operating costs have been deleted so that operating
costs show only operational and maintenance figures and the annual investment
cost shows the debt payback for control equipment only.
B. APPLICATION OF COSTS
These costs were used for all segments in the initial screening for impact.
Detailed analyses were made for two options for those segments impacted. In
addition, sensitivity analyses were conducted for contract hauling cost, investment
payback and wastewater/product ratios.
19
-------
TABLE 14
PHYSICAL/CHEMICAL PRETREATMENT COSTS
($000)
Segment VS S M L VL
Total Investment 19.0 19.0 31.1 44.3 68.0
Annual Investment Cost 5.3 5.3 8.6 12.3 18.9
Annual Operating Cost 4.4 4.4 9.4 13.3 29.3
Total Annual Cost 9.7 9.7 18.0 25.6 48.2
TABLE 15
PHYSICAL/CHEMICAL PRETREATMENT WITH
BIOLOGICAL TREATMENT COSTS
($000)
Segment VS S M L VL
Total Investment 150.6 160.6 162.7 175.8 199.5
Annual Investment Cost 41.8 41.8 45.1 48.8 65.4
Annual Operating Cost 1S.3 15.3 20.4 24.3 40.3
Total Annual Cost 57.1 57.1 65.5 73.1 95.7
TABLE 16
WASTEWATER RECYCLE WITH CONTRACT HAULING COSTS
($000)
Segment VS S M L VL
Total Investment 19.3 19.3 34.2 51.0 83.0
Annual Investment Cost 5.3 5.3 9.4 14.1 23.0
Annual Operating Cost 7.6 7.6 11.1 19.5 28.2
Total Annual Cost 12.9 12.9 20.5 33.6 51.2
20
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TABLE 17
WASTEWATER RECYCLE WITH PHYSICAL/CHEMICAL PRETREATMENT COSTS
($000)
Segment VS S M L VL
Total Investment 34.5 34.5 49.3 65.6
Annual Investment Cost 9.6 9.6 13.7 18.2
Annual Operating Cost 8.5 8.5 9.7 17.0
Total Annual Cost 18.1 18.1 23.4 35.2
TABLE 18
WASTEWATER RECYCLE WITH PHYSICAL/CHEMICAL PRETREATMENT
AND BIOLOGICAL TREATMENT COSTS
($000)
Segment VS S M L VL
Total Investment 166.0 166.0 180.9 197.1 236.2
Annual Investment Cost 46.0 46.0 50.2 54.7 65.5
Annual Operating Cost 19.5 19.5 20.6 27.7 31.6
Total Annual Cost 65.5 65.5 70.8 82.4 97.1
TABLE 19
CONTRACT HAULING COSTS
($000)
Segment VS S M L VL
Total Investment 3.8 3.8 10.9
Annual Investment Cost 1.1 1.1 3.0
Annual Operating Cost 3.3* 5.9 21.1
Total Annual Cost 4.4 7.0 24.1
"Reduced to reflect smaller volume of sludge disposal costs.
21
-------
TABLE 20
MANUALLY OPERATED PHYSICAL/CHEMICAL PRETREATMENT COSTS
($000)
Segmant VS S M
Total Investment 3.8 3.8 4.7
Annual Investment Cost 1.1 1.1 1.3
Annual Operating Cost 5.9 5.9 8.6
Total Annual Cost 76 To 9.9
22
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V. ECONOMIC IMPACT
A. IMPACT SCREENING
As a first screening, the control costs developed by EPA were applied to the
financial data developed for the model plants in each segment shown in Table 13.
For this screening it was assumed that all plants in each segment are identical to
the model. The criterion used to determine impact was a 10% or less before tax
return on plant investment after treatment and/or that the investment for control is
greater than 25% of plant fixed assets.
The effects of these costs on the model plants are shown in Tables 21-27.
