Pollution Prevention Benefits Manual
Volume I: The Manual
Phase II
Prepared for: Office of Policy, Planning and
Evaluation and
Office of Solid Waste
U.S. Environmental Protection
Agency
October 1989
®EPA
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Y ^ TABLE OF CONTENTS
VOLUME I, THE MANUAL
.
Page
ACKNOWLEDGEMENTS k
PREFACE x
CHAPTER 1: INTRODUCTION ............. ........... l-l
1.1 What Is Pollution Prevention? . l-l
1.1.1 What Does EPA Mean By Waste Minimization? 1-1
1.1.2 What Does EPA Mean By Pollution Prevention? 1-1
1.2 Why Should You Undertake Pollution Prevention? 1-2
1.3 What Approach Is Used In This Manual? 1-3
1.3.1 Four-Tier Cost Protocol 1-3
1.3.2 Common Financial Protocol 1-5
1.4 What Will You Get Out Of This Manual? 1-5
1.5 How Is This Manual Organized? 1-6
CHAPTER 2: TIER 0 COST PROTOCOL; USUAL COSTS ............. ....... 2-1
Introduction 2-2
Step 1: Identify PP Alternatives 2-2
Step 2: Estimate The Usual Costs Of Current And Alternative Practices 2-3
Step 3: Complete The Tier 0 Cost Worksheet .......................... 2-7
CHAPTER 3: TIER 1 COST PROTOCOL: HIDDEN REGULATORY COSTS ............ 3-1
Step 1: Establish Your Facility's Regulatory Status 3-2
Step 2: Estimate Hidden Capital Expenditures . 3-2
Step 3: Estimate Hidden Expenses .................................. 3-5
Step 4: Complete Middle Block Of Worksheet I *
,
| ) t,:i ^
Li Bi< AK Y
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ii
TABLE OF CONTENTS (continued)
VOLUME I, THE MANUAL (continued)
«
Page
CHAPTER 4: TIER 2 COST PROTOCOL: LIABILITY COSTS 4-1
Introduction 4-2
Step 1: Identify Regulatory Programs Under Which Penalties and/or Fines
Could Be Incurred 4-2
Step 2: Estimate the Expected Annual Penalties and Fines Associated with
Each Program/Requirement 4-2
Step 3: Identify Waste Management Components to Which Liabilities Can Attach . 4-4
Step 4: Estimate Total Expected Liabilities 4-4
Step 5: Estimate Year When Liabilities are Expected to be Incurred 4-6
Step 6: Estimate Your Share of Total Future Liabilities ................... 4-6
CHATTER 5: TIER 3 COST PROTOCOL: LESS TANGIBLE COSTS 5-1
Introduction . . 5-2
Step 1: Qualify Less Tangible Benefits Of Pollution Prevention .............. 5-2
Step 2: Quantify Less Tangible Benefits Of Pollution Prevention ............. 5-2
CHAPTER 6: FINANCIAL PROTOCOL 6-1
Step 1: Evaluate Annualized Cash Flows For Each Cash Flow Item 6-2
Step 2: Evaluate Incremental Annualized Cash Flows 6-7
Step 3: Evaluate Key Financial Indicators Of Your PP Alternative ............ 6-7
Step 4: Evaluate Economic Feasibility Of Your PP Alternative ............. 6-12
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ill
TABLE OF CONTENTS (continued)
VOLUME II, APPENDICES
Page
APPENDIX A: BLANK WORKSHEETS ...................................... A-l
APPENDIX 1: HIDDEN COSTS OF SELECTED REGULATIONS . . B-l
B.l Resource Conservation and Recovery Act (RCRA) B-l
B.l.l Notification B-l
B.l .2 Reporting .......................................... B-2
B.1.3 Monitoring/Testing B-2
B.l.4 Recordkeeping B-2
B.1.5 Planning/Studies/Modeling ............................... B-3
B.l.6 Training ........................................... B-3
B.l.7 Inspections . . B-3
B.l.8 Manifesting B-3
B 1.9 Labeling B-4
B.1.10 Preparedness/Protective Equipment B-4
B.l.11 Closure/Post-Closure Assurance B-4
B.l. 12 Insurance and Special Taxes B-4
B.2 Comprehensive Environmental Response, Compensation, and Liability
Act (CERCLA) B-6
B.3 Superfund Amendments and Reauthorization Act Title III (SARA Title III) . . B-8
B3.1 Notification B-8
B3.2 Reporting B-9
B.3.3 Recordkeeping B-9
B.3.4 Inspections ......................................... B-10
B.4 Clean Air Act (CAA) B-12
B.4.1 Notification ......................................... B-12
B.4.2 Reporting B-13
B.4.3 MonitoringfTesting B-13
B.4.4 Recordkeeping ....................................... B-13
B.4.5 Inspections ......................................... B-13
B.5 Clean Water Act (CWA) .......... B-19
B.5.1 Notification ......................................... B-19
B5.2 Reporting B-19
B.5.3 MonitoringfTesting B-20
B.5.4 Recordkeeping B-20
B.5.5 Inspections B-20
B.5.6 Preparedness/Protective Equipment ......................... B-21
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iv
TABLE OF CONTENTS (continued)
VOLUME II, APPENDICES (continued)
EH§
B.6 Occupational Safety and Health Act (OSHA) B-27
B.6.1 Notification ......................................... B-27
B.6.2 Reporting B-27
B.6.3 Monitoring/resting B-28
B.6.4 Recordkeeping B-28
B.6.5 Planning/Studies/Modeling . B-28
B.6.6 Training .. .................... B-29
B.6.7 Inspections B-29
B.6.8 labeling B-29
B.6.9 Preparedness/Protective Equipment B-29
B.6.10 Medical Suiveillance ................................... B-29
APPENDIX C: FUTURE LIABILITY COSTS ................. .......... C-l
APPENDIX D; HYPOTHETICAL FIRM EXAMPLE D-l
D.l Presentation Of Hypothetical Finn .............................. D-l
D.2 Tier 0: Usual Costs D-4
D.2.1 Tier 0 Cost Calculations D-4
D.2.2 Tier 0 Financial Calculations ............................. D-7
D.3 Tier 1: Hidden Regulatory Costs D-9
D.3.1 Tier 1 Cost Calculations ................................ D-9
D.3.2 Tier 1 Financial Calculations ............................. D-26
D.4 Tier 2: Liability Costs . . , . D-26
D.4.1 Tier 2 Cost Calculations . D-26
D.4.2 Tier 2 Financial Calculations D-28
D.4.3 By Difference Technique D-28
D.5 Tier 3: Less Tangible Costs . D-29
D.5.1 Tier 3 Cost Calculations . D-29
D.5.2 Tier 3 Financial Calculations D-29
D.6 Summary of Mr. Auric's Calculations . D-29
APPENDIX E:
TREATMENT STANDARDS UNDER THE LAND DISPOSAL RESTRICTIONS
E-l
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V
LIST OF EXHIBITS
VOLUME I, THE MANUAL
Pate
EXHIBIT 1-1: APPROACH AND ORGANIZATION OF MANUAL; FOUR-TIER
COST PROTOCOLS AND FINANCIAL PROTOCOL 1-4
EXHIBIT 1-2: BENEFITS TO THE HYPOTHETICAL FIRM OF SWITCHING
FROM CURRENT PRACTICE TO PP ALTERNATIVE 1-7
EXHIBIT 3-1: REGULATORY STATUS QUESTIONNAIRE ................... 3-3
EXHIBIT 4-1: SUMMARY OF PENALTIES AND FINES UNDER EPA FEDERAL
PROGRAMS (FISCAL YEAR 1987) 4-3
EXHIBIT 4-2: COST TABLE FOR FUTURE LIABILITIES .................... 4-5
EXHIBIT 6-1: TYPE OF CASH FLOW FOR EACH CASH FLOW ITEM 6-4
EXHIBIT 6-2: TABLE OF VALUES OF PRESENT VALUE FACTOR 2 (PVF2) ..... 6-6
EXHIBIT 6-3: TABLE OF VALUES OF ANNUALIZATION FACTOR (AF) 6-8
EXHIBIT 6-4: TABLE OF VALUES OF DEPRECIATION FACTOR (FD) ........ 6-11
VOLUME II, APPENDICES
EXHIBIT B-l-1: REGULATORY COSTS UNDER THE RESOURCE CONSERVATION
AND RECOVERY ACT (RCRA) B-5
EXHIBIT B-2-1: TAX ON CERTAIN CHEMICALS UNDER CERCLA SECTION 4661 . . B-7
EXHIBIT B-3-1: REGULATORY COSTS UNDER TITLE III
THE SUPERFUND AMENDMENTS AND REAUTHORIZATION ACT B-ll
EXHIBIT B-4-1: REGULATORY COSTS UNDER THE CLEAN AIR ACT (CAA) ..... B-14
EXHIBIT B-4-2: CLEAN AIR ACT INDUSTRY-SPECIFIC REGULATIONS ON
STANDARDS OF PERFORMANCE FOR NEW STATIONARY
SOURCES . B-15
EXHIBIT B-4-3: HAZARDOUS AIR POLLUTANTS WITH PARTICULAR EMISSIONS
STANDARDS UNDER THE CLEAN AIR ACT B-17
EXHIBIT B-4-4:
INDUSTRIES WITH PARTICULAR NATIONAL EMISSIONS
STANDARDS FOR HAZARDOUS AIR POLLUTANTS UNDER THE
CLEAN AIR ACr
B-18
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vi
LIST OF EXHIBITS (continued)
VOLUME II, APPENDICES (continued)
P;igc
EXHIBIT B-5-1: REGULATORY COS'IS UNDER THE CLEAN WATER ACT ....... B-22
EXHIBIT B-5-2: TOXIC POLLUTANTS UNDER THE CLEAN WATER ACT ........ B-23
EXHIBIT B-5-3: INDUSTRIES WITH PARTICULAR EFFLUENT GUIDELINES
AND STANDARDS UNDER THE CLEAN WATER ACT B-25
EXHIBIT B-6-1: REGULATORY COSTS UNDER THE OCCUPATIONAL SAFETY
AND HEALTH ACT (OSHA) ............ B-31
EXHIBIT B-6-2: OSHA CHEMICALS AND ASSOCIATED REQUIREMENTS B-32
EXHIBIT C-l: SOIL AND WASTE REMOVAL AND TREATMENT ............. C-2
EXHIBIT C-2: GROUND-WATER REMOVAL AND TREATMENT . . C-3
EXHIBIT C-3: SURFACE SEALING .................................... C4
EXHIBIT C-4: PERSONAL INJURY C-5
EXHIBIT C-5: ECONOMIC LOSSES C-6
EXHIBIT C-6: REAL PROPERTY DAMAGE C-7
EXHIBIT C-7: NATURAL RESOURCE DAMAGE C-8
EXHIBIT C-8: EXPECTED YEAR IN WHICH LIABILITIES ARE INCURRED C-9
EXHIBIT D-l: SUMMARY OF CURRENT AND ALTERNATIVE PRACTICES ..... D-2
EXHIBIT D-2: SUMMARY OF USUAL COST ESTIMATES ................... D-5
EXHIBIT D-3: REGULATORY STATUS QUESTIONNAIRE ................... D-10
EXHIBIT D-4: TIER 1 COST TABLES (HIDDEN REGULATORY COSTS) ..... D-12
EXHIBIT D-5: TIER 2 COST TABLES (FUTURE LIABILITIES) ................ D-27
EXHIBIT D-6: BENEFITS TO THE HYPOTHETICAL FIRM OF
SWITCHING FROM CURRENT PRACTICE TO PP ALTERNATIVE . . D-30
EXHIBIT E-l: TREATMENT STANDARDS FOR WASTES AFFECTED BY THE
LAND DISPOSAL RESTRICTIONS E-2
EXHIBIT E-2: TYPICAL TREATMENT AND DISPOSAL COSTS E-7
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vii
LIST OF COOT TABLES
VOLUME I, THE MANUAL
»
Pa He
TABLE 3-1: Notification 3-9
TABLE 3-2: Reporting 3-11
TABLE 3-3: Monitoring/Testing ........................................... 3-13
TABLE 3-4: Recordkeeping ............... 3-15
TABLE 3-5: Planning/Studies/Modeling 3-17
TABLE 3-6: Training 3-19
TABLE 3-7: Inspections 3-21
TABLE 3-8: Manifesting 3-23
TABLE 3-9: Labeling ............ , 3-25
TABLE 3-10:Preparedness/Protective Equipment (Maintenance) 3-27
TABLE 3-ll:Closure/Post Closure Assurance Facility-Specific Costs ................... 3-29
TABLE 3-12:Medical Surveillance .......................................... 3-31
TABLE 3-13: Insurance and Special Taxes Requirement-Specific Costs . 3-33
TABLE 3-14:Other 3-35
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ix
ACKNOWLEDGEMENTS
This manual was produced under the direction of Dr. Ron McHugh, Office of Policy, Planning and
Evaluation, U.S. EPA by ICF Incorporated. The ICF project team included James Faulstich, James
Dickson, Lew French, Michael Lochhead, James Verderese, and Joseph Karam who served as Project
Manager. Additional project direction and support was provided by Michael Levin, Barry Korb, James
Lounsbury and Robert Dellinger of EPA.
