BEN USER'S MANUAL
Multimedia Enforcement Division (2248-A)
Office of Regulatory Enforcement
Office of Enforcement and Compliance Assurance
United States Environmental Protection Agency
401 M Street, SW
Washington, D.C. 20460
September 1999
THIS MANUAL IS RELEASABLE IN ITS ENTIRETY
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ACKNOWLEDGMENTS
This document was prepared under the technical direction of Mr. Jonathan Libber,
BEN/ABEL Coordinator, Office of Enforcement, U.S. Environmental Protection Agency (EPA).
Technical assistance was provided under contract to EPA by Industrial Economics, Incorporated
(IEc) of Cambridge, Massachusetts.
MAILING LIST ADDITION
If you would like to receive updated materials, and you work for a federal, state or local
government environmental agency, please e-mail your name, government mailing address, and
government phone number to benabel@indecon.com. If you have any questions about updates,
contact the EPA enforcement economics toll-free helpline at 888-ECON-SPT (326-6778).
If you are a member of the public and would like to obtain these materials, download them
from the U.S. EPA's web site at http://es.epa.gov/oeca. (This address may have changed by the time
you read this manual. To obtain the current address, you can call the helpline at 888-ECON-SPT.)
September 1999
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TABLE OF CONTENTS
INTRODUCTION Chapter 1
A. Overview 1-1
B. Context and Theory of Economic Benefit 1-2
C. Summary of BEN Methodology 1-2
D. How to Use this Manual 1-3
USING THE COMPUTER PROGRAM Chapter 2
A. Structure of the Computer Program 2-1
B. Installing BEN 2-2
C. Data Entry 2-5
D. Calculating and Printing Results 2-6
E. Exiting and Saving 2-7
DATA REQUIREMENTS Chapter 3
A. Case Screen 3-2
1. Case Name, Office/Agency, Analyst Name 3-2
a. Case Name 3-3
b. Office/Agency 3-3
c. Analyst Name 3-3
2. Entity Type, State, Customized Taxes 3-3
a. Entity Type 3-3
b. State 3-4
c. Customized Tax Rate : 3-4
3. Competitive Advantage 3-5
4. Penalty Payment Date 3-7
5. Creating/Adding, Copying and Removing Runs 3-7
B. Run Input Screen 3-8
1. Compliance Cost Components 3-9
a. Capital Investment 3-9
b. One-Time Nondepreciable Expenditure 3-10
c. Annually Recurring Costs 3-11
2. Cost Estimate Dates 3-11
3. Noncompliance and Compliance Dates 3-12
C. Options 3-13
1. Discount/Compound Rate 3-14
2. Inflation Indices and Projected Inflation Rate 3-15
3. Capital Investment Replacement Cycles and Useful Life 3-17
4. Avoided vs. Delayed 3-18
5. Tax Deductibility of One-Time, Nondepreciable Expenditure 3-18
D. Specific Cost Estimates 3-18
1. Separate Cost Estimates for Noncompliance and Compliance Dates . 3-21
2. Inflation Data More Appropriate than BEN's 3-23
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TABLE OF CONTENTS
(continued)
ISSUES THAT ARISE WITH BEN Chapter 4
A. Common Violator Arguments 4-1
B. Characterizing Compliance Scenarios 4-3
DETAILED CALCULATIONS Appendix A
A. Theory and Overview A-l
B. Calculations and Spreadsheet A-2
1. Inputs and Variables A-3
2. Discount/Compound Rate Calculation A-5
3. Specific Cost Estimates A-7
4. Capital and One-Time Costs A-7
5. Avoided Annually Recurring Costs A-l 1
6. Economic Benefit Results A-ll
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INTRODUCTION
CHAPTER 1
A. OVERVIEW
The U.S. Environmental Protection Agency developed the BEN computer model to calculate
the economic benefit a violator derives from delaying and/or avoiding compliance with
environmental statutes. EPA uses the model to assist its staff in developing settlement penalty
figures. BEN can also develop testimony for trial or hearings, but an expert is necessary to explain
its methodology and calculations. While the primary purpose of the BEN model is to calculate the
economic benefit of noncompliance, the model can also calculate the after-tax net present value of
supplemental environmental projects (SEP's) that involve early compliance.1 For all other SEP's,
you should use the PROJECT model.
Calculating economic benefit using the BEN model is generally the first step in developing
a civil penalty figure under EPA's February 16, 1984, generic penalty policy. This two part
document was codified in the General Enforcement Policy Compendium as P.T. 1-1 and P.T. 1-2.
Related medium-specific policies have been developed since then to implement the 1984 policy.
The BEN model assists in fulfilling one of the main goals of the generic policy. That goal is that
civil penalties should at least recover the economic benefit from noncompliance to ensure that
members of the regulated community have a strong economic incentive to comply with
environmental laws on time. You can use BEN in all cases to measure benefit from delayed and/or
avoided compliance, except for Clean Air Act Section 120 actions, which require the application of
a Section 120 specific computer model.
1 As a form of SEP, a defendant may offer to comply with an environmental regulation significantly
earlier than is required. Such a SEP has associated with it an after-tax net present value that is the maximum
amount by which you can reduce the proposed civil penalty. For the "compliance date" in the BEN model,
enter the date when the regulation requires compliance of the defendant (i.e., the date by which you would
normally expect the defendant to achieve compliance). For BEN's "noncompliance date," enter the date that
the defendant is proposing for its early compliance (i.e., a date earlier than the compliance date you
previously entered). Enter all other inputs normally. BEN's "economic benefit" result is the maximum
amount by which you should mitigate the proposed civil penalty.
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BEN is easy to use, and designed for people with no background in economics or financial
analysis. Because the program contains standard values for many of the variables needed to calculate
economic benefit, BEN requires only a small number of user inputs. BEN also allows the user to
modify all of its standard values. Data requirements, standard values and modifications are
described in detail in Chapter 3.
B. CONTEXT AND THEORY OF ECONOMIC BENEFIT
Compliance with environmental regulations usually requires a commitment of financial
resources; both initially (in the form of a capital investment or one-time nondepreciable expenditure)
and over time (in the form of annually recurring costs). These expenditures might result in better
protection of public health or environmental quality, but are unlikely to yield any direct financial
return.
Economic benefit represents the financial gains that a violator accrues by delaying and/or
avoiding such pollution control expenditures. Funds not spent on environmental compliance are
available for other profit-making activities or, alternatively, a defendant avoids the costs associated
with obtaining additional funds for environmental compliance. (This concept is known in economics
as opportunity cost.) Economic benefit calculates the amount by which a defendant is financially
better off from not having complied with environmental requirements in a timely manner. Economic
benefit is "no fault" in nature. A defendant need not have deliberately chosen to delay compliance
(for financial or any other reasons), or in fact even have been aware of its noncompliance, for it to
have accrued the economic benefit of noncompliance.
The appropriate economic benefit calculation should represent the amount of money that
would make the violator indifferent between compliance and noncompliance. If the enforcement
agency fails to recover through a civil penalty at least this economic benefit, then the violator will
retain a gain. Because of the precedent of this retained gain, other regulated companies may see an
economic advantage in similar noncompliance, and the penalty will fail to deter potential violators.
Economic benefit does not represent compensation to the enforcement agency as in a typical
"damages" calculation for a tort case, but instead is the minimum amount by which the violator must
be penalized so as to return it to the position it would have been in had it complied on time.
C. SUMMARY OF BEN METHODOLOGY
BEN calculates the economic benefits gained from delaying and avoiding required
environmental expenditures. Such expenditures can include: (1) Capital investments (e.g., pollution
control equipment), (2) One-time nondepreciable expenditures (e.g., setting up a reporting system,
or acquiring land), (3) Annually recurring costs (e.g., operating and maintenance costs). Each of
these expenditures can be either delayed or avoided. BEN's baseline assumption is that capital
investments and one-time nondepreciable expenditures are merely delayed over the period of
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noncompliance, whereas annual costs are avoided entirely over this period. BEN does allow you,
however, to analyze any combination of delayed and avoided expenditures.
The economic benefit calculation must incorporate the economic concept of the "time value
of money." Stated simply, a dollar today is worth more than a dollar tomorrow, because you can
invest today's dollar to start earning a return immediately. Thus, the further in the future the dollar
is, the less it is worth in "present-value" terms. Similarly, the greater the time value of money (i.e.,
the greater the "discount" or "compound" rate used to derive the present value), the lower the present
value of future costs.
To calculate a violator's economic benefit, BEN uses standard financial cash flow and net
present value analysis techniques, based on modern and generally accepted financial principles.
First, BEN calculates the costs of complying on-time and of complying late, adjusted for inflation
and tax deductibility. To compare the on-time and delayed compliance costs in a common measure,
BEN calculates the present value of both streams of costs, or "cash flows," as of the date of initial
noncompliance. BEN derives these values by discounting the annual cash flows at an average of the
cost of capital throughout this time period.
BEN can then subtract the delayed-case present value from the on-time-case present value
to determine the initial economic benefit as of the noncompliance date. Finally, BEN compounds
this initial economic benefit forward to the penalty payment date at the same cost of capital to
determine the final economic benefit of noncompliance.
A violator may gain illegal competitive advantages in addition to the usual benefits of
noncompliance. These may be substantial benefits, but they are beyond the capability of BEN or any
computer program to assess. Instead BEN asks you a series of questions about possible illegal
competitive advantages so that you may identify cases where they are relevant. EPA is in the process
of developing guidance protocols for such situations. You can obtain a copy of these protocols from
EPA's enforcement economics toll-free helpline at 888-ECON-SPT. Meanwhile, if illegal
competitive advantage is an issue you should consult an expert or the helpline.
D. HOW TO USE THIS MANUAL
This manual provides instructions for accessing, operating and interpreting results from the
BEN program. It also takes you step by step through a BEN case.
Chapter 2 outlines the procedures for installing and managing the model. Chapter 3 describes
BEN's data requirements, default values and opportunities for customization. Chapter 4 addresses
common issues that arise when using BEN. Appendix A contains a detailed discussion of the
economic rationale and computational methods used in BEN. You do not have to be familiar with
Appendix A to use BEN or this manual.
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All of the information from this manual except Appendix A is available through BEN's on-
line help system. The help system is context sensitive and may be accessed at anytime during the
program by pressing F1. It may also be accessed using the Help pull-down menu on the main screen.
If you are a government employee (of any federal, state or local agency) and need further
assistance in operating the program or understanding the results, please contact the EPA enforcement
economics toll-free helpline at 888-ECON-SPT (326-6778) or benabel@indecon.com. If you need
legal or policy guidance, please contact Jonathan Libber, the BEN/ABEL coordinator at 202-564-
6102, or e-mail him at libber.jonathan@epamail.epa.gov.
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USING THE COMPUTER PROGRAM
CHAPTER2
BEN is an interactive computer program that runs in the Windows™ operating environment.
You can obtain a copy of BEN from EPA's web site (http://es.epa.gov/oeca).2 If you lack internet
access and are a government employee (federal, state, or local), you can contact EPA's enforcement
economics toll-free helpline (888-ECON-SPT, or 888-326-6778).
Chapter 2 contains five sections describing procedures for using BEN. Section A describes
the structure of the computer program. Section B explains the procedures for installing the program
on your computer. Section C provides data format requirements and additional helpful hints for
entering data at your computer, as well an overview of error messages. Section D tells you how to
calculate and print results. Section E explains how to exit the program and save files. For an in-
depth description of each variable and recommended sources of information, see Chapter 3.
A. STRUCTURE OF THE COMPUTER PROGRAM
BEN consists of five different screens: main/case screen, run screen, options screen, specific
cost estimates screen, and results screen. In general, you start with the case screen, enter data on
separate screens, return to the case screen, then view (and print) your output on the results screen.
BEN operates like any standard Windows™ application. Use the mouse or the Tab and Return keys
to move between cells and within a screen. Hold down the Shift key while pressing Tab to return
to previous entries.
When you first open BEN the case screen appears. BEN starts up with a blank case screen.
You can obtain a new screen at any time by selecting "New" from the File menu, or using the Ctrl+N
shortcut. To toggle between cases, select the appropriate file name under the "Window" menu.