TABLE 21
IMPACT OF PHYSICAL/CHEMICAL PRETREATMENT COSTS
($000)
Segment VS S M L VL
Fixed Assets (Before Treatment) 21.6 40.4 289 732 2851
Investment % Fixed Assets 88.0 47.0 10.8 6.1 2.4
Profit Before Tax 6.8 27 140 293 1260
Total Annual Cost 9.7 9.7 18.0 25.6 48.2
Profit Before Taxes After Treatment (2.9) 17.3 122 267.4 1211.8
Total Investment After Treatment 68.3 170.4 724.1 2086.3 6847
Before Tax Return on Investment
After Treatment (%) (4.2) 10.2 16.8 12.8 17.7
TABLE 22
IMPACT OF PHYSICAL/CHEMICAL PRETREATMENT WITH
BIOLOGICAL TREATMENT COSTS
($000)
Segment VS S M L VL
Fixed Assets (Before Treatment) 21.6 40.4 289 732 2851
Investment % Fixed Assets 697 373 56.3 24.0 7.0
Prof it Before Tax 6.8 27 140 293 1260
Total Annual Cost 57.1 57.1 65.5 73.1 95.7
Profit Before Taxes After Treatment (50.3) (30.1) 74.5 219.9 1164.3
Total Investment After Treatment 199.9 302 855.7 2217.8 6978.5
Before Tax Return on Investment
After Treatment (%) (25.2) (10.0) 8.7 9.9 16.7
23
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TABLE 23
IMPACT OF WASTEWATER RECYCLE WITH CONTRACT HAULING COSTS
($000)
Segment VS S M L VL
Fixed Assets (Before Treatment) 21.6 40.4 289 732 2851
Investment % Fixed Assets 89.4 47.7 11.8 7.0 2.9
Prof it Before Tax 6.8 27 140 293 1260
Total Annual Cost 12.9 12.9 20.5 33.6 51.2
Prof it Before Taxes After Treatment (6.1) 14.1 119.5 259.4 1208.8
Total Investment After Treatment 68.6 170.7 727.2 2093 6862
Before Tax Return on Investment
After Treatment (%) (8.9) 8.3 16.4 12.4 17.6
TABLE 24
IMPACT OF WASTEWATER RECYCLE WITH PHYSICAL/CHEMICAL
PRETREATMENT COSTS
($000)
Segment VS S M L VL
Fixed Assets (Before Treatment) 21.6 40.4 289 732 2851
Investment % Fixed Assets 159.7 85.4 17.1 9.0 3.7
Prof it Before Tax 6.8 27 140 293 1260
Total Annual Cost 18.1 18.1 23.4 35.2 50.3
Profit Before Taxes After Treatment (11.3) 8.9 116.6 267.8 1209.7
Total Investment After Treatment 83.8 185.9 742.3 2107.6 6883.7
Before Tax Return on Investment
After Treatment (%) (13.5) 4.8 15.7 12.2 17.6
24
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TABLE 25
IMPACT OF WASTEWATER RECYCLE WITH PHYSICAL/CHEMICAL
PRETREATMENT AND BIOLOGICAL TREATMENT COSTS
($000)
Segment VS S M L VL
Fixed Assets (Before Treatment) 21.6 40.4 289 732 2851
Investment % Fixed Assets 768 411 62.6 26.9 8.3
Profit Before Tax 6.8 27 140 239 1260
Total Annual Cost 65.5 65.5 70.8 82.4 97.1
Prof it Before Taxes After Treatment (58.7) (38.5) 69.2 156.6 1162.9
Total Investment After Treatment 215.3 317.4 873.9 2239.1 7015.2
Before Tax Return on Investment
After Treatment (%) (27.3) (12.1) 7.9 7.0 16.6
TABLE 26
IMPACT OF CONTRACT HAULING COSTS
($000)
Segment VS S M L VL
Fixed Assets (Before Treatment) 21.6 40.4 289 732 2851
Investment % Fixed Assets 17.6 9.4 3.8 2.1 1.2
Prof it Before Tax 6.8 27 140 293 1260
Total Annual Cost 4.4 7.0 24.1 44.2 124.6
Profit Before Taxes After Treatment 2.4 20 115.9 248.8 1135.4
Total Investment After Treatment 53.1 155.2 703.9 2057.1 6812.2
Before Tax Return on Investment
After Treatment (%) 4.5 12.9 16.5 12.1 16.7
25
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TABLE 27
IMPACT OF MANUALLY OPERATED PHYSICAL/CHEMICAL PRETREATMENT COSTS
($000)
Segment
Fixed Assets (Before Treatment)
Investment % Fixed Assets
Profit Before Tax
Total Annual Cost
Profit Before Taxes After Treatment
Total Investment After Treatment
Before Tax Return on Investment After
Treatment (%)
VS
21.6
17.6
6.8
7.0
(0.2)
53.1
(0.4)
40.4
9.4
27
7.0
20
155.2
12.9
M
289
1.6
140
9.9
130.1
697.7
18.6
B. IMPACT ANALYSIS OF SELECTED OPTIONS
The options selected by EPA for study were: Option 1 — Physical/Chemical
Pretreatment, Option 2 — Zero Discharge by the Most Economical Method.
1. Industry Wide Price Effects
One of the techniques for recovering the costs associated with effluent control
is to pass these costs through to plant customers. To estimate a general industry
price increase, one must assume that all plants affected will pass on costs for control
and that the entire industry will follow suit, even though a large majority of plants
already have controls in place and are already incurring control costs. For each
segment, the amount of additional revenue necessary to maintain return on in-
vestment at the pre-control level was calculated. This value divided by the segment
production shows the increase in cost per gallon estimated for affected plants in
each segment. Since prices are normally established by the larger producers, no
additional price increase is expected over that shown for the largest segment.