Initial project ideas are attributable to Dr. Gregory Hollod (Conoco Inc.), Mr. Ryan Delcambre
(Dow Chemical), and Mr. Richard McLean (General Electric Company). Far too many people provided
useful insights to list all of them, but the following merit special thanks: Jack Campbell, General Electric
Capital Corporation; Teriy Foecke, Minnesota Technical Assistance Program; Nancy Grundahl, EPA;
Richard Kashmanian, EPA; Tapio Kuusinen, EPA; Roger Schecter, North Carolina Pollution Prevention
Pays; and Ned Smith, Natural Resources Defense Council.
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viii
LIST OF WORKSHEETS
VOLUME I, THE MANUAL
Page
WORKSHEET 0: TIER 0 - USUAL COSTS ....... ...................... 2-9
WORKSHEET !: TIER 1 - HIDDEN COSTS ................................ 3-37
WORKSHEET II: TIER 2 - LIABILITY COSTS 4-7
WORKSHEET III: TIER 3 - LESS TANGIBLE COSTS ..... ................. 5-4
WORKSHEET IV: COST SUMMARY ...................................... 6-13
WORKSHEET V: FINANCIAL WORKSHEET . 6-14
VOLUME II, APPENDICES
WORKSHEET 0: TIER 0 - USUAL COSTS ................................. A-l
WORKSHEET I: TIER 1 - HIDDEN COSTS A-3
WORKSHEET II: TIER 2 - LIABILITY COSTS A-5
WORKSHEET 111: HER 3 - LESS TANGIBLE COSTS A-7
WORKSHEET IV: COST SUMMARY ...................................... A-9
WORKSHEET V: FINANCIAL WORKSHEET ... A-ll
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X
PREFACE
It is the policy of EPA that the reduction or elimination of discharges and/or emissions to the
environment through source reduction and environmentally-sound recycling is preferable to controlling such
releases after they are generated or produced. Furthermore, source reduction, or elimination of releases
at the source, is more desirable than recycling. It will be EPA's policy to aggressively implement pollution
prevention (PP) through source reduction and environmentally-sound recycling as an integral part of its
programs to protect all aspects of our nation's environment -- air, water, land, and ground water (policy
proposed in Federal Register, Januaiy 26, 1989).
EPA has produced this manual to simultaneously achieve increased environmental protection and
reduced environmental compliance costs. The purpose of the manual is to promote a complete and
objective analysis of the economic benefits of PP projects. Since the passage of the RCRA Hazardous and
Solid Waste Amendments (HSWA) in 1984, EPA has been developing a program to meet the statutoiy goal
to reduce or eliminate the generation of hazardous waste as expeditiously as possible. EPA has extended
the waste minimization (WM) concept to include releases to all environmental media. This manual refers
to PP as the more meaningful concept.
EPA has met with corporate managers to discuss how PP can be achieved without recourse to
additional regulations. A major theme has been that PP projects frequently do not get undertaken because
the benefits of the project in terms of reduced raw materials, regulatory compliance, and environmental
liability costs are poorly understood. EPA has unique experience in understanding the impacts and
interrelationships of regulatory requirements, some of which can legitimately be avoided or mitigated
through PP. The discussion of regulatoiy costs is intended to provide only an estimate of costs associated
with regulatory compliance. The manual is not designed to provide regulatory guidance.
This manual enables you to calculate the true cost of the current materials and waste management
practice and then evaluate the financial payback of the PP alternative. Until these true costs, often
underestimated by managers by an order of magnitude, are correctly understood, more hazardous materials
and waste will be managed/released than need be - thus imposing additional costs on the generator, the
environment, and society as a whole. EPA believes this manual to represent an exiraordlnaiy commonality
of interests between economic self-interest and environmental protection.
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CHAPTER I
INTRODUCTION
This manual is intended to help you evaluate the economic feasibility of pollution prevention (PP)
or waste minimization (WM) alternatives to your current practice. This introductory chapter is organized
in five sections as follows:
(1.1) What is pollution prevention?
(1.2) Why should you undertake pollution prevention?
(1.3) What approach is used in this manual?
(1.4) What will you get out of this manual?
(1.5) How is this manual organized?
1.1 WHAT IS POLLUTION PREVENTION?
Pollution prevention is an extension of the concept of waste minimization. While pollution
prevention includes waste minimization, it broadens the concept to include minimizing the generation and
release of all hazardous materials and wastes to all environmental media.
1.1.1 What Does EPA Mean by Waste Minimization?
Waste minimization means the reduction, to the extent feasible, of any solid or hazardous waste that
you generate or subsequently treat, store, or dispose of. Waste minimization techniques focus on source
reduction or recycling activities that reduce either the volume or the toxicity of your waste.
Source reduction means the reduction or elimination of hazardous waste at the source; before it is
generated. Recmlme*. on the other hand, means the use, reuse, or reclamation of a hazardous waste as an
effective substitute for a commercial product or as an ingredient or feedstock in a process. Recycling by
use or reuse involves returning a waste material either to the originating process or another process as a
substitute for an input materia!. Reclamation is the recoveiy of a valuable material, or removal of
impurities, from a waste. Because it is significantly more efficient and less expensive to prevent the
generation of hazardous waste in the first place, you should consider source reduction to be the most
preferable waste management option. Source reduction is followed, in order of decreasing preference, by
recycling, treatment, and land disposal.
1.1.2 What Does EPA Mean by Pollution Prevention?
Recently, EPA launched a major new effort to reduce the threats posed by environmental pollution.
The Agency proposed a policy statement that established pollution prevention as an official Agency policy:
"EPA believes that developing and implementing a new multi-media prevention strategy,
focused primarily on source reduction and secondarily on environmentally sound recycling,
offers enormous promise for improvements in human health protection and environmental
quality and significant economic benefits. (Federal Register, Januaiy 26; 1989, Page 3845)."
This new approach is profoundly simple and yet radically different from the Agency's past efforts to
protect health and the environment. This approach recognizes that many of the benefits of controlling
pollution have already been achieved. Further environmental gains must come from preventing the release
of pollutants.
The Agency created the Pollution Prevention Office, which will be the Agency's focal point for an
integrated, cross-media approach to pollution prevention, both inside and outside the Agency. EPA will
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be actively promoting an environmental ethic stressing the prevention of pollution before it becomes a
problem.
1.2 WHY SHOULD YOU UNDERTAKE POLLUTION PREVENTION?
Your firm should investigate and implement PP alternatives to your current practice for several
reasons. Pollution prevention can help you achieve the following:
(1) Improve your firm's "bottom line;"
(2) Make compliance with environmental regulations easier; and
(3) Demonstrate a proactive commitment to genuinely pursuing a PP program.
EPA has developed a system of federal regulations to protect human health and the environment
from dangerous wastes and materials. Although EPA has tried to avoid imposing unnecessaiy costs upon
private industiy as a result of these regulations, EPA understands that private industiy may still face
significant compliance costs. Pollution prevention can improve your firm's bottom line as a result of:
• Reduced process costs;
• Reduced regulatoiy costs;
• Reduced liability costs; and
• Less tangible benefits resulting from improved customer satisfaction and
enhanced corporate image.
If you are like most owners or operators of businesses regulated by the U.S. EPA and/or a state
environmental agency, you have complied with the new regulations by adding equipment to deal with wastes
after they are generated. For example, you may have added wastewater and process-water treatment
equipment or air pollution control equipment like stack scrubbers or electrostatic precipitators and filters.
Also, you may have contracted with vendors who have permits to dispose of your hazardous wastes.
However, many manufacturers have found that the most cost-effective approach to complying with
environmental regulations is to minimize or avoid generating or releasing hazardous materials or wastes in
the first place; i.e., to prevent the pollution before it occurs. Many firms have found that by "coupling"
pollution prevention with other corporate goals (e.g., efficiency, R&D, health and safety) not only have
costs been cut, products been improved, or processes been enhanced, but also compliance with regulations
has become easier! For example, a search for a less expensive, more effective cleaning solvent may lead to
use of an aqueous cleaner that also generates less hazardous waste. Attempting to reduce the down-time
due to cleaning and rinsing of equipment associated with batch-processing may result in rearranging the
process sequence so that the wastes from the previous batch are compatible with the inputs for the next
batch, which may also reduce the amount of wastewater geneiated.
Furthermore, you must certify on your hazardous waste manifests that you have a program in place
to reduce the volume and toxicity of the waste you generate and you must describe this program in your
biennial reports. Any waste minimization or pollution prevention efforts you take now will not only result
in immediate economic benefits to your firm, but will also seive to demonstrate a proactive commitment
to genuinely pursuing a pollution prevention program
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1-3
1J WHAT APPROACH IS USED IN THIS MANUAL?
Your decision to select a PP alternative to cuirent practice, however, Is often an economic one. To
make a particular selection you may need to know how much a PP alternative will cost relative to your
current practice. The purpose of this manual is to help you make this comparison on the basis of the "true"
costs and. benefits of preventing pollution.
Exhibit 1-1 illustrates the general approach taken by this manual. As you can see, the economic
evaluation of a PP alternative can be performed at four levels or tiers. At each tier, the economic
evaluation is a two-step process:
Step 1: Account for all costs associated with cuuent practices and with the alternative
PP project: This manual describes four tieis or levels of costs associated with
hazardous wastes and mateiials management: usual costs, hidden regulatory
costs, liability costs, and less tangible costs.
Step 2: Estimate key financial indicators of the economic viability of the PP project on
the basis of Step 1 costs: This manual describes the financial calculations for
estimating net present value, internal rate of return, and annualized cost savings
of a PP project.
In Exhibit 1-1 the four peripheral boxes represent the four tiers of the cost calculations (i.e., Step 1). The
central box represents the financial calculations (i.e., Step 2). Note that the same financial calculations are
performed in each tier of the economic evaluation.
The manual describes procedures or protocols for performing the cost and financial calculations.
After performing the cost protocol associated with a tier, you should use the financial protocol to evaluate
the economic merits of the PP alternative. Each tier is evaluated using the same basic techniques. Only
you can determine the appropriate level of analysis to employ, not everyone will need or choose to employ
all four tiers of the analysis.
13.1 Four-Tier Cost Protocol
The manual describes four "tiers" or levels of costs associated with hazardous materials and waste
management. You may go through as many tiers as necessary to demonstrate the economic viability of
your PP project. The four cost tiers are summarized next. Note that Tiers 2 and 3 are judgmental in
nature. You are encouraged to be conservative in your cost estimates thus reflecting your emphasis on PP
as a goal and not profit maximization. If you get to Tiers 2 and 3, your estimates of liability costs and less
tangible benefits will reflect subjective corporate policy and not precise, scientific calculations.
Her 0 addresses the "usual" capital and O&M costs associated with new technology and operating
practices - labor costs, equipment costs, raw materials costs, etc. In this manual, EPA has assumed that
you have conducted or will conduct an evaluation of usual costs by using other EPA guidance, internal
corporate experience, or outside consultants. To use this manual, you will need to provide the Tier 0 cost
estimate.