2 This address may have changed by the time you read this manual. To obtain the current address, you
can call the helpline at 888-ECONSPT.
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The first inputs on the case screen are case name, analyst name and office/agency. These
values are for reference only and do not affect the results. Then BEN asks for the violator's tax
status and state. With this information BEN references an internal database and automatically
calculates the relevant marginal tax rates. Here you have the opportunity to modify taxes by pressing
the [Customize Taxes] button. Under taxes is the [Competitive Advantage] button. Pressing this
button presents you with questions to alert you to the presence of illegal competitive advantage. At
the bottom of the screen, BEN requires you to enter the penalty payment date.
The right side of the case screen is for run management. Here you can create a new run, enter
or edit run data, copy a run, remove a run, and calculate a run. You can create multiple runs for each
case.
The run screen is where you enter the costs of compliance. You must enter all the cost data
and cost estimate dates for a run before you can calculate economic benefit.
From the run screen you may go to the options screen. The option screen allows you to
change BEN's standard values for the discount/compound rate and inflation. Here you can also alter
the number of replacement cycles, useful life for capital equipment, whether a cost is delayed or
avoided, and tax deductibility of one-time nondepreciable expenditures. This screen contains BEN's
default settings, so you will never need to use it unless you customize the standard values.
From the options screen you may go to the specific cost estimates screen. This screen is
needed only under certain rare circumstances. Here you can adjust BEN's assessment of on-time and
delay compliance costs.
The result screen is reached from the main screen, and displays the results of BEN's
calculation. Here you have three options: you can print out a summary of the BEN calculation, you
can print out a detailed version of the calculation, and/or you can return to the run screen.
Once you are finished with a calculation, you can create, edit or calculate other runs. You
can even create other case files, and toggle between them. Before you exit BEN it gives you the
option of saving the current case, plus you can save your case file at anytime during your session.
The case is saved with a ".ben" extension in the folder you specify, and all runs are automatically
saved with the case.
At any time during your use of the model you can access the context-sensitive help system
-by pressing the F1 key, just as in any Windows application.
B. INSTALLING BEN
BEN requires a personal computer running the Windows operating system (version 3.1 or
higher). In addition, for optimal formatting of various data entry screens, set your display in the
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control panel to "small fonts" option. ("Small fonts" is the Windows default, so unless your display
settings have been altered, your computer should be set appropriately.)
The remainder of this section describes how to install BEN from EPA's website or from
floppy disks onto a local network or stand-alone PC. Installing BEN will automatically install the
PROJECT model, since the models share some installation files. If you have trouble downloading
or installing the model, consult your local computer technician.
BEN is located on the EPA website at http://es.epa.gov/oeca.3 To install BEN, first download
the installation file to your computer or network, then run the file and follow the steps listed below
for installing it from a set of disks. The installation screens will appear as they do for installation
from a disk, although you will not be prompted for a second disk.
If you have access to the installation disks, insert Disk 1 and run "a:\setup.exe" (or
"b:\setup.exe" if the floppy is in the b:\ drive). Then click [OK]. If you receive a warning message
that you cannot copy a file because it is in use, simply click [OK]. It is merely notifying you that the
file the installation system is trying to copy already exists on your computer and is currently open.
The first BEN setup screen will appear:
You should close all other programs before installing the model. To do so, click on [Cancel],
close the programs and repeat the appropriate steps above. Otherwise click [Next] and proceed to
the second screen as shown below:
3 This address may have changed by the time you read this manual. To obtain the current address, you
can call the helpline at 888-ECON-SPT.
&
Infocmatiorc
{ Caned (
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Choose Destination Location
m
Q
Sai>4> will instal BEN / PROJECT in the fofcwing dnectuy.
To ratal to this d*ectory, c&ck Nod.
T o instal to a different (Sectary, cbck Brome and select another drectoiy.
You can choosenot toitttal BEN /PROJECT by cfckinjjCancel to eat
Seb*.
Destination Diectay-
DVBENPRJ
Biowte..
cfiacfc [r^ Next > i| Cancel |
The second screen offers you the opportunity to designate a directory in which to store the
model. The default directory is "c:\BENPRJ" (assuming that your local hard drive is c:\). If you
wish to save the model to a different directory, press [Browse] and choose your desired directory.
To proceed with the BEN/PROJECT installation, press [Next]. The next setup screen allows you
to choose a program folder name as shown below:
Select Pingiam Foldci
0
|x|
Setup wt add program icons to the Program Folder isted below. You may
type a new folder name, or select one from the existing Folders Ssi. Ctck
Next to contnue.
fiogram Folders:
Existing Folders
BH
GroupWise 5
lEc Doorrents
lEc Utilities
LiveNote
Novell
StartUp
< flack | MH) | Cancel |
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The default folder name is EPA Models, which you may alter. To continue installation press
[Next]. BEN/PROJECT will partially install and then prompt you for Disk 2, as shown below:
£1
Please iraett the next disk.. Disk 2. If the Ret on this ditk can be found
in another location, foi example, in another drive, enter it* fuO path or
dick the Biowsebtfton to jelectiU path.
Path
w
OK | Cancel {
If the files are not on Disk 2 you may type their location or use browse to find them. Press
[OK] when the path is correct. If the program is on two disks, simply insert Disk 2 and press [OK].
The setup program will create icons for BEN and PROJECT and finish installing them. When you
have completed the installation process, you should reboot your computer prior to using the BEN
model or any other software package.
Once BEN has been loaded onto your hard drive, simply double-click the model icon to start
the program. If you are running Windows™ 95 or higher, and did not change the default directory
and folder, BEN and PROJECT will automatically be listed on the start menu under programs in the
"EPA Models" folder.
After installing the model, you may wish to create a subdirectory for storage of all your case
files. Alternatively, you may also choose to save your case files in any pre-existing directories
corresponding to different cases or projects
C. DATA ENTRY
BEN is a Windows™-based computer program. Like other Windows™-based programs it
uses the mouse or the Enter and Tab keys to move from entry to entry or from screen to screen. Hold
down the Shift key while pressing Tab to return to previous entries. Each screen has several options
and spaces for input.
BEN will accept several entry formats. Numerical values can include but do not require
commas. Monetary values may include decimals but will be rounded to the nearest dollar. They
may be entered with or without dollar signs. Rates or percentages should be entered as a decimal
number without a percent symbol (e.g., enter 0.20 to represent 20 percent). If you type 2.5 for an
inflation rate, BEN will read it as an inflation rate of 250 percent.
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BEN converts all dates to a "1-Jan-1998" format, but can understand almost any sensible
format. If you enter an atypical date format, be sure to check that BEN has interpreted it as you
intended. If you do not enter a day, BEN will assume the first day of the month.
Be careful to use only number keys to enter numerical values. A frequent mistake is typing
the lowercase letter L instead of a number 1. Another error occurs when the capital letter O is typed
instead of the number 0 (zero).
BEN will tell you if the format for the entry is incorrect. If this happens, correct the number
and enter it again. Some inputs are limited to a range of values. If an entered value falls out of this
range, BEN will display an error message with the allowable range of values. Other error messages
will appear if you did not enter data in a required field. You may enter variables on the same screen
in any order. The only exception to this is that you must have entered all of the inputs for a case
before you create a run. Therefore you will receive non-entry error messages only when moving
from screen to screen or creating a run.
After typing your entry you might discover that you have typed an incorrect letter or number.
Typing errors are easy to correct: simply return to the relevant value and type over the mistake. Like
all computer programs, BEN follows the GIGO protocol: "Garbage In, Garbage Out." Verifying
your data inputs is therefore extremely important.
D. CALCULATING AND PRINTING RESULTS
To perform an economic benefit calculation, select the desired run title from the list on the
main screen and press [Calculate]. You may calculate multiple runs and display the results
simultaneously by selecting multiple run titles (i.e., select a run and then click on subsequent desired
runs, while simultaneously holding down the Control key). A new screen will display a summary
of the results.
You can may print either a summary of the results or detailed background spreadsheet pages.
The "Summary" option will print only the information contained in the summary results screen. The
"Detail" option will print, separately for each run, a summary page and spreadsheet pages that
include: (1) Illegal Competitive Advantage, which lists possible sources of additional economic
benefit (omitted if the user does not check off any such conditions for the case inputs); (2)
Discount/Compound Rate Calculation, which provides the details for the cost of capital calculation
(omitted if the user overrides BEN's calculations on the Options screen); (3) Calculations for
Specific Cost Estimates, which essentially prints the similarly named screen (omitted if the user
overrides BEN's calculations on the Options screen); and (4) Cash Flow (maximum of four pages),
which show the annual cash flow and net present value calculations.
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For more information on interpreting these pages, consult Appendix A of the BEN User's,
Manual, or call EPA's toll-free enforcement economics support helpline at 888-ECON-SPT
(326-6778).
Although printing is done from the output screen, the printer setup is controlled by the pull-
down menu on the main screen. The printer setup allows you to shift between landscape and portrait
printing, as well as choose more advanced options.
E. EXITING AND SAVING
You exit BEN just like any other standard Windows application. From the main screen,
select Exit under the File pull-down menu at the top left corner of your screen, or click on the [x]
button at the top right comer of your screen. You can also double-click on the BEN icon at the top
left corner of your screen. BEN will ask you if you want to save your work before you exit.
Be sure to save your case(s) before you exit. You save a case by selecting "Save" under the
File menu (or give the case a new name by selecting "Save As..."), or the Ctrl+S shortcut. BEN
cases are automatically saved with the extension ".ben" and can be accessed using the "Open"
command under the File menu or the Ctrl+O shortcut. You can save cases in any folder, and switch
between different folders at any time. Runs are automatically saved as part of a case.
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DATA REQUIREMENTS
CHAPTER3
To run BEN, you enter certain data, including the entity's tax status and state; the dates for
penalty payment, noncompliance, and compliance; and the compliance cost estimates and estimate
dates. BEN provides standard values — which you can modify — for tax, inflation, and discount
rates, as well as the capital equipment's number of replacement cycles and useful life, and the one-
time nondepreciable expenditure's tax deductibility. This chapter explains these variables (in the
order in which you enter them in BEN), covering the criteria for developing input values and the
basis for the standard values. Each explanation also states how a change in each variable's value will
affect the economic benefit result, as summarized below (holding all other variables constant).
Input Item
Direction
of Change
Impact on
Economic Benefit
Marginal Tax Rate
increase
decrease
Penalty Payment Date
later
increase
Cost Estimates
increase
increase
Noncompliance Date
later
decrease
Compliance Date
later
increase
Discount/Compound Rate
increase
increase
Number of Replacement Cycles
increase
increase
Useful Life of Capital Equipment
increase
decrease
Projected Rate for Future Inflation
increase
varies
Cost Index for Inflation
PCI to other index
varies
Tax-Deductibility of One-Time,
Nondepreciable Expenditure
tax deductible to
not tax deductible
increase
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A. CASE SCREEN
The case screen shown below is what you see when you first open BEN. This is where you
enter the following variables: case name, office/agency, analyst name, entity tax status, state,
marginal tax rate, penalty payment date, and run name. It is also where you consider questions of
competitive advantage. The right side of the case screen is where you create, edit, calculate and
remove runs.
EXAMPLE.BEN
Case
Case Name:
|Example Case
Region:
[Region 1
Analyst
U
|J. Analyst
Taxes—
-Entily-
C Not-For-Profit
<• C-Coipotation
Fot-PioW Othet than C-Corporation
Stale: i i
| MA ~~Ell Customize Taxes I
l~ Taxes Have Been Customized
Competitive Advantage
Penally Payment Date: CTUan-1999
rRuns
New Run:
Add
Existing Runs:
Test Run 2--CD 1 /I /98
Erter/Edt
Catenate
Copy |
Remove
1. Case Name, Office/Agency, Analyst Name
Case name, office/agency (formerly EPA Region), and analyst name are the first three inputs
in BEN. They are for reference purposes only and do not affect the calculation. Each of them will
appear along with the current date on the bottom of every page of the results.