Table 28 shows that in order to maintain ROI in the very large plant a price
increase of 20/gallon could be expected if either zero discharge or physical/chemical
pretreatment is promulgated. This price increase would, of course, benefit all
plants.
2. Industry Wide Costs of Compliance
Table 29 shows the anticipated industry costs resulting from plants having to
comply with Option 1 — Physical/Chemical Pretreatment. It is assumed that plants
discharging treated wastewater already comply with pretreatment standards, so
that only those plants discharging untreated water are included. With an expected
2.0(2 per gallon price increase, this is enough to recover the cost of control for all but
the small and very small segments. Table 30 shows the industry costs for plants
having to comply with Option 2 — Zero Discharge which include all discharging
plants (742). An anticipated price increase of 20/gallon will recover the incremental
costs for control for only the very large plants.
26
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TABLE 28
AVERAGE PRICE INCREASE TO MAINTAIN ROI
PHYSICAL/CHEMICAL PRETREATMENT
Segment
VS"
S"
M"
L
VL
Total
No. Plants
to Comply
155
169
97
37
37
495
Needed Revenue
($000)
$ 763.8
1,288.7
1,051.0
1.144.8
2,284.4
$6,532.7
Total Gallons
(MM)
7.75
25.35
58.2
46.25
138.75
276.3
Price
Increase/Gallon
(4)
9.8
5.1
1.8
2.5
1.6
2.4 (Ave.)
ZERO DISCHARGE
Segment
VS"
S'
M*
L*"
VL"*
Total
No. Plants
to Comply
232
254
146
55
55
742
Needed Revenue
($000)
$ 1,143.2
1,936.9
3.838.0
2.194.4
3.714.3
$12,826.8
Total Gallon!
(MM)
11.6
38.1
87.6
68.75
206.25
412.3
Price
Increaie/Gallon
M
9.8
5.1
4.4
3.2
1.8
3.1 (Ave.)
'Contract Haul.
"Manually operated physical chemical.
***Wastewater recycle with contract haul.
TABLE 29
INDUSTRY CONTROL COSTS FOR OPTION 1
PHYSICAL/CHEMICAL PRETREATMENT
($000)
Segment
No. Plants
Annual Control Cost/Plant
Total Annual Cost
Cost/Gallon Product (4)
VS
155
4.4
682
9.4
S
169
7.0
1,183
4.7
M
97
9.9
960.3
1.6
L
37
25.6
947.2
2.0
VL
37
48.2
1,783.4
1.3
Total
495
—
5,555.9
2.0
27
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TABLE 30
INDUSTRY COSTS FOR OPTION 2 - ZERO DISCHARGE
($000)
VS
232
4.4
1,020.8
8.8
S
254
7.0
1,778
4.7
M
146
24.1
3,518.6
4.0
L
55
33.6
1,848
2.7
VL
55
51.2
2,816
1.4
Total
742
—
10,981.4
2.7
Segment
No. Plants
Annual Cost/Plant
Total Annual Cost
Cost/Gallon (i)
3. Closure Analysis
a. Effect on Small and Very Small Segment Impact
Assuming a 20/gallon price increase for the selected options, the effect of this
increase on control cost impact is shown in Table 31. This price increase does little
for the very small plant, but it may provide enough return to the small plant to
avoid closure even if profits decline or costs increase in the future.
TABLE 31
EFFECT OF 24 PRICE INCREASE
($000)
Segment
Treatment
Profit Before Tax
Investment Cost
Operating Cost
Total Annual Cost
Profit Before Tax After Treatment
Total Investment After Treatment
Before Tax Return on
Investment After Treatment (%)
VS
Contract
Hauling
7.8
1.1
3.3
4.4
3.4
53.1
6.4
Manually Operated
Physical Chemical
Pretreatment
30.0
1.1
5.9
7.0
23
155.2
Contract
Hauling
30.0
1.1
5.9
7.0
23
155.2
14.8
14.8
A 20/gallon price increase does not appear to be a large amount when consider-
ing the retail price per gallon of paint. A better comparison, however, is shown in
Table 32, where profit before tax on a per-gallon basis is shown for Option 1 and
Option 2 before and after regulation.