Tier 1 includes "hidden" costs associated with pollution practices - permitting costs,
monitoring/testing costs, training costs, inspection costs, and other regulatoiy costs. In some cases, these
costs can be significant and pollution prevention can lower them. These costs are "hidden" because often
they are not allocated to the corporate unit(s) actually responsible for incurring them. Instead, hidden
costs often are charged to indirect or overhead accounts. Frequently, the individual(s) most able to control
hidden costs are either uninformed about them or lack the incentive to reduce them. Tier 1 costs should
be relatively easy to obtain or estimate, because they generally relate to the regulatory status of your
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1-4
EXHIBIT 1.1
APPROACH AND ORGANIZATION OF MANUAL:
FOUR-TIER COST PROTOCOL AND FINANCIAL PROTOCOL
Loss Tanamm Costs
• Consumer Responses
• Employee Relations
• Corporate Image
• Ghaotef S
II
Usual Costs
m
Process Equipment
m
Process Materials
•
Direct Labor
•
®C" Chmnfepg
Kav Financial Maaauraa
fwjr 9 wwiiyiari
• Net Present Value
• Internal Rate of Return
• Annualized Cost
Savings
fitafittu
• Monitoring
• Paperwork
• Permit Requirement
• ®C* Chaotor a
~
tHHW
Liability Costs
• Penalties and Fines
• Future Liabilities
Chamm€
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1-5
current operations. Using your current accounting records and the procedure in this manual, you should
be able to estimate Tier 1 costs fairly accurately.
Tier 2 considers potential liability costs. As you are probably aware, environmental liability claims
are becoming more common, and more expensive. By avoiding pollution, you may be able to avoid liability
costs. This manual presents a protocol to estimate two types of liability costs: penalties and fines
associated with non-compliance, and other liabilities referred to as future liabilities.
Tier 3 includes "less tangible" benefits that your company may achieve as a result of reducing or
eliminating pollution. Less tangible benefits include increased revenues or decreased expenses due to
improved consumer acceptance, employee relations, and corporate image. Although it is difficult to predict
the extent of these benefits with certainty, it is reasonable to assume that these benefits may be significant.
For example, several States are currently offering "excellence" awards to businesses for outstanding PP
efforts (e.g., CA„ MN, NC, TN). Winning such an award may result in favorable publicity (i.e., free
advertising), which may promote consumer acceptance and interest in a firm's products or services.
Likewise, by drawing attention to efforts to reduce the amount of hazardous materials or hazardous wastes
handled at a facility, thereby making the facility a safer workplace and a safer neighbor, employee
productivity and product acceptance by consumers may be enhanced. This manual discusses some of the
benefits that may be realized by reducing or eliminating pollution. Only you, however, can estimate the
value of these benefits.
13.2 Common Financial Protocol -
The results from each tier are evaluated using the financial protocol. The financial protocol assumes
that a PP project is economically viable if its implementation will result in overall net savings for the plant
or company. The financial protocol will guide you through the calculation of three key financial indicators
of the economic feasibility of your PP alternative:
• Annualized Saving -- the equal amounts of dollar savings (or losses) expected
every year over the lifetime of the project (e.g., $2,000 per year over 20 years);
• Internal Rate of Return (IRK1 - the expected long-term return on investment
in the PP project (e.g., 12 percent); and
• Net Present Value -- the present value of cash inflows minus the present
value of cash outflows (e.g., S5,000).
Each of these financial measures recognizes that one dollar earned or spent today is worth more than one
dollar earned or spent tomorrow, even in the absence of inflation. Financial experts acknowledge this time
value of money by discounting future cash flows in order to compare them to present cash flows. The
financial measures presented above are commonly used by firms; they are all based on discounting of future
cash flows. Using discounted cash flows, you will be able to compare costs or cost savings expected to be
incurred at different times in the future.
1.4 WHAT WILL YOU GET OUT OF THIS MANUAL?
Using this manual, you will be able to summarize the expected savings from choosing a PP
alternative to your current practice. To illustrate this, Appendix D of this manual presents the economic
benefits to a hypothetical firm of switching from current practice to a PP alternative. The hypothetical firm
is an electroplater of gold jewelry. Currently, the firm uses 1,1,1-tricholoroethane (TCA) in a pre-cleaning
step which generates spent solvents. The firm ships the spent solvents off-site for recycling. After
distillation for the spent solvents, the off-site recycler incinerates the still bottoms and disposes of the ash
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1-6
in a landfill. Under the PP project, the hypothetical firm would replace the TCA precleaner with a
mechanized aqueous based cleaner. The firm would not generate any spent solvents under the PP project.
Exhibit 1-2 summarizes the cost savings or benefits to the hypothetical firm at each of the four "tiers'
or levels of analysis. For the hypothetical firm, the cost savings from raw materials are not large enough
to compensate for increased costs such as the capital expenditure for purchase and installation of the
mechanized aqueous-based cleaner.1 At the Tier 0 level, the PP project costs an additional S3,500 a year
compared to the current practice and has an Internal Rate of Return (IRR) of 12 percent, which is less
than the 15 percent minimum rate of return acceptable to the hypothetical firm. Therefore, the PP project
is not justified using usual costs only.
The PP project continues to be not cost-justified when considering hidden regulatoiy costs (Tier 1)
in addition to usual costs. Despite the additional cost savings associated with reduced regulatoiy
requirements (e.g., less inspections), the PP project continues to cost $1,500 more than the current practice
each year with an IRR of 13.7 percent (still less than the 15 percent minimum acceptable rate of return).
The PP project becomes cost-justified when liability costs (Tier 2) are added to usual costs and
hidden regulatory costs. Compared to the current practice, the PP project is estimated to save $45,600 a
year in the form of reduced future liabilities associated with the management (especially solvent storage in
tanks and ash disposal in landfill) of hazardous waste and materials. The PP project has an estimated IRR
of 33 percent, which far exceeds the 15 percent minimum acceptable rate of return.
The PP project looks even better when less tangible benefits (Tier 3), such as increased sales
resulting from improved corporate image, are also taken into account. At the Tier 3 level, the PP project
is estimated to save $48,000 a year compared to the current practice. Because the IRR estimate (34
percent) is greater than 15 percent, the PP project is cost-justified.
1.5 HOW IS THIS MANUAL ORGANIZED?
The remainder of this manual is arranged in five chapters and five appendices. Each chapter first
summarizes the steps to be covered in the chapter and the approach taken, and then provides more detailed
information on how to perform the steps.
Chapter 2 discusses the Tier 0 cost protocol for usual costs.
Chapter 3 discusses the Tier 1 cost protocol for hidden regulatoiy costs.
Chapter 4 discusses the Tier 2 cost protocol for liability costs.
Chapter 5 discusses the Tier 3 cost protocol for less tangible costs.
Chapter 6 describes the steps needed to perform the financial calculations for each tier.
1 Note that the purchase and installation of PP equipment will cost an additional $24,800 a year over
the entire lifetime of the equipment. As demonstrated in Appendix D, this annualized cost corresponds to
a capital investment of $155,000 in equipment with a 20-year lifetime, and assumes a 4 percent annual
inflation rate.
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1-7
EXHIBIT 1-2
BENEFITS TO THE HYPOTHETICAL FIRM OF SWITCHING
FROM CURRENT PRACTICE TO PP ALTERNATIVE
Level of Analysis/ Net Savings or Benefits
Project Justification Cost Item (in S per year) a/
Tier 0: Usual Capital Costs and O&M Costs
PP alternative not cost- Equipment and installation -$24,800
justified. Fails to meet Raw Materials $57,900
the firm's 15% minimum Energy -$14,500
rate of return on investment. Disposal -$2,900
Maintenance -$11,600
Revenues -$3,200
Tier 0 Taxes -$4,500
Alter.Tax Savings Through Tier 0 -$3,500
IRR Through Tier 0 12%
Tier 1: Hidden Regulatory Costs
PP alternative not cost- Reporting $930
justified. Fails to meet Inspections $1,800
the firm's 15% minimum Other $870
rate of return on investment.
Tier 1 Taxes -$1,600
After-Tax Savings Through Tier 1 -$1,500
ERR Through Tier 1 13.7%
Tier 2: Liabilities
PP alternative is cost- Treatment or Storage in Tank $47,500
justified. Has an IRR of 33%, Transportation $1300
which is greater than 15% Disposal in Landfill $35,300
minimum rate of return on
investment. Tier 2 Taxes -$37,000
After-Tax Savings Through Tier 2 $45,600
[RR Through Tier 2 33%
Tier 3: Less Tangible Benefits
PP alternative is cost- Net Increase in Operating Revenues $ 4,300
justified. Meets the firm's
hurdle for investments Tier 3 Taxes -$1,900
(34% > 15%) After-Tax Savings Through Tier 3 $48,000
IRR Through Tier 3 34%
a/
All savings are before tax except when in bold. A discount rate of 15 percent is assumed. Negative
estimates represent a cost increase or net loss. Positive estimates represent a cost decrease or net
benefit. All numbers may not add up due to rounding.
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1-8
Appendix A contains blank worksheets to be used in completing each tier of the analysis.
Appendix B provides information on the regulations that are discussed under Tier 1.
Appendix C provides additional information on the future liability costs discussed under Tier
2.
Appendix D illustrates the manual's approach with a hypothetical firm example.
Appendix E introduces the treatment standards promulgated under the land disposal
restrictions and provides reference for additional guidance on the subject.
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CHAPTER 2
TIER 0 COST PROTOCOL:
USUAL COSTS
This chapter discusses the steps needed to perform the Tier 0 analysis of usual costs. As discussed
in Chapter 1, the Tier 0 analysis includes analyzing facility operations, developing options, and estimating
the direct expenses of the options. For purposes of this manual, it is assumed that you have conducted or
will conduct the Tier 0 analysis by following other EPA guidance, by using your internal corporate
experience, or by using outside consultants. This chapter lists the types of costs that EPA antici pates will
result from the Tier 0 analysis of pollution prevention (PP) alternatives, but does not describe the process
of obtaining the cost estimates.
- STEPS APPROACH
1. Identify one or more PP alternatives; i.e.,
alternatives to the current practice expected to
result in less hazardous waste generated or less
hazardous materials disposed or released.
2. Estimate the "usual" costs (capital equipment,
direct operating and maintenance, and other
direct costs) associated with current and
alternative practices/
3. Report estimates on the Tier 0 cost worksheet
for the current practice and for each PP
alternative separately.
1. Conduct a PP audit, or consult the EPA
Manual for Waste Minimization Opportunity
Assessments for further guidance.
2. Consult the EPA Manual for Waste
Minimization Opportunity Assessments,
engineering handbooks, trade associations, or
outside consultants.
3. Use the blank Tier 0 cost worksheet
(Worksheet 0) provided at the end of this
chapter and in Appendix A of this manual.
1 It is important to emphasize that you must estimate capital and operating costs for both the current
and alternative practices. Frequently the capita! costs associ ated with the current practice will not be zero.
This is because existing equipment either may still have depreciation charges against it or may be made
obsolete by new regulations on pollution control within a few years.
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2-2
INTRODUCTION
The first step in reducing the costs associated with pollution and waste management is to conduct
a facility assessment to determine where waste is generated and which processes lead to the regulated
discharge of pollutants. Frequently, waste-generating processes will be found to date from a time when
waste disposal and pollution control was less costly, so that changes in the process, which may be simple
"housekeeping" changes or those requiring more significant time and planning, can result in immediately
identifiable cost reductions through decreased energy, materials, labor, and disposal costs. Assessment of
these costs is considered to be "Tier 0," because the review of these "usual" costs is assumed to be a
necessary part of doing business.
As discussed in Chapter 1, however, waste reduction need not begin as a separate, full-blown program
nor even as an attempt to minimize pollution. Instead, the initial steps can come about through simple
awareness that waste and pollution are costly, and that minimizing waste and pollution can save money.
Pollution prevention also can result from attempts to optimize certain plant processes, e.g., installation of
a floating roof tank to control evaporative loss of volatile liquids during storage. Although PP audits would
provide the most comprehensive information through a detailed, full-facility review, simply reviewing plant
operations as part of periodic inspections can also provide valuable information on waste stream generation.
Similarly, it is not necessaiy to redesign an entire plant, but if process modifications are being examined,
then the potential impact of the modifications on waste generation and pollutant discharge should be
considered.
This manual does not provide detailed guidance on how to perform the Tier 0 facility analysis and
cost development. Instead, it provides a brief review of the steps that are often entailed and describes the
cost elements that are generally estimated as a result of the review. EPA has prepared a separate manual,
the Waste Minimization Opportunity Assessment Manual, that covers the subject in detail* Engineering
handbooks and manuals may also provide information on estimating equipment needs and costs. Also, many
trade associations can provide guidance, and several commercial firms offer professional auditing and facility
review services.