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a. Case Name
Case name is the first input in BEN. This name can be any length and can contain letters,
spaces, punctuation and numbers (although you may not leave it blank). It will appear along with
the current date, analyst name, and EPA region on each page of the results. Since its sole purpose
is documentation, this label can contain anything you choose. It can reflect the violator's name or
a characteristic of the specific case (e.g., "Payment on July 15, 1999"). Each case can contain
several runs, so you will not need to alter the case name to save individual calculations.
b. Office/Agency
Like case name, office/agency is for reference purposes only (although you may not leave it
blank). It will appear along with the current date, case name, and analyst name on each page of the
results. A pull down menu to the right of the cell lists all ten EPA regions, EPA headquarters, and
the option of "other." You may also type in a different entry.
c. Analyst Name
Like case name and office/agency, analyst name is for reference purposes only (although you
may not leave it blank). This name can be of any length and can contain letters, spaces, punctuation
and numbers. It will appear along with the current date, case name, and EPA region on each page
of the results. It can be anything you choose, but it is most appropriate simply to enter your own
name.
2. Entity Type, State, Customized Tax Rate
BEN needs to know the violator's tax rate to calculate economic benefits, as compliance
costs are usually tax-deductible. Because tax-deductible expenses and depreciation associated with
capital investments reduce taxable income they result in-tax savings. The higher the tax rate, the
higher the tax savings, and therefore the lower the economic benefit of noncompliance. BEN uses
the marginal tax rate to account for the tax effects of compliance costs. Changing the violator's state
or tax status changes the violator's marginal tax rate and thus alters economic benefit.
a. Entity Type
BEN asks you to designate the tax filing status of the entity. The three options are: Not-For-
Profit, C-Corporation, or For-Profit Other than C-Corporation. Choosing the correct tax status is
critical, because it determines BEN's application of the tax rate and the discount/compound rate.
BEN will default to C-Corporation status.
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A C-Corporation files a federal tax Form 1120 or Form 1120-A. These companies are taxed
at corporate income tax rates. Virtually all publicly traded companies are C-Corporations, but small
privately held firms can also be C-Corporations.
For-profit entities other than C-corporations may be S-corporations, partnerships, or sole
proprietorships (e.g., a corner grocery store). These entities file federal tax returns other than 1120
or 1120-A (e.g., an S- corporation files a Form 1120-S and a Schedule K for each shareholder). The
income and expenses of these organizations are divided among the shareholders and reported on their
individual income tax returns. Income is therefore taxed at the individual income tax rate.
Not-for-profit entities, such as municipalities, public authorities, and charitable organizations,
generally have a tax-exempt status. When you indicate that the violator is a not-for-profit entity,
BEN sets the marginal income tax rate to zero. (Although rare, certain not-for-profit companies are
subject to taxation. You should verify the status of the not-for-profit in question and adjust the tax
rates accordingly.)
b. State
This is the state in which the entity conducts the majority of its business, which is not
necessarily the state in which it is incorporated. Selecting the correct state is important because BEN
uses state-specific tax rates in its calculations. The pull-down menu lists all fifty states plus "AVG"
and "BEN." "AVG" is an average of all state tax rates (appropriate if the noncompliant facilities
span several states). "BEN" is similar to "AVG", but instead of adjusting the state average each
year, it uses one state average for the period 1987-1992 and another for 1993 and beyond. This
option is appropriate only for replicating prior calculations from the DOS version of BEN, which
used these rates as its standard value.
c. Customized Tax Rate
Afteryou have entered the tax status and state of the violator, BEN will automatically
calculate the combined marginal income tax rate. The marginal tax rate is the fraction of the last
dollar of taxable income that a defendant would pay to federal and state governments. BEN uses the
marginal tax rate, not the average tax rate (i.e., total tax divided by total taxable income), because
the marginal tax rate is the rate that applies to incremental changes in the violator's tax-deductible
expenses.
State tax rates must be adjusted to reflect the fact that you can deduct state taxes from federal
taxable income. The adjustment is made by multiplying the marginal state tax rate by a factor equal
to one minus the marginal federal tax rate, as shown in the following formula:
Combined tax rate = Federal rate + [State rate x ( 1 - Federal rate)]
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State 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
capital investment or in the one-time nondepreciable expenditure. If the tax recurs regularly, then
it should be included in the annually recurring cost. For example, sales tax would be included in the
capital cost while property tax would be included in the annua] cost.
You may have information that supports the use of tax rates other than those supplied by the
BEN model (e.g., the entity was not subject to the highest marginal rate). In these situations you
can modify the annual rates individually by pressing [Customize Taxes]. The tax customization
window shown below will appear and you can simply type in your customized values.
* Tax H0E3
Combined » Federal + (State" (1- Federal))
Federal
MA
Combined
~
1387
34.0%
9.5%
40.30%
1HHH
34.02
9.5%
40.30%
1S8H
34.0%
9.5%
40.30%
1990
34.0%
9.5%
40.30%
1991
34.0%
15%
40.30%
1992
34.0%
9.5%
40.30%
1993
35.0%
9.5%
41.20%
1934
35.0%
9.5%
41.20%
1995
35.0%
9.5%
41.20%
1996
35.0%
9.5%
41.20%
yr
Note: Changing entity or state on the previous
screen will result in loss of tax customization.
OK | Cancel |
The 'Taxes Have Been Customized" box on the case screen will be checked when
modifications have been made to the tax rates. Similarly, this information will appear in the BEN
run results and print-out. Note that once tax rates are modified, re-designation of the state or entity
tax status will result in a loss of the customized information.
3. Competitive Advantage
BEN — or any computer model — is incapable of calculating economic benefit from illegal
competitive advantage, leading to a possible underestimate of economic benefit in certain cases.
Therefore BEN provides a [Competitive Advantage] button and asks questions for case attributes
indicative of illegal competitive advantage, providing suggestions for further research and analysis.
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You must read the competitive advantage screen and press [OK] before BEN will allow you
to create a run.
Questions on Illegal Competitive Advantage
m
l~ Did violator'* noncompliance allow it to be®n production or sales sooner than it should?
r* Did violator seS prohibited products?
r Are compliance costs a significant percentage of total production costs?
r Does violator tefi products that can develop "brand loyalty" or high switching costs?
I- Has violator developed or sold new products or services whie in noncompianco?
r~ Could violator have complied cost-effective^ by reducing outpiAthroughput?
OK I Cwcd
Below are the responses that appear in BEN's results if you check a question box.
1. Did violator's noncompliance allow it to begin production or sales sooner than it should?
Violator may have received "early-mover advantage" by beginning production or sales sooner than
it should.
2. Did violator sell prohibited products?
Violator's net profits from illegally sold products may constitute economic benefit, and if the
violator continues to sell similar now-legal products in same market, then lasting market share effect
may constitute an additional benefit.
3. Are compliance costs a significant percentage of total production costs?
Violator may have benefitted from market share gains by undercutting its competitors through price
advantages from noncompliance.
4. Does violator sell products that can develop "brand loyalty" or high switching costs?
Violator may have benefitted from market share gains because it sells products that can develop
"brand loyalty" or high switching costs.
5. Has violator developed or sold new products or services while in noncompliance?
Violator may have gained "early mover" market share and been able to discourage competitors by
keeping prices low, since it developed or sold new products/services while in noncompliance.
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6. Could violator have complied cost-effectively by reducing output/throughput?
Incremental net profit from higher output/throughput could constitute economic benefit, since
violator could have complied cost-effectively by output/throughput reduction.
If you answer affirmatively to any of these questions, further research and analysis is
necessary to determine the full extent of the violator's economic benefit. You might wish to consult
U.S. EPA's guidance on illegal competitive advantage, or contact EPA's enforcement economics
support helpline, at 888-ECONSPT (326-6778).
4. Penalty Payment Date
The penalty payment date is the date you expect the violator to pay the civil penalty. Dates
may be entered as month/day/year (i.e., 7/31/98) or written out (i.e., July 31, 1998). BEN will accept
two-digit years, but four-digit years are preferable. You must enter dates to the day.
BEN automatically calculates the final economic benefit 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.
A considerable time lag often occurs between when the violator signs the consent decree and
when it actually pays the penalty. If the violator is willing to transfer the entire penalty figure to an
interest-bearing escrow account on a date before entry of the consent decree, this escrow date may
be used as the penalty payment date. Upon entry of the consent decree, the escrowed penalty plus
any interest should accrue to the enforcement agency.
You should be certain that the violator knows: (1) the penalty payment date used in your
economic benefit calculation; and, (2) that if the penalty payment date is actually later than you have
assumed, the economic benefit will be higher. On the other hand, if the violator settles the case and
pays its penalty prior to the date you used in your calculation, or if it agrees to escrow the economic
benefit amount, the benefit component of the penalty will be lower. By conveying this information
early in a negotiation with a violator, you will give the violator added incentive to settle promptly.
In addition, this approach will allow you to avoid giving the violator any "unpleasant surprises"
should you need to increase the benefit component as a result of a delay in the settlement.
5. Creating/Adding. Copying, and Removing Runs
You must create a run before you can enter compliance cost information. To add a new run,
enter the run name under "New Run:" and press [Add], BEN will save the new run and list it under
"Existing Runs." Run names can be any length and include any letter, punctuation or number. Each
case may contain multiple runs.
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To copy an existing run select the run you wish to copy from the list of existing runs and
press [Copy]. A window will appear asking you to enter a name for the new run. No two runs can
have the same name. Enter the new name and press [OK] to save the new run or [Cancel] to delete
it. The copy will contain all of the information from the original. Copies are particularly useful
when making only minor changes in cost information from run to run, because they can carry over
consistent data.
To remove a run select it from the existing run window and press [Remove]. A window will
appear asking you if you are sure. Press [Yes] and the run is deleted. Remember that BEN does not
have a "trash bin" to hold deleted runs, so you will have no way to retrieve a run once you have
removed it.
B. RUN INPUT SCREEN
To access the run input screen, select a run ana press [Enter/Edit], or simply double click
on the run name. Here you enter cost estimates for three possible compliance components: capital
investments, one-time nondepreciable expenditures and annually recurring costs. Each cost
component requires a cost estimate and an estimate date. At the bottom of the run screen you must
enter the noncompliance and compliance dates.
Example Case: Test'Run
|xd
Compliance Components
Capital Investment
One-Time. Nondepreciable Expenditure:
Annually Recurring
Cost Estimate Es&nate Date
$1,000,000
01 Jan-1992
$100,000
OI-Jan-1992
$10,000
01-Jan-l 992
-Dates
Noncompliance:
Compliance:
OK [ Options | Caned |
01-Jan-1992
01-Jan-l 997
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1. Compliance Cost Components
This is where you enter the costs of the equipment/labor/activities necessary to achieve
compliance. Engineers and technical staff in your enforcement program are usually aware of what
reasonable costs might be for pollution control technologies and remedial activities, and might also
know of standard cost information that exists in publications. Another potential source of
information is the violator, who might willingly give you the required data. Otherwise, you can take
a number of legal approaches to obtain the data from the violator. The EPA usually has authority
to request the necessary information. With a legal issue like this one, the appropriate attorney(s)
should also be consulted. In cases where cost data is available, but the required compliance
measures are still unclear, two general guidelines will assist you:
(1) The best evidence of what the violator should have done to prevent the violations is what
it eventually did (or will do) to achieve compliance. This rule is instructive in those cases where the
violator may appear to be installing a more expensive pollution control system than EPA staff
believe is necessary to achieve compliance. In such situations, the proper cost inputs in the BEN
model are usually still based on the actual (more expensive) system being installed. This is because
the EPA should not second guess the business decisions of a violator. A violator often will have
sound business reasons to install a more expensive compliance system (e.g., it may be more reliable,
easier to maintain, or have a longer useful life).
(2) Costs not truly associated with pollution control efforts to remedy the violations alleged
in the complaint should be excluded from BEN inputs, but the violator must present convincing
evidence that the costs were not associated with the operation of the pollution control system. For
example, if the violator is adding additional capacity to handle a waste stream from a new production
line, the incremental costs associated with treating the new waste stream should not be included in
the BEN run (based on the assumption that the additional capacity for treatment of wastes from new
production was not needed to achieve compliance under previous levels of production). Similarly,
if the violator is adding capacity to accommodate normal anticipated business growth, and on-time
compliance would not have entailed such additional capacity, then you should exclude the
incremental costs of the additional capacity.
