United Slates Environment:! Agency Office of Enforcement Washington. DC 20460 June 1390 BEN: A Model to Calculate the Economic Benefit of Noncompliance User's Manual ------- BEN USER’S MANUAL Prepared for: Program Development and Training Branch (LE-133) Office of Enforcement Policy Office of Enforcement United States Environmental Protection Agency 401 M Street, S.W. Washington, D.C. 20460 (FTS—475—8777) January 1985 Revised July 1990 Prepared by: Industrial Economics, Incorporated 2067 Massachusetts Avenue Cambridge, Massachusetts 02140 617—354—0074 July 1990 ------- CONTENTS Paae I. Introduction.. • I—i A. Overview. . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . • . . I—]. B. 1—6 C. How to Use the Manual..................... 1—9 II. Using the ComputerPrograa................ . .......... 11—1 A. Structure of the Program............... .. 11—2 B. Entering the Data.. . . . . . . . . . . . . . . . . . . . . • . . . . . . . 11—5 1. Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11—6 2. Format of the Data Entries....... .. 11—8 3. CorrectingTypingErrors.......... 11—9 4. Error Messages. . . . . . . . . . . . 1 1—11 C. Ending Procedures 11—16 III. Data Requirements. . . . . . . . 111—1 A. Required Variables. . . . . . . 111—5 1. Case Name, Environmental Statute, and Profitability Status 111—5 2. Initial Capital Investment 111—7 3. One-Time Nondepreciable Expenditures 111-10 4. Annual Expenses. . •. . . . ... . • 111—12 5. Noncompliance Date...... ..... 111—13 6. Compliance Date . 111—15 7. Penalty Payment Date ..... 111—16 B. Variables With Standard Values Available 111-17 8. Useful Life of Pollution Control Equipment. . . . . • . . . . . . . . . . 111—18 9. Marginal Income Tax Rate for 1986 and Before. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111—2 3. 10. Marginal Income Tax Rate for 1987 and Beyond . . . . . . . . 111—21 11. Inflation Rate.. . . . . . . . . . . . . . . . . . . . 111—26 12. Discount Rate. . . • . . . . . . . . • . . . . . . . . . . . . . . . . 111—29 13. Low-interest Financing Information 111-30 July 1990 ------- CONTENTS (con’ d) Page IV. Interpreting Output and Changing Variable Values. . . . . . . . . . . . . . . . . . . . . . IV—1 A. Output Options................................. IV—2 1. Selecting Output.. . . . . . . . . . . . . . . . . . . . . . . . IV—2 2 . Output Option 1 . . . . . . . . . . . . . . . . . . . . . . . . . . IV—4 3. Output Option 2....... . . . . . . .•....... . . . . IV—4 4. Output Option 3....... . . . . . . . . . . . . . . . . . . . IV—7 5. Other Inforination........................ IV—l4 B. ChanginglnputValues......................... IV—16 1. changing Values in the Standard Value Mode. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV—17 2. changing Values in the User-Specified Mode. . . . . . . . . . . . . . . IV—21 Appendix A - Technical Appendix: Methodology for Computing the Economic Benefit of Noncompliance - Appendix B - Special Cases: 1. Governmental Entities and Not-For-Profit Organizations 2. One-Time Avoided Cost Calculations July 1990 ------- EXHIBITS Number Page I—i Civil Penalty Policy Summary ....... . 1—3 1—2 Inputs for BEN . . . . . . . . . . . . . . . . . . 1—5 1—3 Data Entry for BEN . . . . . . . . . . . . . . . . . . 1—10 11 1-i Effect of Variable Changes on Economic Benefit . . . . . . . . . . . . . . . . . . . . . . . . . 111—2 111—2 BENDataEntryForm.... 111—4 111-3 Standard Value Characteristics: For- Profit Violators. . . . . . . . . . . . . . . . . . . . 111—19 111-4 Standard Value Characteristics: Not-For— Profit Violators. . . . 111—20 111-5 Total Corporate Marginal Tax Rates by State... 111-24 111-6 Chemical EncUneering Plant Cost Index, 1971—1989 111—28 111-7 Annual Average Yields on Corporate Bonds, 1975—1989 . 111—34 111-8 Moody’s Corporate Bond Yield Averages, 1977—1989....... . . . 111—35 I V—i Output Option 1. . . . . . IV—5 IV—2 Output Option 2 . . . . . . . . . . ISI—6 IV—3 Output Option 3 . . . . . . . . . . IV—9 IV-4 Input Listing for Calculation Using Standard Values...... . . . . . . . . . . . . . . . . 1V15 July 1990 ------- BEN USER’S MANUAL CO)D(ENT FORM OE is very interested in your comments on this revised BEN User’s Manual . After you have had a chance to use the manual a few times, please fill out this conunent form and return it to: Jonathan Libber, LE-133 U.S. E.P.A. 401 M Street, S.W. Washington, D.C. 20460 If there are any significant errors in the manual, or it needs to be updated in some fashion, we will mail out revised pages to the names on our mailing list. Thus, it is important that you add your name to that list, if it is not already on it. July 1990 ------- I. INTRODUCTION EzceI.le t Satisfactory Poor 10 Opinion II. USING THE COMPUTER PROGRAM Excellent Satisfactory + + Poor lo Opinion I III. DATA REQUIREMENTS Clarity Usefulness Additional Comments: A. B. C. ExceUent Satisfactory Poor In Opini i A. Clarity B. Usefulness C. Additional Comments: A. Clarity B. Usefulness C. Additional Comments: F July 1990 ------- IV. INTERPRETING OUTPUT AND CHANGING VARIABLE VALUES A. Clarity B. Usefulness C. Additional Comments: V. APPENDIX A A. Clarity B. Usefulness C. Additional Comments: F Ezc.U t Satisfactory + + Poor So Opinion + H VI. APPENDIX B Clarity Usefulness Additional Comments: Ezc.U t Satisfactory Poor So Opitiion I A. B. C. Kzc.Usnt Satisfactory Poor Jo Opinion July 1990 ------- NAME OF COMMENTER: Would you like to be placed on the mailing list (Y/N)? Would you like to acquire a USER ID (Y/N)? (If yes, to either of these questions include your address below) MAILING ADDRESS: Please mail to: Jonathan Libber, LE-133 U.S. Environmental Protection Agency 401 M Street, S.W. Washington, D.C. 20460 July 1990 ------- CHAPTER I INTRODUCTION A. OVERVIEW The Agency developed the BEN computer model to calculate the economic benefit a violator derives from delaying or avoiding compliance with environmental statutes. In general, the Agency uses the BEN computer model to assist its own staff in developing settlement penalty figures. While the primary purpose of the BEN model is to calculate the economic benefit of noncompliance, the model may also be used to calculate the after tax net present value of a pollution prevention or mitigation project and to calculate “cash outs” in Superfund cases. This document, the BEN User’s Manual , contains all the formulas that make up the BEN computer model and is freely available to the public upon request. Calculating economic benefit using the BEN computer model is generally the first step in developing a civil penalty figure under the Agency’s February 16, 1984, generic penalty policy (GM-21 and GM-22) and the related medium-specific policies developed since then to implement the 1984 Policy. The BEN computer model has been developed by the Agency to assist the Agency in fulfilling one of the main goals of the generic policy. That goal is to recover, at a minimum, the economic benefit from noncompliance, plus an additional amount, to ensure that members of the regulated community have a strong economic incentive to comply on time with environmental laws. In general, the BEN computer model is used for calculating economic benefit for purposes of developing a settlement penalty. The BEN model is generally not intended for use at trial or in an administrative hearing. If the Agency is going to present economic benefit testimony at trial or in an administrative hearing, the Agency will generally rely on an expert to provide an independent financial analysis of the economic benefit the firm has obtained as a result of its violations. This independent financial analysis, while consistent with the principles of the BEN model, may not July 1990 ------- 1—2 necessarily be identical to that set forth in the BEN User’s Manual . This manual is designed to aid you in providing appropriate input data for BEN, to describe procedures for entering data, and to explain the program’s results. A second, enforcement sensitive guidance document, the BEN User’s Guide , which covers logon procedures, and discusses some issues that typically arise in running BEN, will be provided to State and Federal users. This document is nonreleasable in its entirety. This manual does not require that you have any formal training in economics or finance. Appendix A contains a detailed discussion of the economic rationale and the computational methods used in calculating the economic benefit from delayed compliance. You do not have to be familiar with Appendix A to use BEN or this manual. An outline of general penalty components and adjustment factors is shown in Exhibit I-i below. The first step in establishing an appropriate penalty amount involves estimating a preliminary deterrence figure, which includes an economic benefit component and a gravity component. BEN can be used to calculate the economic benefit component when a violator has delayed compliance with an environmental regulation. BEN is designed to calculate the first two categories of economic benefits listed in Exhibit 1-1: those gained from delaying or avoiding required environmental expenditures. Delayed costs can include capital investments in pollution control equipment, delayed costs to remove unpermitted dredged or fill material and restore wetlands, or one—time expenditures required to comply with environmental regulations (e.g., the cost of setting up a reporting system, or land purchases). Avoided costs include operating and maintenance costs, l For assistance with the selection of an expert on economic benefit, EPA staff should call Jonathan Libber, the BEN/ABEL coordinator, at FIS/202 475-8777. July 1990 ------- 1—3 EXHIBIT I-I. CIVIL PENALTY POLICY SUMMARY I. ECONOMIC BENEFIT COMPONENT • Benefit from delayed costs • Benefit from avoided costs • Benefit from competitive advantage II. GRAVITY COMPONENT • Actual or possible environmental harm • Importance to regulatory scheme • Size of violator III. ADJUSTMENT FACTORS Degree of willfulness and/or negligence Degree of cooperation/noncooperation History of noncompliance Ability to pay Other unique factors July 1990 ------- 1—4 off—site disposal of fluids from injection wells, or other recurring costs. BEN does not calculate the third category of benefits; i.e., those related to the competitive advantage gained by a violator. 2 BEN can be used in all cases where there is a measurable benefit from delaying compliance, except for Clean Air Act Section 120 actions, which require the application of a Section 120 specific computer model. BEN is easy to use, and has been designed for people with no background in economics, financial analysis, or computers. Because the program contains standard values for many of the variables needed to calculate the economic benefit, BEN can be run with only a small number of inputs. The program also provides the opportunity to use values other than the standard values. Exhibit 1-2 presents a listing of the inputs to BEN. The optional inputs listed in Exhibit 1-2 are those for which BEN has standard values. - BEN can be used to estimate econoxnic’benef its for any type of organization: corporations, partnerships, sole proprietorships, not—for—profit organizations, municipalities, and so forth. There are two sets of standard values in BEN: one applied to for-profit business violators, and the other applies to not—for—profit organizations. In either case, care must be taken in selecting input values other than the standard values. Part 1 of Appendix B discusses the special issues of BEN calculations for governmental entities and not—for—profit organizations. 2 Competitive-advantage benefits occur, for example, when a company earns a profit by selling its goods and services, possibly at prices lower than those of its complying competitors, before it obtains an EPA permit or pesticide registration number, or after EPA has prohibited the sale of those goods and services. July 1990 ------- 1—5 E IBIT 1—2 INPUTS FOR BEN Reauired Inputs 1) Case Name, Environmental Statute, and Profit Status 2) Capital Investment 3) One-Time Nondepreciable Expenditure 4) Annual Expenses 5) Date of Noncompliance 6) Date of Compliance 7) Date of Penalty Payment Optional Inputs 3 8) Useful Life of Pollution Control Equipment 9) Marginal Income Tax Rate for 1986 and Before 10) Marginal Income Tax Rate for 1987 and Beyond 11) Inflation Rate 12) Discount Rate 13) Low-interest Financing These are inputs for which Standard Values are available. July 1990 ------- 1—6 B. NATURE OF THE BENEFIT An organization’s decision to comply with environmental regulations usually implies a commitment of financial resources; both initially, in the form of a capital investment or one-time expenditure, and over time, in the form of annual, continuing expenses. 4 These expenditures might result in better protection of public health or environmental quality; however, they are unlikely to yield any direct economic benefit (i.e., net gain) to the organ- ization. If these financial resources were not used for compliance, they presumably would be invested in projects with an expected direct economic benefit to the organization. This concept of alternative investment; that is, the amount the violator would normally expect to make by not investing in pollution control, is the basis for calculating the economic benefit of noncompliance. As part of the Civil Penalty Policy, EPA uses the Agency’s penalty authority to remove or neutralize the economic incentive to violate environmental regulations. In the absence of enforcement and appropriate penalties, it is usually in an organization’s best economic interest to delay the conunitinent of funds for compliance with environmental regulations and to avoid certain other associated costs, such as operating and maintenance expenses. The economic benefit from delaying compliance might have any or all of the following three components: (1) the return a violator can earn by delaying the capital costs of pollution control equip- ment, (2) the return earned by delaying a one—time expenditure, and Under the Clean Water Act §404 program, a decision to comply with regulations means delaying project start up until the U.S. Army Corps of Engineers issues a permit, which may contain mitigation requirements. BEN does not calculate the economic benefit from completing a development project sooner as a result of avoiding the Corps’ permitting process, but the Agency may still choose to recapture this benefit. The Agency calculates the benefit from, for example, delaying the costs of mitigation requirements if the Corps issues an after-the-fact permit or delaying the restoration costs if no permit is issued. July 1990 ------- 1—7 (3) the incremental annual or One—time costs a violator avoids by not complying on time and the return earned on these avoided costs. The first two components arise because violators have the opportunity to invest their funds in projects other than those required to comply with environmental regulations. These other investments are normally expected to yield a monetary return at the violator’s marginal rate of return on capital, whereas environmental expenditures typically yield no direct economic benefit. Thus, by delaying compliance, the violator benefits by the amount of earnings that could be expected from alternative investments. The third component of the benefit from delayed compliance is based on the annual continuing expenses that a violator would have incurred if the facility had complied with environmental regulations on time. These expenses include the costs of labor, raw materials, energy, lease payments and any other expenditures directly associated with the operation and maintenance- of-the pollution control equipment. Unlike capital and one—time expenditures, which are only postponed, delaying compliance allows annual expenditures to be avoided altogether. The resulting benefits to the violator are the total avoided annual costs as well as the return that could be expected on these avoided costs. 5 When calculating the economic benefit from delay, it is necessary to take into account indirect financial impacts associated with environmental expenditures. For example, one important indirect impact of these expenditures is a reduction in income tax liability. 6 Also, depending upon the tax year, the original purchase of equipment might have resulted in an investment tax ‘ On occasion, violator may avoid an one-time expenditure or a capital expense, as well, gaining the benefit of the avoided cost and the return earned on the avoided expenditure. These special cases are discussed in Appendix B, Part 2. ‘ Depreciation and annual expenditures serve to reduce taxable income, thereby reducing income taxes. - July 1990 ------- 1—8 credit. To account for these indirect tax effects, BEN calculates the economic benefit using after—tax cash flows. Another indirect impact relates to the timing of the cash flows, since cash flows occurring in different years are not directly comparable. A basic concept of financial theory is “present value.” This concept is based on the principle that: “A dollar today is worth more than a dollar a year from now,” because today’s dollar can be invested immediately to earn a return over the coming year. Therefore, the earlier a cost (or benefit) is incurred, the greater its economic impact. BEN accounts for this “time value of money” effect by reducing all estimated future cash flows to their “present value” equivalents. This widely—used technique is known as “discounting.” Appendix A contains a more detailed discussion of discounting and the concept of present value. July 1990 ------- 1—9 C. HOW TO USE THE MANUAL This manual provides step-by-step instructions for using BEN. These instructions illustrate operation of the program by using a hypothetical violator as an example. Exhibit 1-3 is a printout illustrating the order and procedure for entering data. The inputs for the example are in bold print to distinguish user entries from the information and prompts provided by BEN. Chapter II describes how to use BEN, but must be used in conjunction with the BEN User’s Guide , an internal, enforcement sensitive, guidance document which covers logori procedures and discusses several issues that typically arise in running BEN. Chapter III defines each of the inputs you will need to calculate the economic benefit. Chapter IV describes the results and output from BEN, and explains how to change input values for subsequent runs. If you are already familiar with the program, you might only need to scan Exhibit 1-3 before proceeding. Help information is available in the program if you need the definition of a variable, sources of information, or the format required for an input entry. To access help for a specific variable, type HELP or H after the prompt for that variable. After the explanation, BEN will prompt you again for that same variable. If you need assistance in operating the program, understanding the results, or other guidance in effectively using BEN, contact the Program Development and Training Branch at 202—475—8777 or FTS—475-8777. July 1990 ------- I — 10 EXHIBIT 1—3 DATA ENTRY FOR BEN Welcome to BEN. Would you like an introduction? (Y/N) N ENTER TODAY’S DATE (e.g., JUNE 1, 1990) JUNE 30, 1990 1A. PLEASE ENTER THE CASE NAME: COMPANY X EXAMPLE lB. PLEASE IDENTIFY THE STATUTE INVOLVED IN YOUR CASE. IF YOUR CASE INVOLVES MORE THAN ONE STATUTE, PLEASE PICK THE MOST IMPORTANT ONE. 1. CLEAN AIR ACT - STATIONARY SOURCE 2. CLEAN AIR ACT - MOBILE SOURCE 3. CLEAN WATER ACT - 404 4. CLEAN WATER ACT - NPDES 5. FIFRA 6. UST (UNDERGROUND STORAGE TANK) 7. RCRA (OTHER THAN UST) 8. SAFE DRINKING WATER ACT - UIC 9. SAFE DRINKING WATER ACT - PWS 10. SUPERFUND 11. TSCA 12. OTHER ENTER THE NUMBER OF THE STATUTE YOU HAVE SELECTED: 2 1C. PLEASE ENTER THE PROFIT STATUS OF THIS ENTITY: 1 FOR-PROFIT 2 NOT-FOR PROFIT PROFIT STATUS: 1 2. INITIAL CAPITAL INVESTMENT IN POLLUTION CONTROL = (FOLLOW WITH DOLLAR-YEAR SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 105000 1989 IS THE INITIAL INVESTMENT ONE-TIME OR RECURRING? 1. ONE-TIME 2. RECURRING PLEASE ENTER THE APPROPRIATE CODE: 2 July 1990 ------- I — 1]. EXHIBIT 1-3 DATA ENTRY FOR BEN (continued) 3. ONE-TIME NONDEPRECIABLE EXPENDITURE = (FOLLOW WITH DOLLAR-YEAR SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 210000 1989 IS THE ONE-TIME EXPENSE TAX-DEDUCTIBLE? (Y/N) [ NOTE: MOST EXPENSES ARE TAX-DEDUCTIBLE] Y 4. ANNUAL EXPENSE = (FOLLOW WITH DOLLAR-YEAR SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 15750 1989 5. MONTH AND YEAR WHEN NONCOMPLIANCE BEGAN (e.g., 1,1988) 10,1987 6. MONTH AND YEAR WHEN COMPLIANCE ACHIEVED (e.g., 1,1990) 6, 1990 7. MONTH AND YEAR WHEN PENALTY PAID (e.g., 8,1990) 9, 1990 BEN will use this information to estimate the economic benefit. If you select standard values for the remaining six variables, these standard values will be printed in your output. You also have the option of entering your own values for the remaining variables after Item 7. HOW DO YOU WISH TO TREAT REMAINING VARIABLES? (1 = USE STANDARD VALUES, 2 = ENTER OWN VALUES) 2 8. USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT IN YEARS (e.g., 15)= 10 - 9. MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE (e.g., 49.6) = 49.6 10. MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND (e.g., 38.4) = 38.4 11. ANNUAL INFLATION RATE (e.g., 4.1) = 3.5 July 1990 ------- I — 12 EXHIBIT 1—3 DATA ENTRY FOR BEN (continued) 12. DISCOUNT RATE: CORPORATE EQUITY RATE (e.g., 18.1) = 17.5 13. ANOUNT OF LOW-INTEREST FINANCING = (FOLLOW WITH YEAR-DOLLARS SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 105000 1989 LOW INTEREST RATE (e.g., 9) = (ENTER 0 IF YOU WANT THIS RATE CALCULATED.) 10 CORPORATE DEBT RATE (e.g., 12) = (ENTER 0 IF YOU HAVE PROVIDED A LOW INTEREST RATE AND YOU WANT THE DEBT RATE CALCULATED.) 12 ------- II — 1 CHAPTER II USING THE COMPUTER PROGRAM BEN is an interactive computer program designed to operate in a time-sharing mode. This chapter is a detailed description of procedures for using BEN in your economic benefit calculations. For an in—depth description of each variable and the recommended sources of information, see Chapter III. Chapter II is divided into three sections. Section A describes how the computer program is structured, and provides an overview of the choices that BEN presents during program execution. Section B provides data format requirements and additional helpful hints for entering data at your computer terminal. This section also illustrates the error messages provided by BEN if you fail to enter data properly. Section C explains the procedure for receiving a printed copy of the program output and for logging of f of the computer when you finish your calculations. July 1990 ------- II — 2 A. STRUCTURE OP THE PROGRAM BEN provides you with a number of choices for running the model. The first choice is whether to read an introduction to BEN. This introduction explains what BEN does, how it will prompt you for information, and the format for data inputs to the program. A series of prompts for your input values follows the introductory question. You enter the requested information after each prompt. The economic benefit calculation involves a total of 13 variables, which are numbered 1 through 13. You must initially provide a name and some descriptive information for the penalty case, the first variable, and the values of variables 2 through 7, which concern the costs of compliance with environmental regulations and the dates for the period of noncompliance. BEN then gives you a choice between entering case—specific data for the remaining six variables, or using the standard values available in BEN. If you choose to enter case—specific values, the program automatically prompts for variables 8 through 13. When you are finished entering data, BEN then calculates the economic benefit of noncompliance. To access an explanation of the information required for a particular variable, simply type the word HELP, or the letter H, after the prompt for that variable. BEN will print a few sentences which define the variable, give sources of information, and a brief reminder of the format required. This information aids the user who has not read chapters II and III of the user manual, or does not have access to a copy of the manual for reference during program operation. After the complete help explanation has been printed, BEN will prompt you again for the variable entry. - You can then enter the required information. July 1990 ------- II — 3 When you have made all of your input selections, you can then choose from among three output options, each of which provides a different level of detail. No matter which output option you choose, BEN will print as part of the output a list of the values used in the calculation. A fourth option enables you to omit the output printing altogether and change any incorrect data entries. On subsequent calculations, BEN presents only a very brief description of the available output options or you can review the detailed description of the output choices provided during the first run by selecting option five. BEN displays the results of your economic benefit calculation at your terminal, and also temporarily saves the output in a computer file for printing. When you are finished with a calculation, you can choose to run the program again, or end the program session. If you run the program again, you can change one or more of your entries from the previous run. You can then recalculate the economic benefit without having to reenter all variable values. The procedure for making changes depends on whether you used standard values in the previous calculation, and whether you plan to use standard values in the new calculation. These procedures are described in more detail in Chapter IV. After all variable changes have been made, BEN allows you to list the current values of all the variables so that you can verify that your changes have been made correctly. You are then given another chance to make changes. When you have finished performing economic benefit calculations and have ended the program session, BEN gives you the opportunity to order a printed copy of your output. This output includes the results and the input values from all of the calculations in your session. July 1990 ------- 11—4 If you want to obtain a copy of your output and are at EPA Headquarters, you can pick up your copy from your bin after indicating the bin number. You can obtain a bin and a bin number from the Washington Information Center (WIC) in the lower level of Waterside Mall (where the bins are located). The output will usually be delivered to your bin within an hour after you end your session. If you are not in Washington, your copy will be mailed to you at the address of record associated with your EPA computer user ID, after you indicate your mail box number. Your mail box number is simply your user identification number preceded by the letter M. You should receive your output in three to five days. As of this printing (July 1990), these output procedures were being revised to allow regional users to receive output from local printers. If you wish to receive a printout locally and you are not in Washington, D.C., contact your local ADP coordinator for local printer procedures. - July 1990 ------- II — 5 B. ENTERING THE DATA BEN is an interactive computer program. The terminal prints or displays a question and then waits for you to type an answer. Sometimes the prompt for information will be a description of the data to be entered instead of a question. In both cases, the cursor (or print head) returns to the beginning of the next line after printing each prompt. 