28
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TABLE 32
PROFIT BEFORE TAX AFTER TREATMENT PER GALLON PRODUCT
Profit Before Tax
Total Annual Cost
Profit Before
Tax After Treatment
Loss in Profit (%)
vs
1
13.6
8.8
4.8
64.7
2
13.6
8.8
4.8
64.7
S
1
18.0
4.7
13.3
50.7
2
18.0
4.7
13.3
50.7
M
1
23.3
1.7
21.6
7.3
2
23.3
4.0
19.3
17.2
L
1
23.4
2.1
21.3
9.0
2
23.4
2.7
20.7
11.5
VL
1
33.6
1.3
32.3
3.9
2
33.6
1.4
32.2
4.2
4. Capital Availability
It was assumed that if investment costs for control was greater than 25% of
plant fixed assets, then capital availability would be a problem. Several lending
institutions were checked to verify this policy and most agreed that small com-
panies would have difficulty raising capital without some outside collateral. Second
mortgages on the owner's home was the method mentioned most often. This, of
course, would imply a much higher interest rate than for a commercial loan. Rates
and payback periods are discussed in the section on sensitivity.
Only the very large plants could have capital available for all alternatives.
Medium and large plants could not raise capital easily if biological treatment was
selected as the control technology. For small and very small plants capital
availability for most options will be difficult. Contract hauling is the best from an
investment standpoint.
5. Closure Effects
The industry survey developed for EPA by its technical contractor shows in
Table V-6 the wastewater discharge volumes of the industry. This table shows 608
zero dischargers out of 1374 total plants; 122 plants did not report the volume
discharged. An examination of the answers to other questions by these 122 plants
shows that 86 practice zero discharge for an industry total of 694 or 50.5% of the
plants responding to the survey. Using this as a guide the 126 very small plants not
responding to the survey were assumed to follow the same practice. The discharge
practice of the industry, therefore, is assumed to be as follows:
Zero Discharge 758
Indirect Discharge 736
Direct Discharge 6_
Total Plants 1,500
29
-------
It is interesting that Table VII-3 in the engineering report, while it contains
multiple data from some plants, shows that about 64% of the industry practices zero
discharge. An analysis of the responses to the question regarding discharging
treated vs. untreated water indicates 58% of the plants practice zero discharge.
Since there is some discrepancy in the total number of zero dischargers, EPA
selected the lower number (758 or 50.5%) in order to evaluate the impact on the
greatest number of plants.
The total number of discharging plants is 742 and of these about one-third
treats the wastewater before discharging, according to the 308 Survey. A break-
down of these data by plant size is shown in Table 33:
TABLE 33
WASTEWATER DISCHARGE PRACTICE
Segment VS S M L VL Total
Zero discharge 237 259 150 56 56 758
Treated discharge 77 85 49 18 18 247
Untreated discharge 155 169 97 37 37 495
Total 469 513 296 111 111 1500
Source: 308 survey and Arthur D. Little, Inc.. estimates.
a. Baseline Closures
No baseline closures were predicted for two reasons. First and most important
is that Census of Manufactures data and industry publications indicate a stable
condition in the net total number of plants over a period of years. This indicates that
for each plant which closes a new one starts up (probably on the premises of the
closed plant). Secondly, the total number of plants used in the study (1500), selected
on the basis of the 308 Survey, appears lower than the number of plants reported by
Department of Commerce data, so that deduction of predicted baseline closures
would understate the industry impact due to control costs.
6. Product Effects
Assuming the worst case, e.g., that 232 very small plants closed under Option 2
the total production from these plants is about 11.6 million gallons annually.
Spreading this product equally among the remaining plants would amount to 9000
gallons annually for each. This represents an increase of 6% for a small plant and
0.2% for a very large plant. The industry is currently operating at less than 85% of
full production capacity so that no production effects will be noted.
7. Employment Effects
For Option 1, some 155 plants are predicted to close creating 775 unemployed,
mostly in urban areas. Under Option 2, 232 plants are predicted to close with about
1160 unemployed.
30
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C. EFFECT OF EXEMPTING SMALL DISCHARGERS
The EPA considered exempting plants discharging small volumes of waste-
water daily from compliance with proposed regulations, because of the severe
financial impact on the plants and the resulting unemployment which might result.
Utilizing the data from Table 33 and the percentage values of average daily
discharge from the Development Document (Table V-6), one can construct Table 34.
It should be noted in Table 34 that some plants may not have provided data on
process wastewater discharge, but rather on total water discharged from the plant.
For instance, the two small plants in the 6001-12,000 gal/day category would be
using an average of 15 gallons of rinse water for each gallon of paint produced.
TABLE 34
AVERAGE DAILY WASTEWATER DISCHARGE VS. PLANT SIZE
(gal/day)
Plant
Size 1-100 101-500 501-1000 1001-6000 6001-12000 > 12000
VS 226 4 2
S 201 34 4 13 2 5
M 80 40 6 10 5 8
L 14 15 6 10 5 12
VL 12 8 2 15 6
Total 533 101 20 48 15 25
Table 34 also shows that about 88% of the smallest plants which would be
financially affected are in the less-than-100-gallon-per-day category. About 72% of
all paint plants discharging are in this category. This shows that the industry, as a
whole, discharges a rather small volume of wastewater.