You may enter compliance costs with or without commas or dollar signs. BEN will accept
decimals but will round the amount to the nearest whole dollar. Enter a zero for any component
category where expenses would not be incurred. All else being equal, larger compliance costs will
result in a higher economic benefit of noncompliance.
a. Capital Investment
The capital investment cost estimate should include all depreciable investment outlays
necessary to achieve compliance. Generally these are expenditures the violator delayed making
(although they could sometimes be avoided altogether). Enter a zero if no capital investment was
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September 1999
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required for compliance. Holding all other inputs constant, the economic benefit from delay will be
greater for larger capital investment outlays.
Depreciable capital investments are made for things that wear out such as buildings,
equipment or other long-lived assets. Note that land is not a depreciable capital investment; land
costs should instead be input as a one-time non-depreciable expenditure. Typical environmental
capital investments include groundwater monitoring wells, stack scrubbers, and wastewater treatment
systems. In estimating capital cost, keep in mind this includes all costs associated with designing,
installing, shipping, and purchasing the necessary equipment (including sales tax) and associated
facilities.
If the capital investment is avoided (i.e., the violator is not just delaying making the
investment, but will never make the investment), after entering all the required information on the
run inputs screen, on the options screen uncheck the "Delayed, Not Avoided" box and set the
replacement cycles to 0. (If a replacement cycle has also been avoided, then retain the default cycle
of 1.)
If you have capital investment costs with significantly different cost estimate dates, you
should perform separate runs for each, which you can add together to produce a total economic
benefit result.
b. One-Time, Nondepreciable Expenditure
This category includes compliance expenditures that need to be made only once and are non-
depreciable (i.e., do not wear out). Enter a zero if no one-time nondepreciable expenditure was
required for compliance. Holding all other inputs constant, the economic benefit from delay will be
greater for larger one-time nondepreciable expenditures.
Such an expenditure could be 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. However, if-training or record keeping must occur over time and
regularly, these costs should be entered as annually recurring costs. If the one-time nondepreciable
expenditure involved is avoided (i.e., the violator is not just delaying making the expenditure, but
will never make the expenditure), on the options screen uncheck the "Delayed, Not Avoided" box.
Most one-time nondepreciable expenditures are tax-deductible; with the primary exception
being purchases of land. Land is an asset and, therefore, cannot be deducted as an expense from
taxable income. BEN assumes that the expenditure is tax-deductible unless otherwise specified. To
change this assumption uncheck the 'Tax Deductible" box on the options screen.
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c. Annually Recurring Costs
Annually recurring costs are costs associated with operating and maintaining pollution
control equipment. Enter a zero if no (additional) annual costs were required to operate the
necessary pollution control equipment. Holding all other inputs constant, the economic benefit from
delay will be greater for larger annually recurring costs.
This cost estimate should reflect the average annual incremental cost of operating and/or
maintaining the required environmental control measures. These expenditures 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 associated with operating the new or improved
pollution control equipment. Note that annually recurring costs may be negative if compliance
increases efficiency. Include any lease payments for equipment, but not expenses such as annualized
capital recovery, interest payments, or depreciation.
Any operating and maintenance (O&M) offsetting credits should also be considered in
determining the incremental annual costs. Such credits might represent actual O&M cost savings:
heat recovery, product or byproduct recovery, and so forth. To be included, such savings must be
proven by the violator, not just asserted. For example, the installation of new pollution control
equipment may reduce certain costs (such as sludge disposal) associated with operations during the
noncompliance period. If the resulting incremental O&M cost is negative, the net cost savings may
be used in determining annual costs. Credit is given only for annually recurring cost savings that are
both documented and directly related to compliance.
Annual costs must be equal for each year of the violation, differing only by inflation, to enter
them into BEN. If they vary only slightly, you can enter an average estimate of the different yearly
figures. If they vary significantly, then you can create separate runs corresponding to the different
years of the violation. Each run's noncompliance and compliance dates should reflect the beginning
and ending dates for the year of the specific annual cost.
If the annual costs are delayed, and not avoided, then enter them as one-time nondepreciable
expenditures. You can either enter the entire sum of the annual costs that have been delayed over
the entire noncompliance period, or you can create a separate run for each year of delayed costs.
Either way, the noncompliance date should be the midpoint of when the annual costs should have
been incurred (i.e., the midpoint of the entire noncompliance period, or the middle of the year), and
the compliance date should be the midpoint of when the costs were or will be incurred.
2. Cost Estimate Dates
Each cost estimate needs a date, reflecting the date on which the estimate is premised. Dates
may be entered as month/day/year (i.e., 7/31/98) or written out (i.e., July 31, 1998). BEN will accept
two-digit years, but four-digit years are preferable. You must enter dates to the day. If you do not
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have date information to the day, use the day that falls in the middle of the time frame you have.
For example, if all you know is that the estimate was made in May of 1998, use May 15,1998 as the
estimate date. If all you know is that the estimate was made in 1998, use July 1,1998 as the estimate
date. If you have multiple costs for the same component with different dollar-years, enter them as
separate runs, and sum the results.
3. Noncompliance and Compliance Dates
For all dates you can use any format, but be sure to enter the year, month, and day. (If you
do not enter a day, BEN will assume the first day of the month.) Also, BEN will not accept any dates
before July 1, 1987.
The noncompliance date is generally when the first violation of the environmental
requirement occurred. BEN uses this as the proxy for when the violator should have actually
incurred the expenditures necessary for compliance. Since compliance expenditures must often
occur far in advance of actual legal compliance, it is highly conservative to use the date by when the
violator should have completed installation of the necessary pollution control equipment and had
such equipment fully operational. 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) will, in virtually all cases, increase the benefit figure. Hence, if you were
to use the actual date when the compliance expenditures would have been incurred — if this
information were available — the economic benefit would be substantially higher than how EPA
typically calculates it.
The compliance date is when the violator came into compliance with environmental
requirements or the date when you expect the violator to achieve compliance. BEN once again uses
this as the proxy for when the violator actually did — or will — incur the expenditures necessary for
compliance. The date when the equipment was initially installed is not necessarily sufficient: the
violator needs to be in compliance (for consistency with the noncompliance date), and have already
incurred all of the capital and one-time costs and started to incur the annual costs. (Often a
significant amount of time is required to "break-in" the equipment and adjust it; thus the compliance
date is when compliance is actually achieved.)
Remember though that BEN is ultimately concerned with financial — not legal — dates:
your object should be to "follow the money." (In an extreme example, if a violator were to install
the required capital equipment — yet for some reason not operate it — then for the purposes of
BEN's calculations of the capital investment economic benefit the violator is in compliance.) Using
the legal dates of noncompliance and compliance can be a useful proxy, and will keep the
noncompliance time period the correct length, but it will generally underestimate the true economic
benefit (since the noncompliance period is being artificially shifted closer to the penalty payment
date).
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Note that in economic benefit analyses, the compliance date must occur after the
noncompliance date. A later compliance date (holding the noncompliance date constant) will, in
virtually all cases, increase the economic benefit figure. If you are running BEN to calculate the
after-tax net present value of an "early compliance" supplemental environmental project, then enter
the date when the violator will comply early as the noncompliance date, and the date when the
violator is required to comply as the compliance date.
The dates are a major consideration in the BEN analysis. As the interval of non-compliance
increases, the economic benefit generally increases. For each month that the violator delays
compliance, it delays capital and one-time costs and avoids operation and maintenance expenses.
In practice, the period of violation is sometimes not clear. Proving the entire period of violation
might encounter evidentiary problems. It might be helpful to perform several different BEN runs
to show the impact of different violation periods on economic benefit.
Although a statute of limitations may apply in your case, it should generally affect only 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 may 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.
Another point to keep in mind is that as of the date the BEN analysis is performed, the
violator might not yet be in compliance. Therefore, you must make an assumption regarding the date
of eventual compliance. In discussions with the violator about the BEN calculation, you should be
explicit about your compliance date assumption. You should then make clear to the violator that
further delays in compliance will yield a higher economic benefit, and thus a higher penalty.
Conversely, earlier compliance will yield a lower penalty. By conveying this information up front,
you will give the violator added incentive to comply early, and will also avoid having to give the
violator any "unpleasant surprises" should you have to increase the benefit component of the penalty.
C. OPTIONS
The standard values in BEN are updated annually to reflect changes in interest rates, tax law,
and so forth. Although 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 may wish to customize some of the optional inputs. In particularly complicated
cases, you might also want to consult the EPA helpline (888-ECON-SPT).
The options screen allows you to modify the discount/compound rate, cost indices for
inflation, number of replacement cycles, whether a cost is delayed or avoided, the useful life of
capital equipment, future inflation rate, and the tax deductibility of one-time nondepreciable
expenditures. You should customize these variables only if you have reliable information to
substantiate the change.
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Test Run: Optional Inputs
m
DbcounlAitanpound Rate
10.3%
rCapftel Investment -
15
1.7X
Cost iTdexfui Inflation: [Fci 53
Number of Replacement Cycles:
Useful Life of Capital Equipment
Projected Rate fo» Futue Inflation:
|7 Delejwd, Not Avoided
|- One-Time, Nondepreciable Expenditure-
Cost Index for I r Ration: |PCI
R TaxDsductible
(7 Delayed. Not Avoided
3
rAnrwal Costs-
Cost Irdex fcr Inflation: fpci 3
OK
Specific Cost Estimates I Cancel
1. Discount / Compound Rate
To compare the on-time and delayed compliance costs from different dates in a common
measure, BEN adjusts both streams of costs (i.e., "cash flows") for inflation as of the date of initial
noncompliance. After determining the initial economic benefit as of the noncompliance date (i.e.,
the difference between the on-tirne-case present value and the delay-case present value), BEN
compounds this amount forward to the penalty payment date. To perform these present value
calculations, BEN must employ a discount/compound rate that reflects the violator's "time value of
money."
For a for-profit entity's discount/compound rate, BEN uses the weighted-average cost of
capital (WACC) for a typical company, reflecting the cost of debt and equity capital weighted by the
value of each financing source. A company must on average earn a rate of return necessary to repay
its debt holders (e.g., banks, bondholders) and satisfy its equity owners (e.g., partners, stock holders).
While companies often earn rates in excess of their WACC, companies that do not on average earn
at least their WACC will not survive (i.e., their lenders will not receive their principal and/or interest
payments, and their owners will be dissatisfied with their returns). The WACC represents the return
3-14
September 1999
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a company can earn on monies not invested in pollution control, or, viewed alternatively, represents
the avoided costs of financing pollution control investments. Thus, a company should make its
business decisions by discounting cash flows at its WACC, and BEN follows the internal analysis
a company will normally perform.
For a not-for-profit discount/compound rate, BEN uses a typical municipality's cost of debt,
based on interest rates for general obligation bonds.
You can view BEN's discount/compound rate calculation by selecting the detail printouts
after you calculate a run. BEN calculates the rate in each year, then uses the average of the annual
rate over the period from the year of initial noncompliance through the year of penalty payment.
Each year EPA appends the BEN model so that it contains another year of data for the annual rates.
Some violators will argue for rates tailored to their industry, company, or specific division,
or, for a not-for-profit entity, actual bond issues or debt ratings. In general, you should involve a
financial analyst or contact the U.S. EPA enforcement economics toll-free helpline at 888-
ECONSPT (326-6778) if the violator raises an issue about the cost of capital. Also, you should
inform the violator that a case-specific cost of capital could result in a higher discount/compound
rate, which will increase the economic benefit result.
If you customize the discount rate, be sure to enter it as a decimal. BEN will automatically
convert it to a percentage.