STEP 1: IDENTIFY PP ALTERNATIVES
Concept and Purpose
Before you can reduce the costs associated with pollution, you must know what processes contribute
to pollution and waste generation and the nature and extent of pollution and waste generation. After
identifying polluting processes or procedures, you can identify ideas for reducing or eliminating the
pollution. Finally, the costs of the alternative processes or procedures can by estimated.
Actions
(1) Develop a Procedure far Reviewing Pollution Generation
The first step is to develop a procedure for reviewing pollution generation. Frequently, any changes
to processes or procedures will require prior approval by management; most successful pollution reduction
and waste minimization programs have strong encouragement from the upper management before they begin.
In general, a team should be developed with experience in the facility operations and knowledge of potential
alternatives. Plant managers and engineers, foremen, and operators can all provide valuable insight into
2 U.S. EPA, Hazardous Waste Engineering Research Laboratory, "Waste Minimization Opportunity
Assessment Manual (EPA/625/7-88/003)," Prepared by Jacobs Engineering Group, July 1988.
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2-3
the nature of the practices. Trade associations, state officials, outside consultants, and vendors can often
provide suggestions based on prior experience in reducing pollution.
(2) Collect Data
The second step in the process is to collect data on the facility operations to identify the waste
generating steps. "Material balances" showing the amount of raw materials going into and the amount of
finished product and waste coming out of a process will often help to pinpoint the largest contributors.
Records from waste disposal operations (air and water treatment plants and solid and hazardous waste
disposal costs) will suggest the largest volumes of waste. In many cases, you can find examples of
unnecessajy pollution or waste generation by simply walking through the plant to find leaking valves, open
drains, evidence of excessive dragoff from chemical baths and cleaning operations, and uncovered containers.
A useful source of data for this purpose may be your SARA §313 data submissions.
(3) Develop PP Alternatives
The next step is to develop PP alternatives. For example, your records may show extensive use of
organic solvents that are not matched by equivalent records of disposal or recycling. Alternatives to reduce
the fugitive losses of solvent include enclosing the process or switching to a different cleaning mechanism
(e.g., aqueous solvents or mechanical abrasion). A review of water flows may show that most water is used
only once, but that all water is mixed before discharge. In many cases, non-contact cooling water (water
routed through jackets to cool equipment) can be used for washing purposes. Many plants have found that
highly toxic waters (e.g., rinse waters from cyanide baths) are drained to the floor, where they can mix with
less hazardous water used for cleaning purposes. Some facilities have found that "counter-current" rinsing,
where the effluent rinse water from one step is used as the source to a preceding step, conserves water
usage and decreases chemical usage and operating costs.
(4) Determine the Feasibility of the Alternatives
The final step in the audit process is to determine if the alternatives are feasible - will they work
at your plant. In some cases, the alternatives merely require good housekeeping practices or minor
alterations (e.g., using a drain board to drain solutions back into baths, rather than letting the fluid drip
to the ground or contaminate the next step in the process). In other cases, additional research will be
necessary to determine whether the change will have an adverse effect on quality (e.g., recycling wastes back
into a process).
STEP 2: ESTIMATE THE USUAL COSTS OF CURRENT AND ALTERNATIVE PRACTICES
Concept and Purpose
Once alternative practices have been identified, you can estimate the "usual" costs associated with
them. As discussed in Chapter 1, "usual" costs include those that are directly associated with the polluting
or alternative practice, and typically include equipment costs, material and energy costs, and direct labor
costs. As shown in Worksheet 0, costs can be put into two major categories: capital expenses that must
be depreciated for tax purposes, and other expenses that can be deducted from taxes in a single year. Some
of the other expenses shown in Worksheet 0 (e.g., start-up costs) are commonly calculated as "capital" costs
because they are one-time costs that are needed before the process can be used. Because they are treated
as expense for tax purposes, however, Worksheet 0 includes them under 'expenses.* Worksheet 0 also
provides room for recording any changes in revenues expected as a result of using an alternative practice,
and provides room to record the estimated annualized cash flows to be developed following the financial
protocol discussed in Chapter 6.
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2-4
Actions
(1) Estimate Capital Cost Items
*
Worksheet 0 shows the 6 elements of depreciable capital costs commonly associated with process changes.
Equipment, This cost item represents the investment in new equipment needed to implement the PP
alternative. The cost element should include the price (f.o.b. factory), taxes, freight, and insurance needed
for delivery, and the cost for the initial spare parts inventoiy. You should include any additional equipment
needed to support the PP alternative, such as additional storage and material handling equipment or
additional laboratory and analytical equipment.
Materials. Materials costs include piping, electrical equipment, new instrumentation, and changes in the
structure. These costs are those incurred in purchasing the materials needed to connect the new process
equipment (or to revise the use of existing equipment) to implement a waste minimization alternative.
Utility Connections. This item includes costs for connecting the new equipment (or for making new
connections to existing equipment) as part of implementing the waste minimization option, "typical utilities
include electricity, steam, cooling water, process water, refrigeration, fuel (gas or oil), plant air (e.g, for
process control), and inert gas.
Site Pre paration. This item includes the costs for any necessary site preparation - demolition, site clearing,
paving.
installation. This item includes the costs incurred during the installation of the process equipment or
process change. Be sure to include charges by the vendor as well as by in-house staff.
Engineering and Procurement. This item includes the costs incurred to design the process equipment or
process change and to purchase any new equipment. Charges for consultants used in designing and
procuring equipment would be included here.
(2) Estimate Expenses
Worksheet 0 shows the 14 operating cost elements commonly associated with process and procedural
changes. The costs in this category include both one-time costs and on-going costs that are deductible for
income-tax purposes. For consistency with the approach used in the Tier 1, 2, and 3 analyses, the costs are
presented as total current costs and total costs after the change; the evaluation of economic feasibility
presented in Chapter 6 will show how to perform the comparative analysis.
Start-up Costs. Start-up costs include labor and material costs incurred during the start-up of the
equipment.
Permitting Costs. These costs include both fees and the costs incurred by in-house staff in documenting .
the process change to meet permit requirements.
Salvage Value. Estimate the net amount (in today's dollars) that the used equipment will be worth at the
end of its useful lifetime. Include the value of working capital and catalysts and chemicals that will remain
at the completion of the equipment's life.
Training Costs. Training costs include the costs for on-site and off-site training related to the use of the
new equipment or for making sure the process change achieves its goal.
Initial Chemicals. The initial charges for chemicals and catalysts can be considered a capital item.
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2-5
Working Capital. This category includes all elements of working capital (required inventories of raw
materials, in-process inventories, materials and supplies) not already included as charges for chemicals and
catalysts or for spare parts.
Disposal. Cost. The disposal cost includes all of the direct costs associated with waste disposal, including
solid waste disposal, hazardous waste disposal, and off-site recycling. Exhibit 2-1 presents typical treatment
and disposal costs (in 1985) by type of waste and technology.
Raw Materials Costs. You should include both the raw materials directly affected (e.g., chemicals for which
more effective or less toxic substitutes are being found) and other raw materials affected by the change in
the process (e.g., if a change in cleaning agent changes the rejection rate of metal parts, then there may be
a change in the total materials costs for raw metal).
Utilities Cost. Utilities costs include electricity, any process steam, water, compressed air, and heating oil
or natural gas. It is important to consider whether a process change causes downstream effects as well as
direct process effects. For example, if a process is modified to recycle aqueous streams, then there may be
utilities costs for the process (different costs to adjust the temperature of the stream to match the process
requirements) and different costs associated with the downstream water treatment process.
Catalysis and Chemicals. In this category, you should include any chemicals or catalysts necessaiy to the
process that are not raw materials. For example, cyanide makeup for metal plating, pH adjusters for water
treatment, and catalysts used to speed chemical reactions all are necessaiy to the process, but do not become
an integral part of the final product.
Operating and Materials fO&Ml labor Costs. This cost elements includes the labor needed to run the
affected processes.
Operating and Materials Supplies Costs. This cost element includes supplies needed on a regular basis, such
as glassware, buckets, cleaning agents, uniforms, air and dust filters, protective equipment.
Insurance and Liability Costs. In some cases, your insurer will review your insurance and make adjustments
based on changes in the risk associated with you plant. For example, if you replace a process with a high
histoiy of accidents or health problems, your rates should go down.
Other Operating Costs. This cost element includes other operating costs that have not been specifically
included above.
(3) Estimate Operating Revenues
In some cases, adopting a PP alternative will lead to changes in the revenue from operations.
Worksheet 0 provides room for two categories: revenues from primary products, and revenues from
marketable by-products.
Primary Products. If the process or procedural change will change the production rate of the process, then
the revenues before and after the change should be calculated.
Marketable By-Products. One outcome of many PP projects is an increase in the amount of marketable
by-products. For example, precious metal platers in Massachusetts have f ound that concentrating the plating
baths and sludge has allowed them to sell the sludge to recycling facilities for the precious metal content.
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2-6
EXHIBIT 2.1
TYPICAL TREATMENT AND DISPOSAL COSTS
Waste Management
Price a/
Price y
Technology
Type/Form of Waste
(1985 $ Per Gallon)
(1987 $ Per Gallon)
Landfill
•
55-gallon drum
50-137/drum
64-186/drum
•
Bulk
69-140/ton
97-166/ton
Land Treatment/
•
All
0.33-0.83
Solar Evaporation
Incineration
•
Clean liquids, high
0.10-1.93
1.35-2.95
BTU value
•
Clean liquid, low
1.33-4.17
1.33-3.38
BTU value
•
Sludges and solids
2.75-4.75
5.40-8.56
•
Highly toxic liquids
2.10-8.30
2.36-5.02
m
PCB liquids
2.50-3.50
2.36-4.34
9
PCB solids
4.50-12.50
3.84-8.17
Chemical Treatment
•
Acids/alkalies
0.12-2.00
N/A
•
Cyanides
0.50-0.90
N/A
•
Highly toxic wastes
0.80-6.00
N/A
«
Heavy metals
0.20-1.00
N/A
Resource Recovery
•
Organics
(0.25)-3.00
N/A
&
Mixed Halogenated
2.20-4.20
N/A
9
Oil
0.00-0.42
0.20-1.13
Deep Well Injection
9
Oily wastewaters
0.08-0.50
0.09-0.50
9
Toxic rinsewaters
0.50-1.20
0.15-0.63
Transportation
0.18-0.22/ton-mile
0.23/ton-mile
270-4.5/1oaded mile
3.35-3.51/loaded mile
(20 tons per load)
(20 tons per load)
NA - Type of waste not included in 1987 survey.
& U.S. EPA, "1985 Survey of Selected Firms in the Commercial Hazardous Waste Management
Industiy," Final Report, November 6, 1986.
- U.S. EPA, "1986-1987 Survey of Selected Firms in the Commercial Hazardous Waste Management
Industiy," Final Report, March 31, 1988.
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2-7
STEP 3: COMPLETE THE TIER 0 COST WORKSHEET
The final s ep is to complete the Tier 0 cost worksheet, i.e., Worksheet 0. .The worksheet has three
major blocks. The left-hand block has summaiy descriptions of each cost item. These descriptions, which
correspond to the cost elements used in EPA's Waste Minimization Opportunity Assessment Manual, have
been defined in Step 2. The middle block provides room to enter values for the elements of the cash
flow. The right-hand block will be discussed in Chapter 6. The following discussion pertains to the
elements in the middle block.
Concept and Purpose
Worksheet 0 provides a way to summarize the costs obtained in Step 2 using a standard format that
allows comparison between the current and alternative practices. In filling out a cost worksheet
(Worksheets 0 through III as introduced in this and subsequent chapters), costs or cash outflows should be
entered as negative values, and revenues or cash inflows should be entered as positive values.
For each t er, you may perform the cost calculations either (1) once; Le., for your PP alternative
relative to current practice or (2) twice, i.e., once for your current practice and once for your PP alternative.
In the first case, you will check the "incremental" box in Worksheet 0 and complete it only once. If, for
example, you estimate that costs will decrease by a certain amount as a result of the PP alternative, you will
enter the decrease in costs on the worksheet as a positive cash flow. In the second case, you will complete
Worksheet 0 once for the current practice and once for the PP alternative and check the current and
alternative practice boxes accordingly. However, you need only estimate and enter those cash flows that are
affected by the PP alternative. For example, if you do not believe that revenues will change as a result of
your PP alternative, then you need not enter the amount of revenues at all.