7 Be aware that there might be slight hesitations in the computer’s response because of the time—sharing mode. Messages sent to and from the computer are interspersed with messages to and from other time—sharing users in your local area. A higher number of users puts a greater time demand on the transmission facilities because more terminals are sending messages over the same local telephone line. The incidence of many long hesitations indicates that there are-more local users than usual using the time—sharing mode of the IBM computer. You will have to be patient in waiting for the entire prompt to be displayed before entering data. 8 Also note that BEN is different from most PC software programs (such as Lotus 123, or Wordperfect) in that its user interaction is linear , as opposed to page—oriented. This characteristic of BEN means that you cannot “back—up,” or move around the screen, in order to edit an entry which you have already made. If you are using a TTY, you should wait until the entire prompt is printed and the print head has returned to the next line before entering data. ‘ Another type of delay can occur if you have not used the program in the previous two weeks. In this case, the mainframe will need to pull information from archives, and you will be put “on hold” until this procedure is completed. The computer will let you know that this is occurring by giving you a prompt preceded by “ARC.” July 1990 ------- II — 6 1. Introduction Welcome to BEN. Would you like an introduction? (Y/N) You need only type Y to represent yes, or N to represent no. BEN will also recognize your answer if you type the full word for your response. If you answer N, BEN will skip the introduction and take you to the next step in the program. The introduction contains four video—screen size pages. To aid PC users in reading, BEN stops printing at the end of each page. Press the carriage return (or enter key) to read the next page. The introduction screens read as follows: This program calculates the economic benefit an entity gains by delaying expenditures necessary for compliance with environmental regulations or permits. This economic benefit is one component of a civil penalty. The economic benefit calculation involves 13 variables. You must provide a name for the penalty case and respond to six prompts for information about compliance costs and the dates involved in the case. BEN then gives you a choice between providing values for the remaining six variables yourself or allowing BEN to use standard values. BEN contains two sets of standard values: One for for—profit entities (e.g., privately-hel4 and publicly-held corporations), and one for not-for—profit entities (e.g., governmental agencies and municipalities). When you use BEN to calculate the economic benefit for a case, you will identify the type of entity involved, BEN can then select the appropriate set of standard values. Press the carriage return (or enter key) for the next page of text. July 1990 ------- II — 7 After each economic benefit calculation, you can change some or all of the values you provide and perform another calculation without leaving the program. If you need additional information, call EPA Headquarters: FTS—475—8777 or 202—475—8777 BEN allows only certain data formats for numerical values and dates: Numerical values (costs, rates, percentages, years) should be entered without commas, dollar signs, or percent signs. For example, enter a $10,000 cost as 10000 and enter 20% as 20. Use decimals only for fractional values, such as 10000.50 dollars, or 20.1 percent. Be careful to use only the number keys. A common mistake is typing the lowercase letter L instead of the number 1. Another error is typing the letter o instead of the number 0. Press the carriage return (or enter key) for the next page of text. Dates entered for compliance and payment periods should be in numerical form, with the month separated from the year by a comma, as in: 6,1984. Note that the year must contain four digits. Shown below is one example of a data prompt, and a response in the correct format. Notice that BEN gives you an example of the required format for data entry following the data prompt, enclosed in parentheses. Also note that the response (1,1988) begins at the left margin. 5. MONTH AND YEAR WHEN NONCOMPLIANCE BEGAN (e.g., 1,1988) 1,1988 You can obtain help in entering any of the variables 1 through 13 by typing HELP or simply the letter H after BEN prompts you for the variable. The help statements in BEN include a defini- tion of the variable, possible sources for related information, and the format required for entry. After providing the HELP explanation, BEN will prompt you again for the same variable. Press the carriage return (or enter key) for the next page of text. July 1990 ------- II — 8 Before you enter any of the input values for your first cal- culation, you will enter today’s date. BEN prints this date and the penalty case name at the top of the output for each calculation. This date may be entered in any format (e.g., Sept. 1, 1989; 9/1/89; or 1 September 1989; and so on). The case name can be up to 40 characters long, including spaces. You may leave the BEN program without leaving the main computer system at any point during the input process. To do this, simply type “QUIT” (without the quotation marks) in response to any prompt. BEN will warn you that quitting the program will mean losing all work done in that session (i.e., your output will not be printed), and will ask you if you are sure you want to “QUIT.” Answering “Y” (yes) will terminate the program immediately, and take you back to the main computer system. Press the carriage return (or enter key) when you are ready to begin. 2. Format of the Data Entries BEN data entries require specific data formats. Numerical values should be entered without commas, dollar signs, or percent signs. For example, a $10,000 capital investment in pollution control equipment is entered as 10000. The same is true for all other cost inputs. Each cost entry must include both the dollar amount and the year in which the dollars are expressed. Throughout this manual and in BEN itself, we refer to the year of the dollars in which an expenditure is expressed as the “dollar—year.” 9 The dollar—year must contain four digits. If you do not enter a year, BEN assumes costs are expressed as of the compliance date. Rates or percentages should be entered as a number without a percent symbol, e.g., enter 20 to represent 20 percent. Decimal numbers need only ‘ In calculating the economic benefit, BEN converts alidollar inputs (initial capital investment, one-time expenditure, annual expenses, and amount of low- interest financing) into dollars of the year in which noncompliance began. This dollar-year conversion is necessary to make the costs comparable. July 1990 ------- II — 9 be used where fractional values occur, such as 10000.50 dollars or 20.1 percent. Be careful to use only number keys to enter numerical values. A common mistake is typing the lowercase letter L instead of a number 1. Another error occurs when the letter 0 is typed instead of the number 0 (zero). Dates entered for compliance and payment periods must be in numerical form, with the month separated from the year by a comma, e.g., 6,1989. The year must contain four digits. An example of the required format for data entry follows each data prompt, enclosed in parentheses. If the exact format is not followed, BEN prints an explanatory error message and then reprolnpts you for the correct entry. After your entry has been correctly typed, press the carriage return (or enter key) to transmit the data and signal to the computer that you are ready for the next prompt. 3. correcting Typing Errors After typing your entry you might discover that you have typed an incorrect letter or number. If you have not yet pressed the carriage return (or enter key), correcting the mistake is straightforward. Simply press the backspace key for each character that you wish to delete, and type in the correct information. For example, if you had typed 10,234 and wanted to delete the comma, you would press the backspace key four times, type 234, press the space bar once to delete the extra 4, and then press the carriage return (or enter key). If you are using a PC, the cursor will erase each figure as you press the backspace key, and your corrected entry will July 1990 ------- II — 10 appear on the screen. 1 ° Since you corrected the mistake before hitting the carriage return (or enter key), the terminal sends 10234 to the computer, instead of the 10,234 entry that you originally typed. If you discover the error after you have pressed the carriage return (or enter key), the terminal will send the incorrect entry to the computer. If your entry contains an unacceptable character, BEN will print an error message and reprompt you for a corrected input. BEN will not detect an error if you simply enter an incorrect value. For instance, if you type 10244 instead of the intended value of 10234, your calculation will be based on an erroneous input. In this case, after you have completed your data entry, BEN will ask if you would like to review your inputs. DO YOU WISH TO SEE A LISTING OF CURRENT VALUES? (Y/N) .Y If you are unsure of an entry or want to correct a mistake, answer Y. BEN will show you the data you have entered and give you an opportunity to make changes. (See Chapter IV.B. for more information on changing input values.) If you are using a TTY, the print head will move one space backwards each time you press the backspace key. Since the original entry is already typed on paper, the backward movement will not erase figures that are being deleted. Rather, your corrected entry will be typed on top of the original entry. July 1990 ------- II — 11 4. Error Messages Occasionally, you might forget to follow the format rules when typing data entries, or you might select an option number that does not exist. In such instances, rather than continuing with the calculation, BEN temporarily interrupts the regular prompting sequence to print an error message alerting you to the mistake. After displaying the error message, BEN reprompts you for the correct information f or that variable. Error messages can be general or variable—specific. General messages apply to all prompts. Variable—specific errors occur for a particular variable when BEN checks for the correct relationships between variables, and for logical errors. Variable—specific messages are fully described in the case example which is covered in Chapter III. There are three general types of mistakes that generate error messages —— out—of—range input values, format errors, and illegal characters. BEN’S error messages will help you locate the mistyped character, and allow you to re—enter the data before proceeding with your next input or beginning calculation. Each of these error messages is described below. Examples from BEN sessions illustrate each error message, and its related correction procedure. User entries are shown in bold-face print. The error—checking mechanism will not recognize the types of errors caused by mistyping; for example, a 3 instead of-a 2, misspelling the case name, or entering the wrong date in response to the “today’s date” prompt. Therefore, you should write down each input before running BEN, and then carefully check the typed data against each item on your written list. To do this, you can use the BEN Data Entry Form (see Exhibit 111-2). July 1990 ------- II — 12 a. Unavailable or Out—of—Range The first type of error involves choosing an option that was either not presented, or not in the allowable range. In the former case, BEN simply reprompts you for another value without printing an error message. In the latter case, BEN prints a message telling you that your entry is not in the range of allowable values for that input. For example, the choice between printing an introduction to BEN or skipping over the introduction requires a yes (Y) or no (N) answer. In the following example, the user mistakenly typed 1 to indicate the first letter choice instead of simply typing the letter Y to signify yes. Welcome to BEN. Would you like an introduction? (YIN) 1 ERROR: ENTRY 1 IS NOT AN AVAILABLE OPTION. ENTER AGAIN: Welcome to BEN. Would you like an introduction? (Y/N) Y BEN recognizes the error, prints an error message that repeats the incorrect entry value, and reprompts the user for the correct information with the same question. The user then correctly typed Y, which is one of the available response options, and execution of the program continued as usual. The error message shown will appear whenever you type anything other than Y or N to the above question. The following example illustrates a response which is out-of— range because the user asks to change Variable 14, when in fact there are only variables 1 through 13. The same error message appears. July 1990 ------- II — 13 TYPE NUMBER OF VARIABLE TO BE CHANGED (TYPE 0 FOR NO CHANGE) 14 ERROR: ENTRY 14 Is NOT AN AVAILABLE OPTION. ENTER AGAIN: The next response is out—of-range because BEN will not accept a negative value for the initial capital investment. In cases such as this one, BEN simply reprompts for the value without printing an error message. 2. INITIAL CAPITAL INVESTMENT IN POLLUTION CONTROL = (FOLLOW WITH DOLLAR-YEAR SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) —150000 - 2. INITIAL CAPITAL INVESTMENT IN POLLUTION CONTROL = (FOLLOW WITH DOLLAR-YEAR SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) A special out-of—range error message appears during the first calculation in a BEN session if you press the carriage return (or enter key) without entering any data in response to a variable prompt.” BEN prints the following error message, and reprompts you for the variable: BEN allows you to press the carriage return without entering data when changing variable values. This means that the program will use the existing value in the next calculation. See Section B of Chapter IV for a further explanation. - July 1990 ------- II — 14 ERROR: YOU CA MUST LCULATI ENTER ON. A TRY VALUE AGAIN FOR THE FIRST b. Format Error The second type of general error message involves a format error. After each data prompt, BEN provides an example of the format in which the data should be entered. These format examples are enclosed in parentheses. If you enter the data in an unacceptable format, an error message results. The user in the example below incorrectly typed commas in the cost input: YOU HAVE ENTERED THE FOLLOWING: 100,000 ERROR: NUMERICAL VALUES SHOULD BE INPUT WITHOUT COMMAS (e.g., 10000 TO REPRESENT 10, 000). ENTER AGAIN. In the next example, the user entered a slash (I) to separate the month from the year instead of the recpiired comma. YOU HAVE ENTERED THE FOLLOWING: 9/1989 ERROR: MONTH SHOULD BE SEPARATED FROM YEAR BY A COMMA (e.g., 6,1985). ENTER AGAIN. c. Illeaal Character - The third general error message indicates that you have entered an illegal character. In this case, you have typed a character that July 1990 ------- II — 15 does not belong to the same alphanumeric category as the rest of the entry. For example, typing $10000 as a cost entry generates the error message because a dollar sign is not an acceptable numerical digit. Similarly, typing 20% to enter “20 percent” is not acceptable because 20% contains the nonnumeric percent sign. A very common mistake is to type the lowercase letter L instead of the number 1 when entering numeric values. The related error message will repeat your entry to show your error as follows: YOU HAVE ENTERED THE FOLLOWING: 120000 ERROR: AN ILLEGAL CHARACTER EXISTS IN THE ABOVE ENTRY. ENTER AGAI1J. Another common mistake is typing the letter 0 instead of the number 0 (zero) when entering numeric values. As in the above example, the incorrect entry is repeated with the error message before BEN reprompts for the correct information. YOU HAVE ENTERED THE FOLLOWING: 120000 ERROR: AN ILLEGAL CHARACTER EXISTS IN THE ABOVE ENTRY. ENTER AGAIN. The illegal character message occurs whenever the entry to any question contains a character that is nonnumeric in response to a prompt for a numeric value, including cases when a key might have been pressed by mistake, and a numeric entry suddenly contains an asterisk, bracket, quotation mark, or other non—alphanumeric symbol. July 1990 ------- II — 16 C. ENDING PROCEDURES Once BEN has completed a calculation and directed the output for printing, you can either end the session, or continue with further calculations. See Chapter IV for an explanation of the procedures for changing variables and making additional calculations. If you have completed your BEN calculations, typing 0 (zero) ends the session: DO YOU WISH TO DO ANOTHER ECONOMIC SAVINGS CALCULATION? (O=NO; 1=YES, USING STANDARD VALUES; 2=YES, USING OWN INPUTS) 0 DO YOU REALLY WANT TO LEAVE BEN? (O=NO; l=YES) 1 After you type 0 (zero), and confirm termination by typing 1, BEN will notify you that output from all of the calculations in the session has been saved temporarily in a computer file, and that you have the opportunity to receive a printed hardcopy. This point in the session is your only opportunity to request a copy of the output, and the output will be automatically deleted when you finish using BEN. If you are using a PC that is not connected to a printer, you will probably want to receive a copy. If you do, simply respond to the prompt by typing I to indicate yes: July 1990 ------- - 11—17 ALL OF YOUR OUTPUT HAS BEEN SAVED IN A FILE. DO YOU WISH TO RECEIVE A PRINTED COPY OF THIS OUTPUT? (Y=YES, N=NO) y BEN then asks you for additional information. If you are in Washington, BEN will ask you for your bin number: PLEASE SUPPLY THE FOLLOWING INFORMATION: ARE YOU WORKING AT A TERMINAL IN THE WASHINGTON D.C. AREA? (Y=YES, N=NO) Y ENTER YOUR BIN NUMBER (THE FORMAT SHOULD BE A LETTER D FOLLOWED BY THREE NUMBERS. E.G., D099) DO 99 You can obtain a bin (and number) at the Washington Information Center (WIC) in the lower level of Waterside Mall. The output will generally be delivered to your bin within half an hour. If you are outside Washington, BEN will ask for your mailing box number: ENTER YOUR MAILING BOX NUMBER (THE FORMAT SHOULD BE YOUR USER IDENTIFICATION NUMBER PRECEDED BY THE LETTER M, e.g. MXXX.) Mxxx This number is your user identification number preceded by the letter M, e.g., MXXX. Your output will be mailed to you at the July 199C , ------- II — 18 address recorded with your account information. You should receive your output in three to five days.’ 2 BEN will then notify you that your output will be printed and delivered or mailed: YOUR OUTPUT WILL BE PRINTED AT THE COMPUTER CENTER AND ROUTED TO YOUR BIN OR MAILED TO YOU. You are out of the BEN program when the computer returns you to the Legal Research Systems screen. You can then log of f by selecting the exit choice (L) from the menu. You are then asked if you wish to stay on the computer. You answer N to be logged of f. Turn off the terminal, modem, and printer, and the session is over. If you don’t get the Legal Research Systems screen, you will instead get a READY prompt. You then log of f the IBM System by typing LOGOFF, followed by a carriage return (or enter key). Turn of f the terminal, modem, and printer, and the session is over.’ 3 12 If you are using a TTY and already have a paper copy of the output, you probably do not want to receive another copy. In this case you simply type N for no when BEN asks if you want to receive a printed copy. BEN then ceases to ask you further questions. ‘ If you fail to log yourself off, the mainframe will automatically do so for you, 15 to 20 minutes later. Note, however, that user charges will continue to accrue during this period. And, if you try to log back on during this period, the computer will inform you that your user ID is in use, and will not let you log on. July 1990 ------- III — 3 . CHAPTER III DATA REQUIREMENTS BEN calculates the benefit a violator accrues from delaying a capital investment, delaying a one—time expenditure, and avoiding any annual costs over the period of noncompliance. BEN requires thirteen data items to calculate the economic benefit of delay, including the case name and certain other information about the case (see Exhibit 1—2 in Chapter I). You must supply the case name and inputs two through seven. For the remaining six variables, you can either use standard values or specify your own values. Standard values for these remaining six variables are contained in BEN for both for—profit companies and not—for—profit organizations such as municipalities, and should be used for your computation if you do not have data specific to your violator. You should change a standard value only if you have reliable information substantiating the change. The economic benefit calculation is performed in the same manner whether you use the standard values or specify your own values for the six optional inputs. The rest of this chapter explains each of the variables, in the order in which you enter them in BEN. Examples for a hypothetical “Company X” accompany the explanation. The examples follow the prompting sequence, item by item, as it appears on your computer screen when you run BEN. An example of a prompt and response follows each variable title, in a shaded box. The response is shown in bold print. The explanations include a brief description of the criteria you should use in developing the first six input values, and the- basis for each of the standard values. Each explanation also contains a statement regarding how a change in the value of each variable will affect the economic benefit of delay (e.g., increase it or decrease it). Exhibit 111—I summarizes these effects by showing the direction of the change in economic benefit caused by a change in each variable, holding all other variables constant. July 1990 ------- III — 2 EXHIBIT 1 1 1—1 EPPECT OP V RI BLE CIM GE8 ON ECONOMIC BENEPIT’ Direction of Change in VariableName Variable Chanae Economic Benefit 2. Initial Capital Investment: — Recurring Increase Increase — Non—recurring Increase Increase 3. One Time Nondepreciable Increase Increase Expenditure - Tax Deductible :s Decrease 4. Annual Expenses Increase Increase 5. Date of Noncompliance Later Decrease 6. Date of Compliance Later Increase 7. Date of Penalty Payment Later Increase 8. Useful Life of Pollution Control Equipment Increase Decreas 9. Marginal Income Tax Rate 1986 and Before Increase Decrease 10. Marginal Income Tax Rate 1987 and Beyond Increase Decrease’ 6 11. Inflation Rate Increase Decrease’ 7 12. Discount Rate Increase Increase 13. Low—Interest Financing Increase Decrease Low—Interest Rate Increase Increase 18 Corporate Debt Rate Increase Decrease ‘ Holding all other variables constant. 