2. Inflation Indices and Projected Inflation Rate
For actual historical inflation, BEN adjusts each cash flow from the date of the cost estimate
by referencing a look-up table of cost index values.4 The default cost index is the Plant Cost Index,
from the magazine Chemical Engineering. This particular index may not be appropriate for every
case. Thus BEN offers a pull-down menu for each compliance component listing other available
cost indices. The inflation rate for each compliance cost category may be modified individually
because the different cost categories may be affected by different inflationary trends. The table on
the next page summarizes the optional indices. (EPA modifies the BEN model each year to include
4 Unlike the earlier DOS version, BEN no longer applies an explicit inflation rate, although an
annualized rate could be imputed from the model's data. For example, suppose a $200 cost estimate from
1991 must be adjusted for inflation to the same day in 1992. The 1991 cost index value is 100, whereas the
1992 index value is 103. The calculation the model performs is $200 * 103 /100 = $206 (i.e., multiplying
the original cost estimate by the ratio of the cost index values from the date on which the cost is actually
incurred, and the date on which the estimate is made). The index change from 1991 to 1992 does represent
an annual inflation rate of three percent (i.e., 103 / 100 = 1.03 - 1 = 0.03), but the model does not directly
apply this rate. A calculation that uses the ratio of the index values is both more precise and more simple
than one that calculates multiple annual inflation rates over different periods for historical costs.
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new data from each index.) For projected future inflation, BEN extrapolates each cost index forward
in time at a separate forecasted rate.5
INFLATION INDICES
Abbreviation and Full Name
Description
Typical Applications
BCI
Building Cost Index
building costs; based on 1.128 tons
Portland cement, 1,088 bd. ft. 2x4
lumber, 68.38 hrs. skilled labor
general construction costs,
especially structures
BEN
current BEN model's
constant inflation rate
average of PCI's last 10 years; i.e.,
a constant 1.8% increase each vear
replication of results from
current BEN model version
CCI
Construction Cost
Index
construction costs; same as BCI,
except 200 hrs. common labor
general construction projects,
especially where labor costs
are a high proportion of total
costs
CPI
Consumer Price Index
representative consumer goods
compliance somehow
involves consumer goods
ECIM
Employment Cost
Index: Manufacturing
employment costs for the
manufacturing industry
one-time nondepreciable
expenditures or annual costs
that comprise mainly labor
ECIW
Employment Cost
Index: White Collar
employment costs for white collar
labor
same as ECIM, except
professional labor (e.g.,
permits)
PCI
Plant Cost Index
plant equipment costs
standard value
In addition to the option of selecting an alternative to the PCI, BEN offers two other ways
to modify its inflation adjustments.
First, BEN uses a separate projected future inflation rate for any additional recurring capital
replacement cycles after the first one. You can override the standard value, which is based on the
PCI projected rate for future inflation. If you modify the inflation rate, be sure to enter it as a
decimal. BEN will automatically convert it to a percentage.
5 This is based upon a consensus forecast for the Consumer Price Index (CPI) and each individual
index's historical relationship to the CPI. The rationale for the calibration of the other indices to the CPI is
that the CPI has widely available forecasts for projected inflation, but the others do not.
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Second, on the "Specific Cost Estimates" screen, you can override BEN's inflation
adjustments for the capital investment and one-time nondepreciable expenditure, and instead enter
separate estimates for these compliance costs as of the noncompliance date, compliance date, and
the initial recurring cycle start dates. This customized data entry can represent another alternative
cost index, case-specific inflation assumptions, or entirely different actions for on-time and delayed
compliance.
3. Capital Investment Replacement Cycles and Useful Life
You can specify the number of replacement cycles for the capital equipment, and the useful
life of the equipment (i.e., the years between replacement cycles). A violator who delays installing
pollution control equipment for, say, five years, benefits not only by delaying the initial expenditure
five years, but also by postponing the second and potentially subsequent replacement cycles by the
same five years.
The BEN model defaults to one replacement cycle, although you can specify as many as five.
Because the present value of future costs decreases rapidly the further they occur from the present,
additional replacement cycles after the first cycle typically have almost no significant impact upon
the economic benefit result.
Not all capital investments need to be replaced at the end of their useful lives. For example,
groundwater monitoring wells or other equipment used to close a RCRA site may not need to be
replaced. By contrast, water and air pollution control equipment are typically replaced since this
equipment is generally needed to support compliance for the foreseeable future. Most capital
investments will be replaced. In identifying equipment as a one-time purchase, you should be
convinced that the equipment will not require future replacement. If this is indeed the case, set the
number of replacement cycles to zero.
The useful life determines the number of years between 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, the total present value of the costs of replacement for
the longer-lived equipment would be lower (since each subsequent investment occurs later).
Therefore, a longer useful life reduces the benefit of delaying compliance — holding all other inputs
constant — although this impact might be offset somewhat if the shorter useful life triggers a more
rapid depreciation schedule.
If your capital investment reflects different pieces of equipment with significantly different
replacement cycles and/or useful lives, you need to create separate BEN runs for the differing
equipment. You can add together the results from the two calculations to determine the total
economic benefit.
3-17
September 1999
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4. Avoided vs. Delayed
BEN's default assumption is that both the capital investment and the one-time
nondepreciable expenditure are delayed, not avoided. If the violator will instead never incur such
compliance costs, then uncheck the "Avoided, Not Delayed" delayed boxes. Also, for an avoided
capital investment, you should change the replacement cycles to 0, unless the violator has avoided
not only the initial installation but also its replacement.
5. Tax Deductibility of One-Time Nondepreciable Expenditure
Most one-time nondepreciable expenditures are tax-deductible; with the primary exception
being purchases of land. Land is an asset and, therefore, cannot be deducted as an expense from
taxable income. BEN assumes that the expenditure is tax-deductible unless you uncheck the box.
D. SPECIFIC COST ESTIMATES
The specific cost estimate screen allows you to view BEN's inflation adjustments, which
calculate specific cost estimates for certain dates, extrapolating from the original single cost estimate
(which you enter on the earlier screen for compliance components data). This screen also allows you
to override BEN's calculations for the specific cost estimates. You reach the specific cost estimates
screen by pressing [Specific Cost Estimates] at the bottom of the options screen.
All data except for the specific cost estimates are "grayed out", since BEN allows to you
override only the final estimates, not the intermediate calculations. Changing your inputs on prior
screens, however, will have an impact on the "grayed-out" data, unless you click [OK] on this
screen, which will lock in your inputs on prior screens. (BEN takes this action because otherwise
it would not know whether you intended subsequent changes to prior screens to affect the
customized data you have entered on this screen.) Clicking [OK] on this screen will also visually
erase all of the other data when you return to this screen in the future. (BEN takes this action
because it does not know how much of the other data you incorporated into your customized-specific
cost estimates.)
BEN displays four separate columns of data, corresponding to the start dates of the on-time
compliance scenario (i.e., the noncompliance date), the delay compliance scenario (i.e., the
compliance date), the on-time replacement cycle (i.e., the noncompliance date plus the useful life
of capital equipment), and the delay replacement cycle (i.e., the compliance date plus the useful life).
The first row simply provides the date for each scenario, as calculated above. The next rows are
divided into two groupings: the first for capital investments, and the second for one-time
nondepreciable expenditures.
3-18
September 1999
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Each grouping starts with a row for the single cost estimate you originally entered on the
basic run input screen. The second row then displays the value of the selected cost index (the Plant
Cost Index is the default) as of the cost estimate date, and the third row displays the value for the
same cost index as the specific cost estimate date. The final row (as the operator signs between the
rows indicate) is equal to the first row divided by the second row, multiplied by the third row.
Test Run: Specific Cost Estimates
Comptence Start
On-Time Delay
Replacement Cycle Start
On-Time Deteu
Capital Investment-
1,000 000
T~
Original Cost Estimate:
Cost Index Value as of 135'3 5
i
Cost Index Value as of (BJ: |359 5
Specific Cost Estimate:
11,000,000
11 000.000 11,000,000
53 5U0
x
359 500
x
U0
jlJU
1359 5l
>
|442 S33 |481 776
359 500
x
0U
x
$1,000,000
$1,066,203
$1,231,803
$1,340,127
fxl
01 \lan-1992
01 -.Jari-1997
01-Jan-2007
01 >Jjn-2012
One-Time, Nondepreciable Expenditue
Original Cost Estimate:
1100 000
1100,000
CostlndexValueasof(A): 1359 5i
Cost Index Vatue as of (B): [
00
x
1359 5i
UU
x
35'd 500
: 300
Specific Cost Estimate: $100,000
$106,620
(A) - Orignal Cost Estimate Date
(B) - Specific Cost Estimate Date
OK
Cancel
3-19
September 1999
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If you click [OK] on the specific cost estimate screen, exit it and then later return, all of the
intermediate calculations will be blank, and only the final specific cost estimates will appear:
Test Run: Specific Cost Estimates
a
Compliance Start
On-Time Delay
Replacement Cycle Start
On-Time Delay
OKIan-1992
01 -Jan-1997
01 -J an-JOO?
01-Jar,-2012
[-Capital Investment-
CD rigind Cost Estimate:
Cost Index Value as of(A): ^
Cost Index Value as of (B): |~
- One-Time. Nondepreciable E>pencfiture
Original Cost Estimate:
Cost Index Value as of (A): |
Cost Index Value as of (B):
Specific Cost Estimate: $100.000
$106,620
31
$1,000,000
$1,086,203
$1,231,803
$1,340,127
(A) - Original Cost Estimate Daw
(B) - Specific Cost Estimate Dale
OK | Cancel |
Reasons for modifying BEN's calculations can include the following, but be prepared to
document your actions and rationale.
3-20
September 1999
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1.
Separate Cost Estimates for Noncompliance and Compliance Dates
This could reflect several scenarios: the violator obtained a cost estimate at the
noncompliance date, even though it did not comply until later; technological change between the
noncompliance and compliance dates implies that different compliance measures were available at
the two dates; or, regulatory change over time mandated different compliance measures at the
noncompliance vs. compliance dates. Under such scenarios, use the most recent data for the original
capital cost estimate so that it reflects the delay compliance scenario (ensuring that any future capital
equipment replacement cycles are calculated correctly). Then, override the specific cost estimate
in the first column (i.e., on-time scenario compliance start) with the correct estimate.
In the example below, the violator obtained a cost estimate for required capital investments
of $100,000 at the date of noncompliance (January 1, 1992), but because of technological change
it only had to spend $80,000 when it came into compliance on January 1, 1997. The user entered
the $80,000 estimate (with an estimate date of January 1, 1997) as the capital investment cost on
the initial input screen. The specific cost estimate screen then appears as:
SPC2: Specific Cost Estimates
13
Compliance Start
On-Time Delay
Replacement Cycle Start
On-Time Delay
01 J-an-1991
01 I nr i 1 997
01 -J-anOOU? 01 Jan-:01
Capital Investment-
X
Cost Index Value as of (8): |358 SOU
Specific Cost Estimate:
383 900 1381300
x x
|471 943 |526192
75033
$80,000
$98,501
$109,824
Original Cost Estimate: 180,000
'5.00,000
180,000
$80,000
+
4
+
+
One-Time, Nondepreciable ExpenditLae-
Original Cost Estimate:
1100 000
1100,000
+
Cost Index Value as of (A): J 359 500
+
j 359 500
Cost Index Value as of (0): |359 500
J"::-:-: -mil
S
Specific Cost Estimate:
$100,000
$106,620
IA) - Original Cost Estimate Data
(B) - Specific Cost Estimate Date
OK
Cancel
3-21
September 1999
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However, had the violator actually complied on time it would have faced a capital investment
of $100,000 (the estimate it received in 1992), not $75,033 (the specific cost estimate as calculated
from the 1997 estimate). To reflect this, the user changed the on-time compliance specific cost
estimate to $100,000.
SPC 2: Specific Cost Estimates
T"
Compliance Start
On-Time Delay
Replacement Cycle Start
On-Time Delw
01 -Jan-1992
01 -.J.an-1 '397
CTUan-2007
01 -Jan-2012
- Capital Investment—
Original Cost Estimate:
ISO 000
ISO 000
$80,000
$80 000
Cost Index Value as d(AJ [
Cost Index Value as of [Bt
38 J GO
h 500
j oL'iJ
X
138 3 300
383 300
x
471 343
|383 300
x
526 1'32
Specific Cost Estknate: 1000000
$80,000
$98,501
$109,824
- One-Tone, Nondepreciable Expenditure
Original Cost Estknate:
$100 000
'{.mil iiiiii
+
~r
Cost Index Value as of (A): 1353 500
X
1359 500
X
Cost Index Value as of (B): |359 500
a
|38 3 300
a
Specie Cost Estimate:
$100,000
$106,620
(A) - Original Cost Estimate 0*6#
(B) - Specific Cost Estimate Dote
OK ( Cancel |
3-22
September 1999
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2.