Actions
(1) Record the Cash Flow Amount
For each cash flow item, report your cash flow estimate in current dollars, as obtained in Step 2,
(2) Estimate and Record the Escalation Rate
The escala ion rate, or inflation rate is the average increase in unit costs or revenues from year to
year, expressed as a decimal. For example, if your costs are rising at a raie of 5 percent per year (that is,
for eveiy $20 dollare spent today, you expect to spend $21 next year for the same quantity of goods or
services), then you should enter the escalation rate as 0.05. If you expect some costs to go up faster than
others, you shou d enter different rates. Otherwise, you should enter the same rate. For example,
treatment, storage, and disposal (TSD) costs for solid and hazardous wastes have increased rapidly in the
last few years, and may continue to rise sharply as a result of further restrictions on the types of wastes that
may be land disposed. In particular, the costs of TSD services have increased by 10 percent to 150 percent
per year between 1983 and 1985. High increases in rates were observed for such services as incineration.
More recently, the costs of TSD services have continued to rise at a rate of 10 percent to 20 percent per
year.
(3) Record the First Year of Cash Flew
The second element is the year when the cash flow is expected to first occur. For example, salvage
value would be recorded as a positive cash flow starting in the first year after the expected useful life. Thus,
if you expect to install new equipment within the next year, and you expect it to last 10 years, you should
record a value of 10. In most cases, the first year of cash flow, however, will be year 0 (today).
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2-8
(4) Estimate and Record the Lifetime
The third element is the lifetime associated with the cash flow. For equipment costs (A1 through
A6) you should use the expected equipment lifetime. For other costs, you should use the estimated project
lifetime. As a general rule, a good value to use for lifetime is the estimated lifetime of the longest-lived
equipment item.
After completing Worksheet 0, you should proceed to Chapter 6.
Chapter 6 provides the financial protocol, which will give you
instructions to (1) complete the right-hand block of the Tier 0
Cost Worksheet (i.e., annualized cash flows), and (2) calculate the
annualized cost savings, net present value, and internal rate of
return of each alternative PP practice relative to current practice.
These values will allow you to assess the economic feasibility of
your PP alternative(s).
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2-9
Worksheet 0
Tier 0 • Usual Costs
A. DEPRECIABLE CAPITAL
EXPENDITURES
A1
Equipment
A2
Materials
A3
Utility Connections
A 4
Site Preparation
A5
Installation
A6
Engineering St. Procurement
B. EXPENSES
BI
Stan-up
B2
Permitting
B3
Salvage Value
B4
Training
B5
Initial Catalysts
B6
Working Capital
B7
Disposal
B8
Raw Materials
B9
Utilities
810
Catalysts & Chemicals--' :
Bll
Labor
B12
Supplies
B13
Insurance
B14
Oth«r
C. OPERATING REVENUES
Cl
Revenues
C2
By-product Revenues
C] Current Practice
O Alternative Practice
~ Incremental
.¦-¦-.'J=>: ;s:..ew J
r.» S*
d i
f.« 10%
Q I
1S%
In thousands of ytar-0 dollars
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CHAPTER 3
ITER I COOT PROTOCOL:
HIDDEN REGULATORY COSTS
This chapter presents the protocol for estimating the hidden regulatoiy costs associated with your
current and alternative practices. You may perform the cost calculations described in this chapter either
(1) once; i.e., for your alternative practice relative to current practice, or (2) twice, i.e., once for your
current practice and once for your PP alternative.
Worksheet I for the Tier 1 Cost Protocol has three major blocks (see end of chapter). The left
block has summaiy descriptions of each cost item. The middle block provides room to enter values for the
elements of the cash flow. The right block allows for the Tier 1 financial calculations (see Chapter 6).
STEPS
For the current practice and each PP alternative:
1. Establish what regulations are applicable to your
facility.
2. Estimate hidden capital expenditures expected
to be incurred by your facility.
3. Estimate hidden expenses incuired or expected
to be incurred by your facility.
4. Complete Middle Block of Worksheet 1.
APPROACH
1. Fill out Regulatory Status Questionnaire
(Exhibit 3-1).
2. Analyze technology-forcing requirements of
existing or anticipated regulations.
3. Using results from the Regulatoiy Status
Questionnaire (Step 1), fill out Cost Tables
3-1 to 3-14 and report your cash flow
estimates on Worksheet I.
4. Use guidelines presented.
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3-2
STEP 1: ESTABLISH YOUR FACILITY'S REGULATORY STATUS
Concept and Purpose
The Regulatory Status Questionnaire (Exhibit 3-1) has been developed to determine your facility's
regulatory status for purposes of this analysis. The term "questionnaire" does not imply that the government
will ask for any information from this exercise. It will not! This questionnaire is for your use only.
Likewise, the regulatory descriptions provided in this manual may not be comprehensive, they are intended
to be used only as guidelines.
The questionnaire spans all of the regulatoiy programs covered in this manual (i.e., RCRA,
CERCLA. SARA Title III, Clean Air Act, Clean Water Act, OSHA) and presents questions to aid in
establishing which specific requirements are applicable to your facility (for both your current practice and
PP alternative). To answer the questions, you may need to locate further regulatory information. This
information can be obtained by.
• referring to Appendix B of this manual;
• contacting facility personnel familiar with the regulatory aspects of your facility's
operations; or
• referring to the regulations or acts pertaining to the programs for which you
need information.
Actions
(1) Complete the Regulatory Status Questionnaire
Complete the questionnaire (Exhibit 3-1) by reviewing each of the questions on the right-hand side.
If you answer the question affirmatively for your current practice, circule the status number under current
practice. If you answer the question affirmatively for your PP alternative, circle the status number under
PP alternative. For example, if your facility is a large quantity generator in the current practice (i.e., you
produce more than 1000 kilograms of hazardous waste per month), yet in your proposed PP alternative you
will completely eliminate your hazardous waste generation, you will circle the status number T in the
column under the heading "Current Operation" and will not circle the status number T under the heading
"PP Alternative." The circled status numbers will be needed in Step 2 when estimating costs for the specific
requirements applicable to your facility.
STEP 2: ESTIMATE HIDDEN CAPITAL EXPENDITURES
Concept and Purpose
EPA's approach to environmental regulations over the past years has emphasized the need to install
new technologies in order to protect the nation's environment. Provisions of the Resource Conservation
and Recovery Act, the Clean Air Act, and the Clean Water Act provide examples of technology-forcing
requirements and regulations promulgated by EPA. In addition to the technology-based federal regulatory
requirements, there are many state regulatory programs that can also impose technology-forcing regulatory
requirements.
Your firm may incur capital expenditures in the near future to satisfy technology-forcing
requirements For example, if you have an on-site surface impoundment, you may have to retrofit it with
a double-liner in order to meet the minimum technology requirements of the land disposal restrictions.
The costs of retrofitting will likely be significant and, therefore, you must consider them in the economic
evaluation of any PP alternative to your current practice.
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3-3
EXHIBIT 3-1
REGULATORY STATUS QUESTIONNAIRE
(for current and alternative practices) a/
Status Number
Current Practice PP Alternative
Does/Is Your Facility:
Resource Conservation and Recovery Act
1 1 A RCRA large quantity generator?
2 2 A RCRA small quantity generator?
3 3 A primaiy exporter of hazardous waste?
4 4 Have hazardous waste storage tankjs) on site?
5 5 Transport hazardous waste?
6 6 A final status TSD facility?
7 7 An interim status TSD facility?
Comprehensive Environmental Response, Compensation, and Liability Act b/
8 8 Have CERCLA Section 4661 chemicals (see Exhibit B-2-1)
Superfund Amendments and Reauthorization Act, Title III
Handle any 40 CFR §355 Appendix A and B extremely hazardous
substances at or above their Title III threshold?
10
11
12
Clean Air Act
13
14
£/
£f
Si
10
11
12
13
14
cf
£/
C/
Occasionally release reportable quantities (see 40 CFR §302 and
Table 302.4) of CERCLA hazardous substances or any 40 CFR §355
Appendix A and B extremely hazardous substances?
Maintain any material safety data sheets under 29 CFR
§1910.1200(g)(8) (see (22) under OSHA)?
Have 10 or more employees and fall within SIC codes 2000 to 3999
and within the current calendar year handle 40 CFR §372.65 toxic
chemicals above thresholds stated in 40 CFR §372.25?
A new stationasy source (see Exhibit B-4-2 of Appendix B)?
Emit Section 112 hazardous air pollutants (see Exhibit B-4-3 of
Appendix B)?
Within an industry listed in Exhibit B-4-4 of Appendix B?
Have a PSD permit?
Have a nonattainment permit?
Clean Water Act
15 15
16 16
Discharge wastewaters directly to surface water?
Discharge wastewaters to a publicly owned treatment works
(POTW)?
-------
3-4
EXHIBIT 3-1 (continued)
REGUIATORY STATUS QUESTIONNAIRE
(for current and alternative practices) a/
States Number
Current Practice PP Alternative
Does/Is Your Facility;
Clean Water Act (continued)
17 17
Occasionally discharge reportable quantities of hazardous substances
as defined in 40 CFR §117?
18
18
£/
Occupational Safety and Health Act
19
20
21
22
23
19
20
21
22
23
Have toxic pollutant discharges listed in Exhibit B-5-2 of Appendix
B for which chemical-specific standards have been promulgated?
Within an industiy listed in Exhibit B-5-3 of Appendix B?
Have less than 10 employees or is it within SICs 52-89 (except 52-
54, 70, 75, 76, 79, 80)?
Have 10 or more employees and is it not within SICs 52-89 (except
52-54, 70, 75, 76, 79, 80)?
Have OSHA air contaminants as per 29 CFR §1910.1000, Table Z-
1, Z-2, or Z-3?
Handle any hazardous chemicals as defined in 29 CFR
§1910,12Q0(c)?
A hazardous waste treatment, storage, and disposal facility (regulated
under 40 CFR Parts 264 or 264), or a large quantity generator of
hazardous waste, or a facility accumulation of hazardous wastes for
90 or more days (as defined in 40 CFR §262.34)?
cf
Handle any OSHA chemicals listed in Exhibit B-6-2?
a/ For further information about the regulatory programs, see Appendix B or the appropriate sections
of the Code of Federal Regulations. Other Federal Programs (e.g., Toxic Substances Control Act,
Safe Drinking Water Act) and state programs (e.g., New Jersey ECRA) may apply but were not
analyzed in this manual due to resource limitations. Note that SARA Section 312 (reporting on
emergency preparedness) is covered by Status Number 11 and SARA Section 313 (reporting on
environmental releases) is covered under Status Number 12.
h) Most of these costs are covered in Tier 2, Liability Costs - Chapter 4.
cj These ques ions apply to additional chemical or industry-specific requirements that can impose
significant costs, and should be considered. Due to their specific nature, however, these costs are
not quantified in this manual.
-------
3-5
Actions
m
(1) Identify Technology-Forcing Requirements
Your responses to the regulatoiy questionnaire should give you a good picture of existing regulations
applicable to your firm under current and alternative practices. To find out about the technology-forcing
nature of these requirements, either consult the regulations themselves (see Appendix B for a brief
summary), read specialized literature (e.g., newsletters and magazines), consult the State's technical
assistance program or consult any environmental or legal experts available to your firm.
By establishing treatment standards for hazardous wastes and minimum technology requirements for
land disposal, the and disposal restrictions provide a good example of technology-forcing requirements.
Appendix E contains the treatment standards established under the land disposal restrictions for solvents,
dioxins, and California list wastes. Treatment standards also have been or will be established for those
hazardous wastes not included in Appendix E (the so-called remaining wastes).
(2) Estimate the Costs of Future Technologies
Estimate the capital outlay necessary to satisfy these technology-forcing requirements and report your
estimates on Worksheet I either for the current and alternative practices separately, or incrementally for
the PP alternative elative to the current practice. Remember, all cash outflows (costs) must be reported
as negative numbers. As suggested in Worksheet I, you can categorize your hidden capital expenditures into
the following items monitoring equipment, preparedness and protective equipment, additional technology,
and other. Of course, you can create your own items if these categories do not fit your needs.
STEP 3: ESTIMATE HIDDEN EXPENSES
Concept and Purpose
This step allows you to estimate the hidden expenses resulting from complying with the regulations
applicable to the type of operations at your facility (e.g., having hazardous waste storage tanks, having
various SARA Title III hazardous substances on site, etc.). Therefore, you will start by taking the
regulatory status numbers determined in Step 1 and transferring them onto each of the Cost Tables (Tables
3-1 to 3-14) to help you limit the calculations to only those costs directly applicable to your facility.