The number of plants discharging by daily volume vs. the effect on return on
investment after installing physical/chemical pretreatment facilities is shown in
Figure 3. These same data plotted against Control Investment as a percentage of
Plant Fixed Assets are shown in Figure 4. This same plot could, of course, be
prepared for the zero discharge data with the same general results.
From these data, it appears that a cut-off of 100 gal/day for plant exemption
would eliminate the severe financial burden on most of the small and very small
plants, since about 88% are in this group. The remaining 12% may have reported
their discharge practices incorrectly and, therefore, the percentage of plants which
may have to reduce their discharge to qualify for exemption may be less than that
shown.
D. IMPACT OF RCRA COSTS
The Resource Conservation and Recovery Act (RCRA), if implemented, would
impose additional costs on the paint industry, if it is determined that discharged
31
-------
20
15
10
o
5
2 (
2
• 12
.5
•8
1-100 1-500 5-1000 1-6000 0-12000 >12000
Gal/Day
FIGURE 3 NUMBER OF PLANTS DISCHARGING VS. PERCENT RETURN ON INVESTMENT
BY AVERAGE DAILY DISCHARGE VOLUME
32
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90
80
70
£ 60
tt £
1 | 50
__ **-
0 0
IB . .
S *^
c
_ V
0 | 40
30
20
10
0
"~
—
-
-
_ i
<
i
>226
> 201 i
80 (
14 1
12 (
i4
34 i
40 i
15 (
8 ,
'2
4 <
6 <
6 <
2 ,
>13 i
10 i
10 i
15 ,
2
5 <
2 <
6 i
5
8
12
1-100 101-500 501-1000 1001 -6000 6000- 12K >12K
Gal/Day
FIGURE 4 CONTROL INVESTMENT PERCENT OF FIXED ASSETS
VERSUS DAILY FLOW RATE (gal/day)
33
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wastes are hazardous. Incremental costs associated with assumed RCRA require-
ments were furnished by EPA (Table 35). These, of course, are costs which will be in
addition to those incurred for water pollution control.
TABLE 35
CONTRACT HAULING COSTS DUE TO RCRA
($000)
Segment VS
Total Investment 0
Annual Investment Cost 0
Annual Operating Cost 5.1
Total Annual Cost $5.1
Source: Paint Manufacturing Industry, ISS Costs.
For very small plants, costs have been calculated for both contract hauling and
for physical/chemical pretreatment options. Only physical/chemical pretreatment
costs were shown for small plants. Apparently, contract hauling was not considered
as an option. No incremental costs were calculated for plants in other size cate-
gories, since the application of physical/chemical pretreatment standards has negli-
gible effect (see Table 36) on the hazardous waste generation rate in these plants
(ISS Document, page 5 of 26). The impact of these costs, added to those for water
pollution control, are shown in Table 37.
TABLE 36
PHYSICAL/CHEMICAL PRETREATMENT COSTS DUE TO RCRA
($000)
Segment VS S
Total Investment 0 0
Annual Investment Cost 0 0
Annual Operating Cost 1.5 4.4
Total Annual Cost $1.5 $4.4
Source: Paint Manufacturing Industry, ISS Costs.
Since the addition of RCRA costs establishes a negative cash flow for very
small plants, they would have no choice but to close. The impact of RCRA costs
alone are larger than the costs for water pollution control, and would likely lead to
closure of those plants which might be exempted from water pollution control
34
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TABLE 37
IMPACT OF CONTRACT HAULING COSTS
INCLUDING RCRA COSTS
($000)
Segment VS
Fixed Assets (Before Treatment) 21.6
Investment % Fixed Assets 17.6
Profit before Tax 6.8
Annual Cost for Pollution Control 4.4
Annual RCRA Cost 5.1
Total Annual Cost 9.5
Profit before Tax after Treatment (2.7)
Total Investment after Treatment 53.1
Before Tax Return on Investment after Treatment (%) (5.1)
requirements. Table 38 presents the cost impact, including RCRA costs, from phys-
ical/chemical pretreatment. In this case, both segments are likely closure candi-
dates since the return on investment is below the 10% criterion. The very small
plant, of course, would not select this option, since the contract handling option is
less costly.
TABLE 38
IMPACT OF PHYSICAL/CHEMICAL PRETREATMENT COSTS
INCLUDING RCRA COSTS
($000)
Segment VS S
Fixed Assets before Treatment 21.6 40.4
Investment % Fixed Assets 88.0 47.0
Profit before Tax 6.8 27.0
Annual Cost for Pollution Control 9.7 9.7
Annual RCRA Costs 1.5 4.4
Total Annual Cost 11.2 14.1
Profit before Tax after Treatment (4.4) 12.9
Total Investment after Treatment 68.3 170.4
Before Tax Return on Investment after Treatment (%) (6.4) 7.6
These two plant size categories were predicted to be closure candidates on the
bases of the impact study of pollution control costs. The addition of RCRA costs, of
course, adds to the financial burden of regulation compliance. For those plants
exempted from water pollution control requirements, the impact of RCRA costs
alone would create a severe impact on the very small and small paint plants.