Inflation Data More Appropriate than BEN's
Although BEN offers many other alternative cost indices in addition to its default Plant Cost
Index, occasionally some other inflation adjustment may be necessary. If so, override whichever
specific cost estimates you believe are inaccurate. (If you are using some other index, you might
want to create a spreadsheet that mimics the BEN screen, substituting your index's values for the
ones on the screen.)
In the following example, the one-time nondepreciable expenditure consists mostly of
chemicals. A subset of the Producer Price Index for chemicals will give a more precise inflation
adjustment than the various indices BEN offers. You can use this chemical index to adjust the
original cost estimate for inflation as shown in the table below:
Specific Cost Estimate Transportation Equipment Index
On-Time
Delay
(1/1/1992)
(1/1/1997)
Original Cost Estimate
100,000
100,000
Cost Index Value
111.0
111.0
as of original estimate date
x
x
Cost Index Value
111.0
116.9
as of specific cost estimate date
—
—
Specific Cost Estimate
1,000,000
105,315
Once you have calculated the appropriate specific cost estimates, you can incorporate them
into the BEN calculation by overriding the values on the specific cost estimate screen, as shown on
the next page.
3-23
September 1999
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Test Run: Specific Cost Estimates
Compliance Start
On-Time Delap
Replacement CydeSUit
OrvTme Del«>
01-Jan-1992
OI-Jan-1997
01-Jan-2007
01-.Jan-2012
r Capital Investmertt-
11.000 000
359 500
Original Cost Estimate:
Co$t index Value as of (A):
Cost Index Value as of (B): |359 500
Specific Cost Estmate:
11 000,000
11 000 000
1359 500
x
jo 3. 3uu
11 000,000
—
i59 500 ! [359 500 |j
x x ..
442 i
481 778
$1,000,000
$1,066,203
$1,231,803
$1,340,127
F
One-Time, Nondepreciable Expentfitue -
Urtgnal Cost Estimate:
Cost Index Value as of {At 1359 500
X
Cost Index Value as of (B J: 1359 500
itooooo
n 00,000
+
4-
j'359 500
X
J 383 300
Specific Cost Estimate: $100,000
$105,315
(A) - Origrol Cost Estimate Date
(B) - Specific Cost Estimate Date
OK
Caned
3-24
September 1999
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ISSUES THAT ARISE WITH BEN
CHAPTER 4
Section A of this chapter provides guidance for addressing common arguments made by
violators. Section B discusses how to characterize more complicated compliance scenarios.
A. COMMON VIOLATOR ARGUMENTS
1. Cost of roof on new treatment building should be excluded since roof is not needed to
operate treatment system.
In virtually all cases BEN should include the cost of the roof unless the violator can
conclusively prove that the treatment system would operate just as effectively and efficiently without
the roof (all else being equal) and that the roof is not a customary part of such treatment systems.
A violator can almost never support this claim, since it must essentially argue that installing a roof
was a waste of money (serving no sensible business purpose).
2. Cost of painting walls and landscaping treatment building should be excluded since they
are unnecessary for compliance.
While such items may not be directly necessary to achieve compliance, if these items are
normally part of such projects, then BEN should include their costs. Such expenditures often
provide intangible and tangible benefits, such as improving the appearance of the facility, reducing
erosion and dust, preserving the building, and creating a more attractive environment for employees,
visitors, and customers. Presumably these expenditures would have been necessary for on-time
compliance, and hence the violator benefitted by delaying them.
4-1
September 1999
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3. Cost of an extra (backup) pump should be excluded, since it is unlikely ever to be used.
While the pump may never be used, if reasonable engineering practice would include an extra
pump (or any other backup systems), then BEN should include its cost. Given that the violator did
(or will) purchase the extra pump, the burden is on the violator to show that it is unnecessary to
achieve and consistently maintain compliance. Further, even if the cost of the extra pump were
subtracted from the capital investment, annual operation and maintenance costs might need to be
increased to reflect the greater importance of maintaining the existing pumps.
4. Cost of building second floor above treatment plant should be excluded since it is used
exclusively for purposes unrelated to compliance.
If the second floor does not support the pollution control system, then the incremental cost
of building the second floor may be subtracted from the capital investment.
5. Cost of building tertiary treatment system should be excluded since only primary and
secondary treatment systems were necessary to remedy violations.
If the tertiary treatment system really was unnecessary to prevent the violations alleged in the
complaint, but rather is necessary for achieving compliance with future standards, then subtract its
cost from the capital investment. Recall that the capital investment should reflect the pollution
control system that was necessary to remedy the violations at the time and under the conditions
alleged in the complaint. The violator, however, must convince EPA that the additional cost is truly
unrelated to remedying the violations alleged in the complaint.
6. No additional labor is necessary to operate new pollution control system, since existing
employees operating old system will operate it.
If the existing employees were operating an old pollution control system replaced by the new
system, then this claim may be correct. Presumably the total labor costs associated with the old
pollution control system (replaced by the new system) are less than or equal to the labor costs for the
new system. If the new system is more efficient to operate, even less labor may be required. Your
entry for annually recurring costs should reflect this and can even be negative.
7. Labor costs for new system are really zero because we are reassigning workers from
another part of plant; thus, since we are not hiring additional workers to run system, we
have no incremental labor costs.
This claim is not correct since the employees who will operate the new system are not
coming from the old pollution control system that is being replaced. Rather, they are coming from
4-2
September 1999
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another part of the facility and the facility will be deprived of the productive work these employees
were doing. If the violator had complied on-time, it would have had to shift these employees to
pollution control and given up the work these employees otherwise would have done somewhere else
(e.g., the production line) during the period of noncompliance. This is the concept of opportunity
cost: the cost of resources for a particular use is measured by the benefit lost in forfeiting their most
profitable alternative use.
B. CHARACTERIZING COMPLIANCE SCENARIOS
1. Violator Spends $100,000 on System that Does Not Work.
The violator should have spent $1,000,000 to install a satisfactory system, but instead spent
$100,000 on-time for a system that did not work. If the system did not result in compliance, it is
questionable that the system's expenditures were in fact intended for compliance. Unless some other
factor is present, the correct entry for the capital cost should be $1,000,000.
The enforcement team might find that the violator had some reasonable basis or justification
for selecting the inexpensive technology. If the violator went to a reputable firm, the firm
recommended the system that failed, and the violator's reliance on the recommendation was
reasonable, then you should offset the economic benefit by the after-tax present value of the
unsuccessful expenditure. You could use BEN to calculate this offset, although remember that this
is a case-specific judgement for the litigation team.
2. System "Works," But Is Too Small.
The violator spent $100,000 on-time for a system that was too small to sol've the pollution
problem, but the existing system can be incorporated into the final, fully sized system. The Agency
should subtract from the total required investment the $100,000 already spent; the BEN capital
investment input would be $900,000. The reason for this treatment is that the violator gained a
benefit on only the $900,000 that it did not spend, not the $100,000 it did spend.
3. Same as Scenario 2, But Violator Has Letter from Government Official Approving System.
While the violator has a reason for being out of compliance, it still had the benefit of using
the $900,000 for other purposes while it was in violation. Thus, BEN's capital investment is still
$900,000. BEN is "no-fault" in nature. Regardless of how good the violator's excuse is, it still had
the use of the $900,000 over the period of the violation. The only difference between this and
scenario 2 is the existence of an arguable approval by the regulatory agency, but this is a legal
distinction, not an economic one, possibly affecting the gravity component of the penalty, but not
the economic benefit component.
4-3
September 1999
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4. Violator Complies in Stages.
The violator put part of the pollution system into operation (with actual pollution reduction)
one year after the noncompliance date at a cost of $200,000. One year later (and two years after the
noncompliance date), the violator put a second piece of the system costing $300,000 into operation
(which resulted in additional pollution reduction). Three years later the entire system was in
operation, and the final piece cost $500,000.
If on-time compliance could have been achieved in one stage instead of three (see timeline
below), create three separate BEN runs, each with the same noncompliance date:
• $200,000 capital investment, and a one-year period of noncompliance;
• $300,000 capital investment, and a two-year period of noncompliance;
• $500,000 capital investment, and a three-year period of noncompliance.
As the violator paid for each component, it was no longer delaying the purchase of that
equipment. Add the results from the three runs to determine the total economic benefit.
7/1/92
7/1/93
HYPOTHETICAL COMPLYING FIRM'S TIMELINE
(not adjusted for inflation)
7/1/94
BEN's noncompliance date-
7/1/95
Decision
to comply
on-lime
Expenditures
for $1,000,000
NONCOMPLYING FIRM'S ACTUAL TIMELINE
7/1/92
7/1/93
7/1/94
7/1/95
BEN's compliance dales for.
Run 1: Run 2: Run 3:
7/1/96 7/1/97 7/1/98
Decision Expenditures Expenditures Expenditures
to comply for Part A for Part B for Part C
in delayed $200,000 $300,000 $500,000
fashion
4-4
September 1999
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5. System is Operational at Conclusion of Series of Expenditures.
This is similar to scenario 4 (where the violator purchased and installed the various system
components over three years), except that here the system is put into operation only after all of its
components are installed, instead of sequentially.
You should create one BEN run with a capital investment of $1,000,000 and a three-year
noncompliance period. This assumes that on-time compliance would have been accomplished the
same way as delayed compliance, in three separate stages. For both on-time and delayed compliance,
three years are necessary to comply, and therefore if the violator had complied on time it would have
needed to start three years before the compliance date.
HYPOTHETICAL COMPLYING FIRM'S TIMELINE
(not adjusted for inflation)
7/1/92
7/1/93
7/1/94
BEN's noncompliance dale:
7/1/95
Decision Expenditures Expenditures
to comply for Part A for Part B
on-time $200,000 $300,000
Expenditures
for Part C
$500,000
System on-line
NONCOMPLYING FIRM'S ACTUAL TIMELINE
7/1/92
7/1/93
7/1/94
7/1/95
7/1/96
7/1/97
BEN's oomDhanoe date:
7/1/98
Decision
to comply
in delayed
fashion
Expenditures
for Part A
$200,000
Expenditures
for Part B
$300,000
Expenditures
for Part C
$500,000
System on-line
Note that BEN's calculation here is based upon the simplifying assumption that all the money
was spent on a single date, i.e., the day compliance was achieved. Instead of this simplifying
assumption, you could instead create three separate BEN runs, with different noncompliance and
compliance dates (yet hence the same-length noncompliance period). This will yield a slightly
higher BEN result, although the additional complexity may not be worth the additional accuracy
(especially if the noncompliance period is long relative to the period over which the actual
expenditures are spread out).
4-5
September 1999
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6. Pollution Control Equipment Will Be Leased, Not Purchased.
The violator is actually leasing the equipment it needs to comply for $125,000 per year.
Rather than entering the $1,000,000 as a capital cost, you should enter a zero for capital investment
and $125,000 as an annually recurring cost.
7. Compliance is "Cheaper" than Noncompliance.
The violator comes into compliance late and finds that it has been saving money since it
installed the new technology. This may occur because the compliant technology allows the violator
to recover materials and/or reduce operation and maintenance costs. BEN produces a negative result,
seemingly confirming that the violator would have been better off had it complied on-time. Other
factors may have caused the violator to delay compliance, or perhaps the violator was unaware not
only of the potential cost savings from compliance but also the status of its noncompliance.
Be wary of such negative economic benefit results! For example, the violator might have felt
that the new processes and technology needed to comply would have adversely affected its product
quality. In that case, the violator probably realized an economic benefit from not having its product
quality adversely affected by the compliant technology. This constitutes illegal competitive
advantage, and typically requires additional research into the alternative compliance scenarios and
their financial impacts.
Even if the economic benefit really is negative, the enforcement team should carefully
consider the appropriate gravity component of the penalty, since the violations might still be serious,
despite the lack of economic gain to the violator.
4-6
September 1999
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DETAILED CALCULATIONS
APPENDIX A
This technical appendix explains in detail how the BEN computer program calculates the
economic benefit a violator gains from delaying or avoiding compliance with environmental
regulations. The first section is an introduction to the theory and underlying assumptions of BEN.