15 Tax deductibility of the one-time expense will reduce the economic benefit from what it would be if the expense is not tax deductible. Except in cases as outlined in footnote 26 on p. 111-14. ‘ ‘ With rare exceptions, as explained under Inflation Rate. “ Only if both rates are supplied. July 1990 ------- III — 3 To simplify and aid your data entry to BEN, you might find it helpful to use the Data Entry Form at Exhibit 111-2. The form provides space for organizing multiple BEN runs, thus allowing you to plan in advance which inputs you will want to vary. To facilitate future BEN analyses, we suggest that you reproduce this page so that you will have a sufficient supply when the need arises. Before you input the thirteen data items, BEN asks you to enter the current date: ENTER TODAY’S DATE (e.g., JUNE 1, 1990) JUNE 30, 1990 Any format may be used. For example, BEN accepts 6/30/90 just as easily as June 30, 1990 or Jun. 30, 1990. This date will be printed on each page of the results, for each calculation you make. You enter the date only once each time you execute BEN, even if you make economic benefit estimates for several cases during a single session. If you use the program more than once during the same day, you can add the time of day after the date to differentiate between sessions. Be sure to press the carriage return (or enter key) after correctly typing your entry. BEN then begins prompting you to enter data specific to the penalty case you are analyzing. July 1990 ------- III — 4 EXHIBIT 111-2 BEN DATA ENTRY FORX 1. A. Case Name _________ B. Statute _____________ C. Profitability Status: _____ For Profit _____ Not-for-Profit Initial Run 2nd Run 3rd Run 2. Initial Capital Investment Dollar -year ________ ________ ________ One-Time or Recurring? ________ ________ ________ 3. One-Time Nondepreciable _______ _______ _______ Expenditure Dollar-year ________ ________ ________ Tax Deductible? ________ ________ ________ 4. Annual Expenses ________ ________ ________ Dollar-year ________ ________ ________ 5. Month, Year of Noncompliance —,_____ —,_____ —,____ 6. Month, Year of Compliance —,_____ —, _____ _____ 7. Month, Year of Penalty Payment , _____ , _____ —, _____ USE STANDARD VALUES? (Yes/No) ________ ________ ________ If No, complete following: 8. Useful Life of Capital Investment (years) 9. Marginal Tax Rate in 1986 and Before 10. Marginal Tax Rate in 1987 and Beyond ________ ________ ________ 11. Inflation Rate ________ ________ ________ 12. Discount Rate _______ _______ _______ 13. A. Amount of Low- Interest Financing ________ ________ ________ B. Low-Interest Rate _______ _______ _______ C. Corporate Debt Rate ________ ________ ________ BEN RZSULT _______ _______ _______ July 1990 ------- III — 5 A. REQUIRED VARIABLES 1. • Case Name, Environmental Statute and Profitability Status a. Case Name 1A. PLEASE ENTER THE CASE NAME: COMPANY X EXAMPLE BEN first asks for the penalty case name. This name can contain up to 40 characters, including spaces, and will appear along with the date on each page of the results. Since its sole purpose is for your own documentation, this label can be anything you choose. The label can reflect the violator’s name; the name of a specific source, pollution control project, or environmental requirement; or a characteristic of the specific BEN run (e.g., “Compliance in January 1989”). If you are doing multiple runs for the same case, you might find it helpful to vary the case name for each run so that you can more easily distinguish among the various runs. For example, you might title your runs “ABC Corp.: Outfall 1”; “ABC Corp.: Outfall 2”; etc. If you enter nothing for the case name, blanks will be printed where the label normally appears on your results. Be sure to check for misspellings or incorrect dates before pressing the carriage return (or enter key), since BEN will accept and print whatever you type for this label. July 1990 ------- III — 6 b. Statut. lB. PLEASE IDENTIFY THE STATUTE INVOLVED IN YOUR CASE. IF YOUR CASE INVOLVES MORE THAN ONE STATUTE, PLEASE PICK THE MOST IMPORTANT ONE. 1. CLEAN AIR ACT - STATIONARY SOURCE 2. CLEAN AIR ACT - MOBILE SOURCE 3. CLEAN WATER ACT - 404 4. CLEAN WATER ACT - NPDES 5. FIFRA 6. UST (UNDERGROUND STORAGE TANK) 7. RCRA (OTHER THAN UST) 8. SAFE DRINKING WATER ACT - UIC 9. SAFE DRINKING WATER ACT - PWS 10. SUPERFUND 11. TSCA 12. OTHER ENTER THE NUMBER OF THE STATUTE YOU HAVE SELECTED: 2 Select the statute under which you are citing the violator. If your violator is affected by more than one statute, select the most important one. For example, in this case, the violation occurred under the Clean Air Act (Mobile Sources), and you would enter “2”. July 1990 ------- III — 7 c. Profitability 8tatus 1C. PLEASE ENTER THE PROFIT STATUS OF THIS ENTITY: 1 FOR-PROFIT (e.g., A BUSINESS) 2 NOT-FOR-PROFIT (e.g., A MUNICIPALITY) PROFIT STATUS: 1 Enter 2. if the violator is a profit-making entity or 2 if the violator is not—for—profit. Profit—making organizations can be corporations, partnerships or sole proprietorships. Typical not— for-prof it entities include towns, school districts, sewer or water districts, or counties. Your determination will direct BEN’S application of tax rates and the discount factor. 2. Initial Capital Investment a. Cost Data 2. INITIAL CAPITAL INVESTMENT IN POLLUTION CONTROL = (FOLLOW WITH YEAR-DOLLARS SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 105000 2.989 Enter the initial capital investment in pollution control equipment, without commas or dollar signs. The cost should be followed by a blank, and the year in which the dollars are expressed. Express the dollar—year in four digits. If you do not enter a dollar-year the first time through the program, BEN assumes the cost is in compliance—year dollars (i.e., the year compliance July 1990 ------- III — 8 was achieved). Enter a zero if there is no initial capital investment. There is an eight-character limit on cost amounts BEN will accept. If your entry exceeds this limit, BEN prints the following error message and reprompts you for a correct input: ERROR: INPUT VALUE EXCEEDS THE 8-DIGIT LIMIT. ENTER AGAIN. In the unlikely case that your costs are greater than $99,999,999 dollars, you should give BEN all of your costs divided by a factor of 1,000 and rounded to the nearest whole number. You can then multiply the BEN result by 1,000 to determine the total economic benefit.’ 9 The initial capital investment should include all depreciable investment outlays necessary to achieve compliance with the environmental regulations or permit. Depreciable capital investments are usually made for buildings, equipment, or other long—lived assets. 2 ° Typical environmental capital investments include ground—water monitoring wells, stack scrubbers, and wastewater treatment systems. Sources for the capital investment figure include EPA engineering estimates, quotations from manufacturers, and reported This result will not be exact, but will be sufficiently precise given BEN’s rounding constraints. a Land is not a depreciable capital investment. Land costs should be input as a one-time non-depreciable cost (Item 3). July 1990 ------- III — 9 actual expenditures or estimates made by the violator. 2 ’ The total investment should include: (1) the direct purchase cost (including sales tax), (2) the cost of site preparation and engineering design work, and (3) shipping and installation costs. You also must provide the dollar-year for the investment. If you do not provide a dollar—year, BEN will assume that the costs are in compliance—year dollars (see Input 6). If you have investment costs with different dollar—years, you should do separate calculations for each. Holding all other inputs constant, the economic benefit from delay will be greater for larger capital investment outlays (See Exhibit 111-1). In general, increases in the cost of compliance also increase the benefit from delay. b. Type of Costs IS THE INITIAL INVESTMENT ONE-TIME OR RECURRING? 1. ONE-TIME 2. RECURRING PLEASE ENTER THE APPROPRIATE CODE: 2 BEN next asks you whether the investment is one—time or recurring. Enter 2. if the capital expenditure is a one—time cost, or 2 if the cost is recurring (i.e., will be repeated at the end of the asset’s useful life). Examples of one—time depreciable expenditures include groundwater monitoring wells or purchase of One very useful source of information can be the plant’s “daily operations log.” The log contains reports of upsets, other problems and recommendations for fixing the problems. July 1990 ------- III — 10 other equipment to close a RCRA site. In identifying equipment as one-time purchase, you should be convinced that the eq 1ipment will not require future replacement. - Water and air pollution—control equipment are capital investments that are typically assumed to be replaced at the end of their useful lives, since this equipment generally is needed to support the entity’s manufacturing activities for the foreseeable future. Recurring capital costs will result in higher BEN results than will one—time capital costs, if all other inputs are the same. If some of your capital investments are one—time and others are recurring, you will need to categorize them as such, and make separate BEN calculations for the two categories. You can then add together the results from the two calculations to determine the total economic benefit. 3. One-Time Nondepreciable Expenditures a. Cost Data 3. ONE-TIME NONDEPRECIABLE EXPENDITURE = (FOLLOW WITH YEAR—DOLLARS SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 210000 1989 Enter one—time, nondepreciable expenditures followed by the appropriate dollar-year. Enter a zero if there is no one-time expenditure. Your entry for this variable should include any one—time non- depreciable expenditures made by the violator to comply with the environmental regulation or permit. Such an expenditure could be July 1990 ------- III — 11 for purchasing land, setting up a record—keeping system, removing illegal discharges of dredged and fill material, disposing of soil from a hazardous—waste site, or initial training of employees. 22 BEN assumes that this expenditure will not be repeated in the future. As in the case of the initial capital investment, BEN will use the compliance year if you do not provide a dollar—year. The economic benefit increases as the value for this variable increases because the violator has delayed paying a larger amount of money. b. Tax Deductibility BEN then asks whether the one—time non-depreciable expenditure is tax deductible: IS THE ONE-TIME EXPENSE TAX-DEDUCTIBLE? (1/N) (NOTE: MOST EXPENSES ARE TAX-DEDUCTIBLE] I You should answer yes (Y) or no (N). Most one—time expenditures are tax-deductible; with the primary exception being purchases of land. 23 For any expenditure amo ,int, the economic benefit will be smaller if the expenditure is tax-deductible (see Exhibit 111-1). If training or recordkeeping must occur over time and regularly, rather than a one-time effort, these costs should be included in Variable 4, Annual Costs rather than here. Land is an asset and, therefore, cannot be deducted as an expense from taxable income. July 1990 ------- III — 12 4. Annual Expenses 4. ANNUAL EXPENSE = (FOLLOW WITH YEAR-DOLLARS SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 15750 1989 Enter the annual, recurring costs associated with operating and maintaining the required pollution control equipment, followed by the year in which the dollars are expressed. Enter a zero if there are no annual costs. If no dollar—year is entered the first time through the program, BEN assumes that the costs are in compliance- year dollars. The same format and eight character limitation apply to the annual expenditure as to the other cost inputs. The annual, recurring expense is an estimate of the average annual incremental cost of operating and/or maintaining the required environmental control measures. These costs should include any changes in the cost of labor, power, water, raw materials and supplies, recurring training of employees and any change in annual property taxes. 24 The value of operating and maintenance (O&M) credits should also be considered in estimating the incremental annual costs. O&M credits may represent actual O&M cost savings: heat recovery, product or byproduct recovery, and so forth. For example, the ‘ In the case of underground injection wells, the cost of alternative disposal of injection fluids is the avoided operation cost. Similarly, the required treatment, storage or disposal of PCB5 or other toxic wastes is the avoided operation cost. The avoided costs must be equal for each year of the violation in order to enter them into BEN as an annual continuing expense. If the avoided costs are differer for each year of violation, they should be treated as avoided one-ti nondepreciable costs according to the methodology set out in Part II of Appendix B. In this situation, you should perform separate calculations for each year of avoided costs. July 1990 ------- III — 13 installation of new pollution control equipment may reduce certain costs (such as sludge disposal) that were associated with operations during the period of noncompliance. If the resulting incremental O&M cost is negative (i.e., there is a net cost savings from the new pollution control equipment), the negative figures may be used in BEN. Credit is only given for annual, recurring expenses that were both paid and legal (e.g. no credit is given for costs associated with illegal disposal of hazardous waste). The annual costs should also reflect any annual lease payments for pollution control equipment. However, the annual costs should not include annualized capital recovery, interest payments, or depreciation. The economic benefit figure increases with greater avoided annual, recurring costs (See Exhibit Ill-i). 5. Noncompliance Date 5. MONTH AND YEAR WHEN NONCOMPLIANCE BEGAN (e.g., 1,1988) 10,1987 The noncompliance date is the date when the first violation of the environmental requirement began. You should type in a month and a year, separated by a comma. The month is a number between 1 and 12, and. cannot be omitted. The year must contain four digits (e.g., do not shorten the input to read 87 instead of 1987). If you fail July 1990 ------- III — 14 to enter four digits for the year the following error message occurs: YEAR MUST BE 4 DIGITS. There is one more limitation on all year entries: BEN will not accept years before 1971. The error message generated if the noncompliance year entered is earlier than 1971 is as follows: 25 YEAR MUST BE 1971 OR LATER. If you vary the date of noncompliance (holding all other variables constant), BEN automatically adjusts the cost of complying as of the new noncompliance date, by discounting the costs to the revised date. The benefit from delayed and/or avoided expenditures generally increases with the length of the delay period. An earlier noncompliance date (holding the compliance date constant) or a later compliance date (holding the noncompliance date constant) will, in most cases, increase the benefit figure. 26 Although there may be an applicable statute of limitations in your case, it will only affect the maximum penalty you can assess (i.e., the statutory cap). Since you are only trying to calculate the amount the violator gained by violating the law, you can go beyond any statute of limitations, as long as you do not exceed the statutory cap. Should your case go to trial or hearing, you should consult your legal staff before going forward with a benefit amount based on the earlier violations. In cases where the delay period straddles January 1, 1987, lengthening the period of noncompliance will decrease and possibly eliminate the benefit. This phenomenon is due to the change in the tax code effective in 1987. Because tax rates are lower in 1987 (and onward) than they were through 1986, the cost of delayed compliance is greater than it would have been if the tax rates had stayed the same. July 1990 ------- III — 15 6. Compliance Date 6. MONTH AND YEAR WHEN COMPLIANCE ACHIEVED (e.g., 1,1990) 6,1990 Enter the date when the violator was in compliance with environmental requirements or the date you expect the violator to achieve compliance. Note that the date when the equipment was installed is not sufficient; the violator needs to be in compliance . The format and range limitations which apply to the noncompliance date also apply to the compliance date. In addition, the compliance date must occur after the noncompliance date (otherwise, -there is no violation). BEN checks for the possibility that you have switched the two dates. If this error has been made, BEN prints an error message before reprompting you for both the compliance and noncompliance dates. The error message below occurred when the noncompliance and compliance dates entered in the examples above were switched: ERROR: THE NONCOMPLIANCE DATE 6,1990 DOES NOT OCCUR PRIOR TO THE COMPLIANCE DATE 10,1987 ENTER BOTh DATES AGAIN: Remember that BEN assumes that dollar amounts for Inputs 2, 3 and 4 are in compliance-year dollars if you do not enter the dollar— year along with the amount. If you have not entered a specific dollar-year and you vary the compliance date, BEN will automatically change the dollar—year for the cost inputs. In general, it is best to include the dollar-year with your cost inputs. July 1990 ------- III — 16 7. Penalty Payment Date 7. MONTH AND YEAR WHEN PENALTY PAID (e.g., 8,1990) 9,1990 Enter the date the violator is expected to pay the civil penalty. Keep in mind that there often is a considerable time lag between when the violator signs the consent decree and when it actually pays the penalty. As with the previous dates, the month should be entered with the year, separated by a comma. The year must contain four digits. The penalty payment date may be before, after, or the same as the expected compliance date. BEN states the economic benefit figure as of the penalty payment date and assumes that the violator earns a return on the benefit until that date. Therefore, the benefit figure increases for later penalty payment dates, holding all other variables constant (see Exhibit 111—1). July 1990 ------- III — 17 B • VARIABLES WITH STABDARD VALUES BEN uses• 13 inputs to calculate the economic benefit of delayed compliance. At this point in the program you have already entered seven of the inputs. BEN offers two methods for supplying values for the remaining six variables. The first time you run the program, BEN prints a short message outlining the choices available. BEN then asks you to choose between using standard values and providing your own values: BEN will use this information to estimate the econoijic benefit. If you select standard values for the remaining six variables, these standard values will be printed in your output. You also have the option of entering your own values for the remaining variables after Item 7. HOW DO YOU WISH TO TREAT REMAINING VARIABLES? (1 = USE STANDARD VALUES, 2 = ENTER OWN VALUES) 2 If you select the first choice, BEN will use the standard values that it has stored in its memory. You need only to type 1 followed by a carriage return (or enter key), and BEN will calculate the economic benefit using these stored standard values. The standard values in BEN are updated from year to year to reflect changes in interest rates, tax law, and so forth. While these values are updated, the assumptions upon which they are based remain the same. If the case you are analyzing is significantly different from that represented by the standard values, you might wish to specify values for some of the optional inputs. In particularly complicated cases, you might also want to consult a financial analyst or an economist. July 1990 ------- III — 18 The standard variables are numbered from 8 to 13. (Recall that variables 1 through 7 are the case name and the six inputs discussed in the previous section.) Exhibit 111—3 lists the assumptions that support the standard values for for-profit companies. Exhibit 111-4 lists the assumptions that support the standard values for not-f or— prof it companies. Additional information regarding not-for-profit calculations can be found in Appendix B, Section 1. If you want to enter your own values for variables 8 through 13, type 2 followed by a carriage return (or enter key). BEN then prompts, you, beginning with Variable 8, for each nonstandard variable value. 27 8. Useful Life 8. USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT IN YEARS (e.g., 15) = 10 Enter the useful life in years followed by a carriage return (or enter key). The useful life is the number of years that the equipment can be operated before it must be replaced. The program only accepts integer values, and will not accept a zero. A fractional value, such as 15.6 years, must be rounded to the nearest integer value (i.e., 16). If compliance does not involve investment in equipment, use the standard value. 28 Do not enter a useful life If you select standard values on your first BEN calculation of a session, and decide to use a nonstandard value for your second calculation, you will still be prompted for each variable, 8 through 13. As a shortcut, for each variable you want to keep standard, simply hit the carriage return (or. Enter key) to tell the computer to use the same standard value for the second calculation. The useful life value does not affect the economic benefit result if you: calculation does not involve a capital expenditure. This choice does, however, define the number of years of data presented in Output Option 3. July 1990 ------- III — 19 EXHIBIT 111-3 STANDARD VALUE CHARACTERISTICS FOR- PROFIT VIOLATORS Variable Characteristic Assumed for Standard Value 8. Useful Life 9. Marginal Tax Rate 1986 and Before 10. Marginal Tax Rate 1987 and Beyond ]l. Inflation Rate 12. Discount Rate 13. Low-Interest Financing The violator is installing typical pollution control equipment, for example: air pollution control equipment. including an electrostatic precipitator, FGD scrubber, fabric filter, solvent recovery system, and incinerator; or water pollution treatment systems including, activated sludge, screening, filtration, chemical treatment, and aerated lagoons. The standard value for useful life is 15 years. The for-profit violator’s income is taxed on the margin at the highest corporate income tax rate (federal and state). The model assumes that the violator is located in a state whose marginal corporate income tax rate is equal to the average across all states. BEN uses two tax rates, one for 1986 and before and the second for 1987 and beyond, to take into account the major change in the federal marginal corporate income tax rate made by the Congress in 1986. The rate of increase in the violator’s cost of compliance is equal to the average annual rate of increase in the Chemical Engineering Plant Cost Index over the most recent ten-year period. The discount rate is based on the cost of capital for pollution control investments. The model assumes that pollution control investment is of average risk, and financed by equity capital. The standard value is equal to the corporate long term equity cost of capital average over the past ten years. The model further assumes that entity earned a return on these delayed and avoided costs at this same rate. BEN assumes that the company did not use an industrial development bond, or any other government sponsored low- interest financing mechanism, to finance its pollution control investment. July 1990 ------- III — 20 E IBIT 111-4 STARDARD VALUE CHARACTERISTICS NOT - FOR- PROFIT VIOLATORS Variable Characteristic Assumed for Standard Value 8. Useful Life The violator is installing typical pollution control equipment, such as a water pollution treatment system, including activated sludge, screening, filtration, chemical treatment, and aerated lagoons. The standard value for useful life is 15 years. - 9. Marginal Tax Rate The not-for-profit violator does not pay taxes; therefore 1986 and Before its marginal tax rate is 0 percent. 10. Marginal Tax Rate 1987 and Beyond 11. Inflation Rate The rate of increase in the violator’s cost of compli is equal to the average annual rate of increase in th Chemical Engineering Plant Cost Index over the most recent ten year period. 12. Discount Rate The discount rate is equal to the average annual cost of debt to municipalities over the last ten years. 13. Low-Interest Financing BEN assumes that the not-for-profit entity did not use any low-interest financing mechanism to finance its pollution control investment. July 1990 ------- III — 21 greater than 50 years or BEN will print the following error message and then reprompt you: ERROR: USEFUL LIFE CANNOT EXCEED 50 YEARS. ENTER AGAIN. BEN uses the useful life figure to calculate the total cost of investing in, and maintaining pollution control equipment over future replacement cycles. Equipment with a long useful life is replaced less frequently than equipment with a short useful life. Assuming the same investment cost per replacement cycle of each, the total present value of the costs of continual replacement for the longer-lived equipment would be lower (since you would have to buy fewer of them, with each subsequent investment occurring later). Therefore, a longer useful life reduces the benefit of delaying compliance, holding all other inputs constant (see Exhibit 111-1). 9. Marginal Income Tax Rate for 2986 and Before 10. Marginal Income Tax Rat. for 1987 and Beyond 9. MARGINAL INCOME TAX RATE IN 1986 AND BEFORE (e.g., 49.6) = 49.6 July 1990 ------- III — 22 Enter the marginal income tax rates in percentage terms followed by a carriage return (or enter key). The program will accept any value less than 100.00 percent, including 0.00 percent. BEN has two tax—rate inputs because of the major changes to the tax code made by Congress in 1986. These changes substantially reduced the marginal federal corporate tax rate from 46% in 1986, to 34% in 1987 and onward. The standard values reflect the highest marginal federal rate and the average marginal state tax rate. The marginal income tax rate is the fraction of the last dollar of taxable income that a violator should pay to federal, state, and local governments. It is the statutory tax rate, and it reflects the amount by which taxes would increase or decrease if taxable income were to increase or decrease. It is important to use the marginal tax rate, not the averaae tax rate (i.e., total tax divided by total taxable income), because the marginal tax rate is the rate which applies to incremental changes in the violator’s tax— deduct ible expenses. State and local income taxes do not include sales tax, inventory tax, charter tax, or taxes on property. One time tax payments, such as taxes on the purchase of equipment, should be included in the investment cost. If the tax recurs regularly, then it should be included in the annual expenditures. For example, as mentioned above, sales tax is included in the investment outlay while property tax is included in annual expenses. When there is a state or local income tax, the state and local tax rates must be adjusted to reflect the fact that state and local, income taxes are deductible expenses in computing federal taxes. The standard values for these variables will produce a reasonable July 1990 ------- 111 — 23 result. However, the preferable approach is to use state-specific Values in place of the standard values in your BEN runs. The total corporate marginal tax rates are calculated for you by state in Exhibit III_5.29 Select the values for the state where the affected facility is located. BEN uses the marginal tax rate to account for the tax effects of compliance expenditures. Because tax-deductible expenses and depreciation associated with capital investments reduce taxable income, they result in tax savings. A lower marginal tax rate reduces this tax savings, thereby increasing the cost of compliance. Thus, a lower tax rate results in a higher benefit from delay (see Exhibit 1111) •30 The standard value, calculated according to the above formula, is based on the highest federal marginal tax rate, and the average of all marginal corporate tax rates imposed by states. The adjustment is made by multiplying the state rates by a factor equal to one minus Lhe marginal federal tax :ate. as shown in the following formula: MTR - MTRFW ,JLI + [ MTR A x ( 1 - MTRffDEI )] where: MTR D DA — the marginal tax rate at the federal level; and MTRSTATh — the marginal tax rate at the state level Therefore, if you were to calculate the total marginal, tax rate for 1987 and beyond, based on a marginal state tax rate of 10% for example, the result would be 40.6 percent. This computation is shown below: — .34 + [ .10 x (1 - .34)1 — .34 + (.10 x .66) — .34 + .066 — .406 — 40.6% As mentioned above, the tax rate changes may cause a lower than expected BEN value, especially if the noncompliance and compliance dates straddle the date of the tax code changes. BEN values may be lower than expected because lower tax rates reduce the tax savings (and i.rcrease the cost) associated with delayed compliance. July 1990 ------- III — 24 EXHIBIT 111—5 Total Corporate Marginal Tax Rates by State (Percent) 1986 and Before 3 ’ 1987 and Beyond 32 Alabama 48.7 37.3 Alaska 51.1 40.2 Arizona 51.7 40.9 Arkansas 49.2 38.0 California 51.2 40.1 Colorado 49.2 38.0 Connecticut 52.2 41.6 Delaware 50.7 39.7 Florida 49.0 37.6 Georgia 49.2 38.0 Hawaii 49.5 38.2 Idaho 50.2 39.3 Illinois 48.2 38.3 Indiana 47.6 39.2 Iowa 52.5 41.9 Kansas 49.6 37.0 Kentucky 49.9 38.8 Louisiana 50.3 39.3 Maine 50.8 40.6 Maryland 49.8 38.6 Massachusetts 51.1 40.3 Michigan 47.3 34.0 Minnesota 52.5 40.3 Mississippi 48.7 37.3 Missouri 48.7 37.3 3’ Based on a federal marginal tax rate of 46% and 1986 State corporate marginal tax rates from the 1986/1987 All States Handbook . 