Since no incremental costs were calculated for the other size plants, no in-
dustry-wide RCRA compliance costs can be calculated.
35
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VI. LIMITS OF THE ANALYSIS
A. MODEL PLANTS
On the basis of the 308 Survey and an analysis of unreturned questionnaires,
1500 paint plants has been adopted as the total figure. This figure is not in
agreement with published "Census of Manufactures" data or the "Paint Red Book."
If there are more plants than the 1500 assumed, it is highly likely that they would
fall into the very small category and the number of closures would increase in direct
proportion to the number of plants omitted.
It was also assumed that all plants in each segment have financial data
equivalent to the model plant. Recognizing that not all plants of the same size would
have the same profitability, an analysis of the range of profitability suggests that no
additional closures can be predicted for plants which differ from the model.
B. CONTROL COSTS
A sensitivity analysis of the effect of increasing contract hauling costs by
factors of 2 and 3 shows little change in the impact predicted. However, for small
and very small plants, total investment and annual investment costs can be critical.
Any serious underestimate of these costs could increase predicted closures.
C. AMOUNT OF EFFLUENT
This is a major variable noted in the 308 Survey. Even a slight change in ratios
would seriously affect small plants and if the change is large enough, medium-sized
plants would be highly impacted. High-pressure rinsing would reduce the amount of
effluent, but even if it reduced it by a factor of 5, the small plants would still be
affected. In addition, the small and very small plants probably could not borrow the
capital necessary to install this equipment.
This is the most serious assumption in the analysis since the entire economic
analysis is based on the assumed ratio. At the higher ratios, most paint plants
would be predicted as closures.
D. CAPITAL AVAILABILITY
Capital availability for small plants was assumed available under a five-year
direct payback with 12% annual interest. Short-term loans are more likely for non-
productive equipment, especially where regulations may change and render the
equipment obsolete. Short-term paybacks could create serious cash flow problems
for small plants. For some alternatives, the capital investment required is so high
that these options are not available for small and very small plants.
E. PRICE INCREASE
A 20/gal price increase will return the cost of control for only very large plants
under zero discharge conditions. Since prices are largely established by these
plants, all other plants will operate at a lower profitability than pre-regulation
conditions.
36
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F. CONTRACT HAULING COSTS
The Development Document used 300/gal as the contract hauling charge.
Sensitivity has been examined using 30,60 and 900/gal as shown in Tables 39-42.
TABLE 39
SENSITIVITY OF CONTRACT HAULING COSTS ON
PHYSICAL/CHEMICAL PRETREATMENT COSTS
($000)
Segment L VL
Hauling Cost (oVgal) 30 60 90 30 60 90
Profit Before Taxes 293 293 293 1260 1260 1260
Total Annual Cost 25.6 31.2 36.8 48.2 66.1 82.0
Profit before Tax after
Treatment 267.4 261.8 256.2 1211.8 1194.9 1178
Before tax return on
Investment after
Treatment (%) 12.8 12.5 12.3 17.7 17.6 17.2
TABLE 40
SENSITIVITY OF CONTRACT HAULING COSTS
ON WASTEWATER RECYCLE COSTS
($000)
Segment L VL
Hauling Cost (eYgal) 30 60 90 30 60 90
Prof it Before Taxes 293 293 293 1260 1260 1260
Total Annual Cost 33.6 41.1 48.6 51.2 66.2 81.2
Profit Before Tax After
Treatment 259.4 251.9 244.4 1208.8 1193.8 1178.8
Before Tax Return on
Investment after
Treatment (%) 12.4 12.0 11.7 17.6 17.4 17.2
37
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TABLE 41
SENSITIVITY OF CONTRACT HAULING COSTS ON
MANUALLY OPERATED PHYSICAL/CHEMICAL TREATMENT COSTS
($000)
Segment M S
Hauling Costs (tf/gal) 30 60 90 30 60 90
Prof it Before Taxes 140 140 140 27 27 27
Total Annual Cost 9.9 12.3 13.4 7.0 8.7 9.2
Profit Before Tax After
Treatment 130.1 127.7 126.6 20.0 18.3 17.8
Before Tax Return on
Investment after
Treatment(%) 18.6 18.3 18.1 12.9 11.8 11.5
TABLE 42
SENSITIVITY OF CONTRACT HAULING COSTS
ON CONTRACT HAULING
($000)
Segment VS S M
Hauling Cost (tf/gal) 30 60 90 30 60 90 30 60 90
Prof it before Taxes 6.8 6.8 6.8 27 27 27 140 140 140
Total Annual Cost 4.4 5.9 7.4 7.0 10.8 14.5 24.1 42.8 61.6
Profit Before Tax After
Treatment 2.4 0.9 (0.6) 20.0 16.2 12.6 115.9 97.2 78.4
Before Tax Return on
Investment After
Treatment (%) 4.5 1.7 (1.1) 12.9 10.4 8.1 16.5 13.8 11.1
On the basis of these data, it can be shown that any increase in the costs for
contract hauling will have the most effect on the small and very small plants.