The second section is a step-by-step explanation of a sample economic benefit calculation.
A. THEORY AND OVERVIEW
Economic benefit represents the financial gains that a violator accrues by delaying and/or
avoiding pollution control expenditures. Funds not spent on environmental compliance are available
for other profit-making activities or, alternatively, a defendant avoids the costs associated with
obtaining additional funds for environmental compliance. (This concept is known in economics as
opportunity cost.) Economic benefit is "no fault" in nature: a defendant need not have deliberately
chosen to delay compliance (for financial or any other reasons), or in fact even have been aware of
its noncompliance, for it to have accrued the economic benefit of noncompliance.
The appropriate economic benefit calculation should represent the amount of money that
would make the violator indifferent between compliance and noncompliance. (BEN implicitly
assumes a 100-percent probability of the violator paying that sum of money in the form of a civil
penalty, but as that probability declines, the amount of money increases that would make the violator
indifferent between compliance and noncompliance.) If the enforcement agency fails to recover
through a civil penalty at least this economic benefit, then the violator will retain a gain. Because
of the precedent of this retained gain, other regulated companies may see an economic advantage in
similar noncompliance, and the penalty will fail to deter potential violators. Economic benefit does
not represent compensation to the enforcement agency as in a typical "damages" calculation for a
tort case, but instead is the minimum amount by which the violator must be penalized so as to return
it to the position it would have been in had it complied on time.
The economic benefit calculation must incorporate the concept of the "time value of money."
In simple terms, a dollar yesterday is worth more than a dollar today since yesterday's dollar had
A-l
September 1999
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investment opportunities. Thus, the further in the past the dollar is, the more it is worth in "present
value" terms. The greater the time value of money (i.e., the greater the "discount" or "compound"
rate), the more value past costs have in present value terms.
Pollution control expenditures can include: (1) Capital investments (e.g., pollution control
equipment), (2) One-time nondepreciable expenditures (e.g., setting up a reporting system, or
acquiring land), (3) Annually recurring costs (e.g., operating and maintenance costs, or off-site
disposal of fluids from injection wells). Each of these expenditures can be either delayed or avoided.
BEN's baseline assumption is that capital investments and one-time nondepreciable expenditures
are merely delayed over the period of noncompliance, whereas annual costs are avoided entirely over
this period. BEN does allow you, however, to analyze any combination of delayed and avoided
expenditures.
BEN derives a violator's economic benefit in several steps. First BEN adjusts compliance
costs from the cost estimate date to the date when they would have been expended had the violator
complied on time (on-time scenario) and to the date when they will be expended as the violator
comes into compliance (delay scenario). Next BEN uses these costs to compute the total cost of
complying on-time and of complying late, adjusted for inflation, depreciation and taxes. BEN also
calculates the present value of both scenarios as of the date of initial noncompliance, so that they can
be compared in a common metric. Then BEN subtracts the delayed scenario present value from the
on-time scenario present value to determine the initial economic benefit as of the noncompliance
date. Finally, BEN compounds this initial economic benefit forward to the penalty payment date.
A violator may gain illegal competitive advantages in addition to the usual benefits of
noncompliance. These may be substantial benefits, but they are beyond the capability of BEN or any
computer program to assess. Instead BEN asks you a series of questions about possible illegal
competitive advantages so that you may identify cases where they are relevant. If illegal competitive
advantage is an issue you should consult the EPA enforcement economics toll-free helpline at 888-
ECON-SPT (326-6778) or benabel@indecon.com. If you need legal or policy guidance, please
contact Jonathan Libber, the BEN/ABEL coordinator at 202-564-6102, or e-mail him at
libber.jonathan@epamail.epa.gov.
B. CALCULATIONS AND SPREADSHEET
BEN references a Microsoft Excel™ spreadsheet to perform all of its economic benefit
calculations, although you do not need Excel to run BEN. The data you enter into the program is
automatically transferred to the spreadsheet. The spreadsheet calculates economic benefit and
returns the result to the program for output. This section illustrates a BEN calculation by taking you
step-by-step through relevant portions of the underlying spreadsheet. Italicized comments within
brackets are added to explain the calculations, and are not part of the spreadsheet itself.
A-2
September 1999
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The spreadsheet is in your BEN folder (on your C drive or wherever else you installed BEN),
filename "ben****.xls". (The asterisks represent the most recent year for which EPA has performed
updates for the spreadsheet.) You may open the file, but it has been write-protected to preserve the
integrity of the calculations. This spreadsheet contains necessary formulas and background
information like tax rates, discount rates, and inflation indices. The background information will
be updated once a year, but the calculations themselves will remain the same.
1. Inputs and Variables
The first section of the spreadsheet contains the variables entered by the user. These are a
prerequisite for the calculations. The following page lists BEN's basic inputs, along with inputs
from an example case.
Tax rates are contained in the spreadsheet as tables that contain corporate and individual tax
rates and state tax rates from 1987 to 2010, (with rates for future years assumed to remain the same).
Annual updates will keep tax rates current and add future years. When you designate a state and tax
status for the violator, BEN finds the appropriate federal and state tax rates and calculates a
combined tax rate. State taxes are deductible from federal taxable income, so the combined tax rate
calculation is:
Combined = Federal + (State * (1 - Federal)).
The spreadsheet also contains a table for the BCI, BEN, CCI, CPI, ECIM, ECIW and PCI
inflation indices. (See Chapter 3 for a complete explanation of these difference indices.) Inflation
indices are more precise than an annual inflation rate, but they require an index value for every
relevant month. Therefore, BEN contains a database of monthly index values for every index from
1987 to 2029. Annual updates will keep indices current and add future values. For projected future
inflation, BEN extrapolates each cost index forward in time at a separate forecasted rate, which is
based upon a consensus forecast for the Consumer Price Index (CPI) and each individual index's
historical relationship to the CPI. (The rationale for the calibration of the other indices to the CPI
is that the CPI — yet not the more specialized indices — has widely available forecasts for projected
inflation.)
A-3
September 1999
-------
Inputs
Example
Comments
Case Name Example Case
Analyst Name Jon Analyst
EPA Region EPA Region I
Tax Status c-corp
State MA
Customized Tax Rates? n
Penalty Payment Date (PPD) 01 -Jan-1999
Run Name Test Run
Discount/Compound Rate 10.0%
Customized Discount/Compound Rate? n
Customized Specific Cost Estimates? n
Capital Investment:
Cost Estimate $1,000,000
Cost Estimate Date 01-Jan-1992
Cost Index for Inflation PCI
Cost Index Value 359.500
Number of Replacement Cycles 1
Useful Life of Capital Equipment 15
Projected Rate for Future Inflation 2.2%
One-Time. Nondepreciable Expenditure:
Cost Estimate $100,000
Cost Estimate Date 01 -Jan-1992
Cost Index for Inflation PCI
Cost Index Value 359.500
Tax Deductible? Y
Annually Recurring Costs:
Cost Estimate $10,000
Cost Estimate Date 01 -Jan-1992
Cost Index for Inflation PCI
Cost Index Value 359.500
Noncompliance Date (NCD) 01 -Jan-1992
Compliance Date (CD) 01-Jan-1997
Question 1 n
Question 2 n
Question 3 n
Question 4 n
Question 5 n
Question 6 n
IAlso known as "Entity Type")
[You may customize tax rates, in which case BEN will use the
customized rates instead of its internal table]
I BEN calculates this from tax status, state, & relevant dates]
[ You may customize the discount rateJ
IYou may customize the specific cost estimate screen]
[You may choose from several indices]
IThis is the index value as of the cost estimate date]
[This is the default value]
[This is the default value]
[This is the default value]
[You may choose from several indices]
[This is the index value as of the cost estimate date/
IThis is the default setting]
[You may choose from several indices]
[This is the index value as of the cost estimate date]
[These are the competitive advantage questions. If you
answer yes to any of them a warning that possible illegal
competitive advantage exists appears in the results.]
A-4
September 1999
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2. Discount/Compound Rate Calculation
Once the entity type and relevant dates have been entered, BEN can then calculate the
violator's discount/compound rate. This is based on entity type and financial information from the
date of noncompliance to the penalty payment date. (An industry- or company-specific discount rate
can be calculated by experts, but cannot be calculated by BEN.) The discount/compound rate
quantifies the time value of money. BEN discounts and compounds all cash flows at the cost of
capital, averaged over the time period from the noncompliance date to the compliance or penalty
payment date, whichever is later.
For a for-profit entity's discount/compound rate, BEN uses the weighted-average cost of
capital (WACC) for a typical company, reflecting the cost of debt and equity capital weighted by the
value of each financing source. A company must on average earn a rate of return necessary to repay
its debt holders (e.g., banks, bondholders) and satisfy its equity owners (e.g., partners, stock holders).
While companies often earn rates in excess of their WACC, companies that do not on average earn
at least their WACC will not survive (i.e., their lenders will not receive their principal and/or interest
payments, and their owners will be dissatisfied with their returns). The WACC represents the return
a company can earn on monies not invested in pollution control, or, viewed alternatively, represents
the avoided costs of financing pollution control investments. Thus, a company should make its
business decisions by discounting cash flows at its WACC, and BEN follows the internal analysis
a company will normally perform.
For a not-for-profit discount/compound rate, BEN uses a typical municipality's cost of debt,
based on interest rates for general obligation bonds.
A-5
September 1999
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Discount/Compound Rate Calculation
Notes:
(1)Corporate Bonds: All Industries; Federal Reserve Bulletin, Table 1.35. [Average industry cost of debt J
(2) Combined state/federal marginal tax rates: federal+(state*(1 -federal)); Federation of Tax Administrators.
(3) Calculated as: (1) * (100%-(2)).
(4) Standard & Poor's Analyst's Handbook, S&P Industrials Sample Balance Sheet, Liabilities section. [Average Industry debt weightj
(5) Federal Reserve Bulletin Table 1.35. [ Used as a risk-free rate. Capital Asset Pricing Model (CAPM)]
(6) Beta is a measure of risk relative to the overall market. [A value of 1.00 assumes risk is same as overall market j
(7) Differences of historical arithmetic mean returns from 1926 to prior year; Ibbotson Associates Handbook,
[Representing expected return on an average risk investment}
(8) Calculated as (6) * (7). [This equals (7) for average risk, because average risk has a beta of I]
(9) Calculated as (5) + (8). [Risk-free rate of return plus the risk premium]
(10) Calculated as 100% - (4). [Total financing - debt = equity financing]
(11) Calculated as (3) * (4) + (9) * (10). [(Debt cost x debt weight) + (equity cost x equity rate)]
average 1992 to: 1998 = 10.0%
from: fFinal result /
(1)
(2)
(3)
(4)
(5)
5-Year
(6)
(7)
Intermed.
(8)
Company
(9)
(10)
(11)
Cost of
After-Tax
Debt
Treasury
Horizon
Risk
Equity
Equity
YEAR
Debt
Tax Rate
Debt Cost
Weight
Notes
Beta
Risk Prem
Premium
Cost
Weight
Rate
1987
9.9%
40.3%
5.9%
43.0%
7.94%
1.00
7.7%
7.7%
15.6%
57.0%
1988
10.2%
40.3%
6.1%
52.0%
8.47%
1.00
7.3%
7.3%
15.8%
48.0%
1989
9.7%
40.3%
5.8%
49.0%
8.50%
1.00
7.4%
7.4%
15.9%
51.0%
1990
9.8%
40.3%
5.9%
50.0%
8.37%
1.00
7.8%
7.8%
¦ 16.2%
50.0%
1991
9.2%
40.3%
5.5%
49.0%
7.37%
1.00
7.5%
7.5%
14.9%
51.0%
1992
8.6%
40.3%
5.1%
47.0%
6.19%
1.00
7.7%
7.7%
13.9%
53.0%
9.8%
1993
7.5%
41.2%
4.4%
47.0%
5.14%
1.00
7.6%
7.6%
12.7%
53.0%
8.8%
1994
8.3%
41.2%
4.9%
44.0%
6.69%
1.00
7.6%
7.6%
14.3%
56.0%
10.2%
1995
7.8%
41.2%
4.6%
42.0%
6.38%
1.00
7.4%
7.4%
13.8%
58.0%
9.9%
1996
7.7%
41.2%
4.5%
37.0%
6.18%
1.00
7.8%
7.8%
14.0%
63.0%
10.5%
1997
7.5%
41.2%
4.4%
37.0%
6.22%
1.00
7.9%
7.9%
14.1%
63.0%
10.5%
1998
7.0%
41.2%
4.1%
37.0%
5.50%
1.00
8.2%
8.2%
13.7%
63.0%
10.2%
A-6 September 1999
-------
3. Specific Cost Estimates
After the compound/discount rate, BEN calculates specific cost estimates. This calculation
adjusts costs from the cost estimate date to the date on which they should have been spent (on-time
compliance scenario) and the date on which they will be spent (delay compliance scenario). These
calculations are visible and may be altered on the specific cost estimates screen. (If the violator will
avoid compliance completely, rather than simply delay it, you must modify this screen by changing
the delay cost of compliance to zero.) The specific cost estimate calculations are shown below.