3’ Based on a marginal Federal tax rate of 34% and State marginal corporate tax rates for 1988, from the 1988-89 edition of The Book of the States . July 1990 ------- III — 25 E IBIT 1 1 1 -5 (con’d) Total Corporat. Xarqinal Tax Rats. by stat. - (P.ra.nt) 1986 and Before 1987 and Beyond Montana 49.6 38.5% Nebraska 49.6 38.4 Nevada 46.0 34.0 New Hampshire 50.3 39.3 New Jersey 50.9 39•9 New Mexico 50.1 39.0 New York 51.4 39.9 North Carolina 49.2 38.6 North Dakota 51.7 40.9 Ohio 51.0 39.9 Oklahoma 48.7 37.3 Oregon 50.1 38.4 Pennsylvania 51.1 39.6 Rhode Island 50.3 39.3 South Carolina 49.2 38.0 South Dakota 46.0 34.0 Tennessee 49.2 38.0 Texas 46.0 34.0 Utah 48.7 37.3 Vermont 50.9 39.4 Virginia 49.2 38.0 Washington 46.0 34.0 West Virginia 51.3 40.4 Wisconsin 50.3 39.2 Wyoming 46.0 34.0 Standard Valus 49. 5 39.4 July 1990 ------- III — 26 21. InflittbnRate 11. ANNUAL INFLATION RATE (e.g., 4.1) = 3.5 Enter the inflation rate as a percent, followed by a carriage return (or enter key). Be certain that you enter an annual rate and not a monthly or semiannual rate. The inflation rate variable in BEN is the annual rate at which the costs of environmental control measures have, and are expected to grow over time. These cost increases are the result of various factors affecting supply and demand for particular products and services, as well as general inflationary pressures in the economy. BEN uses the inflation rate to adjust the cost of compliance into noncompliance—year dollars, and then into future—year costs. When the inflation rate is higher, the costs increase more quickly over time. An increase in the future cost of pollution controls reduces the economic benefit of delaying compliance, because the equipment would have cost less had it been purchased on time. Thus, in general, the economic benefit figure decreases for higher inflation rates (see Exhibit 111-1). There are rare exceptions to this relationship, depending on the year in which annual costs are expressed and the relative size of annual expenditures to capital and one—time expenditures. The standard value of the inflation rate in BEN is an average of inflationary trends over the last ten years, as reported by the “Plant Cost Index” (PCI) published in Chemical Enaineerina July 1990 ------- III — 27 magazine. 33 The Chemical Enaineering Plant Cost Index is used rather than another index (e.g., the Consumer Price Index, or the GNP Deflator) because it more accurately reflects the costs of activities associated with pollution-control expenditures. The PCI is based on cost changes in typical components of pollution control, including equipment, construction labor, buildings, and engineering and supervision. Exhibit 111—6 presents the annual Plant Cost Index for 1971 through 1989. Over the ten-year period between 1979 and 1989, inflation related to plant costs averaged 4.1 percent. 34 This value is reasonable for most BEN calculations. If you have some reason to believe that a better inflation forecast for your purposes is available, contact your local BEN expert to discuss the use of a nonstandard input. - Chemical Engineering , McGraw Hill, Inc., biweekly issues. The Plant Cost Index is normally located on the page labeled “Economic Indicators.” In general, an annual inflation rate is calculated as follows: r Index in final yearn u N It — ljx 100 \ ndex in initial yearJ J Where: N — Final year - Initial year To obtain the standard value, the index values for 1989 and 1979 (355.4 and 238.7, respectively) were used to calculate the ten-year average. The calculation is: rr 355 . 4 i 1 ii I - lix 100 LL238.7J J — (1.041 - 1) x 100 — 4.1 percent July 1990 ------- III — 28 EXHIBIT 111—6 CBEXICRL ENGINEERING PLZNT COST INDEX 1972—1989 Year Index 1971 132.2 1972 137.2 1973 144.1 1974 165.4 1975 182.4 1976 192.1 1977 204.1 1978 218.8 1979 238.7 1980 261.2 1981 297.0 1982 314.0 1983 316.9 1984 322.7 1985 325.3 1986 318.4 1987 323.8 1988 342.5 1989 355.4 Source: chemical Enaineering , McGraw Hill, Inc., biweekly issues, 1975—1990. u1y 1990 ------- III — 29 12. Discount Rate 12. DISCOUNT RATE: EQUITY COST OF CAPITAL (e.g., 18.1) = 17.5 Enter the discount rate as a percent followed by a carriage return (or enter key). Be certain that the discount rate is greater than the inflation rate. Otherwise, after all entries have been made, BEN will flag the error with a message and then reprompt you for both the inflation and discount rates. In the example below, the user entered an inflation rate of 9 percent and a discount rate of 7.5 percent: ERROR: THE INFLATION RATE 9.00% MUST BE LESS THAN THE DISCOUNT RATE 7.50% ENTER BOTH RATES AGAIN To calculate the economic benefit of delay as of the noncompliance date, BEN uses the equity cost of capital to discount the relevant cash flows. The equity cost of capital represents the return a company needs to earn to compensate stockholders for the risk associated with its equity securities. BEN also uses the equity cost of capital rate to bring the initial economic benefit forward to the penalty payment date. July 1990 ------- 111 — 30 The standard value in BEN is based on the average cost of lonc term equity capital over the most recent ten years.” A higher discount rate increases the return from delaying compliance, thereby increasing the economic benefit (See Exhibit 111-1). If you want to make any changes to the discount rate, it is strongly recommended that you consult an economist or financial analyst. 13. Low-Interest Financing Variable 13 deals with the use of low—interest financing for all or part of an investment in pollution control equipment. Some companies finance all or a portion of their pollution control investment with low—interest debt such as industrial development The equity cost of capital (E ) is calculated according to the following formula: E€, — Cost of equity capital, calculated by — Rf + £*E where: R, — Return from risk-free investments, such as treasury bonds; £ — Beta, or market risk relative to average stock — Equity risk premium The standard values are based on an average over the past ten years, where: — the yield on 30-year federal treasury bonds; £ — 1.00, indicating a firm of average risk; E , — based on arithmetic mean long-term equity risk premium of 7.5% for 1926-1989 calculated by Ibbotson Associates. July 1990 ------- III — 31 bonds (IDB’s) or Small Business Administration (SBA) loans. Because they are federally subsidized and issued at lower interest rates than other corporate bonds, such financing instruments reduce the cost of the pollution control investment or one—time expenditure. BEN can take this cost reduction into account by using three pieces of information: the amount of low—interest financing, the low- interest rate, and the corporate bond rate. Please note that only government subsidized loans should be considered here. Intra- company loans are not considered low interest financing. 13. AMOUNT OF LOW INTEREST FINANCING = (FOLLOW WITH DOLLAR-YEAR SEPARATED BY BLANK; e.g., 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) 105000 1989 An initial prompt asks for the amount of the investment financed with low—interest debt. If low—interest financing was not used, type 0 (zero), and BEN will skip over the next two parameters. If low—interest financing was obtained, enter the dollar amount of the low—interest debt (without entering commas or dollar signs) and follow the entry with the year in which the dollars are expressed (in four digits). If you omit the dollar-year the first time you answer this question, BEN assumes that the figure is in compliance- year dollars. You will need to determine the dollar amount of the initial capital investment and one-time expenditure that is financed with low-interest financing. When the entire pollution control project is one of several projects financed by low—interest debt, the total initial capital investment and/or the one-time expenditure associated with the pollution control project is the proper amount to enter in BEN. If you enter an amount greater than the sum of the Ju].v 1990 ------- III — 32 initial capital investment and the one—time expenditure, BEN will replace your entry with this sum. A greater amount of low—interest financing lowers the cost of compliance, thereby reducing the benefit from delaying compliance (See Exhibit I ll-i). The standard value in BEN is a zero amount of low—interest financing. LOW INTEREST RATE (e.g., 9) = (ENTER 0 IF YOU WANT THIS RATE CALCULATED.) 10 If the amount of low—interest financing is not zero, you are next asked to enter the interest rate paid by the firm on the low- interest debt instrument. As for previous rates, the low—interest rate entry should be entered as a percent, without the percent sign. If you do not know this rate, but you do know the interest rate paid on other corporate debt, enter a zero; BEN will estimate the low- interest rate using your corporate-debt rate entry, by applying the historical relationship between tax—free arid taxable bonds. BEN assumes that the alternative to low—interest financing is financing with corporate bonds at the corporate debt rate. The benefit from low—interest financing increases as the difference between the low-interest rate and the corporate debt rate increases. This benefit reduces the cost of compliance and the benefit of delay. Thus, holding the corporate debt rate constant, as the low- interest rate falls, the economic benefit figure falls (See Exhibit 111—1). July 1990 ------- III — 33 CORPORATE DEBT RATE (e.g., 12) — (ENTER 0 IF lot, HAVE PROVIDED A LOW INTEREST RATE AND YOU WANT THE DEBT RATE CALCULATED.) 12 - If possible, find the corporate debt rate for the company employing low-interest financing. If you provide the low-interest rate, you are not required to provide the corporate debt rate. If the corporate debt rate is not provided, BEN will estimate it from the low—interest rate, using the historical relationship between taxable and tax—free bonds. Therefore, enter a 0 in response to the corporate debt rate prompt if yol. ,ant BEN to estimate it. The corporate debt rate entered in BEN should reflect the financing rates that prevailed at the time the low-interest financing was obtained. If the violator issued long-term debt at about the same time that it obtained its low-interest financing, the rate on that corporate debt may be used. The corporate debt rate can also be estimated from the reported yield on corporate bonds having the quality rating assigned to the violating firm’s most recently issued bonds; or, when the rating is not known, from the reported yield on corporate bonds having an “A” rating. Long-term bond yields are reported monthly in Moody’s Bond Record for specific publicly—held companies, and as averages for each debt-quality rating. Bonds are rated by Moody’s according to their risk, with higher quality ratings denoting lower-risk bonds. The ratings range from the highest—quality “Aaa,” to a low of “C.” Average corporate yields are reported for only the highest four ratings: “Aaa,” “Aa,” “A,” and “Baa.” Exhibit 111—7 presents historical and recent average annual yields. Exhibit 111-8 presents a representative summary page from Moody’s Bond Record . Use the average corporate yield for bonds of “Baa” rating if the company has a rating of “Baa” or lower. July 1990 ------- 111 — 34 Exhibit 111—7 JJN AVERAGE YIELDS ON CORPORATE BONDS 1975—1989 Bond Rating Year Avg. Aaa A Baa 1975 9.46 8.83 8.97 9.65 10.39 1976 9.01 8.43 8.75 9.09 9.75 1977 8.43 8.02 8.24 8.49 8.97 1978 9.07 8.73 8.92 9.12 9.49 1979 10.12 9.63 9.94 10.20 10.69 1980 12.75 11.94 12.50 12.89 13.67 1981 15.06 14.17 14.75 15.29 16.04 1982 14.94 13.79 14.41 15.43 16.11 1983 12.78 12.04 12.42 13.10 13.55 1984 13.49 12.71 13.31 13.74 14.19 1985 12.05 11.37 11.82 12.28 12.72 1986 9.71 9.02 9.47 9.95 10.39 1987 9. 1 9.38 9.68 9.99 10.58 1988 10.18 9.71 9.94 10.24 10.83 1989 9.66 9.26 9.46 9.74 10.18 SOURCE; Moody’s Bond Record , January 1981 — January 1989, and Table 1.35, Federal Reserve Bulletin , March 1990. July 1990 ------- III — 35 Exhibit 1 1 1—8 MOODY’S CORPORATE BOND YIELD AVERAGES 1977—1989 Av. Cs.p Ae. C.por.t. by P ti g A .. A Cer or t. by CtOhapI S ..i P.U I..d. Av. C..’p &aj Corporat. by Rata’ j &. * $ m Co’por , Dy G ou PU 77 3 $3 - - - I.& Mu. Ape. May J av a. July Aug. S.ep. Oct. 94o . D—_ $43 *41 1.31 I 49 I 47 4.3$ 4.33 1.34 I 3$ 142 $ 4* 1.34 7$ 4.04 $10 1.04 4.05 3,3 79’ 7.92 2.04 10* LII LU 11$ 1 3 $49 1.31 1.33 $ 2* 1.3$ 1.31 4.33 1 $9 $44 I $2 $40 117 *40 $ 1$ 1.37 . I2 $42 I 34 $ 34 140 1.37 O1 $59 1.24 127 9 12 $ ) 4.33 $.2 9.12 266 L3 I3 90 ’ $ S 1.22 $ 6’ $ 191 2.33 1.23 117 2 I 102 1*2 *47 1.33 103 I 90 $4) Ill $0’ I I, $ 34 2.27 1.07 I 93 161 I.3 I $0 199 $ 5 142 $ $0 3 p Feb M.r Apt *4•y July *111 SIpI Oct Pvc.. Dcc. .. 1603 $311 3633 IS 25 3361 I’ SI 13 33 Id 46 IS 34 Id 76 $37’ 1411 3370 $161 IS 0 $373 $4 1294 I) 3’ 1217 1301 136$ 130? $ $3 3373 36 19 IS 7 1633 132$ Ill) 4 90 IS 93 $4 7) 33 70 1326 $601 13.2$ $670 1443 1570 137? 1307 1295 4 3.4 1251 $311 $2 £1 $366 1,10 I) I I $612 1672 36 b 1697 *610 $632 1563 $4 73 1430 4 4 1653 $3 3) 14i: 1672 1333 )i0 $605 1539 l4 12 $2 I ! 2.2 403 IS 60 $303 1393 lb I I IS 33 1399 lb D l IS 35 1405 15.12 34 Ii *3 4 36 14 II *3 c 3311 $3 19 $301 *33* i: 55 32. ’ 1325 I ? 41 12 197 1 Ji . Feb. 34j A May j Jv.ly .& a.g. 5 pi_ _ .o . 174 I 7* $ $0 $ I I 02 9 I) 12.3 10$ 904 9.20 940 949 $41 $47 $47 1 S $69 *56 1*2 $69 169 129 903 9$ $57 $7 ’ $ 63 I 79 $ 66 1 I) 173 L93 I 14 903 193 9 II 05 9.23 $96 93$ 192 II I 9 07 926 9.3’ 941 9.33 9.33 937 I$ $10 1.70 9.20 $10 I 13 1 32 9.22 $93 $66 141 933 903 $72 $49 9 49 9 I $4 1 10 60 933 I $61 910 9 3* 903 170 9 4 92$ $93 173 942 917 $90 “ 9 902 1 ‘ 9.13 9 3 9• 96 67 9.31 9.33 1913 Jan let M I Ap U ,. Jijp 4 Jv) Aug Sc-p. Oc P .o. 3290 II 79 3302 $2 01 12.7$ I. 73 $2 44 I I 33 32)0 II it r ‘ I. 5’ C..73 12 1 *30. 32.53 $291 *23’ $379 $..23 $2.93 $243 12.33 $3 33 32.3* 1353 2.3: 1313 $2 U lb fl 93 $2 63 2 *211 *2 2 3299 $2.72 $215 32 6.2 13 31 $2 4C $2 C7 I26 1309 *3 6’ $3 93 136$ *2 29 I) C X I) 35 *339 2364 1335 1344 1363 13 ‘6 *2 )4 12.. 33 *243 12 U 332* 3 : 32 12.3 I *3 0? II I ’ I I 90 $3 I I 3 i 62 33 Ii I 53 22.2! i: 1 12C 133.C i:.z: 3 :3) 33 22 U ‘.6 *2 C.’ $3 I $3 3C $203 *333 2.53 12.32 1971 . 330) U37 U. )6 *3 21 33 73 $341 *2.66 *2 2 Jan. 65 923 4$ 972 IC I) 9.23 944 .2I Fe’o 9 63 9.26 9 50 6$ 100$ 9 14 42 9.33 1911 Mar 976 937 bI 9*3 10.26 3002 9.30 9)0 Ju.. $2.92 U20 1271 $3 $3 1365 1340 1263 1241 AW May Jvr.t 9 II 996 9 $3 931 9.50 979 9 3 II 916 3002 964 *9 3033 3003 57 9.2$ $047 $023 69 941 103* $004 9.37 let blat AD *2.64 $201 $323 US’ 1339 1211 I2. C 1311 $22.. $3 34 $34! 1377 13 59 $395 34 31 33 50 32 22.21 *402 1302 12.53 34 )C 12 25 UlI Ju!y Av3 3 p Oc. Plc .. Dcc. 9 69 9 54 993 10,1 11.37 11.23 9 3 523 9 ‘.4 $013 1076 30.7’ 919 973 923 *3 970 3003 3046 *033 13.12 $1.50 1113 3144 $029 90 947 943 $035 99 9.52 $054 3019 966 9.30 $140 I ) $3.99 $373 $102 1033 $3.06 1161 um 10.44 Ma. Ja.ia. ivI Sep.. . 34 13 131 ‘40 123! l4_ $344 $371 $215 13 54. *266 3333 1:63 I ’ ID Ii 35 14 33 I’ 66 Ii U I I 57 134 14$) 33.25 *3 94 $311 136$ II 74 3302 33 IS 1463 Ii 33 *394 1493 13 IS It I I 03 $2.3 14 92 ‘CX 3) $47; $363 531: $40 $342 1364 1344 $3 IC *344 1910 3.,.. $I 4 $3.09 $1.34 $113 • $142 32.92 1125 1061 No. D $211 I ?_2C $3. ) 4 $2.1? 2.66 $309 U_SC 12.92 334$ 1340 3333 lit 130: 12.96 *2.51 12.b Feb $*at Apt P4 .7 June .Iuly Aug. Sept. Oct. P4o. D . 3911 3.... Feb. 12.92 13 73 13.31 $2 $1 1$ 44 11.77 22.33 $210 3307 I) 63 $4.0 ’ *3.10 *4.22 13.3$ $296 32.0’ 1099 10.5 1 13.07 *3.64 17.02 12.3$ 31.97 13.2$ 12.1* 15.33 32.53 31.99 13 SI l39 1306 *3.35 II 9$ $2.33 $1.39 13.19 11.4) $1.93 11.09 12.44 32.32 *2.97 33.61 $3.03 33.34 $3.39 13.7$ 34.03 1322 11.1) 13.19 $4.27 $337 $341 12.33 3106 443 14.33 13.11 33.1) 14 II $3.30 $2.93 I 3.63 $3.17 13.37 33.04 31.31 12.7$ I 3.17 11.41 3 3.26 $2.63 $1.32 *3.4) 11.2$ $3. 13 $1.12 liii I2 *3.70 $3.2 32.3$ fl_34 $4.2.) 33.5) $1.60 1173 4.64 $4.07 $3.20 $2.02 25.34 14.4$ 33.60 32.22 13.02 14.22 33.37 *243 13.37 34.11 *3.60 12.6$ . 1915 Jar. Feb h ApT May June Ji ’ AVg. $e,i. . P .o. Dc 3916 • 12.64 U01 *2.66 U_I) 13 *3 $236 *2.29 U 2.) 12.47 II 77 1170 1094 13.64 $097 1176 II 03 .1 1.75 II 07 11.69 13.02 1139 1033 3019 $016 *243 12 10 $219 32 10 1291 •333.6 I2_t’ $3 Ii 13.3C $2.70 $144 II 93 1142 $192 II 47 . 12.02 • II £6 I I 99 I I 3 1194 iIO7 33.54 $063 11.19 1326 33.23 $36 ’ 13 31 $3 13 32.10 3113 *2.30 12.4$ 1236 1195 11.51 12 1! 32 41 3262 $3 02 12.3: 12 3* 1366 $210 1L5 3342 32.37 12 6C 12*9 *2.0’ 32.39 I I 9$ 1341 I I I; 1111 3315 $3 6.3 ii 93 1 .3.7 I 34 I I 93 I: .!! $1 6.2 311’ 31.33 1.3.’ 1133 11.2.2 13.3! $012 $096 1131 • Mu 14.26 35.33 13.90 34.47 35.34 4.16 32.46 11.77 ia&. .1073 $0.05 3046 $104 1144 $066 1013- 30*4 Ape May Jung July Avg. Sept. Oct. Na ,. D . 34.66 IS 33 4 76 13.1$ $3.60 16.1$ *6.20 33.33 33.3$ 5.61 14.32 13.73 14.31 4.19 15.49 1340 4.2.2 4.2.) *4.29 34.12 34.1* 254) $441 $3.01 1479 *3.36 $317 3576 1393 34.36 13.12 $64, $4.97 *3.12 33.02 13.75 $3.34 33.32 *4.02 ILlS 3.93 15.14 *443 *2.90 $3.10 *3.37 *4.23 $3.09 *6.37 33.17 3442 $3.22 34.31 $6.33 34.17 33.30 I6. 2 16.19 *3.47 13.71 $7.13 $6.76 *4.64 13.1$ 34.39 $320 15.19 33.92 $6.33 $3.77 23.02 13.14 Feb MaJ Ape May June July Aug. Scp._ C’ct. P.o. D _ $040 967 979 902 9.3$ 179 9.69 909 9.73 $3 9.37 I II 944 177 j3 I $9 934 I 16 9.37 $41 9.2.) 149 10 13 • $067 949 $0.13 .2I 9 1) 943 994 919 94 931 76 9.22 964 9.36 . 9.73 p.3) 9.72 920 931 9.02. 9 i 11.11 $049 30 19 3029 3034 *0 I I 10 II 3020 10.24 200’ .9.97 $0 $6 1063 105$ 933 *02’ *00S 9.02 91 97* 9.32 IS 9 SI 9.33 993 917 )9 IS 973 9 IS 9.73 969 942 961 9.3 9.39 9.61 963 913 93$ 9.34 1.96 L49 9.3 July 1990 ------- 1107 1075 998 1004 1062 10!l -967 985 1057 lOll 96 1 991 1090 1053 976 1008 1104 1075 997 1003 1100 1071 999 1004 liii 1096 998 1006 Ii 21L.ll.09 10.07 1010 1090 1056 1000 1012 1041 992 988 1003 104.8 989 993 bob 1065 1002 1004 1006 981 1010 1065 1002 10081004 983 -1013 1061 1002 1008 1005 •998 1026 1067 • 1016 1019 1019 994 1030 1061 1014 1013 1027 975 1000 1046 992 997 1031 929..-959 1003 949 951 1017 9I . 942 987 934 934 1005 914.945 688 937,933 — 923 9.51 991 943 939 — 9.19—944 981 937 931. 914 -‘942 -981 933 .930 911 939 982 9.31 9.28 —-. III — 36 Exhibit 111—8 (aon’d) MOODY’S CORPORATE BOND YIELD AVERAGES 1977—1989 1987 - - - - Jan 904 $36 886 923 972 877 931 919 Feb - -9O3 838 88 1 920 965 1881 925 922 199 -$36 8M 913 961 875 923 913 Apr ?-.935.:.8I5 915 : 936 -l004 930- 940. .930 May;982.933..959. 983-1051 982_9$l_953 June’ --987- .932 .965 .998:1032.987 $7. . 956 3uly ..-992 942’ 964 1000 1061 ’100I’ 982 ‘9 52 AUg 1014 967 986 1030 1080 1033 994 969 SCPL 1064 1018 1033 1072 1131 1100 102$ 996 OCL 1097 1052 1074 1098 1162 1132.1060 1007 Nov 1054 1001 1027 1063 1123 1082 1025 1030 D 1059 1011 1033 1062 1129 1099 101$ 100$ 2988 hr 1037 986 1009 1043 989 940 960. 994 Mar 986 .939 959 989 Ap 1015 967 986 10 17 May 1037 990 1010 1041 June 1036 986 1013 1042 July . - 1047 9.96’ 1026 ‘IC 55 Aug . 1038 .1011 1037 1063 Sept 1028 982 1006 1034 Oct 990 - 9.51 971 999 Nov 991 945 972 999 : 1003 957 981.2011 1989. Ja 1005 962 Feb 1005 964 Mat 10 18.—980 Ap 1014 979 Mi - - 993 957 June - 950 910 July 934 893 Aug 936 -896 ScpI 941 901 Oct ’ - 934 -.8.92 Nov - 932 .* 89 Dcc ’’ 930 ’ .886; SOURCE: Moody’s Bond Record , January 1981-January 1989. July 1990 ------- 111 — 37 If you do not enter the low—interest rate, the period selected for estimating the average corporate debt rate should i nclude the noncompliance period through the year of the most recgnt bond-yield data. If you do enter the low—interest rate, simply use the average bond yield for the year in which the low-interest financing was obtained. As discussed above, the benefit from low—interest financing depends on the differential between the corporate debt rate and the low—interest rate. The cost savings increases and the benefit of delay decreases for higher corporate debt rates relative to the low— interest rate (See Exhibit Ill-i). In summary, if there is low—interest financing, you must enter either the low-interest rate, the corporate debt rate, or both values, if available. BEN calculates the unknown rate from the given rate. If you enter a zero for both questions, BEN will print the following error message and reprompt you for both interest rates: ERROR: YOU MUST ENTER EITHER THE LOW INTEREST RATE OR A CORPORATE DEBT RATE (OR BOTH). YOU WILL BE PROMPTED FOR THESE VARIABLES AGAIN. There are three restrictions on the inputs regarding low- interest financing. First, the amount of low—interest. financing must not exceed the investment in pollution control equipment plus the one-time expenditure. BEN checks for this condition after all variables have been entered and prints the following error message: July 1990 ------- III — 38 AZ4OUNT OF LOW INTEREST FINANCING EXCEEDS TOTAL INITIAL OUTLAY AND HAS BEEN ADJUSTED. Rather than reprompt you for the amount financed, BEN assumes that the amount is equal to the sum of the investment entered in response to variables 2 and 3. If the low—interest financing amount exceeds the initial capital investment but not the sum of the capital investment plus the one—time expenditure, BEN assumes that the entire capital investment is financed by low-interest debt with the remaining portion applied to the one-time expenditure. The second restriction is that the low—interest rate must be less than the interest rate paid on other long—term corporate debt. BEN checks the relationship between these two variables immediately after you enter the two rates. If the low-interest debt rate exceeds the corporate debt rate, BEN prints an error message and reprornpts you for both interest rates: ERROR: THE LOW INTEREST RATE 14 • 00% MUST NOT EXCEED THE CORPORATE DEBT RATE OF 11.00% ENTER AGAIN: Third, the corporate debt rate cannot exceed the discount rate entered for Variable 12. After you have entered all values, BEN checks for this error. If the corporate debt rate does exceed the discount rate, BEN prints the following error message and then July 1990 ------- III — 39 reprompts for the inflation rate, the discount rate, the low— interest rate, and the corporate debt rate: ERROR: THE CORPORATE DEBT RATE 14.00% MUST BE LESS THAN THE DISCOUNT RATE 13.50% YOU WILL BE REPROMPTED FOR THE INFLATION RATE, DISCOUNT RATE, LOW INTEREST RATE, AND THE CORPORATE DEBT RATE. RECALL THAT THE INFLATION RATE CANNOT EXCEED THE DISCOUNT RATE, AND ThE LOW-INTEREST RATE CANNOT EXCEED THE CORPORATE DEBT RATE. a a a BEN now has all of the information needed to calculate the economic benefit a violator gains by delaying expenditures required for compliance with environmental regulations. The next chapter describes the choices available for a printout of the results, and the procedures for changing standard and user-specified values for additional economic benefit calculations. July 1990 ------- Iv- ’ CHAPTER IV INTERPRETING OUTPUT AND CHANGING VARIABLE VALUES This chapter describes the output provided by BEN and the procedures used to revise data values. The chapter is divided into two sections: Section A describes the three levels of detail available for output. Examples of printouts for each option are provided and explained. Section B explains how to re—run the program by changing some or all of the variables. The different procedures for calculations using standard values and calculations using user—specified values are described. Also shown are error messages specific to changing standard and user—specified values. July 1990 ------- IV-2 A. OUTPUT OPTIONS 1. Selecting Output When BEN has finished its calculations, it asks you how the output should be presented. The first tine through the program, BEN describes the four output choices in detail: BEN is ready to provide output. You have 4 choices: 1. Print only the economic benefit of delayed compliance. No intermediate calculations are printed. All of the inputs used in the calculations are shown. 2. Print the economic benefit of delayed compliance plus the present values of delayed and on time cash flows. All of the inputs used in the calculations are shown. 3. Print Option 2 plus 2 tables of annual cash flows for the useful life of the initial pollution control equipment. All of the inputs used in the calculations are shown. 