Actions
For each of the fourteen types of regulatory requirements (i.e., for each of Tables 3-1 to 3-14),
perform the following three actions:
(1) Identify Applicable Regulatory Requirements
For the current practice and the PP alternative, circle applicable status numbers by referring to
Exhibit 3-1 as completed in Step 1. For example, if you have a hazardous waste storage tank on site under
current practice, then you will have circled Status Number 4 under current practice in Exhibit 3-1. In this
case, you will circle Status Number 4 under current practice every time this status number appears in the
first column of Tables 3-1 to 3-14.
-------
3-6
(2) Estimate the Cost of Each Applicable Regulatory Requirement
Having identified all specific regulatory requirements applicable to your facility (e.g., all notification
requirements using Table 3-1), you will now estimate the costs of complying with those requirements as
follows:
(a) if you do not recognize the requirement, look it up either in Appendix B under
its regulatory program heading, or directly in the Code of Federal Regulations
to see what the requirement entails;
(b) Calculate the Annual Cost of the specific requirement by one of
the three following methods:
• If you have access to the total annual amount your facility
is spending under this requirement, enter it in the Annual
Cost Column.
• If you do not know the annual cost, use the cost equation
provided with parameter values speci'fic to your facility (i.e.,
facility-specific values of frequency f, non-labor costs m,
time t, and loaded wage w for the specific regulatory
requirement). Enter the cost estimate in the Annual Cost
, column.
• If you have neither the annual cost nor a basis on which to
estimate your facility-specific parameter values, use or adjust
the defaults provided in Tables 3-1 to 3-14. When either
equations or defaults/estimates are not provided, you must
rely on facility-specific information and best professional
judgement to make estimates. Place your cost estimate in
the Annual Cost column.
(3) Sum All Costs
Sum all costs in the Annual Cost column and place the total in the space provided at the bottom
right of the cost table. After completing the applicable cost tables, transcribe the total annual costs from
each table onto Worksheet I in the Cash Flow Estimates column of the middle block.
STEP 4: COMPLETE MIDDLE BLOCK OF WORKSHEET I
Concept and Purpose
Having estimated the total annual costs associated with each type of regulatory requirement (e.g.,
notification, reporting), you now will report these cost estimates onto Worksheet I and specify the
escalation rates and lifetimes associated with these cash flows. For a brief overview and discussion of the
concepts of escalation rate and lifetime, please refer to Chapter 2, Step 3
Actions
(1) Record the Cash Flow Amount
For each cash flow item, report your cash flow as estimated in Step 3.
-------
3-7
(2) Estimate and Record the Escalation Rate
(3) Record the First Year of Cash Flow
(4) Estimate and Record the Lif etime
After completing Worksheet I, you should proceed to Chapter 6.
Chapter 6 provides the financial protocol, which will give you
instructions on how to (1) comp ete the right-hand block of the
Tier 1 Cost Worksheet (i.e., annualized cash flow), and
(2) calculate the annualized cost savings, net present value, and
internal rate of return of each PP alternative practice relative to
your current practice. These values will allow you to assess the
economic feasibility of your PP a ternative(s) taking into account
usual costs, in addition to hidden regulatory costs.
-------
COST TABLKS
-------
TABLE 3-1
notification
* CN'
* %.
• mR'
" tN-
* WH'
«=» = % * ^ + % x "j,)l
annual cost of notification ($ per year)
frequency of notification (occurrences per year); e.g., a monthly notification has an fjj of 12
non-labor costs associated with notification requirement (S per occurrence); e.g., materials costs
time required to complete a notification (hours per occurrence); e.g., time to gather information
loaded wage rate of person(s) completing a notification ($ per hour)
3-9
-------
mnFicftiiw cost table
Status Hutrtber Retp»ir«nent Variable a/
_ Annual Cost
Current Alternative f« 0%, *o fjj * luty +
-------
ISBLE 3-2
Reporting
% - % z [Pfe + CfeR * *&)!
• CR, annual cost of reporting (S per year)
» fp,, frequency of reporting (occurrences per year); e.g., a biennial report has an fg of 0.5 because it is submitted once every two years
• nig, non-labor costs associated with reporting requirement ($ per occurrence); e.g., materials costs
• tg, time required to complete report (hours per occurrence); e.g., time to gather information
• Vp, loaded wage rate of person(s) filing report (S per hour)
3-11
-------
REKSttHG COST TABLE
Status Number Requirement Variable a/
Annual Cost
Current Alternative fjj ufe to "to % * I®n + (tg x *r>]
Practice Practice Description Citation {Occ/Vr) (S/8cc) (Hrs/Occ) ($/Hr) (S/Vr)
RGRA b/
1 2
1
2
Generators Biennial Report
1262.41
0.5
5
8
25
1
1
IPG Exception Report
1262.42(a)
0.1-1.5
1
2
25
2
2
5QG Exception Report
1262.42(b)
0-0.1
1
0.25
25
3
3
Primary Exporters Exception Report
1262.55
0.1-1.5
1
2
25
3
3
Primary Exports Annual Report
1262,56
1
2
2.5
25
6 7
6
7
TSDF Biennial Report
1264.35, S265.75
0.5
5
8-40
25
6 7
6
7
ISDF unmanifested waste report
1264.76, 1265.76
0-125
1
1
25
6 7
6
7
Release, fire, explosion, and closure reporting
1264.77, 1265.76
2
2
5
25
CERCT A £/
SARA Title III b/
11
11
Supplemental MSDS report
1370.21(c)
0.04-8
4
0.5
20
11
11
Requested MSDS report
1370.21(d)
&/
1
0.25
20
11
11
Inventory report
1370.25(a)
1
1
5
25
11
11
Tier 11 reporting by request
1370.25(c)
0-1
1
5
25
12
12
Excess of applicable threshold report
1372.30(a)
1
1
8-40
25
C A b/
13
13
Quarterly Compliance and Monitoring Assessment Report
160.7(c)
4
2
5
25
13
13
Performance test results reporting
160.8
4
2
2
25
13
13
Opacity test results reporting
160.11
4
2
2
25
14
14
Hazardous pollutant emissions reporting
$61.10
1
2
8
25
14
14
Hazardous pollutant monitoring system reporting
S61.14
2
1
5
25
cm b/
15
15
NPDES permit reporting requirements
1122.411
16
16
Industrial Users' continued compliance reports
1403.12(e)
2
2
5
25
16
18
Toxic standards annual compliance report a/
1129.5(d)(2)
1-6
1
5
25
QSB4C/
in
sn
Injury and illness reporting each occurrence
11904.4
0,05-5
1
1.5
20
Injury and Illness nnual Summary
11904.5
1
0.25
1
20
Fatality or hospitalization report
11904.6
0.005-0.5
0
1-10
20
Occupational Injuries and Illness Survey
11904.21
1-2
0
0.5-3
20
State or Local
TOTAL: $
Sj Default values are based on, ICF analysis,
b/ Provision cites are from 40 CPR.
c/ Provision cites are from 29 CPR.
&/ Site-specific.
•/ This requirement applies only to six toxic pollutants narked with an asterisk (*) on Exhibit B-5-2 of Appendix B.
£/ Ho reporting requirement under this act was identified in this analysis. However, regional and local contingency planning may have additional reporting requirements.
-------
IABU5 3-3
Monitoring/Testing
% = % x 111,+ (tfc * %J]
Gjj, annual cost of monitoring and testing ($ per year)
fjj, frequency of monitoring/testing (occurrences per year); e.g., a test performed weekly would have an of 52
non-labor costs associated with monitoring/testing requirement ($ per occurrence); e.g., materials coat*
tM, time required to complete test or monitoring (hours per occurrence), e.g.. tine to prepare and run equipment, then analyze results
loaded wage rate of person (s) filing report ($ per hour)
3-13
-------
MntmRms/roiHis cost mm
Status (lumbar Bequirettent Variable */
Annual Cost
Current Alternative fu %j "m fjj * tow + (tjj z "^)]
Practice Practice Description Citation (Oee/Yr) ($/Occ) (Br*/Occ) (S/nr) (S/Yr)
RCRA b/
6 7 Hazardous waste chemical and physical analysis
6 Groundwater monitoring
7 Groundwater monitorlng/land-based Interim Status TSDFs
CEMX4 d/
1264.13, 1265.13
1264.97
1265.90
SARA title III d/
13
13
13
14
14
15
16
18
13
13
13
14
14
15
16
18
CAA b/
Emissions control performance testing
Continuous monitoring system
Continuous Opacity Monitoring System
Hazardous pollutant testing
Hazardous pollutant monitoring
CHA b/
Effluent stream monitoring and sampling
Pratraatment standards monitoring
Daily toxic pollutant sampling d/
$60.8
160.13
S60.ll
161.13
561.14
J122.41CJ)
1403,12
5129.5(d)(3)
OSHA d /
Stafca or Local
TOTAL: $
a/ Ho default values are provided,
b/ Provision cites are from 40 CFR.
c/ This requirement applies only to six toxic pollutants marked with an asterisk (*} on Exhibit B-5-2 o£ Appendix B.
if Ho monitoring/testing requirement under this act was identified in this analysis.
-------
TABLE 3-4
Recordkeeping
CKK ~ %£ x [nte + {tHK x
Cpjj, annual cost of recordkeeping ($ per year)
fpjj, frequency of record (occurrences per year): e.g. , a record of a monthly performance test would have a fjjjj of 12
mgjj, non-labor costs associated with recordkeeping CS per occurrence); e.g., materials costs
tgj-, time required to record information (hours per occurrence), e.g., time to transcribe data
WRK' loaded wage rate of person(s) keeping records ($ per hour5
3-15
-------
mrmmzzpim cost table
Status Nunbar Requirement Variable a/
__________________Annual Cost
Current Alternative %* Btaj. In "or fjgj x (ww + (% *
Practice Practice Description Citation (OceAr) (8/uec) (8/Hr) (S/Yr)
KCMA bf
12 12 Reports, test results, and waste analysis records
3 3 Exporter's reports and notifications records
5 5 Manifesting records
6 7 6 7 Operating record
1262.40
1262.57
1263.22
1264.73, 1265.73
5-100
5
0-200
250
0.25
0.25
0.25
0.25
cstcxA ®/
12
12
SARA Title III b/
12 Excess of threshold reports and doc
12 Notification determination records
.tat ion
1372.10(a)
5372.10(b)
0-2
0-2
13
13
13
14
14
CM b/
13 Startup, shutdown, and malfunction records
13 Performance test data records
13 Opacity test data record
M Hazardous pollutant monitoring data records
14 Hazardous emissions test results records
160.7(b)
160.8
160.11
161.14
161.13
1
0.25
0.25
1
1
15
16
18
15
16
18
CWA b/
NPDES monitoring records
Industrial users/POTW pretreatinent records
1122.41(j)
5403.12(1)
Toxic pollutant effluent discharge compliance records <1/ 1129.(S)(d)(l,2)
osra c/
19 20 19 20 Occupational injuries and illness log and stannary 51904.2, .6
23 23 Medical Surveillance program records J1910.120(o)(2)
State or Local
1-5
0.25
TOTAL:
a/ Default values are based on ICF analysis,
b/ Provision cites are from 40 CFR,
c/ Provision cites are from 29 CFR.
d/ This requirement applies only to six toxic pollutants marked with an asterisk (*> on Exhibit B-5-2 of Appendix B.
e/ So recordkeeping requirement under this act was identified in this analysis.