Calculations for Specific Cost Estimates
Compliance Start:
Replacement Cycle Start:
On-Time
Delay
On-Time
Delay
Date:
01 -Jan-1992
01-Jan-1997
01-Jan-2007
01-Jan-2012
CaDital Investment:
Original Cost Estimate
$1,000,000
$1,000,000
$1,000,000
$1,000,000
PCI Value as of Cost Estimate Date,
359.500
359.500
359.500
359.500
01 -Jan-1992
X
X
X
X
PCI Value as of Specific Estimate Date
359.500
383.300
471.943
526.192
Specific Cost Estimate,
$1,000,000
$1,066,203
$1,312,777
$1,463,677
reflecting implicit annualized inflation rate of:
N/A
1.3%
1.8%
1.9%
One-Time. NondeDrectable Exoenditure:
Original Cost Estimate
$100,000
$100,000
PCI Value as of Cost Estimate Date,
359.500
359.500
01-Jan-1992
X
X
PCI Value as of Specific Estimate Date
359.500
383.300
Specific Cost Estimate,
$100,000
$106,620
reflecting implicit annualized inflation rate of:
N/A
1.3%
Note that the specific cost estimate and the original cost estimate are the same here for the
"Compliance Start: On-Time" scenario. This is because the cost estimate was made on the on-time
date, so no inflation adjustment was needed.
4. Capital and One-Time Costs
Now BEN can calculate the total costs of compliance for both scenarios. First it calculates
the costs of compliance as of the on-time and delay scenarios. Then BEN adjusts both sets of costs
to the noncompliance date so that they can be compared to each other.
Each scenario is divided into an initial cycle and a replacement cycle. The initial cycle covers
the cost of installing equipment, while the replacement cycle covers the cost of replacing that
A-7
September 1999
-------
equipment when its useful life is over. The number of replacement cycles defaults to one, and the
useful life of equipment defaults to fifteen years.
Because of the time value of money, the farther in the future costs are, the less value they
have in present terms. Therefore, replacement cycles after the First one have almost no impact on
economic benefit. They are cumulatively calculated from the value of the first replacement cycle.
The present value (as of the noncompliance date) of each date's cash flow is equal to the cash
flow multiplied by that date's present value factor. The PV factor uses the discount/compound rate
to determine a dollar's equivalent value in noncompliance date dollars. Therefore, the PV factor for
any date is equal to the sum of one plus the discount/compound rate, raised to the difference in the
number of years (including any fractions) between that date and the noncompliance date.
A-8
September 1999
-------
A) On-Time Capital & One-Time Costs: Initial Cycle
01-Jan-1992
01-Jul-1992
01-Jul-1993
01-Jul-1994
01-JUM995
OI-Jul-1996
01-Jul-1997
01-Jul-1998
01-Jul-1999
One-Time, Nondepreciable Expenditure
(100,000)
[From specific cost estimates/
Capital Investment
(1,000,000)
[From specific
cost estimates J
Depreciation
0
(142,860)
(244,897)
(174,935)
(124,953)
(89,243)
(89,243)
(89,243)
(44,626)
Marginal Tax Rate
40.3%
40.3%
41.2%
41.2%
41.2%
41.2%
41.2%
41.2%
41.2%
Net After-Tax Cash Flow
(1,059,700)
57,573
100,898
72,073
51,481
36,768
36,768
36,768
18,386
PV Factor: Adjusts Cash Row to NCD
1.0000
0.9536
0.8669
0.7881
0.7164
0.6511
0.5919
0.5381
0.4892
PV Cash Flow as of NCD
(1,059,700)
54,900
87,468
56,800
36,883
23,941
21,765
19,786
8,995
Net Present Value (NPV) as of NCD:
Initial Cycle ($749,162)
Subsequent Replacement Cycles ($216,058)
Total - All Cycles ($965,220)
[Companies may deduct the depreciation of capital equipment from their taxable income. Below is the standard 7-year depreciation schedule, using the half-year convention.]
Depreciation 14.2860% 24.4897% 17.4935% 12.4953% 8.9243% 8.9243% 8.9243% 4.4626%
(MACRS):
B) Delay Capital & One-Time Costs: Initial Cycle
01-Jan-1997
01-Jul-1997
01-Jul-1998
01-Jul-1999
01-Jul-2000
01-Jul-2001
01 -Jul-2002
01-JUI-2003
01-Jul-2004
One-Time, Nondepreciable Expenditure
(106,620)
IFrom specific cost estimates]
Capital Investment
(1,066,203)
[From specific
cost estimates]
Depreciation
0
(152,318)
(261,110)
(186,516)
(133,225)
(95,151)
(95,151)
(95,151)
(47,580)
Marginal Tax Rate
41.2%
41.2%
41.2%
41.2%
41 2%
41.2%
41.2%
41.2%
41 2%
Net After-Tax Cash Flow
(1,128,8%)
62,755
107,577
76,845
54,889
39,202
39,202
39,202
19,603
PV Factor: Adjusts Cash Row to NCD
0.6206
0.5919
0.5381
0.4892
0.4446
0.4042
0.3675
0.3341
0.3036
PV Cash Row as of NCD
(700,589)
37.148
57,891
37,593
24,405
15.846
14,405
13,096
5,952
Net Present Value (NPV1 as of NCD
Initial Cycle
Subsequent Replacement Cycles
Total - All Cycles
($494,254)
($149,541)
($643,796)
A-9 September 1999
-------
A) On-Time Capital & One-Time Costs: First Replacement Cycle
One-Time, Nondepreciable Expenditure
Capital Investment
Depreciation
Marginal Tax Rate
Net After-Tax Cash Row
PV Factor: Adjusts Cash Row to NCD
PV Cash Row as of NCD
01-Jan-2007 01-Jul-2007 01-Jul-2008 01-Jul-2009 01-Jul-2010 01-Jul-2011 01-Jul-2012 01-Jul-2013
0 /Zero because this is the replacement cycle, and one-time costs do not occur again by definition I
(1.312,777) IFrom specific cost estimates/
0
41.2%
(1,312,777)
0.2391
(313,940)
Total NPV of First Replacement Cycle as of NCD
V, where i = (1+/utureinflation)/(1+discountrate)
V, where u = useful life of capital equipment
"n", where n = number of replacement cycles
T, where f = sum [from i = 1 to i = n] of: rA (u * (i-1))
Total NPV of All Replacement Cycles as of NCD
(187,543)
41.2%
77,268
0.2281
17,625
(321,495)
41.2%
132,456
0.2073
27,460
(229,651)
41.2%
94,616
0.1885
17,832
(164,035)
41.2%
67,583
0.1713
11,579
(117,156)
41.2%
48,268
0.1558
7,518
(117,156)
41.2%
48,268
0.1416
6,833
($216,058)
0.9291
15
1
1.0000 [This is where the value offuture replacement cycles is calculated]
($216,058) = f * First Replacement Cycle
(117,156)
41.2%
48,268
0.1287
6,212
01-Jul-2014
(58,584)
41.2%
24,137
0.1170
2,824
Depreciation
(MACRS):
14.2860%
24.4897%
17.4935%
12.4953%
8.9243%
8.9243%
8.9243%
4.4626%
B) Delay Capital & One-Time Costs: First Replacement Cycle
01-Jan-2012
01-Ju 1-2012
01-Jul-2013
01-Jul-2014
01-Jul-2015
01-Jul-2016
01-Jul-2O17
01-Jul-2018
01-Jul-2019
One-Time, Nondepreciable Expenditure
0
Capital Investment
(1,463,677)
Depreciation
0
(209,101)
(358,450)
(256,048)
(182,891)
(130,623)
(130,623)
(130,623)
(65,318)
Marginal Tax Rate
41.2%
41.2%
41.2%
41.2%
41.2%
41.2%
41.2%
41.2%
41.2%
Net After-Tax Cash Row
(1,463,677)
86,150
147,681
105,492
75,351
53,817
53,817
53,817
26,911
PV Factor: Adjusts Cash Flow to NCD
0.1484
0.1416
0.1287
0.1170
0.1064
0.0967
0.0879
0.0799
0.0726
PV Cash Row as of NCD
(217,282)
12,195
19,005
12,342
8,014
5,202
4,729
4,299
1,954
Net Present Value {NPV) as of NCD:
Total NPV of Rrst Replacement Cycle as of NCD
Total NPV of All Replacement Cycles as of NCD
($149,541)
($149,541) [Calculated using the same formula as on-time all replacement cycles above]
A-10 September 1999
-------
5. Avoided Annually Recurring Costs
Annual costs are avoided, not merely delayed. Therefore BEN does not need to calculate and
compare two different scenarios for annual costs. Instead, it computes the costs avoided each year, then
adjusts those costs to the noncompliance date. Finally it adds the present values of the costs avoided each
year to compute the total net present value of avoided costs.
C) Avoided Annually Recurring Costs
PCI value as of cost estimate date= 359.500
PCI mid-point value:
356.100
359.400
368.000
381.900
381.800
Period of Avoided Annual Costs; From:
01-Jan-1992
01-Jan-1993
01 -Jan-1994
01-Jan-1995
01-Jan-1996
To:
31-Dec-1992
31-Dec-1993
31-Dec-1994
31-Dec-1995
31-Dec-1996
Annual Costs Avoided
(9,933)
(9,997)
(10,236)
(10,623)
(10,649)
Marginal Tax Rate
40.3%
41.2%
41.2%
41.2%
41.2%
Net After-Tax Cash Flow
(5,930)
(5,878)
(6,019)
(6,246)
(6,262)
PV Factor: Adjusts Cash Flow to NCD
0.9535
0.8667
0.7879
0.7163
0.6511
PV Cash Flow as of NCD
(5,654)
(5,095)
(4,742)
(4,474)
(4,077)
NPV of Avoided Annual Costs as of NCD
($24,042)
Note that BEN determines the cost index value for the midpoint of the period in question to account
for inflation. BEN also adjusts the annual cost for any partial years.
6. Economic Benefit Results
Now that BEN has computed the present values (PVs) of complying on-time and complying
delayed, it compares the two. Economic benefit is the PV of complying on-time, minus the PV of
complying delayed, plus the PV of the avoided annually recurring costs. The initial economic benefit is
calculated as of the noncompliance date, and then brought forward to the penalty payment date at the
discount/compound rate.
The initial economic benefit is multiplied by the sum of one plus the discount/compound rate,
raised to the difference in the number of years (including any fractions) between the noncompliance and
penalty payment dates.
Run Name = Test Run
Present Values as of Noncompliance Date.
A) On-Time Capital & One-Time Costs
B) Delay Capital & One-Time Costs
C) Avoided Annually Recurring Costs
D) Initial Economic Benefit (A-B+C)
E) Final Econ. Ben. at Penalty Payment Date,
01-Jan-1999
01-Jan-1992
$965,220
$643,796
$24,042
$345,466
[Sum from on-time scenario calculations I
[Sum from delay scenario calculations]
[Sum from avoided annually recurring cost calculation!
[Economic benefit as of the date of noncompliance]
$673.567 I FinnI result economic benefit ns nf the nennltv nnvment Hate I
A-ll
September 1999
------- |