4. Do not print results. Use this option if a data entry error is discovered. CHOOSE OUTPUT OPTION 1, 2, 3, OR 4. All output options are designed to fit on standard letter-size paper, with top, bottom, and side margins on each page. For identification purposes, each page is marked with the date of the case run and the case name. All values are rounded to the nearest dollar, for printing in the output tables. When one or more of the expenditure inputs is a large dollar amount (e.g., the capital investment exceeds $1 million, or annual July 1990 ------- IV — 3 expenses exceed $100,000), BEN converts all dollar amounts to thousands. When this conversion occurs, BEN provides a message alerting you that the results are in thousands of dollars. The message appears in parentheses under the economic benefit result in output Options 1, 2, and 3 and under the table headings in Option 3. In all of the output options, a listing of the variables used in the calculation follows the printout of the results. The costs in this listing are the oriainal cost inputs; that is, they are not converted to thousands even if conversion to thousands is made in the output. Select one of the output options by typing the number 1, 2, or 3; or skip over printing by choosing Option 4. BEN will respond with the prompt below if you choose Option 1, 2, or 3: POSITION PAPER ON BOTTOM LINE OF THIS PAGE, THEN PRESS CARRIAGE RETURN If you are using a PC without a printer, you can simply press the carriage return (or enter key) to read the output on the screen. After you have finished all of your desired economic benefit calculations, BEN will provide you the option to receive a printed hardcopy of the output. Alternatively, you can use your PC—based communications software to capture the output into a file. Consult with your local computer software specialist to proceed via this route. 36 If you are using a TTY, align the print head with the last line of the current sheet of computer paper. When you press the carriage return (or enter key), the output will start on a fresh blank page. July 1990 ------- IV-4 2. Output Option 1 Option 1 is the shortest torn of output. Option 1 reports the economic benefit of delayed compliance and the variable values used in the calculation. The economic benefit is expressed as of the penalty payment date. Exhibit IV-l shows the output under Option 1. Note that the number of months of delay between the initial date of nonco npliance and the compliance date is printed in a label next to the economic benefit result. The label also states the number of months from the initial noncompliance date until the date the penalty is to be paid. 3. Output Option 2 Option 2 prints the economic benefit calculation as in Option 1, but adds intermediate calculations-to the output. Option 2 provides more information, and can help users understand the effect of changes in the inputs on the economic benefit. Exhibit IV-2 shows an example of output Option 2. o Calculation A is the present value of the costs that would have been associated with the timely purchase, installation, and operation of pollution control equipment over one useful life . This figure is expressed in noncompliance-year dollars. - o Calculation B includes the present value of the costs associated with subsequent replacement and operation of equipment, in addition to the total of the one-time expenditure and the first useful life period costs expressed in A. This figure is the present value cost that the violator would g Daid had it complied on time, expressed in noncompliance year dollars. July 1990 ------- IV-5 EXHIBIT IV-1 OUTPUT OPTION 1 COMPANY X EXAMPLE JUNE 30, 1990 THE ECONOMIC BENEFIT OF A 32 MONTH DELAY , 35 MONTHS AFTER NONCOMPLIANCE $ 133194 THE ECONOMIC SAVINGS CALCULATION ABOVE <-<-<-<-c-<- USED THE FOLLOWING VARIABLES: USER SPECIFIED VALUES 1A. CASE NAME = COMPANY X EXAMPLE lB. STATUTE = CLEAN AIR ACT - MOBILE SOURCE 1C. PROFIT STATUS = FOR-PROFIT 2. INITIAL CAPITAL INVESTMENT (RECURRING) = $ 105000 1989 DOLLARS 3. ONE-TIME NONDEPRECIABLE EXPENDITURE = $ 210000 1989 DOLLARS (TAX-DEDUCTIBLE EXPENSE) 4. ANNUAL EXPENSE = $ 15750 1989 DOLLARS 5. FIRST MONTH OF NONCOMPLIANCE = 10, 1987 6. COMPLIANCE DATE = 6, 1990 7. PENALTY PAYMENT DATE = 9, 1990 8. USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT = 10 YEARS 9. MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE = 49.60 % 10. MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND = 38.40 % 11. ANNUAL INFLATION RATE = 3.50 % 12. DISCOUNT RATE: CORPORATE EQUITY RATE = 17.50 % 13. AMOUNT OF LOW INTEREST FINANCING = $ 105000 1989 DOLLARS LOW INTEREST RATE = 10.00 % CORPORATE DEBT RATE = 12 • 00 % July 1990 ------- IV — 6 EXHIBIT IV-2 OUTPUT OPTION 2 COMPANY X EXAMPLE JUNE 30, 1990 A. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE IN 1987 DOLLARS $ 242354 B. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE PLUS ALL FUTURE - REPLACEMENT CYCLES IN 1987 DOLLARS - $ 289924 C. VALUE OF DELAYING EMPLOYMENT OF POLLUTION CONTROL EQUIPMENT BY 32 MONTHS PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS $ 206708 D. ECONOMIC BENEFIT OF A 32 MONTH DELAY IN 1987 DOLLARS (EQUALS B MINUS C) $ E. ThE ECONOMIC BENEFIT AS OF THE PENALTY PAYMENT DATE, 35 MONTHS AFTER NONCOMPLIANCE $ 133194 ->->->->-> THE ECONOMIC SAVINGS CALCULATION ABOVE c-<-<-c-<- USED THE FOLLOWING VARIABLES: USER SPECIFIED VALUES CASE NAME = COMPANY X EXAMPLE STATUTE = CLEAN AIR ACT - MOBILE SOURCE PROFIT STATUS = FOR-PROFIT INITIAL CAPITAL INVESTMENT (RECURRING) = $ 105000 1989 DOLLARS ONE-TIME NONDEPRECIABLE EXPENDITURE = $ 210000 1989 DOLLARS (TAX-DEDUCTIBLE EXPENSE) ANNUAL EXPENSE — $ 15750 FIRST MONTH OF NONCOMPLIANCE = COMPLIANCE DATE = 6 PENALTY PAYMENT DATE = USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT = MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE = MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND = ANNUAL INFLATION RATE = 3 DISCOUNT RATE: CORPORATE EQUITY RATE = AMOUNT OF LOW INTEREST FINANCING = LOW INTEREST RATE = CORPORATE DEBT RATE = 83216 1A. lB. ic. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 1989 DOLLARS 10, 1987 , 1990 9, 1990 10 YEARS 49.60% 38.40% .50% 17.50% $ 105000 1989 DOLLARS 10.00% - 12.00% July 1990 ------- IV-7 o Calculation C expresses the present value costs of delayed compliance as of the noncompliance date including all subsequent replacements of equipment, if any. This value is usually less than B, and represents the actual cost to the violator of delayed compliance with environmental requirements. 37 o Calculation D, the initial economic benefit, is obtained by subtracting C from B. The initial economic benefit in D is expressed in dollars as of the noncompliance date. In some cases D will not exactly equal B minus C because of rounding. o Calculation E adjusts D to the value of the economic benefit as of the expected penalty payment date. This adjustment reflects the violator’s earnings on the initial economic benefit between the noncompliance date and the penalty payment date. 4. Output Option 3 Option 3 shows the detailed calculations behind the final BEN values, and is most helpful to financial analysts wanting to understand the program’s calculations. Option 3 provides two tables showing annual cash flows over the first useful life of the pollution control equipment. The first table contains the cash flows that would have occurred had the violator complied on tine. The second table contains the cash flows estimated to occur when the violator actually complies. Both tables will appear on one page if the useful life of the capital investment is 15 years or less. If the useful life exceeds 15 years, each table will appear as a “ The result of Calculation C can be greater than that of Calculation B. The most common reason for this result is the effect of the lover marginal tax rates after 1986. Lower marginal tax rates increase the Cost of pollution control: they lover the depreciation tax shield and reduce annual costs, thereby increasing the after-tax annual costs. Thus, the usual benefit associated with postponing compliance-related investments can be offset by increased future annual costs due to tax changes. In other words, in these cases, the violator would have been better off had it complied on time. July 1990 ------- IV-8 separate page. The last page of output for Option 3 is identical t the one-page Option 2 output. Exhibit IV-3 presents an example of output Option 3. In the two tables of annual cash flows in Option 3, the header displays the initial capital investment plus any non-deductible one- time expenditures. For the on—time case, this value is expressed in noncompliance—year dollars, and for the delay case, this value is inflated to compliance-year dollars. Note that this figure in either table might differ from the sum of the inittal capital investment and non—deductible one—time expenditure printed in the variable value listing at the end of the second page. This difference occurs because you might have entered the costs in dollars of another year (or by default, in compliance—year dollars), and the figures in the table are adjusted for inflation to the noncompliance or compliance year. - The first column in each cash flow table lists the years of th cash flow analysis beginning with year zero: when compliance should have been achieved for the on—time case, and when compliance was achieved for the delay case. The years printed after the zero correspond to the number of years in the useful life of the pollution control equipment. In this example there is a ten—year useful life. The remaining columns in the cash flow tables contain the types of cash flows and factors used to arrive at a present value. The top half of the table displays capital and one-time non-deductible costs. The bottom half contains annual expenses, one-time deductible expenses and the total of the present values of capital investment, depreciation tax benefit, and after—tax O&M expenditures. The last column in the bottom half of the table sums all present value calculations for each year. All cash outflows are listed as negative values, and the tax savings as positive values (because they represent a benefit to the firm). July 1990 ------- Iv-9 EXHIBIT IV-3 OUTPUT OPTION 3 (paga 1) COMPANY X EXAMPLE JUNE 30 1989 ON-TIME CASE CASH FLOWS FIRST CYCLE CASH FLOWS BASED ON A TOTAL INITIAL OUTLAY OF $ 98019 AS OF ThE BEGINNING OF THE PERIOD OF NONCOMPLIANCE YEAR INVESTMENT DEPRECIATION DEPREC PRESENT VALUE NET OF DEPRECIATION TAX DISCOUNT OF DEPREC TAX ITC Cs) (5) SAVINGS (5) FACTOR SAVINGS (5) 0 —98019 0 0 1.0000 0 1 0 14003 5377 .9225 4961 2 0 24005 9218 .7851 7237 3 0 17146 6584 .6682 4400 4 0 12247 4703 .5687 2675 5 0 8748 3359 .4840 1626 6 0 8748 3359 .4119 1384 7 0 8748 3359 .3506 1178 8 0 4374 1680 .2983 501 9 0 0 0 .2539 0 10 0 0 0 .2161 0 YEAR ANNUAL AFTER-TAX PROJECT PRESENT VALUE TOTAL EXPENSES ANNUAL DISCOUNT AFTER-TAX PRESENT COST FACTOR O&M (5) VALUE (5) 0 —196037 —120759 1.0000 —120759 —218778 1 —14958 —9214 .9225 —8500 —3540 2 —15481 —9537 .7851 —7487 250 3 —16023 —9870 .6682 —6595 —2196 4 —16584 —10216 .5687 —5810 —3135 5 —17165 —10573 .4840 —5117 —3492 6 —17765 —10943 .4119 —4508 —3124 7 —18387 —11326 .3506 —3971 —2793 8 —19031 —11723 .2983 —3497 —2996 9 —19697 —12133 .2539 —3081 —3081 10 —20386 —12558 .2161 —2714 - —2714 THE DISCOUNTED BENEFIT PROM THE LOW INTEREST DIFFERENTIAL $ 3743 PRESENT VALUE OF PURCHASING THE INITIAL POLLUTION CONTROL EQUIPMENT ON TIME AND OPERATING IT THROUGHOUT ONE USEFUL LIFE $ -242354 July 1990 ------- IV — 10 EXHIBIT IV-3 (cou’d) OUTPUT OPTION 3 (page 2) COMPANY X EXAMPLE JUNE 30, 1990 DELAY CASE CASH FLOWS FIRST CYCLE CASH FLOWS BASED ON A TOTAL INITIAL OUTLAY OF $ 107436 AS OF THE END OF THE PERIOD OF NONCOMPLIANCE YEAR INVESTMENT DEPRECIATION DEPREC. PRESENT VALUE NET OF DEPRECIATION TAX DISCOUNT,: OF DEPREC TAX ITC (5) Cs) SAVINGS (5) FACTOR SAVINGS (5) 0 —107436 0 0 1.0000 0 1 0 15348 5894 .9225 5437 2 0 26311 10103 .7851 7933 3 0 18794 7217 .6682 4822 4 0 13424 5155 .5687 2931 5 0 9588 3682 .4840 1782 6 0 9588 3682 .4119 1517 7 0 9588 3682 .3506 1291 8 0 4794 1841 .2983 549 9 0 0 0 .2539 0 10 0 0 0 .2161 0 YEAR ANNUAL AFTER-TAX PROJECT PRESENT VALUE TOTAL EXPENSES ANNUAL DISCOUNT AFTER-TAX PRESENT COST FACTOR O&M CS) VALUE ($) 0 —214872 —132361 1.0000 —132361 —239797 1 —16395 —10099 .9225 —9317 —3880 2 —16969 —10453 .7851 —8207 —274 3 —17563 —10819 .6682 —7229 —2407 4 —18177 —11197 .5687 —6368 —3436 5 —18814 —11589 .4840 —5609 —3827 6 —19472 —11995 .4119 —4941 —3424 7 —20154 —12415 .3506 —4352 —3061 8 —20859 —12849 .2983 —3833 —3284 9 —21589 —13299 .2539 —3377 —3377 10 —22345 —13764 .2161 —2974 —2974 THE DISCOUNTED BENEFIT FROM THE LOW INTEREST DIFFERENTIAL $ 4103 PRESENT VAUJE OF DELAYING THE PURCHASE OF THE INITIAL POLLUTION CONTROL EQUIPMENT AND OPERATING IT THROUGHOUT ITS USEFUL LIFE $ -265639 Julv 19 ------- IV — 11 EXHIBIT IV-3 (con’d) OUTPUT OPTION 3 (page 3) COMPANY X EXAMPLE JUNE 30, 1990 A. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE IN 1987 DOLLARS $ 242354 B. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS $ C • VALUE OF DELAYING EMPLOYMENT OF POLLUTION CONTROL EQUIPMENT BY 32 MONTHS PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS $ D. ECONOMIC BENEFIT OF A 32 MONTH DELAY IN 1987 DOLLARS (EQUALS B MINUS C) $ E. THE ECONOMIC BENEFIT AS OF THE PENALTY PAYMENT DATE, 35 MONTHS AFTER NONCOMPLIANCE $ 1A. lB. ic. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 15750 1989 DOLLARS 10, 1987 6, 1990 9, 1990 10 YEARS 49.60 % 38.40 % .50 % 17.50 % 105000 1989 DOLLARS 10.00 % 12.00 % 289924 206708 83216 133194 ->->->->-> THE ECONOMIC SAVINGS CALCULATION ABOVE <-<-<-<-<-<- USED THE FOLLOWING VARIABLES: USER SPECIFIED VALUES CASE NAME = COMPANY X EXAMPLE STATUTE = CLEAN AIR ACT - MOBILE SOURCE PROFIT STATUS = FOR-PROFIT INITIAL CAPITAL INVESTMENT (RECURRING)= $ 105000 1989 DOLLARS ONE-TIME NONDEPRECIABLE EXPENDITURE = $ 210000 1989 DOLLARS (TAX-DEDUCTIBLE EXPENSE) ANNUAL EXPENSE = $ FIRST MONTH OF NONCOMPLIANCE = COMPLIANCE DATE = PENALTY PAYMENT DATE = USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT = MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE = MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND = ANNUAL INFLATION RATE = 3 DISCOUNT RATE: CORPORATE EQUITY RATE = AMOUNT OF LOW INTEREST FINANCING = $ LOW INTEREST RATE = CORPORATE DEBT RATE = July 1990 ------- - IV— 12 The second column, “Investment Net of ITC,” is the capital cos 1 . plus any one—time non—deductible expenditures, less the investment tax credit, if any. This net expenditure is assumed to occur in year zero, and is stated in noncompliance—year dollars. This cost figure is lover than the investment figure listed in the table header by the amount of the investment tax credit (ITC) taken by the violator. For for-profit entities, BEN uses a ten—percent ITC for investments made before 1986 and a zero—percent ITC for investments made in 1986 and later. For not—for—profit organizations, BEN uses a zero—percent ITC rate for all years. The third column, “Depreciation,” lists the depreciation expenses that the firm is allowed to deduct from taxable income, thereby reducing its taxes. BEN uses a five-year straight-line method of depreciation for investments made before 1987, and a seven—year double—declining balance (with half—year- convention) method of depreciation for investments made in 1987 and later. To estimate the depreciation tax benefit, the depreciation amount is multiplied by the marginal tax rate. These figures must be adjusted to reflect the time period in which they occur (e.g., the further in the future they occur, the lower their present value). The discount factor related to depreciation cash flows is listed in column 5. This discount factor is the same as the equity cost of capital described on pages 111-29 and 111-30. Multiplying this discount factor by the depreciation tax benefit yields the present values listed in column 6. The bottom half of the Option 3 cash flow table details mainly annual expenditures. Annual costs are inflated yearly to reflect the rising prices of labor and materials. These costs appear in the second column. If you have entered a tax—deductible one—time expenditure, its value will appear in year 0 (zero) in this column. Annual costs are tax—deductible and must be adjusted to reflect th. July 1990 ------- - IV—13 benefit. Multiplying the annual expenses by one minus the tax rate adjusts them to reflect the actual cash outflow from the firm, net of the tax benefit that arises from deducting the original annual expenditure. The present value of these annual costs net of the tax benefit is computed by multiplying the figures in column 3 by the equity cost of capital discount rate described in Chapter III. The last column in the bottom half of the table sums the present values of capital investment, depreciation tax benefit, and after-tax annual expenditures. The Option 3 cash flow table might also contain an adjustment for low-interest financing. BEN computes the present value of the interest saved by using low-interest debt financing instead of paying the higher corporate debt rate. This benefit reduces the cost of pollution control equipment and thus reduces the economic benefit of delay. The benefit figure is shown as a positive adjustment to the summation of figures in the annual present value column (as illustrated in Exhibit IV-3). Had Company X not used low—interest financing, there would be no low—interest differential and this adjustment would not appear on the output. The total of the annual present values appears at the very bottom of the page, next to the label: “PRESENT VALUE OF PURCHASING THE INITIAL POLLUTION CONTROL EQUIPMENT ON TIME AND OPERATING IT THROUGHOUT ONE USEFUL LIFE.” This figure is the same as the value shown as Calculation A in Output Option 2 (see Exhibit IV-2). Output Option 3 produces a similar print-out for the delay case. These calculations are in compliance—year dollars. The output sums up the cost of compliance at the bottom of the page next to the label: “PRESENT VALUE OF DELhYING THE PURCHASE OF THE INITIAL POLLUTION CONTROL EQUIPMENT AND OPERATING IT THROUGH ITS USEFUL LIFE.” This value does not match Calculation C in Option 2 because the delay case table is in compliance—year dollars rather than noncompliance—year dollars, and because it only includes the July 1990 ------- IV — 14 flows from one useful life rather than all additional replacement cycles. 5. Other Information The first three output options described above for a user- specified calculation are the same for a standard value calculation with one exception: in a standard value calculation, the variable listing displays user—specified and standard values separately (see Exhibit IV-4). Option 4 allows you to skip printing the output. This option should be used if you have discovered an error in your entry values. BEN will then ask if you wish to make any further changes so that you can correct the error. Type 0 (zero) after you have made all necessary changes. BEN then asks if you would like to see a listing of the current variable values to review your changes. If you answer N, for no, BEN again lists the output options to choose froz July 1990 ------- IV — 15 EXHIBIT IV-4 INPUT LISTING FOR CALCULATION USING STANDARD VALUES ->->-)->-> THE ECONOMIC SAVINGS CALCULATION ABOVE <-c-<-<-c-<- USED THE FOLLOWING VARIABLES: USER SPECIFIED VALUES 1A. CASE NAME = COMPANY X EXAMPLE lB. STATUTE = 1C. PROFIT STATUS = 2. INITIAL CAPITAL INVESTMENT (RECURRING) = $ 3. ONE-TIME NONDEPR.ECIABLE EXPENDITURE = $ (TAX-DEDUCTIBLE EXPENSE) 4. ANNUAL EXPENSE = $ 5. FIRST MONTH OF NONCOMPLIANCE = 6. COMPLIANCE DATE = 7. PENALTY PAYMENT DATE = STANDARD VALUES USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT = MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE = MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND = ANNUAL INFLATION RATE = DISCOUNT RATE: CORPORATE EQUITY RATE AMOUNT OF LOW INTEREST FINANCING = $ CLEAN WATER ACT FOR-PROFIT 105000 1989 DOLLARS 210000 1989 DOLLARS 15750 1989 DOLLARS 10, 1987 10, 1989 12, 1989 8. 9. 10. 11. 12. 13. 15 YEARS 49.60 % 38.40 % 4.10 % 18.10 % 0 July 1990 ------- IV — 16 B. CHANGING INPUT VALUES Once BEN has completed a calculation and printed the output, you can end the session, or continue with a second calculation. This section outlines the procedure for changing variable values after you complete your initial run. This feature allows you to recalculate the economic benefit without having to re—enter all values. You might also wish to test the sensitivity of the economic benefit calculation to changes in individual variables. (See Chapter II, Section D above for an explanation of the procedure for ending all calculations.) DO YOU WISH TO DO ANOTHER ECONOMIC SAVINGS CALCUL ITION? (0= NO; 1=YES, USING STANDARD VALUES; 2=YES, USING OWN INPUTS) If you want to do another calculation, you must choose betwee a calculation using the standard values for variables 8 through 13, or a calculation in which you specify all inputs. Typing 2. indicates that you wish to use the standard values; typing 2 indicates that all values will be user-specified. BEN then prompts you for the variable(s) you wish to change. BEN allows you to change only certain variables when you rerun the program, depending on whether you used standard -values in the previous calculation, and whether you plan to use standard values in the new calculation. Note that whenever you are planning a BEN session involving multiple runs, it is helpful to fill out the Data Entry Form before you start (see Exhibit 111—2). Whenever you choose to use standard values, BEN will prompt you for any changes to variables 1 through 7. The remaining variables will have the standard values. July 1990 ------- IV — 17 If you decide to use user—specified values, and the previous run used standard values, BEN will prompt you for changes to variables 1 through 7. When all changes to these variables are completed, BEN asks you to enter values for variables 8 through 13. If the current and previous runs both use user—specified values, BEN prompts you for any changes to variables 1 through 13. The next two subsections outline the procedures for changing variable values. The first subsection describes changing values in the standard value mode. The second subsection describes changing values in the user—specified mode. 1. changing Values in the Standard Value Mode DO YOU WISH TO DO ANOTHER ECONOMIC SAVINGS CALCULATION? (O=NO; 1=YES, USING STANDARD VALUES; 2=YES, USING OWN INPUTS) 1 This section outlines the procedures for changing variable values when BEN assigns standard values to variables 8 through 13. Type 3 to indicate that you wish to use standard values. BEN will only allow you to change variables 1 through 7, since standard values will be used for the remaining variables. You can, however, change any or all of variables 1 through 7 one or more times during the change procedure. In the following example, the user wants to change variable 4. July 1990 ------- IV — 18 TYPE NUMBER OF VARIABLE BETWEEN 1 AND 7 TO BE CHANGED (TYPE 0 FOR NO CHANGE) 4 BEN responds with a prompt for the new variable value: 4. ANNUAL EXPENSE = (FOLLOW WITH DOLLAR-YEAR SEPARATED BY BLANK; e.g’;, 100000 1984) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) OLD VALUE = 15750.00 IN 1989 DOLLARS; ENTER NEW VALUE: The former value is displayed to help you decide whether to change the value or keep the former value. Simply enter the new value according to the required format and press the carriage return (or enter key). If you decide not to change the former value, simply. press the carriage return (or enter key) without typing any other keys and BEN will keep the former value in its memory. In the case of a cost and year entry, BEN uses both former values. If you want to change a variable, and the prompt requires the dollar—year in addition to the cost entry, enter both values. If you omit the dollar—year entry and enter only the cost, BEN will use the former value for the dollar—year, which is printed with the former cost value. July 1990 ------- IV — 19 If you attempt to change any of the variables between 8 and 13, BEN will print the following message: ERROR: STANDARD VALUES 8 THROUGH 13 CANNOT BE CHANGED WITH THE STANDARD VALUE OPTION, ENTER AGAIN: TYPE NUMBER OP VARIABLE BETWEEN 1 AND 7 TO BE CHANGED (TYPE 0 FOR NO CHANGE) 0 When you have made all of your changes, type 0 (zero). BEN then asks if you wish to see a listing of the current values for all the variables. This option allows a final check for incorrect entries before recalculating the economic benefit. DO YOU WISH TO SEE A LISTING OF CURRENT VALUES? (Y/N) I Typing N, for no, signals BEN to calculate the economic benefit. Typing I, for yes, results in a variable listing similar in format to that provided with the output, but including the new entries. After the listing BEN asks if you want to make any further changes. This option provides the opportunity to correct entries or enter new values that were missed during the first round of changes. July 1990 ------- IV — 20 DO YOU WISH TO MAKE ANY FURTHER CHANGES? (1/N) N I Typing N, for no, signals BEN to calculate the economic benefit. Typing 1, for yes, recycles the program back to the change procedure, after which BEN prompts you for the number of the variable to be changed. When you have made all of the changes, type o (zero). BEN will again ask if you desire a variable listing and if you want to make any further changes. A negative response to both questions signals BEN to calculate the economic benefit. After completing the calculation, BEN prompts you to select the output format from the following choices: PLEASE CHOOSE FORMAT: - 1 = ANSWER 2 = ANSWER PLUS PRESENT VALUE CALCULATIONS 3 = FULL OUTPUT WITH CASH FLOW TABLES 4 = OMIT OUTPUT 5 = DESCRIBE OUTPUT OPTIONS IN DETAIL This menu is an abbreviated version of the menu presented during the first run. The added Option 5 allows you to see the detailed version shown on page IV-2 before selecting an output format. Selecting options 1, 2, or 3 begins another output printing session. Option 4 skips over the printing. BEN then offers you the opportunity to do another economic benefit calculation. July 1990 ------- IV — 21 