-------
BIBLE 3-5
Pltaming/Stadies/Modeliitg
* CPSM-
* fPSM-
* mPSM-
* fcPSH*
* WPSM'
CPSM " fPSM x I®paM + x "FSM*1
annual cost of planning/studies/modeling ($ per year)
frequency of planning/studies/modeling (occurrences per year)
non-labor costs associated with planning/studies/modeling <$ per occurrence); e.g., materials costs
time required to complete planning/studies/modeling (hours per occurrence), e.g., time to gather information, perform calculations, etc.
loaded wage rate of person(s) performing planning/studies/ modeling (S per hour)
3-17
-------
FLMmTBG/STODIKS/nSDELIMB OOST TABLE
Status Dumber Requirement Variable a/
Annual Cost
Current Alternative %5B "PSM fcK2f "KM %SM 1 '^TSM + ^PSH 1 WTSH^
Practice Practice Description Citation '{fi/Vr)
RCBA b/
6 Final Status TSDF detection monitoring program
7 Ground-water outline of Interim Status TSDFs
6 Final Status TSDF compliance monitoring program
6 7 Emergency and Contingency Plan Procedures
6 7 Cost estimate for facility closure
CERCTA d/
5264.98
§265,93
1261.99
1264, 1265
Subpart D
1264.142, 1265.1*2
SARA Title III d/
CM d/
CWA d/
OS0A c/
Hazard conoonication program
Safety and health program
Emergency response program
$1910.1200(b)
11910.120(d)(3)
§1910.120(1)
Stat® or local
TOTAL; $
a/ Mo default values are provided,
b/ Provision cites are from 40 CFR.
c/ Provision cites ate from 29 CFR,
6/ No planning/studies/modeling requirements under
this act were identified in this analysis.
-------
TABLE 3-6
Training
Oj - fT i [sij + (fcj x wj)J
• Cj, annual cost of training (S per year)
• fT, number of employees trained per year (employees per year)
• m-p, non-labor costs associated with training employees ($ per employee)! e.g.. materials costs
• tpr time required for one instructor to train one employee (hours per employee); e.g., a two hour training session in which one instructor trains four employees
would result in a t^ of 0.5
• Wg, loaded wage rate of person(s) training your employees ($ per hour)
3-19
-------
HUUNIHG COST TABLE
Status JJimfljer Requirement Variable »/
______________________________________________________________ _ Annual Cost
Currant Alternative £- nv t* Wj £» x ti»y + Ctj x «t)I
Practice Practice Description Citation (Occ/Yr) (5/0cc> (Brs/Oee) ($/Br) (S/Yr)
HCRA b/
2 2 SQG Emergency response coordinator S262.34(d)(5)(i)
2 2 SQG waste handling and emergency training 1262.34(d)(5)(iii)
6 7 6 7 Personnel training 1264.16, 1265.16
6 7 6 7 T5DP emergency response coordinator training 5264.55, 1265.55
CEKCLA/SARA d/
SABA Title III d/
CAA d/
CWV d/
05HA c/
22 23 22 23 Initial assignment and addition of hazard training 11910.1200(h)
23 23 Hazardous waste training fl910.120(o)(5)
State or Local
TOTAL; $
it So default values are provided,
b/ Provision cites ate from 40 OPR.
c/ Provision cites are from 29 CPU.
d/ No training requirement under this
act was identified in this analysis.
-------
TABLE 3-7
Impactions
Cj - fj x [»i + (tj * wj)]
Cj, annual cost at inspections ($ per year)
fj, frequency of inspection (occurrences per year); e.g., a daily tank inspection has an fj of 365
nij, non-labor costs associated with inspection retirement ($ per occurrence); e.g., materials costs
t|, time required to complete inspection or even prepare for a state performed inspection (hours per employee); e.g. , time to lather information
Wj, loaded wage rate of person(s) involved with the inspection (S per hour)
3-21
-------
IWSFECTIOro COST TABLE
Status Nunbar Requirement Variable a/
Annrai Cost
Current Alternative
Practice Practice Description Citation
£j n>r tj »j fr x trnj + (tj *»[)!
{Occ/Yr) (S/occ) (Hrs/.Occ) (S/Hr) (S/Yr)
1 & 4
2 & 4
RCHA b/
Facility/Inspection and inspection schedule
LOG tank inspections
SQG tank inspections
CEKCLA d/
1264,174
S264.193-.195
$264,226
5264.253-.251
5264.303
1264.347
S265.195
5265.201
125
0.50d/
0.50d/
11
13
15
11
13
15
SARA Title III b/
f Fire Department inventory inspections
CIA b/
Point source inspections
CWA b/
Compliance inspections
1370.25
160.11
1122.41(1)
asm &/
Stat* or Local
TOTAL: S
a/ Default values are based on ICF analysis,
b/ Provision cites ate from 40 CFR,
c/ Or. a par-storage-tank basis.
d/ Ko inspection requirement under this act was identified in this analysis.
-------
TABLE 3-8
(faoif«8fein»
% = % 1 + % ^ «Hr>J
• C^jp, annual cost of writing manifests (S per year)
• frequency of manifests (manifests per year); e.g., facility wastes manifested about three times a month would have a f^p of 36
• non-labor costs associated with manifest writing ($ per manifest); e.g., materials costs
• tjjp, time required to write a manifest (hours per manifest)
• "MF- loaded wage rate of p@rson(s) writing manifest ($ per hour)
3-23
-------
MANIFESTU65 COST TABLE
Status Nunbar
Current Alternative
Practice Practice
Requirement
Description
Citation
%F
(Occ/Yr)
Variable «/
,sX, (Hr»
i&o
Annual Cost
["^IP + ^tw x WMP3'
/Yr)
RCRA h/
Generators off-site transport manifesting
Transporter shipment manifest
TSDF standard manifesting
CEHX4 £/
5262 Subpart B
1263,20
1264.71, 1265,71
4-100
4-500
4-500
0.5
0.5
0.5
0.25-1
1-3
0.25-1
25
15-25
25
SARA Title III c/
OA c/
cm c/
OSHA. c/
SUto or Local
a/ Default values ate based on ICF analysis,
b/ Provision cites are from 40 CFR.
e/ Bo manifesting requirement under this act was Identified in this analysis.
TOTAL: S
-------
TABLE 3-9
L@b@llns
Cj. - fL x Ebj, + Ctj, x wjH
• CL, annaal cost of labeling (S per year)
• fL, number of items labeled per year (labeli per year)
• non-labor costs associated with labeling requirements ($ per label); e.g., materials costs
• tj_, time required to label one item {hours per label)
• w^, loaded wage rate of person(s) labeling <$ per hour)
3-25
-------
LMffiLIBG COST TABLE
Status
number
Requirement
Variable a/
Annual Cost
Current
Practice
Alternative
Practice
Description
Citation
(OccWr)
Ac,
(Brs/'Occ)
C$/lr)
fL *
[il* + (tj. X
T$/Yr)
1 2
1 2
1 2
1
1
1
2
2
2
mm b/
Pre-Transportation labeling
Hazardous waste package marking
Transporter placarding
C0CU d/
SARA Title III d/
cm d/
1262.31
1262.32
5262.33
4-500
4-500
4-500
2
2
15
0.25
0.25
0.25
15
15
15
12
12
12
am d /
Q3HA c/
22 22 Hazardous chemical labeling 11910.1200(£)(4-8)
Stetu or Local
TOTAL: S
•/ Default values are based on ICF analysis,
b/ Provision cites are from <0 CFR.
c/ Provision cites are from 29 CFR.
§J Bo labeling requirement under this act was identified in this analysis.
-------
TABLE 3-10
Preparedness/Protective Equijnent (Maintenance)
* CPPE>
' fPPE-
* mPPE>
' tppE-
" WPPE'
' °PPE-
CPPE ~ t%pE x {®PPE + {tPFB x WPPE))J + ®FPE
annual cost of equipment maintenance/replacement ($ per year)
frequency of equipment maintenance/replacement (occurrences per year)
non-Labor costs associated with equipment maintenance/replacement (S per label); e.g., supplies cost
time required to complete equipment maintenance/replacement (hours per occurrence); e.g., time to gather information
loaded wage rate of person(s) performing task <$ per hour)
annual cost of any non-labor items not specifically associated with a single maintenance/replacement operation ($ per year); e.g., maintenance tools
and respirators
3-27
-------
StBSASEDRESS/OlOTECZI¥E EQUIIMENT COST TABLE
Status Number Requirement Variable a/
Annual Cost
Current Alternative fppjr raPf?E ^PPB *PPE fppg x Crappp + (tppg X Wppg)]
Practice Practice Description Citation (Occ/Yr) (S/Occ) (Hrs70cc) (S/Hr) fS/Yr)
FCHA b/
6 7 6 7 Internal communicating alarm system, 5264.32-.34
fire control equipment, etc. £265.32- 34
CERCLA/SARA d/
SARA Title III d/
CRA d/
cm b/
15 15 NPDES backup or auxiliary facilities 1122.41(e)
OSBft a/
21 21 Restricted exposure to Table 3-1, 51910.1000
Z-2, and 2-3 constituents
State or Local
TOTAL: $
a/ No default values are provided,
b/ Provision cites are from 40 CFR.
c/ Provision cites are from 29 CFR.
d/ No preparedness/protective equipment requirements under this act were identified in this analysis.
-------
TABLE 3-11
Closure/Post Closure Assurance
Facility-Specific Costs
3-25
-------
QUOTE/TOST CUEWE COST CABLE
Status Number Requirement
_______________ ________________ Annual Cost
Current Alternative
Practice Practice Description Citation
ma ®/
6 6 Financial assurance for closure and post-closure 1264.1*3, 1263.143
1264,145, 1265,145
State or Local
«/ Provision cites ire from 40 CFR.
TOTAL: $
-------
TABLE 3-12
Medical Surveillance
* %s,
* fMS-
* %S»
' 'MS-
' «HS.
^ * ftte +
annual cost of medical surveillance <$ per year)
frequency of medical surveillance (occurrences per year); e.g., if 5 employees receive medical checkups twice a year, the ffg is 2 x 5, or 10
professional costs associated with medical surveillance ($ per occurrence); e.g., physician cost
time required to complete nodical eurveillanoe (hours per occurrence);
loaded wage rat® of person(s) receiving medical surveillance ($ par hour)
3-31
-------
MEDICSL SroemZAHCZ COST XABIE
Status Stiober Requirement Variable a/
_______________________________________________________ Annual Cost
Current Alternative *M3 * [<^<3 + Cbfug *
Practice Practice Description Citation (Occ/Yr) (S/Occ) CHri/Occ) (S/Hr) ($/Yr)
RCTA c/
CKRCLA c/
SARA Title IU C/
CAA c/
CHA c/
O'SB/1 b/
23 23 Hazardous waste madical surveillance proRrem $1910.120(o){2)
Stat® or Local
a/ So default values are provided,
b/ Provision cites are from 29 CFR,
£/ Bo medical surveillance requirement under this act was Identified in this analysis.
TOTAL: S
-------
TABLE 3-13
Invuramc* and Special Texas
Roqulraanat-Specific Coat®
-------
IHSBRASCE ma SPECIAL IMES
Status Number Requirement
Annual Cost
Current Alternative
Practice Practice Description Citation
HCBA a/
6 6 Financial responsibility requirements 1264.147
CHRCleA a/
8 8 Taxes on certain chemicals CERCLA Sec. 4661
SARA Title III b/
cm b/
CK» b/
OSBA b/
State or Local
a/ Provision cites are from 40 CFR.
b/ No insurance or special tax requirements under this act were identified in this analysis.
TOTAL: S
-------
TABU 3-14
jit
3-35
-------
OTHER
Status Number
Current Alternative
Practice Practice
BCRA
cercia
SARA litis III
QfUk
on
Stats or Local
TOTAL: S
Requirement
Annual Cost
Description Citation
-------
3-37
___
A. DEPRECIABLE CAPITAL
EXPENDITURES
A1
Monitoring Equipment
A2
Preparedness and Protective
Equipment
A3
Additional Technology
A4
Other
B. EXPENSES
B1
Notification
B2
Reporting
B3
Monitoring/Testing
B4
Recordkeeping
85
Planning/Studies/Modeling
B6
Training
B7
Inspections
B&
Manifesting
B9
Labeling
BIO
Preparedness and
Protective Equipment
Bll
Closure'Post Closure Care
'. B12-
M«dic*l Surveillance
B13
Insuran ;e/Special Taxes
B14
Other
Worksheet 1
Tier 1 • Hidden Costs
CASH FLOW INFORMATION
Escalation
Rata
(V %>
First Yoar
of C *h Flow
(lf y»w»)
LIfellm®
(n, years)
Cash Flow
Estimate
(C.JJ)
CH Current Practice
[H Alternative Practice
~ Incremental
ANNUALIZED CASH FLOW-il
r « 5*
d
r,= 10%
a
T.- 15%
¦J
In thousands of ytar-0 dollars
-------
CHAPTER 4
HER 2 COST PROTOCOL:
LIABILITY COSTS
This chapter describes the cost protocol for estimating potential liability costs associated with
hazardous waste and materials management. Two tj^pes of liabilities are addressed: penalties and fines
associated with non-compliance, and other liabilities referred to as future liabilities. The steps and
approach outlined below will assist you in completing the middle block of the Tier 2 worksheet
(Worksheet II) attached to the end of this chapter.