Substantial increases could adversely affect the medium-sized plants as well.
G. CAPITAL INVESTMENT PAYBACK
Since the payback period on high-risk capital may be much shorter than that
indicated in the Development Document, the sensitivity to this variable was deter-
mined for medium, small and very small plants for manually operated physical/
chemical pretreatment and contract hauling. Time spans of 3, 5, 10 and 30 years
(life of equipment) were used. 12% interest was assumed in all cases.
38
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Tables 43 and 44 prevent the effect of payback period for manually operated
physical/chemical treatment investment and contract hauling investment,
respectively.
TABLE 43
EFFECT OF PAYBACK PERIOD FOR
MANUALLY OPERATED PHYSICAL/CHEMICAL TREATMENT INVESTMENT
($000)
Segment S M
Payback Period (yre.) 3 5 10 30 3 5 10 30
Prof it Before Taxes 27 27 27 27 140 140 140 140
Annual Cost of Capital 1.6 1.1 0.7 0.5 2.0 1.3 0.8 0.6
Operating Cost 5.9 5.9 5.9 5.9 8.6 8.6 8.6 8.6
Total Annual Cost 7.5 7.0 6.6 6.4 10.6 9.9 9.4 9.2
Profit Before Tax After
Treatment 19.5 20.0 20.4 20.6 129.4 130.1 130.6 130.8
Before Tax Return on
Investment After
Treatment (%) 12.6 12.9 13.1 13.3 18.5 18.6 18.7 18.7
H. WASTEWATER/PRODUCT RATIO
The 308 Survey indicated that as much as 19% of the industry created ratios of
wastewater to product of 1:1 or greater. It is anticipated that these higher ratios are
found in the smaller plants. Assuming that capital investment remains as it is at
the 0.2 ratio, but that operating costs are directly proportional to volume, one can
see in Table 45 the effect of increasing ratio on contract hauling costs for the very
small, small and medium segments.
These data indicate a high impact for all very small plants at all ratios. High
impact is also noted for small and medium plants at the higher ratios. Negative
returns for very small plants and small plants at the 1:1 ratio would predict closure
under these conditions.
The Development Document provides capital costs for a high-pressure water
rinsing system. Assuming that the volume could be reduced from the average 0.2:1
ratio to 0.04:1 through high-pressure rinsing, then the following conditions would
result. Operating costs are assumed to be no higher than those associated with
normal rinsing and therefore are omitted. Operating costs for contract hauling have
been included, however.
From an economic view, the high-pressure rinse system (Table 46) is attractive
for very large, large and medium plants which would have to meet zero discharge
regulations. Small and very small plants would not make the investment since
conventional contract hauling (Table 47) is less costly and requires less investment
39
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TABLE 44
EFFECT OF PAYBACK PERIOD FOR CONTRACT HAULING INVESTMENT
($000)
Segment VS S M
Payback Period (yrs.)