2. Changing Values in the User-Specified Mode DO YOU WISH TO DO ANOTHER ECONOMIC SAVINGS CALCULATION? (O=NO; ]=YES, USING STANDARD VALUES; 21ES, USING OWN INPUTS) 2 This section outlines the procedures for changing variable values when variables 8 through 13 are user—specified. Type 2 to indicate that you wish to use nonstandard values. If your last run employed user—specified inputs, you can change any or all of the thirteen variables. You can make as many changes as desired. If your last run used standard values, BEN first asks for changes to be made to any of the variables between 1 and 7. TYPE NUMBER OF VARIABLE BETWEEN 1 AND 7 TO BE CHANGED (TYPE 0 FOR NO CHANGE) 0 When all changes to variables 1 through 7 have been completed, type 0 (zero) to signal BEN that no further changes to these 7 variables are needed. Do not attempt to change variables 8 through 13 at this time or the following error message will occur: July 1990 ------- IV — 22 ERROR: CHANGE ONLY VARIABLES 1 THROUGH 7 AT THIS TIME. YOU WILL AUTOMATICALLY BE PROMPTED FOR VARIABLES 8 THROUGH 13 LATER TYPE NUMBER OF VARIABLE BETWEEN 1 AND 7 TO BE CHANGED (TYPE 0 FOR NO CHANGED) 0 A response of 0 (zero) indicates that BEN should begin prompting for the remaining variables: YOU WILL NOW BE PROMPTED FOR VARIABLES 8 THROUGH 13 8. USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT IN YEARS (e.g., 15) OLD VALUE = 10 YEARS; ENTER NEW VALUE: 15 Enter the new value for variable 8 followed by a carriage return (or enter key). If the old value printed under the prompt is the desired value, press only the carriage return (or enter key) and BEN will keep this value in memory. Note that in most cases where the previous run used standard values, the old values shown in the prompts are the standard values. July 1990 ------- IV — 23 9. MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE (e.g., 49.6) = OLD VALUE = 49.60%; ENTER NEW VALUE: 49.6 10. MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND (e.g., 38.4) = OLD VALUE = 38, 4%; ENTER NEW VALUE: 38.4 11. ANNUAL INFLATION RATE (e.g., 4.6) = OLD VALUE = 3.50%; ENTER NEW VALUE: 3.3 12. DISCOUNT RATE: CORPORATE EQUITY RATE (e.g., 18.1) = OLD VALUE = 17.50%; ENTER NEW VALUE: 19.1 13. AMOUNT OF LOW INTEREST FINANCING = (FOLLOW WITH YEAR-DOLLARS SEPARATED BY BLANk: e.g. 100000 1990) (ENTER 0 IF THIS COST CATEGORY IS NOT APPLICABLE) OLD VALUE = 105000 IN 1989 DOLLARS; ENTER NEW VALUE: 150000 1989 LOW INTEREST RATE (e.g. 9) = (ENTER 0 IF YOU WANT THIS RATE CALCULATED) OLD VALUE = 10.00%; ENTER NEW VALUE: 10 CORPORATE DEBT RATE (e.g. 12) = (ENTER 0 IF YOU RAVE PROVIDED A LOW INTEREST RATE AND YOU WANT THE DEBT RATE CALCULATED.) OLD VALUE = 12.00%; ENTER NEW VALUE: 12 Continue entering new values in response to each prompt, or simply press the carriage return (or enter key) to retain the old values. Be sure to maintain the required relationships between variables. For example, the low—interest rate cannot exceed the corporate debt rate (BEN checks for this error after you enter the low—interest financing values at variable 13). Also remember that the inflation rate cannot exceed the discount rate. BEN checks for July 1990 ------- IV — 24 these two errors after all changes have been made. See Chapter II for examples of the error messages that BEN provides. DO YOU WISH TO SEE A LISTING OF CURRENT VALUES? (1/N) y After you have entered all the information and BEN has checke 1 for errors, BEN asks whether you desire a listing of the variables and their current values. DO YOU WISH TO MAKE ANY FURTHER CHANGES? (1/N) N Typing N, for no, signals BEN to begin recalculating the economic benefit. Typing Y, for yes, yields a listing of the former values that were left unchanged and the new values you just entered. BEN then asks if any further changes are desired. TYPE THE NUMBER OF VARIABLE TO BE CHANGED (TYPE 0 FOR NO CHANGE) 0 After all changes have been made (by either entering new values or by pressing the carriage return (or enter key) to use the former values), enter 0 (zero) to end the change session. BEN again checks for errors, asks if you want a variable listing, and asks if you want to make further changes. A response of N to both questions July 1990 ------- IV — 25 signals BEN to recalculate the economic benefit using the new values. BEN responds with the abbreviated menu of output options as explained on page IV-20. After providing output, BEN again offers you the opportunity to perform another economic benefit calculation. July 1990 ------- APPENDIX A TECHNICAL APPENDIX METHODOLOGY FOR COMPUTING THE ECONOMIC BENEFIT OF NONCOMPLIANCE July l99O ------- CONTENTS Paae I. Introduction . . . . . . . . . . . . . . . . . . . . . A—I—i A. Cash Flows Resulting From Complying On Time A-I-2 1. Capital—Related Cash Flows. A—I-2 2. One-Time Nondepreciable Expenditure..... A-I-3 3. Annual Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . A—I—3 B. Present Value of Cash Flows................. A—I-3 C. Present Value of Cash Flows Associated With Delayed Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . A—I—6 D. Economic Benefit of Delayed Compliance...... A—I—6 II. Underlying Assumptions..... ... A—Il—i A. Discounting Assumptions....... .. . . A—Il—i B. Application of the Inflation Rate A—II—2 C. Mid—Year Cash Flow Occurrence... A—II—2 D. Non-Deductibility of the Civil Penalty A-II—3 E. Continuous Sequence of Replacement Cycles... A—II—3 III. Derivation of Mathematical Pormulae A-Ill-i A. Cash Flows as of Required Compliance Date... A-Ill-i 1. Capitallnvestment............ A—III—2 2. One-Time Nondepreciable Expenditure.... A-III-4 3 . Annual Costs. . . . . . . . . . . . . . . . . . . A—III—5 B. DiscountingCashFlows............ A—III—6 1. Capital and Annual Expenditure Cast Flows............................. A—III—6 2. The One-Time Nondepreciable Expenditure Cast Flow.... .......... ............... . A—hI—b 3. Total Cash Flow........................ A—hI—b C. The Economic Benefit of Delayed Compliance.. A-hI-b •D. Savings From Low Interest Financing......... A-IhI-]2 July 1990 ------- CONTENTS (cou’d) E. Calculations for the Cash Flow Table for Output Option 3................ . A—III—16 1. Annual Cash Flows and Tax Effects...... A-III-l6 2. Treatment of the One-Time Nondepreciable Expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . A—III—17 3 . Discounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . A—III—17 4. Aggregating Present Values............. A—III—l8 IV. Sample Calculation of Economic Benefit............ A-IV-l A. FirstCycleCashFlows......................A—Iv—2 B. Including Replacement Cycles................ A—IV—8 C. CostofDelayedComp].iance. ...........A—IV—1O D. EconomlcBenefxtofDelay...................A—Iv—12 E IBITS Exhibit A—l Definition of Symbols.................. A—III—20 Exhibit A-2 Option 3 Cash Flow Table............... A-IV-3 Exhibit A-3 Benefit of $98,019 Low Interest Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A—IV—7 Exhibit A-4 Summary Results From Output Options 2 and 3 . . . . . . . . . . . . . . . A—IV—9 July 1990 ------- A-I-i I • INTRODUCTION This technical appendix explains the methodology used in the BEN computer program to calculate the economic benefit from delaying compliance with environmental regulations. This first section is an introduction to the methodology followed in the economic benefit calculation. Underlying assumptions are discussed in Section II, and Section III presents and explains the mathematical formulae used in BEN. Section IV provides a sample economic benefit calculation. BEN follows a four—step procedure to compute the economic benefit of delayed compliance. First, BEN calculates the incremental after—tax cash flows that the violator would have experienced had it made the expenditures necessary to come into compliance on time. BEN includes the present value of cash flows attributable to future replacements of pollution control equipment as well as those associated with complying initially. BEN converts these cash flows to their “present value” as of the noncompliance date. Second, BEN calculates the present value as of the noncompliance date of the cash flows that the violator experiences when it makes the expenditures necessary to come into compliance after the delay. Again, this calculation takes into account the replacement of pollution control equipment at the end of its useful life. Third, BEN calculates the difference between the present values of the cash flows associated with complying on time and the cash flows associated with complying after the period of delay. This difference is the initial economic benefit. Finally, BEN adds on the earnings accrued by the violator on the initial economic benefit between the noncompliance date and the penalty payment date. In BEN, we are calculating the economic benefit a firm gained. This is not a “damages” calculation. In a damages calculation, the aggrieved party is attempting to retrieve losses that were incurred as a result of the accused’s actions. In an environmental violation, damages may or may not have been incurred, but that is July 1990 ------- A-I-2 not what the BEN calculation is attempting to capture. Instead, B attempts to assess the amount of money that the company expected to earn from its savings in pollution control costs. A. CASH FLOWS RESULTING PROM COMPLYING ON TIME The BEN model requires users to identify the month and year when noncompliance began, and the month and year when compliance was (or will be) achieved. The former is referred to as the “noncompliance date,” and the latter as the “compliance date.” BEN assumes that all capital and one—time expenditures should have been made on the noncompliance date, and that annual expenditures should have begun at the same time. In estimating the cash flows that would have resulted from complying on time, BEN first expresses all cost inputs in dollars of the noncompliance year. BEN then converts the three types of cost that may be entered by the user into three categories of cash flow beginning at the noncompliance date; that is, those associated with: a capital investment, a one—time nondepreciable expenditure, and annual costs. Each category is described separately below. More detailed discussions of the three types of cost inputs appear in Chapter III of this User’s Manual. 1. Capital—Related Cash Flows Capital-related cash flows include the direct costs and indirect financial impacts associated with a capital investment, both initially and over time. Initially, the violator makes a capital outlay to purchase and install pollution control equipment. At the same time, the amount of any applicable investment tax credit serves to reduce the initial cash outf low. 1 There are also indirect I BEN applies the Investuient Tax Credit to capital investments made in 1985 and before. July 1990 ------- A-I-3 annual impacts associated with depreciating pollution control equipment. Depreciation does not itself involve a cash outflow; however, its effect is to reduce pre—tax income and hence to reduce income tax payments. The tax benefit associated with depreciation in subsequent years are cash inflows that reduce the net cost of the equipment. BEN allows you to specify whether the capital cost is a one- time or recurring cost. One—time capital investments will have a lower present value than will recurring capital costs. 2. One-Time Nondepreciable Expenditure A one—time nondepreciable expenditure occurs initially and is not repeated. If the expenditure is tax-deductible, the tax benefit is subtracted from the expenditure amount to arrive at the net cash outflow. If the expenditure is not tax—deductible, the cash outflow equals the entire expenditure amount. 3. Annual Costs The third category of cash flows consists of those resulting from annual expenditures. The most typical annual costs are for operation and maintenance of pollution control equipment. Other annual costs include the leasing of equipment or monitoring of pollution clean—ups. Annual expenses are tax deductible, and BEN estimates their after—tax value in each year. These cash outflows are assumed to increase each year because of inflation. B. PRESENT VALUE OP CASE PLOWS After all present and future direót costs and indirect financial impacts have been determined and arrayed over time, they are converted into a present—value figure as of the noncompliance date. This conversion is necessary because two cash flows of equal July 1990 ------- A-I-4 dollar values occurring in different years would not have equal financial impacts on the violator. This differential arises because there is a “time value of money.” In other words, assuming that the violator can invest its funds at some positive rate of return, if a dollar of expenditure can be postponed for one year, that dollar can be invested in the interim. At the end of that year, the expenditure can be made; and the return on the investment during the intervening period accrues as a benefit to the violator. The technique used to compensate for this effect is called “discounting”. Discounting converts the value of future cash flows to amounts that are equivalent in terms of constant—year dollars. For example, suppose that a firm wants to make a $100 investment next year. If the firm’s investment alternatives today are such that it can earn a 15 percent annual return, the firm could invest $86.96 today and that amount would grow to $100 in one year. 2 Thus, $86.96 is called the “present value,” at 15 percent, of a $100 cash flow one year in the future. Similarly, if $75.61 were invested at’ 15 percent, it would grow to $86.96 in one year, and to $100 by the end of the second year. Thus, $75.61 is the present value, at 15 percent, of a $100 cash flow two years hence. The rate used in determining present values, 15 percent in this case, is called the “discount rate.” 2 Fifteen percent of $86.96 — $13.04, and $86.96 + $13.04 — $100.00 July 1990 ------- A-I-5 The general formula for discounting is: F 3 Present Value = (1 + E) 3 where: F 3 = the “future value” cash flow expected in year j E = the annual discount rate in decimal form (e.g., .15 for 15 percent) j = the number of years in the future in which the cash flow occurs; and j = 0 is the year to which you are discounting. Applying this technique to each year’s cash flows converts them into their present—value equivalents. The sum of these individual values represents the equivalent after—tax cost, in terms of a single present value, of the cash flows arising out of the requirement to comply with environmental regulations. Except for any one—time expenditures, the cash flows associated with investing in and operating pollution control equipment are repeated continually in the future, as the equipment is replaced after each useful life. All of these cash flows associated with future replacements are also discounted back to a present—value equivalent. July 1990 ------- A—I—6 C. PRESENT VALUE OP CASH FLOWS ASSOCIATED WITH DELAYED COMPLIANCE BEN calculates the present value of the cash flows associated with complying at the end of the delay period, based on the following assumptions: 1. The delayed cash flows will be similar to the on-time cash flows in that they will have the same sequence of capital expenditures, one—time nondepreciable expenditure, and annual cost flows. The after—tax cash flow amounts might differ, however, because tax provisions in effect during the years following the compliance date might differ from those in effect during the years following the non- compliance date. 2. Each delayed cash flow will be separated in time from the corresponding on-time cash flow by the number of months c noncompliance. 3. The nominal value of each delayed cash flow will be greater than the corresponding on—time cash flow because of the impact of inflation over the period of delay. D. ECONOMIC BENEFIT OF DELAYED COMPLIANCE The present values of both sets of cash flows (those that should have been incurred to achieve compliance on time, and those that were actually incurred) are then compared. The present value of the second set will usually be lower, reflecting the fact that delaying compliance yields a financial benefit to the violator. The initial economic benefit the violator gains from delaying compliance is the difference between the present values of the first set of cash flows and the second set of cash flows. To obtain the economic benefit as of the penalty payment date, the economic benefit as of July 1990 ------- A-I-7 the noncompliance date is increased at the return on equity capital for the number of months between the noncompliance date and the penalty payment date. This is done to account for the amount of money the violator earned on the economic benefit gained as of the noncompliance date, compounded over time until the penalty payment date. BEN assumes that the violator invested the net economic benefit in plant and equipment similar to the violator’s existing investment risk and financing. In addition, because we assume that the violator is an average company, BEN applies the average rate of earnings that equity holders expect over the long—term from investing in a firm of average market risk. July 1990 ------- A—I l—i II. UNDERLYING ASSUMPTIONS Several important assumptions are made in calculatir economic benefit of delay as described in this appendix. Many of these assumptions were only implicit in the discussion in the previous section. Each major assumption i identified and explained below. A. DISCOUNTING ASSUMPTIONS BEN uses the Adjusted Present Value (APV) method to calculate the present value of pollution control—related cash flows. This method first estimates the present value of an investment project under the assumption that it is entirely equity financed (i.e., financed by selling stock). Then, the present value of the side effects of financing (if any) are taken into account. Expenditures made to comply with environmental regulations ar necessary to continue in business under the law, but generally do not generate a direct economic benefit. As a result, environmental expenditures do not increase a firm’s debt capacity. Therefore, BEN does not attribute any of the side effects of normal debt financing (e.g., interest tax shields) to the pollution control investment. As discussed below, cost savings from the use of low interest debt are taken into account by BEN. The cash flows in BEN are generally discounted at a rate that reflect their overall risk, at a rate that is an estimate of the return that would be expected by equity investors. The one exception is cash flows from low interest debt financing for pollution control expenditures. Investments in pollution control equipment and other projects undertaken to comply with environmental regulations are sometimes financed with low interest debt such as Industrial Development Bon July 1990 ------- A—Il —2 (IDBs) or Small Business Administration (SBA) loans. The BEN model assumes that such financing replaces other, higher cost debt in the violator’s capital structure. This replacement thereby reduces the cost of financing the pollution control expenditures. BEN estimates the benefit of lower cost financing by calculating the difference between interest payments made at the market interest rate and those based on the lower interest rate, on an after—tax basis. These annual differential cash flows are then discounted at the after—tax market interest rate, reflecting the opportunity cost of the debt funds. 3 B. APPLICATION OF TEE INFLATION RATE The inflation rate input (either the standard value or a user— specified value) is used to convert all dollar inputs -- the capita investment, one—time expenditure, annual operating and maintenance costs, and amount of low interest financing —— into dollars of the noncompliance year. Annual costs and future replacement cycle expenditures are also inflated using the annual inflation rate. BEN also uses this same inflation rate to derive the delayed costs from the on—time costs (i.e., investment, one—time, and annual costs). C. BID-YEAR CASH FLOW OCCURRENCE BEN estimates periodic cash flows, such as annual costs and depreciation tax benefit, as if they occur once each year at mid- year. These mid—year cash flows begin six months after the capital investment and one-time expenditure are incurred. By assuming that BEN assumes that the debt principal is repaid in equal annual installments over the useful life entered in the model. - Tulv 1990 ------- A— 11—3 these costs occur at mid—year, BEN averages the costs across the year. - The one exception to this mid—year assumption involves the payment of principal and interest in calculating the savings from low—interest financing. Payments associated with bonds are often made annually or semi—annually, and not monthly. BEN assumes that annual payments are made at the end of each year. D. NON-DEDUCTIBILITY OF TflZ CIVIL PENALTY In calculating the cash flows from which the economic benefit of delayed compliance is computed, BEN takes into account the normal tax consequences of expenses, depreciation, and so forth. On the other hand, BEN assumes that the total penalty being calculated, including the economic benefit component, is not deducted from the violator’s income for tax purposes. This comports with current IRS policies. E. CONTINUOUS SEQUENCE OF REPLACEMENT CYCLES The model assumes that pollution control equipment is replaced at the end of its useful life, at a cost that reflects the rate of inflation. This process continues repeatedly, implying that the underlying source of pollution is never eliminated and that the cost of the pollution control remains the same taking inflation into account. In BEN, recurring capital and annual cash flows associated with pollution control equipment are incurred over an infinite number of replacement cycles in both the delay and the on-time cases. The one—time capital or nondepreciable expenditure, however, is incurred only once. July 1990 ------- A—Ill—i III • DERIVATION OP )(A it XATICAL FORMULAE This section describes the procedure for calculating the economic benefit of delayed compliance. The explanation is fairly detailed, including some of the mathematical formulae used in the BEN model. Not all of the variables described below are actually used in BEN, since the program combines some of the steps for the sake of efficiency. A separate subsection explains the procedures used to calculate the values in the detailed cash flow table provided in output Option 3. All symbols are listed and defined in Exhibit A-i at the end of this section. Note that BEN converts all rates (e.g., marginal tax rates, discount rate), which the user must enter as percentages, to a decimal format by dividing by 100. The decimal form (e.g., .15 for 15 percent) is required in all of the formulae used in calculating the economic benefit. All of the rates used in the formulae below are expressed in decimal form. A. CASH PLOWS AS OP REQUIRED COMPLIANCE DATE This section describes the cash flows associated with complying on time (on the noncompliance date). The costs of compliance with environmental regulations can be categorized into three types of cash flows: those associated with an initial capital investment, annual costs, and an initial one—time nondepreciable expenditure. Subsections 1, 2 and 3 below explain each of these. Before any of these costs are used in the formulae, BEN first converts the costs into dollars of the year compliance should have been achieved (i.e •, the noncompliance year). The model performs this adjustment using the dollar-year entered with the cost figure. July 1990 ------- A—III—2 If the dollar—year is later than the noncompliance year, the cost deflated as follows: COST COST 0 , (1) (1 + 1 )IDFLT where: COSTD = the cost expressed in noncompliance- year dollars COST = the cost as entered I = the annual inflation rate IDFLT = the number of years between the noncompliance year and the cost’s dollar—year When the dollar—year occurs before the noncompliance date, the cost must be inflated as follows: COST 0 1 = COST X (1 + I) IDYLl ( No adjustment is necessary when the dollar—year is the same as the year of the noncompliance date. Each of the values discussed below is expressed in noncompliance—year dollars. Assume that BEN has already performed the appropriate deflating or inflating. 3. CaDital Investment The initial cash outflow resulting from the capital investment is the total capital cost of the pollution control equipment. This capital cost, denoted by II, is in noncompliance—year dollars. The investment tax credit (ITC), if applicable, is a cash inflow which must be subtracted from the initial investment. The ITC is equal to July 1990 ------- A—III—3 the product of the investment tax credit rate applicable in that year and the capital cost: ITC = II X t (3) where: t 1 = investment tax credit rate In this model, the ITC rate is set at 10 percent for investments made in 1985 and before, and at 0 percent for investments made in 1986 and after. For not—for—profit entities, the ITC is set at 0 percent regardless of the year. Also associated with the capital investment are tax benefits resulting from depreciation. Annual depreciation is the product of the capital cost, adjusted for any ITC taken, and the depreciation fraction in year j: DEPJ = II x d (4) where: DEPJ = amount of depreciation in year j II = the depreciation basis; equal to the original initial investment adjusted, if necessary, for any ITC taken = the fraction of the adjusted initial investment cost depreciated in year j For investments made before 1987, the model sets the deprecia- tion life at five years and uses a straight-line depreciation schedule, so the depreciation percentage in each year is constant at 20 percent. Thus, d = .20 for the first five years of the equipment’s useful life, and d 3 = 0.0 for the remainder of the useful life. This assumption was made to approximate the two possible depreciation schedules that could be applied to pollution control investments during the pre-1987 period: (1) the Accelerated July 1990 ------- A—III—4 Cost Recovery System’s (ACRS) five-year schedule that applies to most types of equipment, and (2) the 60—month rapid amortization procedure, which could be used for certain pollution control investments. For investments made in 1987 and later, the model uses the double-declining balance depreciation method (with half—year convention) over a seven year depreciation life, as prescribed by the revised tax law’s Modified Accelerated Cost Recovery System (MACRS). - The depreciation basis, II , is equal to 100 percent of the original initial investment, II, in all years except 1983 through 1985. In those years, as was required then by tax law, the basis is reduced by one-half of the ITC taken.’ The- cash flow impact- from depreciation is the reduced income tax liability that results from deducting depreciation as an expense. These deductions are assumed to occur annually at mid- year. The tax benefit from depreciation is calculated by multiplying the depreciation expense for each year by the marginal tax rate in effect in that year. The tax benefits are cash inflows that reduce the cost of compliance. The model calculates the tax benefit from depreciation later in the program when the cash flows are discounted (see Equation 10). 2. One-Time Nondepreciable Expenditure The one-time nondepreciable expenditure, like the capital investment, occurs initially. Expressed in noncompliance—year dollars, it is denoted as EXP. If the user indicates that the Since BEN assumes a 10% ITC on investments made in years including 1983 through 1985, the depreciation basis during this period equals 95% of the original initial investment. July 1990 ------- A—III—5 nondepreciable expenditure is not tax-deductible, the initial cash outflow (ONE 0 ) is equal to the one—time expenditure: ONE 0 = EXP (5) If the one-time nondepreciable expenditure is tax-deductible, meaning that it serves to reduce the violator’s taxable income and consequently its tax liability, the expenditure must be adjusted to an after-tax basis. This adjustment is accomplished by multiplying the expenditure amount by one minus the marginal tax rate. ONE 0 = EXP x (1 — MTR J) (6) where: MTRj = the violator’s marginal income tax rate in effect in year j 3. Annual Costs The initial annual cost, expressed in noncompliance—year dollars, is denoted by OM 0 . Annual costs in the model increase at the rate of inflation. As with depreciation cash flows, annual cash flows are assumed to occur at mid—year. The first annual cash flow (O)1 ) occurs in the middle of the first year, six months after the initial capital cost. The inflation rate is thus applied for half a year: OI4 = OM 0 x(l+I)” 2 where: I = the annual inflation rate This equation can be generalized for any year j, for j equal to or greater than 1: OM = O)4 x (1 + 1 )cJh12) (7) July 1990 ------- A—III—6 Since annual costs are tax deductible, the after—tax cash flow associated with an annual expense is the product of the annual cosi and a factor equal to one minus the marginal tax rate. The model adjusts the annual cash flow to after—tax dollars later in the program when the cash flows are discounted (see Equation 12). B. DISCOUNTING CASH PLOWS The cash flows associated with the on—time case, as calculated above, are then discounted to the present value as of the noncom- pliance date. Those cash flows occurring at the noncompliance date are already expressed in present—value terms; thus, no discounting of these is necessary. Each cash flow occurring annually, such as the depreciation tax benefit and after—tax annual costs, must be discounted. The following explanation is divided into two parts: The first discusses all the cash flows associated with capital and annual expenditures; the second discusses cash flows associated with the one-time nondepreciable expenditure. - 2. CaDital and Annual ExDenditure Cash Flows The net initial cash flow associated with a capital investment in pollution control equipment is the capital cost minus the investment tax credit: PVIN = II — ITC (8) Using equation (3), this can be restated: PVIN = II— (IIxt 11 ) = lix (1—t 1 ) (9) July 19 ! ------- A— 111—7 The present value of depreciation—related cash flows for any year j is: DEP x MTR PVDEP (10) (1 + E) 1/2) where: DEP = depreciation in year j MTRJ = marginal tax rate in year j E = the annual discount rate The marginal tax rate in effect in that year is applied to depreciation in that year to calculate the depreciation tax benefit. In discounting the annual tax benefit for year j, the exponent is “j — 1/2” because each cash flow in the model occurs at mid—year. The present value of all the annual depreciation tax benefit cash flows (PVDEP) over the N-year useful life is calculated by summing: N PVDEP = E PVDEPJ (11) j1 where: = the present value of all depreciation- related cash flows Similarly, the present value of after-tax annual cash flows for any year j is: OM x (1 - MTR ) PV = (12) (1. + where: E = the annual discount rate July 1990 ------- A—III—8 The present value of annual expenditures over the equipment’s useful life of N years is the sum of the present values for each year: I , PVc, = E PV (13) i—i The present value of all cash flows resulting from the capital and annual o&M expenditures required to comply with environmental regulations throughout the initial useful life cycle of the controls is equal to the combination of the present values of the three associated cash flows: the initial capital investment net of ITC, the depreciation tax benefit, and the after—tax annual O&M costs, taken from equations (9), (11), and (13), respectively: PV’ = PV 1 — + PV (14 An adjustment to this figure occurs if all or part of the capital is financed with low interest debt. (The adjustment is discussed in Section D below.) The present value of all cash flows associated with the initial useful life cycle of the pollution control equipment- must next be expanded to include the present value of cash flows in all future replacement cycles. This can be accomplished by first calculating the second cycle of cash flows, which is the first replacement cycle. The BEN model assumes that the most recent tax law provisions apply to the cash flows in every year of this second cycle, and in all subsequent replacement cycles. Therefore, BEN calculates cash flows for the second cycle by inflating all investment and annual costs to the end of the first useful life and applying the new tax law provisions. The present value of this July 1990 ------- A—III—9 PVREP = PV + = x + pv 2 x second cycle of cash flows as of year N, when the original equipment wears out, is denoted PV 2 PCE. The present value of the cash flows from the second cycle and all future replacement cycles is calculated by summing: + . . for E>I (15a) where: N = the useful life of the equipment (in years). The present value of these replacement-cycle cash flows as of the noncompliance date is then determined by discounting: (15b) Where the capital investment is a one—time, not a recurring investment, PV , only includes future annual expenditure cash flows. Capital investment and depreciation cash flows are zero. The present value of the cash flows from the original cycle and all future replacement cycles is calculated by summing: PV (15c) PVREP - PVRZP (1 + E) = PV 1 pcz + PVREP July 1990 ------- A—III—lO 2. The One-Time Nondenreciable Exnenditure Cash Flew The present value of the cash flow associated with a one—time nondepreciable expenditure is simply the initial after-tax cash flow as expressed in equation (5) or (6): PV = ONE 0 (16) This àne—time cash flow is not repeated in subsequent years. Therefore, the calculations of equations (15a), (15b) and (15c) are not required for this cash flow. 3. Total Cash Flow The total present value of cash flows associated with the pollution control—related capital investment, annual O&M expenditures, and a one—time nondepreciable expenditure is: PV = PV + PV (17) This is the total present value of complying on time, as of the date compliance was required. C. ECONOXIC BENEFIT OF DELAYED COMPLIANCE The economic benefit of delayed compliance is the difference between the present value of complying on time and the present value of complying at the end of the delay period. The total figure calculated in (17) above is the total present value of complying on time, as of the noncompliance date. The cash flows associated with complying after the delay period are similar to those associated with complying on time, as explained in the above two sections. However, the delay—case cash flows differ from the on-time cash July 1990 ------- - A—Ill—li flows for two reasons: (1) inflation, and (2) differential tax provisions. Each of these reasons is discussed below. The cost of complying after the delay period is generally higher than the cost of complying on time because of the impact of inflation. Each cost of delayed compliance, as of the day on which compliance is actually achieved, is inflated over the delay period from the on—time compliance cost. For example, the one—time expenditure in the delay case is given by: * L ONE DELAY = ONE 0 X (1 + Im) (18) where: I = the monthly inflation rate (derived from I, the annual inflation rate) L = the number of months of delay The other two cost categories are similarly inflated. BEN then calculates the delay case cash flows from these inflated costs according to the tax law provisions that apply to each year of the first cycle of the delay case. Because the first cycle of the delay case covers different years than the first cycle of the on—time case, the application of different tax law provisions might create a different pattern of tax impacts. BEN then calculates the present value of the delay case cash flows and adds the replacement cycle cash flows, calculated as described above for the on—time case. The total present value of the delay case cash flows as of the compliance date is denoted PV*D!LAy. The present value of the delayed cash flows, as of the day on which compliance should have been achieved, is given by discounting: PVDELAY DLA = (1.9) (1 + where: = the monthly discount rate (derived from E, the annual discount rate) July 1990 ------- A—Ill —12 The economic benefit from delay is thus the difference between these two present values: EC 3 = PV - PVD (20) This economic benefit figure is then valued as of the expected penalty payment date, reflecting the fact that the violator is earning a market rate return on the savings until the penalty is paid. This future value of the benefit is given as: — P — ECEEN x (l+EM) where: P = the number of months between the - noncompliance data and the penalty payment date (21) D. SAVINGS FROM LOW-INTEREST FINANCING Low-interest financing (e.g., industrial development bonds) can be used to finance all or a portion of the capital investment and one-time expenditure. BEN assumes that debt obtained to finance pollution controls replaces other debt in the violator’s capital structure. Thus, the savings from using low-interest debt is equal to the difference between the present value cost of financing at the market rate and at the lower interest rate. The amount borrowed, FIN, is assumed to be repaid in equal amounts at the end of each year over the useful life of the pollution control equipment. (This assumption holds even if part of the financing is used for a one—time expenditure, which does not July 1990 ------- A—III—13 have a useful life.) The repayment of principal in year j is expressed as: 1 PRINJ = FIN X (22) N Where: PRIM 3 = the amount of principal repaid in year j N = the useful life of the pollution-control equipment BEN assumes that both low-interest and market-interest finan- cing would have the same principal repayment schedule, and that the effective cost difference is the difference between the interest payments for each type of financing. Interest is assumed to be paid at the end of each year on the principal outstanding at the beginning of that year. Since interest is tax-deductible, the tax effects are considered in calculating the cash flow. The after—tax interest cash flow in any year j at the low interest rate is: INTLOWJ = (FIN - E PRIN 1 ) x (1 - MTRJ) x R (23) i—i where: RL = the low interest rate The interest cash flow in any year at the market interest rate is: i—i INTMXT 3 = (FIN - E PRIN ) x (1 - MTR 3 ) x R, (24) i—i where: = the market interest rate that the violator pays for debt financing July 1990 ------- A—III—14 The difference between the annual interest cash flows is thus: DIFFJ = INTMKTJ - INTLOWJ (25) j—i = ((FIN - E PRINJ x (1 - MTRJ) x R ] j—i ((FIN — E PRIN ) x (1 - MTRJ) x R ] i —i i-i = (FIN - E PRIN ) x (1 - MTR 3 ) x (R,lI T — RL ) i—i In its simplified form, the difference in interest charges in any year can be computed by multiplying the remaining balance by the after—tax difference between the two interest rates. The present value of each differential is given by: DI FF PVDXFF (26) (3. + R” 1 ) 3 where: R T = the after—tax market rate The total present value of the interest savings differential is given by: N PV = E PVDIFFJ (27) i—i BEN uses this savings figure to reduce the present-value cost of the capital investment in pollution controls and, if necessary, the one-time expenditure. If the amount financed is less than or July 1990 ------- A—III—15 equal to the initial capital cost, the full savings figure of equation (27) reduces the present value of the costs of pollution control equipment. If the amount financed exceeds the initial capital cost, the model allocates the savings from the interest differential first to the pollution control capital investment and then to the one-time expenditure. Thus, equation (14) is adjusted to reflect this cost reduction: PV’ E = PVIN - + PV - SAV E (28) II where: SAV E = PVSAV for 1 FIN II II - and: SAV E = PVSAV x for < 1 FIN FIN This adjusted present value total is then used in the subsequent calculations using equation (14). Savings from low interest financing are subtracted from the one-time nondepreciable expenditure cash flow only if the low interest financing amount, FIN, exceeds the capital cost. Equation (16) is thus adjusted to reflect the savings: PV = ONE 0 - SAV (29) II where: SAV = 0 , for 1 FIN ( ii and: SAV = PV ,x(1- ), for < 1 FIN) FIN July 1990 ------- A—III— 16 E. CALCULATIONS FOR TEE CASE PLOW TABLE FOR OUTPUT OPTION 3 The model employs the procedures described above to calculate the economic benefit from delayed compliance as reported in the summary results in output Options 1 and 2 and the last page of Option 3. slightly different procedures are used to calculate the values in the detailed cash flow tables provided for Option 3. The table illustrates tax effects and discounting in a sequence that is different from that used by the program to create the summary. The following discussion explains the additional calculations used to create the tables. Note that the difference between the delay case cash flows and the on—time case cash flows derive from inflation and differential tax impacts. 1. Annual Cash Flows and Tax Effects Each table presents annual, undiscounted expenses both before and after tax effects for each year. After—tax annual costs are calculated as follows: TXSVOM 3 = - OM , x (1 - MTR ,) (30) The negative sign associated with the annual expenditure denotes a cash outflow. For each year the tables also present the depreciation amount and the undiscounted depreciation tax benefit. The tax benefit is calculated as follows: TXSVDPJ = DEPJ x MTRJ (31) The depreciation tax savings is positive because it is a cash inflow. July 1990 ------- A—III—17 2. Treatment of the One-Time Wondepreciable ExDenditure If the one—time nondepreciable expenditure is not tax— deductible, it appears as part of the investment net of ITC at year zero: INV = — EXP — (PV 11 - ITC) (32) Note again that negative signs are used to denote cash outflows. If the one—time nondepreciable expenditure is tax-deductible, it appears in the annual cost column at year zero and its after—tax value appears as after—tax annual cost. Thus, TXSVOM 0 = - EXP x (1 - MTRJ) (33) and, INV = - (PV 11 - ITC) 3. Discountina Each table shows the present value of the after—tax annual cash flows. The table also lists the discount factors used in calculating each present value. For each year j, the discount factor is calculated as follows: 1 DF (34) (1 + where: DF = the project discount factor applied to after-tax annual cash flows and depreciation tax savings in year j E = the annual discount rate July 1990 ------- A—III—18 The discount factor equals 1.0 for year zero, since this is the year to which you are discounting, and cash flows occurring in this year are already in present-value terms. The table displays the discounted value of each annual cash flow. These are calculated by applying the discount factors to the appropriate cash flows for each year j: PV1, = TXSVOM x DF, (35) PV2, = TXSVDP, x DF, (36) where: PV1, = the present value of after—tax annual costs in year j and: PV 2 J = the present value of the depreciation tax savings in year j 4. Ag re atin Present Values For each year, the tables list the annual present value, which is the sum of (1) the investment net of ITC, (2) the present value of after—tax annual costs, and (3) the present value of depreciation tax savings. A negative figure denotes a net cash outflow or cost; a positive figure is a net cash inflow or savings: PV = INV + PV1 + PV2 (37) The discounted benefit from low interest financing appears separately at the bottom of the cash flow table, immediately below the annual present value for year N. It equals the present value calculated in equation (27). The final figure at the bottom of the cash flow table represents the sum of all the annual present value totals and the low interest debt savings adjustment. This sum is equal to the July 1990 ------- A— 111—19 total pre EWt value of compliance from equation (28). In each casl flow table, the negative sign is used to indicate that this present’ value represents a net cash outflow. In the on—time case table, the present value is expressed as of the noncompliance date, and in the delay case table, the present value is expressed as of the compliance date. July 1990 ------- A—III—20 EXHIBIT A-I. DEFINITION OF SYMBOLS COST — Cost of compliance with environmental regulations as entered COST,, — Cost of compliance with environmental regulations in noncompliance- year dollars DEP 1 — the amount of depreciation in year j DF 1 — the factor used to discount after-tax annual expenses and depreciation tax savings DIFF — the cash flow differential arising from substituting low interest for market interest rates d, — the fraction of the original asset value depreciated in year j E — the annual discount rate — the monthly discount rate EC — the present value of the economic benefit from delay as of noncompliance date EXP — the one-time nondepreciable expenditure incurred to comply with environmental regulations FIN — the amount of low interest financing FV — the future value of the economic benefit I the annual rate of inflation for expenditure made to comply with environmental regulations I. — the monthly inflation rate IDFLT — the number of years between the noncompliance year and year in whih the cost is expressed II — the initial capital investment for pollution control ii — the depreciation basis of the initial capital investment INTLOW 1 — after-tax interest payment cash flow in year j at the low interest rate INT) TJ — after-tax interest payment cash flow in year j at the market interest rate INV — investment cash flow July 1990 ------- A—III—2 1 EXHIBIT A-i DEFINITION OF SYMBOLS ITC — the investment tax credit 1,1 — indices, usually indicating the year in which a cash flow occurs L — the number of months of delayed compliance MTR, — the marginal income tax rate (federal & state) in year j N — the useful life of pollution control equipment in years OX, — the annual (operating and maintenance) expense in year j ONE, — the after-tax cash flow associated with the one-time expenditure PRIN, — the principal repayment in year j PV — the present value of a cash flow or cash flows — present value of all cash flows in first cycle PV 2 pc — present value of all cash flows in second cycle PV — present value of all cash flows in all cycles — the low interest rate — the market interest rate the violator pays for long-term debt financing R g y — the market interest rate expressed on an after-tax basis SAV — the reduction in present value of pollution control costs arising from the use of low interest financing — the investment tax credit rate TXSVDPJ — the tax savings associated with depreciation expense in year J TXSVOX 1 — the after-tax cash flow from operating and maintenance expenses in year j July 1990 ------- A-IV-1 IV. SAMPLE CALCULATION OP ECONOMIC BENEFIT This section illustrates BEN’S calculation of the economic benefit of delayed compliance for a hypothetical noncomplying fix-rn. The inputs are as follows: 1) A. Case Name B. Statute C. Profitability Status 2) Capital Investment 3) One-Time Nondepreciable Expenditure 4) Annual Expense 5) Date of Noncompliance 6) Date of Compliance 7) Penalty Payment Date 8) Useful Life 9) Marginal Tax Rate - 1986 and Before 10) Marginal Tax Rate - 1987 - and Beyond 11) Inflation Rate 12) Discount Rate: Equity 13) Low Interest Financing Low Interest Rate Corporate Debt Rate Company X Example 2. Clean Air Act — Mobile Source For-Profit $105,000, 1989 dollars, recurring $210,000, 1989, tax—deductible $15,750, 1989 dollars October 1987 June 1990 September 1990 10 years 49.6 percent 38.4 percent 3.5 percent 17.5 percent $105,000, 1989 dollars 10 percent 12 percent July 1990 ------- A-IV-2 A. PXRST CYCLE CASE PLOWS The initial step in calculating the economic benefit of delayed compliance is to lay out all the cash flows that result f m on-time compliance, including both direct costs and indirect financial impacts. First, BEN deflates the dollar input amounts —- capital investment, one-time nondepreciable expenditure, annual cost, and amount of low interest financing —- from 1989 dollars to 1987 dollars (noncompliance—year dollars) using the 3.5 percent inflation rate. The amounts are deflated over two years by dividing by 1.0712 (one plus the inflation rate, squared) as indicated in equation (1). The inputs and the deflated amounts are given in the following table: Input Dollar Amounts Deflated Values (Delay Case) (On—Time Case) Input ( 1989 dollars) ( 1987 dollars ) Capital Investment 105,000 98,019 One-Time Nondepreciable Expenditure 210,000 196,037 Annual Expense 15,750 14,703 Low-Interest Financing 105,000 98,019 BEN then calculates the on-time cash flows associated with these inputs, expressed in noncompliance—year dollars, and the delay case cash flows associated with these inputs expressed in compliance-year dollars. Exhibit A-2 reports the cash flows on both a before—tax and an after-tax basis, and also ona present value basis. BEN prints the cash-flow table shown in Exhibit A-2 as part of output Option 3. Each table is divided into two halves, and the years of the useful life of the capital investment are printed in the first column of each half. The second column of the top half of each table includes the investment outlay ($98,019 for the on-time case; $107,436 for the delay case), net of the investment tax credit. In this example, since both the on—time and delay cases occur after 1985, the investment tax credit (ITC) is zero for both cases. Thus, the July 1990 ------- A-IV-3 EXHIBIT A-2 OPTION 3 CASH FLOW TABLES COMPANY X-EXAMPLE JUNE 30, 1989 ON-TIME CASE CASH FLOWS FIRST CYCLE CASH FLOWS BASED ON A TOTAL INITIAL OUTLAY OF $ 98019 AS OF THE BEGINNING OF THE PERIOD OF NONCOMPLIANCE YEAR INVESTMENT DEPRECIATION DEPR.EC PRESENT VALUE NET OF DEPRECIATION TAX DISCOUNT OF DEPREC TAX ITC Cs) CS) SAVINGS (5) FACTOR SAVINGS (S) 0 —98019 0 0 1.0000 0 1 0 14003 5377 .9225 4961 2 0 24005 9218 .7851 7237 3 0 17146 6584 .6682 4400 4 0 12247 4703 .5687 2675 5 0 8748 3359 .4840 1626 6 0 8748 3359 .4119 1384 7 0 8748 3359 .3506 1178 8 0 4374 1680 .2983 501 9 0 0 0 .2539 0 10 0 0 0 .2161 0 YEAR ANNUAL AFTER-TAX PROJECT PRESENT VALUE TOTAL EXPENSES ANNUAL DISCOUNT AFTER-TAX PRESENT COST FACTOR O&M (5) VALUE (5) 0 —196037 —120759 1.0000 —120759 —218778 1 —14958 —9214 .9225 —8500 —3540 2 —15481 —9537 .7851 —7487 250 3 —16023 —9870 .6682 —6595 —2196 4 —16584 —10216 .5687 —5810 —3135 5 —17165 —10573 .4840 —5117 —3492 6 —17765 —10943 .4119 —4508 —3124 7 —18387 —11326 .3506 —3971 —2793 8 —19031 —11723 .2983 —3497 —2996 9. —19697 —12133 .2539 —3081 —3081 10 —20386 —12558 .2161 —2714 —2714 THE DISCOUNTED BENEFIT FROM THE LOW INTEREST DIFFERENTIAL $ 3743 PRESENT VALUE OF PURCHASING THE INITIAL POLLUTION CONTROL EQUIPMENT ON TIME AND OPERATING IT THROUGHOUT ONE USEFUL LIFE $ -242354 July 1990 ------- A-IV-4 EXHIBIT A-2 OPTION 3 CASE FLOW ThBLES (continued) COMPANY XEXAMPLE JUNE 30, 1990 DELAY CASE CASH FLOWS FIRST CYCLE CASH FLOWS BASED ON A TOTAL INITIAL OUTLAY OF $ 107436 AS OF THE END OF THE PERIOD OF NONCOMPLIANCE YEAR INVESTMENT DEPRECIATION DEPREC PRESENT VALUE NET OF DEPRECIATION TAX DISCOUNT OF DEPREC TAX ITC Cs) ( 5) SAVINGS (5) FACTOR SAVINGS (5) 0 —107436 0 0 1.0000 0 1 0 15348 5894 .9225 5437 2 0 26311 10103 .7851 7933 3 0 18794 7217 .6682 4822 4 0 13424 5155 .5687 2931 5 0 9588 3682 .4840 1782 6 0 9588 3682 .4119 1517 7 0 9588 3682 .3506 1291 8 0 4794 1841 .2983 549 9 0 0 0 .2539 0 10 0 0 0 .2161 0 YEAR ANNUAL AFTER-TAX PROJECT PRESENT VALUE TOTAL EXPENSES ANNUAL DISCOUNT AFTER-TAX PRESENT COST FACTOR O&M (5) VALUE (5) 0 —214872 —132361 1.0000 —132361 —239797 1 —16395 —10099 .9225 —9317 —3880 2 —16969 —10453 .7851 —8207 —274 3 —17563 —10819 .6682 —7229 —2407 4 - —18177 —11197 .5687 —6368 —3436 5 —18814 —11589 .4840 —5609 —3827 6 —19472 —11995 .4119 —4941 —3424 7 —20154 —12415 .3506 —4352 —3061 8 —20859 —12849 .2983 —3833 —3284 9 —21589 —13299 .2539 —3377 —3377 10 —22345 —13764 .2161 —2974 —2974 THE DISCOUNTED BENEFIT FROM THE LOW INTEREST DIFFERENTIAL $ 4103 PRESENT VALUE OF DELAYING THE PURCHASE OF THE INITIAL POLLUTION CONTROL EQUIP IENT AND OPERATING IT THROUGHOUT ITS USEFUL LIFE $ -265639 July 1990 ------- A-IV-5 investment ét of rr in the second column is the sum of the one- time nondepreciable expenditure (zero) and the capital investment net of the ITC. This total is reported as a negative cash flow, as are all other cash outflows shown in the tables. The third column of the top half presents the annual depreci- ation in years 1 through 7. The depreciation amount is based on the double-declining balance depreciation method (with the half-year convention). The tax savings from each depreciation amount, which is in the fourth column, is calculated using equation (31). It equals the product of the depreciation amount and the applicable 38.4 percent marginal tax rate. The depreciation discount factors in the fifth column are based on an annual discount rate of 17.5 percent, the rate used for all cash flows. Since annual cash flows occur at mid—year in the model, their values are discounted from the middle of the year. For example, the discount factor in year 1 is equal to: 1 = .9225 (1.175)1/2 The sixth column presents the present value of the depreciation tax savings, obtained by multiplying the depreciation tax savings (column 4) and the discount factor (column 5). The second column in the bottom half of the table lists the annual costs, inflated by 3.5 percent per year. Since annual expenses occur at mid—year in the model, the annual amount for year 1 for the on—time case is calculated by inflating the annual amount in noncompliance—year dollars for one—half year (see Equation 7): $14,703 x ( 1 • 035 )1I2 = $14,958 July 1990 ------- A-IV-6 The one—time nondepreciable expenditures, because they are tax- deductible, are reported in this column at year 0 ($196 ,O37 for the on—time case, and $214,872 for the delay case). The after—tax annual and one—time nondepreciable expenses are in the third column. The figures in this column are calculated by multiplying the annual costs by a factor equal to one minus the marginal tax rate, as in equation (30). The discount factors in the fourth column are based on 17.5 percent, the discount rate entered as an input. These discount rates are identical to those applied to the depreciation tax savings. The fifth column, which is calculated using equation (36), contains the present value of the annual cash flows (column 3 times column 4). The last column provides the totals of the present values of the investment net of ITC (if applicable), depreciation tax savings, and after—tax annual costs for each year. The discounted benefit from low interest financing is reported at the bottom of the cash flow table. Calculations for this figure are presented in Exhibit A-3. The low interest benefit is calcu- lated assuming equal principal payments at year-end over the ten- year life of the equipment. The annual interest differential in the third column of Exhibit A-3 is equal to the 2 percent interest differential (the 12 percent corporate debt rate minus the 10 percent low interest rate) multiplied by the principal balance, in the second column. The interest differential is then expressed on an after—tax basis in the fourth column, using the 38.4 percent marginal income tax rate. The discount factors in the fifth column are based on 7.38 percent, the after—tax market interest (corporate debt) rate. The present value of the after-tax differential is shown in the final column. The sum of these annual present values is the discounted benefit reported in the on-time case table of Exhibit A-2. July 1990 ------- A-IV-7 EXHIBIT A-3 BENEFIT OF $98,029 LOW INTEREST FINANCING $1,027.74 787.20 595.52 443.47 323.51 229 • 44 156.21 99.71 56.57 24.07 Interest Differ— Remaining ential Year Balance at 2% After- Tax Differ- ential 17. 