Profit Before Taxes
Annual Cost of Capital
Operating Cost
Total Annual Cost
Profit Before Tax After
Treatment 1.9 2.4 2.8 3.4 19.5 20.0 20.4 20.6 114.4 115.9 117 117.6
Before Tax Return on
Investment After
Treatment (%) 3.6 4.5 5.3 5.6 12.6 12.9 13.1 13.3 16.4 16.5 16.8 16.9
3
6.8
1.6
3.3
4.9
5
6.8
1.1
3.3
4.4
10
6.8
0.7
3.3
4.0
30
6.8
0.15
3.3
3.4
3
27
1.6
5.9
7.5
5
27
1.1
5.9
7.0
10
27
0.7
5.9
6.6
30
27
0.5
5.9
6.4
3
140
4.5
21.1
25.6
5
140
3.0
21.1
24.1
10
140
1.9
21.1
23.0
30
140
1.3
21.1
22.4
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TABLE 45
EFFECTOR INCREASEDWASTEWATER/PRODUCT RATIO
($000)
Segment VS S M
Ratio 0.2 0.6 1.0 0.2 0.6 1.0 0.2 0.6 1.0
Prof it Before Taxes 6.8 6.8 6.8 27 27 27 140 140 140
Total Annual Cost 4.4 11.0 17.6 7.0 18.8 30.6 24.1 66.3 108.5
Profit Before Tax
After Treatment 2.4 (4.2) (10.8) 20.0 8.2 (3.6) 115.9 73.7 31.5
Before Tax Return on
Investment After
Treatment (%) 4.5 (7.9) (20.3) 12.9 5.3 (2.3) 16.5 10.5 4.5
TABLE 46
COST FOR REDUCTION OF WASTEWATER FROM 0.2/6AL TO
0.04 GAL/GAL VIA HIGH PRESSURE RINSING WITH
CONTRACT HAULING
($000)
Segment VS S M L VL
Gal/day 0.2/1 20 50 250 500 1500
Gal/day 0.04/1 4 10 50 100 300
Capital Investment
High Pressure Rinse 16.6 16.6 16.6 16.6 16.6
Capital Investment
Contract Haul 3.8 3.8 3.8 10.9 15.1
Total Investment 20.4 20.4 20.4 27.5 31.7
Annual Cost of Capital 5.7 5.7 5.7 7.6 8.8
Annual Operating Cost
Contract Haul* 2.4 2.9 5.9 9.6 24.8
Total Annual Cost 8.1 8.6 11.6 17.2 33.6
'Sludge disposal varied by volume, other costs (i.e., labor) are as shown in the Engineering
Report.
41
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TABLE 47
IMPACT OF WASTEWATER REDUCTION WITH
CONTRACT HAULING COSTS
Segment VS S M L VL
Fixed Assets (Before Treat) 21.6 40.4 289 732 2851
Investment % Fixed Assets 94.4 50.5 7.1 3.8 1.1
Profit Before Tax 6.8 27 140 293 1260
Total Annual Cost 8.1 8.6 11.6 17.2 33.6
PBT After Treatment (1.3) 18.4 128.4 275.8 1226.4
Total Investment After
Treatment 69.7 171.8 713.4 2069.5 6810.7
Before Tax Return on
Investment after
Treatment (%) (1.9) 10.7 18.0 13.3 18.0
and provides a higher return on investment. It is also apparent that many indirect
dischargers could change to zero discharge by installing this equipment. For in-
stance the return on investment for very large, large and medium plants is greater
using this technology than with physical/chemical pretreatment. Such an effect
would reduce the load on POTW's and increase the demand on landfill operations
significantly.
I. DISCOUNTED CASH FLOW VS. PLANT SALVAGE VALUE
While this technique is not used by the paint industry to determine closure
options, one can predict closure on the assumption that plant salvage value is
greater than the discounted value of a future amount of earnings after treatment.
Plant salvage value is, at best, difficult to estimate in an industry dominated by
small, old plants. For the most part, fixed assets of land and building are what is
salvageable, and it is extremely difficult to factor land appreciation values over the
projected period. For very small plants, depreciation is estimated at 1.6% of sales or
about $3,200 which represents the present value of equipment. This added to the
value of the land and building suggests that 75% of fixed assets is the lowest
reasonable estimate of plant salvage value that can be used in the analysis. Table
48 shows the net present value of return (profit before tax) after zero discharge over
5, 10, 30 and 50 years at 12% discount rate against the salvage value of small and
very small plants.
These data show that small plants after treatment still have net present values
greater than salvage values for both short- and long-term operations. If profitability
declines and/or costs increase during this period, then much longer periods of this
condition would occur. For instance, if the combination of decreased profitability
and cost increases reduced profit by 20%, then the very small plants would have a
negative DCF vs. salvage value forever.
42
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TABLE 48
DISCOUNTED CASH FLOW VS. SALVAGE VALUE
($000)
VS
Segment
Profit before Tex
Net Present Value
5 years
10 yean
30 years
50 years
Salvage Value
Before Treatment After Treatment
6.8 2.4
Before Treatment After Treatment
27 20.0
24.5
38.4
54.8
56.4
8.7
13.6
19.3
19.9
97.3
152.6
217.5
224.2
72.1
113
161
166
16.2
16.2
30.3
30.3
43
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VII. REFERENCES
1. Economic Analysis of Proposed Effluent Guidelines Paint and Allied Products
and Printing Ink Industries EPA-230/1-74-052, August 1974.
2. Kline Industrial Marketing Guide 1MG-1-75 Paint Industry.
3. Paint Red Book Eighth Edition; Palmerton Publishing Company.
4. Operating Cost Survey, 1976. National Paint and Coatings Association.
5. Draft Engineering Report for Development of Effluent Limitations Guidelines
for the Paint Manufacturing Industry. Burns and Roe.
6. U.S. Department of Commerce, Census of Manufactures.
44
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