50% Discount Factor Annual Present Value 1 2 3 4 5 6 7 8 9 10 98, 019 88,217 78,415 68,613 58,811 49,010 39,208 29,406 19, 604 9, 802 1,960 1,764 1,568 1,372 1,176 980 784 588 392 196 1,208 1,087 966 845 725 604 483 362 242 121 0.8511 0. 7243 0. 6164 0. 5246 0. 4465 0. 3800 0.3234 0. 2752 0. 2342 0.1994 Total Benefit = $3,743.45 July 1990 ------- A-IV-8 The last dollar figure in each table (negative $242,354 for th on-time case, and negative $265,639 for the delay case) is the sum of the annual present—value cash flows, including the benefit from the low-interest financing for one useful life. BEN reports the value for the on-time case as the first figure (A) in the output shown in Exhibit A-4. This output is provided for output Option 2 and as the last page of Option 3. Note that costs and benefits are both shown as positive numbers in Exhibit A-4. B • INCLUDING REPLACEMENT CYCLES The present value of purchasing and operating pollution control equipment must include future replacements of the equipment. BEN uses equations (15a), (15b), and (15c) to compute the present value cost of all replacement cycles from the second cycle of cash flows. Because all of the years of the first cycle are subject to the most recent tax law, the second cycle is identical to the first cycle except for inflation. Thus, for the on-time case, the present value’ of the second cycle is the final figure in the on-time cash flow table ($242,354) net of the after-tax one-time expenditure ($120,759) inflated over the ten-year useful life: = $121,595 x (1.035) ° = $121,595 x 1.41060 = $171,522 The replacement cycle cash flows thus total: 1 = $171,522 x ( 1. 03 11.175) = $171,522 x 1.39122 = $238,624 July 1990 ------- A-IV-9 EXEIBIT A-4 8U)O(ARY RESULTS FROM OUTPUT OPTIONS 2 MID 3 COMPANY X EXAMPLE JUNE 30,1990 A. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE IN 1987 DOLLARS $ B. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS $ C. VALUE OF DELAYING EMPLOYMENT OF POLLUTION CONTROL EQUIPMENT BY 32 MONTHS PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS $ 206708 D. ECONOMIC BENEFIT OF A 32 MONTH DELAY IN 1987 DOLLARS (EQUALS B MINUS C) $ 83216 E. THE ECONOMIC BENEFIT AS OF THE PENALTY PAYMENT DATE, 35 MONTHS AFTER NONCOMPLIANCE $ 133194 THE ECONOMIC SAVINGS CALCULATION ABOVE <-<-c-c-<-<- USED THE FOLLOWING VARIABLES: USER SPECIFIED VALUES CASE NAME = COMPANY X EXAMPLE STATUTE = CLEAN AIR ACT - MOBILE SOURCE PROFIT STATUS = FOR-PROFIT INITIAL CAPITAL INVESTMENT (RECURRING)= $ 105000 1989 DOLLARS ONE-TIME NONDEPRECIABLE EXPENDITURE = $ 210000 1989 DOLLARS (TAX DEDUCTIBLE EXPENSE) ANNUAL EXPENSE $ FIRST MONTH OF NONCOMPLIANCE= COMPLIANCE DATE PENALTY PAYMENT DATE= USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT = MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND = ANNUAL INFLATION RATE= 3 DISCOUNT RATE: CORPORATE EQUITY RATE = AMOUNT OF LOW INTEREST FINANCING = LOW INTEREST RATE — CORPORATE DEBT RATE = 242354 289924 1A. ‘B. ‘C. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1.1. 12. 13. 15750 1989 DOLLARS 10, 1987 6, 1990 9, 1990 10 YEARS 49.60 % 38.40 % .50 % 17.50 % $ ] O5000 1989 DOLLARS 10.00 % 12.00 % Ju]v 1990 ------- A-IV-10 The t ta1 present value cost of complying with environmental regulations on time is the present value of the original cycle cash flows plus the present value of all replacement cycle cash flows, as of the noncompliance date: 238,624 = $242,354 + (1. 175) 10 238,624 = $242,354 + 5. 01624 = $242,354 + 47,570 = $289,924 This is the second figure (B) reported in Exhibit A-4. The on- time compliance cost total is equal to the sum of (1) the total present value cost of investing in and operating pollution control equipment over the initial useful life cycle and all future replacement cycles and (2) the one-time expenditure. C • COST OP DELAYED COMPLIANCE The present value cost of delayed compliance is derived from the delay case cash flow table. The replacement cycle cash flows are calculated as in the on—time case and for this example, in exactly the same way as above. The present value of the second cycle of cash flows is the final figure in the delay case cash flow table ($265,639), net of the after-tax one-time expenditure ($132,361), inflated over the ten—year life: = $133,278 x (1.035)’° = $133,278 x 1.41060 = $188,002 July 1990 ------- A-IV-11 The t p1acement cycle cash flows thus total: 1 = $188,002 x — 1.035 10 1. 175 = $188,002 x 1.39122 = $261,552 The total present value of delayed compliance is the present value of the original cycle cash flows plus the present value of all replacement cycles’ cash flows, as of the compliance date: 261,552 = $265,639 + (1.175)’° 261,552 = $265,639 + 5 • 01624 = $265,639 + 52,141 = $317,780 A monthly inflation rate is used to inflate on—time case costs to delay costs. A monthly discount rate is used to discount the delay case present value total to the noncompliance date. The annual inflation and discount rates are converted to monthly equivalents as follows: = (l+I)14 12_l = (1 + 035)1 112 — 1 = .0028709 July 1990 ------- A-IV-12 and: (1 + E)” 12 — 1 = (] + .l75) 2 — 1 = .013530 In this example, compliance was delayed 32 months from October 1987 to June 1990. BEN uses equation (19) to calculate the present value cost of delayed compliance for the 32—month delay as of the noncompliance date: $317,780 (1.013530)32 — $317,780 — 1.5373 = $206,708 This is the third figure (C) reported in the output shown in Exhibit A-4. D. ECONOMIC BENEPIT OP DELAY The economic benefit of the 12-month delay, valued as of the noncompliance date, is simply the difference between the present value costs of complying on time and complying after the delay: = $289,924 — $206,709 = $83,216 This is the fourth figure (D) reported in Exhibit A-4. It is the difference between the two preceding figures (B and C) in the output. July 1990 ------- A-IV-13 Finalj , the economic benefit is valued as of the penalty payment date of September 1990, which is 35 months after the noncompliance date. The economic benefit is brought forward using the discount rate, which is compounded monthly from the noncompliance date to the penalty payment date. This value of the benefit at the time the penalty is paid is calculated as in equation (21): = $ 83,216 x (1 + EM) 35 = $ 83,216 x (1 + .013530) = $ 83,216 x 1.60058 = $ 133,194 July 1990 ------- APPENDIX B SPECIAL CASES July 1990 ------- CONTENTS I. Governmental Entities and Not-For-profit Organizations B—I—i A • Cost Inputs . . . . . . B—I—3 1. One Time Grant. . . • . . . . . . • . . . . • . • . . . . B—I—3 2. On—Going Grant. . . • . . . . . . . . . . B—I—4 B. Tax Information. . . . . . . . . . . . . . B—I—4 C. Discount Rate. . . . . . . . . . . . . . . . . . . . . . . B—I—4 II. Avoided One—Time Cost Calculations...... B—I l—i A. Introduction B—I l—i B. Procedure for Economic Benefit Calculation. . . • . . . . . . . B—Il—i C. Example of An Avoided One-Time Capital Expenditure Calculation ... B—II—3 D. Example of An Avoided One-Time Nondepreciable Cost Calculation B—II—6 EXHI BITS B-i Summary of Adjustments For Not-For- Profit Organizations................ ..... B—I—2 B—2 MunicipalBondYieldAverages....................B—I-6 B-3 Example of An Avoided One-Time Capital Expenditure Calculation: OutputOption2.................... B—II—4 B-4 Example of An Avoided One-Time Nondepreciable Cost Calculation: OutputOption2....................B—II—7 July 1990 ------- B-I-i I • GOVERNMENTAL ENTITIES AND $OT-FOR-PROPIT ORGANIZATIONS BEN can be used to estimate the economic benefit of delayed compliance for any type of organization. The first section of this appendix explains how to use BEN when calculating the economic benefit for municipalities and other governmental entities and for not-for—profit organizations. NOTE: If you are making an economic benefit calculation for a not- for—prof it organization, answer Y for yes when BEN asks if the violator is a not-for-profit entity in Question lc. IS THE VIOLATOR A NOT-FOR-PROFIT ENTITY? (Y,N) Y There are three areas in which characteristics might differ between for-profit and not—for—profit entities: the cost inputs (if a subsidy is involved), the variables relating to tax information, and the discount rate. Each of these areas is explained below. Exhibit B-I lists all variable inputs to BEN and summarizes the adjustments, if any, that should be made to each. July 1990 ------- B-I-2 EXHIBIT B-i SUNNARY OP ADJUSTMENTS FOR NOT-FOR-PROFIT ORGANIZATIONS VARIABLE 1. Case Name 2. Initial Capital Investment 3. One-Time Nondepreciable Expenditure 4. Annual Expense 5. Date of Noncompliance 6. Date of Compliance 7. Date of Penalty Payment 8. Useful Life of Pollution Control Equipment 9. Marginal Tax Rate —- 1986 and Before 10. Marginal Tax Rate -- 1987 and Beyond Inflation Rate Discount Rate Low Interest Financing None 0% 0% None Cost of municipal debt Not applicable if the violator is a not-f or- ADJUSTMENT None Subtract grant funds here if the grant includes support for future expenditures on replacement equipment Subtract grant funds here if the grant supports only an initial expenditure None None None None 11. 12. 13. NOTE: Answer Y (yes) when BEN asks profit entity. July 1990 ------- B-I-3 A. COST INPUTS Cost figures entered in BEN should be adjusted to account for any portion covered by Federal or state grants. Such grants might support only an initial expenditure (one-time grant) or they might - include support for future expenditures on replacement equipment (on-going grant). 2. One-Tim. Grant If the grant supports only an initial pollution control investment (Variable 2) or a one-time expenditure (Variable 3), you must adjust the one—time expenditure entry (Variable 3). Subtract the one—time grant amount from the original one—time expenditure value. Enter the difference as the adjusted one—time expenditure value. This difference will be negative if the original one-time expenditure is less than the grant amount (or is zero). BEN will accept a negative value for the one—time expenditure variable. For example, suppose a project requires an immediate expenditure of $350,000: $275,000 to construct pollution control equipment and $75,000 to purchase land. You would normally enter $275,000 as the initial capital investment (Variable 2) and $75,000 as the one-time expenditure (Variable 3). Suppose now, however, that a $100,000 construction grant will be made available, a grant that does not provide for funding future investments in replacement equipment. You would adjust Variable 3 to account for this one—time grant by subtracting the grant amount ($100,000) from the original one-time expenditure ($75,000). Thus, you would enter a negative $25,000 for Variable 3. If there had been no one—time expenditure, you would enter a negative $100,000, the difference between zero and $100,000, as the value for Variable 3. July 1990 ------- B-I-4 2. On-Going Grant If the grant supports investment in the initial pollution control equipment and all future replacements of the equipment, you must adjust the initial capital investment entry (Variable 2). Subtract the grant funding amount from the original investment amount. Enter the difference as the adjusted initial capital investment value. The grant funding amount should not exceed the original capital investment or the difference will be a negative value. BEN will not accept a negative value for the initial capital investment variable. Suppose in the previous example that the $100,000 grant supports the initial capital investment and that it will provide an equal amount (plus an inflation adjustment) each time the equipment is replaced. You would adjust Variable 2 to account for this on- going grant. Subtract the $100,000 grant amount from the $275,000 initial capital investment. Enter $175,000, the difference between $275,000 and $100,000, as the adjusted Variable 2 value. B. TAX INPORXATION Not—for—profit entities have a tax—exempt status. Therefore, when you indicate that the violator is a not-for-profit entity, BEN automatically adjusts the tax variables. BEN sets the investment tax credit and the marginal income tax rates at zero. Thus, at a zero marginal tax rate, BEN calculates no tax consequences from depreciation, operating and maintenance expenses, or low interest financing. C. DISCOUNT RATE The economic benefit calculations in BEN for not-for-profit organizations use the cost of municipal debt as the basis for the discount rate. When you indicate that the violator is a not-for- July 1990 ------- B-I-s profit ent-i4 ’, -BEN automatically defines the discount rate for a not—for—profit entity based on the cost of average rated municipal bond yields as reported by Moody’s over the last ten years. If you want to modify this standard value, you should enter the cost of debt most applicable to the violator. The municipal bond yield can be estimated by the interest rates for municipal bonds issued during the noncompliance period. Alternatively, you can use the reported yield on municipal debt having the quality rating assigned to the violator’s bonds, or, when the rating is not known, the reported average municipal bond yield. Municipal bond yields are reported monthly in Moody’s Municioal and Government Manual for specific municipalities and as averages for each bond quality rating. Bonds are rated by Moody’s according to their riskiness, the higher quality ratings denoting lower risk bonds. The ratings range from “Aaa,” the highest quality; to a low of “C.” Average bond yields are reported for only the highest four ratings: “Aaa,” “Aa,” “A,” and “Baa.” You should use the average yield for bonds of “Baa” rating if the violator has a rating of “Baa” or lower. The municipal bond yields over the past sixteen years are shown in Exhibit B-2. The standard value for the cost of municipal debt is based on the average municipal bond yield over the last ten years. July 1990 ------- B-I-6 EXHIBIT B-2 MUNICIPAL BOND YIELD AVERAGES 1974—1989 SOURCE: Moody’s Municipal and Government Manual Ave rage Aaa Baa 1974 6.19 5.89 6.04 6.27 6.53 1975 7.05 6.42 6.77 7.37 7.62 1976 6.61 5.65 6.12 7.17 7.49 1977 5.64 5.20 5.39 5.86 6.12 1978 5.86 5.51 5.68 5.99 6.27 1979 6.28 5.89 6.11 6.34 6.73 1980 8.34 7.85 8.06 8.44 9.01 1981 11.10 10.42 10.89 11.31 11.75 1982 11.63 10.88 11.30 11.84 12.48 1983 9.45 8.80 9.20 9.64 10.17 1984 10.00 9.61 9.88 10.15 10.37 1985 9.08 8.60 8.93 9.20 9.59 1986 7.33 6.95 7.16 7.42 7.75 1987 7.59 7.12 7.39 7.76 8.20 1988 7.57 7.36 7.49 7.59 7.84 1989 7.18 7.00 7.10 7.22 7.40 July 1990 ------- B—Il—i II. AVOIDED ONE-TIME COST CALCULATIONS A. INTRODUCTION In some cases, usually involving a RCPA violation, a violator can completely avoid one-time capital expenditures or nondepreciable costs. This usually occurs when the violator delayed pollution control expenditures, but the government is now seeking to close the violator’s operation. Thus, the violator will never have to pay certain costs. BEN, as it is currently structured, is not designed to directly address this situation. But you can use BEN to accurately calculate the economic benefit by using same of the intermediate calculations. The following discussion shows how you can use BEN to make such a calculation. B. PROCEDURE FOR ECONOMIC BENEFIT CALCULATION The first step is to run BEN as you normally would, including only the avoided capital expenditure (enter as Variable 2 and selec one—time) or one-time nondepreciable expense (enter as Variable 3). The model will assume that it is a delayed expense, but you will use BEN’S intermediary calculations to get the correct answer. In these cases assume that the compliance date is the same as the penalty payment date. When you select the output option for your BEN analysis, select output option 2. The value shown in both (A) and (B) will be the after—tax one-time capital expenditure or nondepreciable expense in noncompliance year dollars. This is the amount that the violator initially saved. This amount, however, does not reflect the fact that the violator had use of this money from the time it should have spent the money (the noncompliance date) until it pays the civil penalty (the penalty payment date). In order to determine the total benefit, we want to multiply the value in Item (A) or (B) by the July 1990 ------- B—II—2 discount rate for the number of months between the noncompliance date and the penalty payment date. You can do this easily by using two other values presented in output option 2. What you want to do is apply the percentage increase between items CD) and CE) to the value in Item (A) and (B). Thus, first determine the ratio of (E) to (D): E = I D where I = the percentage increase of CE) from CD). Then, multiply the value in (A) by I: A X I = economic benefit as of penalty payment date July 1990 ------- B—lI —3 C. EXAMPLE OF AN AVOIDED ONE-TIME CAPITAL EXPENDITURE CALCULATION This example is identical to the one shown tlroughout the manual, except that the one-time nondepreciable and annual costs are iow zero, and there is no low interest financing. In this case, you only enter a capital cost (Variable 2) and select “one—time”. Thus, your inputs are as follows: 1) A. Case Name COMPANY X EXAMPLE B. Statute 2. Clean Air Act — Mobile Source C. Profitability Status 1. For-Profit 2) Capital Investment $105,000, 1989.dollars, one—time 3) One-Time Nondepreciable Expenditure $ 0 4) Annual Expense $ 0 5) Date of Noncompliance October 1987 6) Date of Compliance June 1990 7) Penalty Payment Date September 1990 8) Useful Life 10 Years 9) Marginal Tax Rate — 1986 and Before 49.6 percent 10) Marginal Tax Rate — 1987 and Beyond 38.4 percent 11) Inflation Rate 3.5 percent 12) Discount Rate: Equity 17.5 percent 13) Low Interest Financing $ 0 Once you have completed your inputs, select Output Option 2. The results are shown in Exhibit B-3. Note that the value for items (A) and (B) is $74,059. The violator avoided an after-tax cost of this amount at the time of noncompliance. July 1990 ------- B—Il —4 - EXHIBIT B-3 EXAMPLE OF AN AVOIDED ONE-TINE CAPITAL EXPENDITURE CALCULATION - OUTPUT OPTION 2 COMPANY X EXAMPLE JUNE 30, A. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE IN 1987 DOLLARS $ 74059 B. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS $ C. VALUE OF DELAYING EMPLOYMENT OF POLLUTION CONTROL EQUIPMENT BY 32 MONTHS PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS D. ECONOMIC BENEFIT OF A 32 MONTH DELAY IN 1987 DOLLARS (EQUALS B MINUS C) E. THE ECONOMIC BENEFIT AS OF THE PENALTY PAYMENT DATE, 35 MONTHS AFTER NONCOMPLIANCE $ 52082 $ 21257 $ 34023 ->->->->-> THE ECONOMIC SAVINGS CALCULATION ABOVE <-<-<-c-<- USED THE FOLLOWING VARIABLES: 1A. lB. ic. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. USER SPECIFIEI VALUES 10, 1987 6, 1990 9, 1990 10 YEARS 49.60 % 38.40 % 3.50 % 17.50 % 0 1990 74059 CASE NAME = COMPANY X EXAMPLE STATUTE = CLEAN AIR ACT - MOBILE SOURCE PROFIT STATUS = FOR-PROFIT INITIAL CAPITAL INVESTMENT (ONE TIME) = $ 105000 1989 DOLLARS ONE-TIME NONDEPRECIABLE EXPENDITURE = $ 0 ANNUAL EXPENSE = $ 0 FIRST MONTH OF NONCOMPLIANCE = COMPLIANCE DATE PENALTY PAYMENT DATE = USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT = MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE = MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND = ANNUAL INFLATION RATE = DISCOUNT RATE: CORPORATE EQUITY RATE AMOUNT OF LOW INTEREST FINANCING — $ July 1990 ------- B—Il —5 To pute the economic benefit as of the penalty payment date, first calculate the ratio of (E) to CD): E $34,023 I = = = 1.6006 D $21,257 Now, we multiply this result times the value in (A) and (B):. A X I = $74,059 X 1.6006 = $118,536 The economic benefit resulting from the avoided one—time capital expenditure is thus $118,536. July 1990 ------- B—Il —6 D. EXAMPLE OP AN AVOIDED ONE-TIME NONDEPRECIABLE COST CALCULATION This example also corresponds to the one shown throughout the manual, except that the capital and annual costs are now zero, and there is no low interest financing. Thus, your inputs will be as follows: 1) A. Case Name B. Statute C. Profitability Status 2) Capital Investment 3) One-Time Nondepreciable Expenditure 4) Annual Expense 5) Date of Noncompliance 6) Date of Compliance 7) Penalty Payment Date 8) Useful Life 9) Marginal Tax Rate — 1986 and Before 10) Marginal Tax Rate — 1987 and Beyond 11) Inflation Rate 12) Discount Rate: Equity 13) Low Interest Financing COMPANY X EXAMPLE 2. Clean Air Act — Mobile Source 1. For-Profit $ 0 $210,000, 1989 dollars, tax-deductible $ 0 October 1987 June 1990 September 1990 10 Years 49.6 percent 38.4 percent 3.5 percent 17.5 percent $ 0 Once you have completed your inputs, select Output Option 2. The results are shown in Exhibit B-4. Note that the value for items (A) and (B) is $120,759. The violator avoided an after-tax cost of this amount at the time of noncompliance. - July 1990 ------- B—lI —7 EXEIBIT B-4 EXAMPLE OPAN AVOIDED ONE-TIME NONDEPRECIABLE COST CALCULATION - OUTPUT OPTION 2 COMPANY X EXAMPLE JUNE 30, 19 0 A. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE IN 1987 DOLLARS $ 120759 B. VALUE OF EMPLOYING POLLUTION CONTROL ON TIME AND OPERATING IT FOR ONE USEFUL LIFE PLUS ALL FUTURE REPLACEMENT CYCLES IN 1987 DOLLARS $ 120759 C. VALUE OF DELAYING EMPLOYMENT OF POLLUTION CONTROL EQUIPMENT BY 32 MONTHS PLUS ALL FUTURE - REPLACEMENT CYCLES IN 1987 DOLLARS $ 86098 D. ECONOMIC BENEFIT OF A 32 MONTH DELAY - IN 1987 DOLLARS (EQUALS B MINUS C) $ 34661 E. THE ECONOMIC BENEFIT AS OF THE PENALTY PAYMENT DATE, 35 MONTHS AFTER NONCOMPLIANCE $ 55478 ->->->->-> THE ECONOMIC SAVINGS CALCULATION ABOVE USED THE FOLLOWING VARIABLES: USER SPECIFIED VALUES 1A. CASE NAME = COMPANY X XANPLE lB. STATUTE = CLEAN AIR ACT - MOBILE SOURCE 1C. PROFIT STATUS — FOR-PROFIT 2 • INITIAL CAPITAL INVESTMENT = $ 0 3 • ONE-TIME NONDEPRECIABLE EXPENDITURE = $ 210000 1989 DOLLARS (TAX-DEDUCTIBLE EXPENSE) 4. ANNUAL EXPENSE — $ 0 5. FIRST MONTH OF NONCOMPLIANCE = 10, 1987 6. COMPLIANCE DATE — 6, 1990 7. PENALTY PAYMENT DATE = 9, 1990 8 • USEFUL LIFE OF POLLUTION CONTROL EQUIPMENT — 10 YEARS 9. MARGINAL INCOME TAX RATE FOR 1986 AND BEFORE = 49.60 % 10. MARGINAL INCOME TAX RATE FOR 1987 AND BEYOND 38.40 % 11. ANNUAL INFLATION RATE - 3.50 % 12. DISCOUNT RATE: CORPORATE EQUITY RATE — 17.50 % 13. AMOUNT OF LOW INTEREST FINANCING = $, 0 July 1990 ------- B—II—8 To compute the economic benefit as of the penalty payment date, first calculate the ratio of (E) to CD): E $55,478 I = = = 1.6006 D $34,661 Now, we multiply this result with the value in (A) and (B): A X I = $120,759 X 1.6006 = $193,285 The economic benefit resulting from the avoided nondepreciable expenditure is thus $193,285. July 1990 ------- |