STEPS
For the current practice and each PP alternative:
Penalties and Fines
1. Identify the regulatory programs and specific
requirements for which your facility could be
pena ized for non-compliance.
2. Estimate the expected annual penalties and fines
associated with each program/requirement.
Future Liabilities
3. Identify those waste and materials management
activities to which future liabilities can attach.
4. Estimate the total expected liabilities associated
with each activity.
5. For each activity, estimate the year in which
these liabilities are expected to be incurred.
6. For each activity, estimate your company's share
of total expected liabilities.
APPROACH
Penalties and Fines
1. Check the applicable regulatory programs and
requirements in Exhibit 4-1.
2. Use statistics on penalties and fines
summarized n Exhibit 4-1. Compare to
historical penalties and fines at your facility.
Future Liabilities
3. Focus on activities that potentially could
cause personal injuiy and property damage
(e.g., past and current tank storage and
treatment, transportation, and land disposal
practices).
4. Compare to claims, awards, and settlements
under known liability cases, or use predictive
modeling approach outlined in this chapter.
5. Estimate time of travel to exposure points
(e.g., drinking water well) or damage areas
(e.g., river).
6. Pro-rate total liabilities as a function of your
company's relative ability to pay and
contribution to waste handled.
-------
4-2
INTRODUCTION
Liability costs include penalties and fines due to non-compliance, and future liabilities for remedial
action, personal injuiy, and property damage associated with routine and accidental hazardous releases. Like
the hidden regulatoiy costs of Tier 1 (see Chapter 3), liability costs are hidden because you may not believe
that you will incur them or you may underestimate their amount.
The likelihood and amount of liability costs can be veiy significant. For this reason, you are
encouraged to factor estimates of expected liability costs into the aggregate costs for your current practice
and your PP alternative. The Tier 2 analysis described below will assist you in estimating the likelihood
and amount of liability costs at your facility.
PENALTIES AND FINES
STEP 1: IDENTIFY REGULATORY PROGRAMS UNDER WHICH PENALTIES AND/OR FINES
COULD BE INCURRED
Exhibit 4-1 shows the major EPA environmental programs and specific requirements (in footnote)
prescribing penalties and fines for non-compliance or violations. Under the Clean Water Act (CWA), for
example, Exhibit 4-1 references penalties for NPDES violations, oil or hazardous material spills violations
(Section 311(b)), and dredge and fill violations, including wetland protection (Section 404(s)). Check
Exhibit 4-1 for those regulatory programs where you could be penalized or fined for non-compliance.
Supplement this exhibit with your knowledge of plant operations and any previous penalties and fines
imposed on your plant.
STEP 2: ESTIMATE THE EXPECTED ANNUAL PENALTIES AND FINES ASSOCIATED
WITH EACH PROGRAM/REQUIREMENT
For each regulatoiy program, you can use Exhibit 4-1 to estimate the expected annual value of
penalties and fines that may be assessed on your plant as follows:
(1) Select a value of the penalty or fine from the range indicated: Exhibit 4-1 shows broad ranges
of penalties and fines imposed in Fiscal Year 1987. For example, penalties and fines under
RCRA in Fiscal Year 1987 ranged between $500 and $115,000, with a median penalty or fine
value of $7,550. Actual penalties and fines will depend on the severity of the violation. Note
that Exhibit 4-1 is for Federal enforcement actions only; in particular, Exhibit 4-1 does not
reflect penalties and fines imposed by states and local governments. State and local penalties
and fines potentially can be higher than Federal penalties and fines.
(2) Enter a value for the probability that von will be penalized or fined in a given year: Exhibit
44 provides a column for you to enter your estimate of the probability that your plant will
be penalized or fined for non-compliance with this program. The value of the probability
must be between 0 and 1 and must reflect past violations at your plant or other similar plants.
(3) Multiply vour estimates of dollar value and probability of penalties/fines to obtain the expected
value of penalties and fines.
(4) Sum the calculated expected penalties or fines over all programs/requirements and enter the total in
the spaces provided at the right-hand column in Exhibit 4 and in Worksheet II.
1 Exhibit 4-1 is based on "Overview of EPA Federal Practices, FY 86 and 87," Compliance Policy
and Planning Branch, Office of Enforcement and Compliance Monitoring, March 1988.
-------
4-3
EXHIBIT 4-1
SUMMARY OF PENALTIES AND FINES
UNDER EPA FEDERAL PROGRAMS
(FISCAL YEAR 198?)
Range of Penalties/
Check Fines Assessed fS*i
'f Probability of Expected Value of
Applicable Regulatory Program Low High Median Penalties/Fines Penaities/Fines
RCRA
500 115,000 7,550
CAA, Stationary Source
Judicial
Administrative
CAA, Mobile Source
Judicial
Administrative
CWA
SDWA
Judicial
Administrative
TSCA
FIFRA
600,000 65,750
1,270 1,270 1,270
21,000 180,000 100,500
100 2,600,000 1,000
- 1,000,0QG 50,000
1,000
2,050
6,200
10,000
1,000,000
25,000
3,000
1,300
780
Total
RCRA. Section 3008(a) of RCRA authorizes assessment of a penalty for any person in violation of Subtitle C requirements. Civil
penalties may be assessed up to $25,000 per day of violation, depending upon the seriousness of the violation and any good faith efforts
to comply with the appropriate requirements.
CAA. Stationary Souroe Program. Two sources of cavil penalty authority (1) civil judicial under Section 311, limited to $25,000 per
day of violation, and (2) c ivil administrative under Section 120, designed to recover the economic benefit gained through non-compliance.
CAA. Mobile Sources. Violations of the antitampeiing provisions of Section 203 are subject to a $10,000 penalty (for new car dealers
and manufacturer) or a $2,500 penalty (for fleet operators and repair facilities). Vsolatois of the fueis regulations promulgated under
Section 211 are potentially subject to $10,000 per day per violation.
CWA. Most penalties are for NPDES violations under Sections 309(d) & (g), including pretreatment. A relatively smaller number
of penalties is assessed for violations of Sections 311 or 404. Section 311 deals with oil or hazardous material spills. Section 311(b)
authorizes civil penalties of up to $50,000 per violation or $250,000 if the violation is willful. Section 404 deals with dredge and fill
violations including wetlands protection. Under Sect "son 404(s), violators are subject to a maximum civii penalty of $25,000 per day
for each violation.
SDWA. Under the SDWA penalties can be assessed for non-compliance with the UIC (Underground Injection Control) and PWS
(Public Water System) programs. UIC and PWS violators are subject to a $25,000 per day judicial civil penalty. Violators of public
notification, monitoring and recordkeeping requirements are subject in court to $25,000 total civil penalties.
TSCA. Persons who violate Section 15 of 1SCA are liable for a civil penalty not to exceed $25,000 for each violation, as authorized
by Section IS of the Act. Criminal penalties of not more than $25,000 for each day of violation may also be imposed upon violators.
FIFRA. Civil penalties not to exceed $5,000 for each offense are authorized under Section 14(a) of FIFRA. Violations of the Act
are also subject to criminal penalties of no more than $25,000 or one year in jail.
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4-4
FUTURE LIABILITIES
t>
STEP 3: IDENTIFY WASTE MANAGEMENT COMPONENTS TO WHICH LIABILITIES CAN ATTACH
Future liability (FL) costs can attach to both current and alternative waste management practices.
Future liability costs are strictly equal to zero if and only if your company generates no hazardous waste
and releases no hazardous materials. Opportunities for future liabilities can arise from non-permitted
potential releases as well as permitted releases. In particular, you may want to focus your attention on the
following waste management activities to which significant future liabilities can attach:
• Treatment or storage in tanks;
• Transportation; and
• Land disposal (on-site or off-site).
STEP 4: ESTIMATE TOTAL EXPECTED LIABILITIES
There are seven types of liability costs that are potentially associated with each waste or materials
management activity:
• Soil and waste removal and treatment (FL1, Exhibit C-l, Appendix C):
• Ground-water removal and treatment (FL2, Exhibit C-2, Appendix C);
¦ Surface sealing (FL3, Exhibit C-3, Appendix C);
• Personal injury (FL4, Exhibit C-4, Appendix C);
• Economic loss (FL5, Exhibit C-5, Appendix C);
• Real property damage (FL6, Exhibit C-6, Appendix C); and
• Natural resource damage (FL7, Exhibit C-7, Appendix C).
You can estimate the magnitude of total liabilities associated with each waste and materials
management activity by comparing your particular activities to other known activities where actual claims,
awards, or settlements have been documented. Real-life liabilities generally are reported in specialized
literature, such as environmental newsletters, as well as newspapers.
You can also use the conceptual framework outlined in Appendix C for developing these liability
costs. If you choose to use the methodology described in Appendix C, you must be careful in handling the
numbers presented. Specifically, keep in mind the uncertainties inherent to the problem at hand and the
numerous assumptions made to establish a predictive modeling approach. Because Tier 2 is judgmental
in nature, your estimates of future liabilities will reflect subjective corporate policy and not precise, scientific
calculations.
To assist in estimating the costs to be used in Worksheet II (Page 4-7), an intermediate worksheet
is presented in Exhibit 4-2. You should complete Exhibit 4-2 for your PP alternative compared to your
current practice, taking into account any residual future liabilities due to current and past practices.
Exhibits C-1 to C-8 of Appendix C illustrate how you can estimate the magnitude of future liability costs
for each of the seven types of future liabilities for each applicable waste management practice, and the first
year of cash flow.
-------
4-5
EXHIBIT 4-2
COST TABLE FOR FUTURE LIABILITIES
Exhibit # Tanks Land
Type of Liability in Appendix C a/ Treatment/Storage Transportation Disposal
Soil and Waste Removal C-l
and Treatment
Ground-Water Removal C-2
and Treatment
Surface Sealing C-3
Personal Injuiy C-4
Economic Loss C-5
Real Property Damage C-6
Natural Resource Damage C-7
Total Liability (TL) NA
Your Share of Total NA
Liability (fL)
Cash Flow Estimate NA
(« TL x f£)
First Year of Cash Flows bj C-8
NA = Not Applicable
a/ Refer to Appendix C, Exhibits C-l through C-8, for preliminary illustrative guidance on how to
estimate each type of liability and the first year of cash flow. Note, however, that Appendix C is
meant only to be illustrative of the concept and mechanics of future liabilities associated with
hazardous materials and waste management. Appendix C cannot and should not be used for definite
answers to the very complex problem of liabilities.
bj The timing of future liabilities is veiy important because, other things being equal, liabilities incurred
in a distan future have a smaller net present value, and therefore a lesser impact on the economic
feasibility of a PP alternative, than liabilities incurred in the near future.
-------
4-6
STEP 5: ESTIMATE YEAR WHEN LIABILITIES ARE EXPECTED TO BE INCURRED
Because you have calculated penalties and fines on an expected annual basis, penalties and fines are
expected to be incurred annually starting from the first year (year 1), and until the end of the PP project.
Therefore, set the first year equal to 1 for penalties and fines in Worksheet II.
For future liabilities, the first year of cash flow is obtained by completing the last line in Exhibit 4-
2. This calculation is presented in Exhibit C-9 for each waste management pracitce. Perform the
calculations and enter your results on Exhibit 4-2 and on Worksheet II.
STEP «fc ESTIMATE YOUR SHARE OF TOTAL FUTURE LIABILITIES
This step applies only to future liabilities. For off-site disposal or transportation, where not all of
the waste disposed or transported is yours, you are not necessarily liable for all the waste. To account for
this you should ca culate a liability fraction, alpha, which ranges from 0 to 1. As a first approximation for
calculating alpha, you can use the following formula:
alpha = Q / Q,
where
Q = Your waste quantity contributed; and
Q, = The total quantity of waste managed.
A factor of zero would mean that you are not liable (perhaps for financial reasons) for your waste, whereas
a factor of one would mean that you are fully liable for the waste involved in the activity. Enter your value
for this factor in Exhibit 4-2 for each activity.
The final step in filling out Exhibit 4-2 is summing for each waste management practice the seven
types of future liability costs and multiplying them by their corresponding liability factors, alpha. Enter this
product as the "Cash Flow Estimate" in Exhibit 4-2 as well as in the appropriate cells of Worksheet II.
After completing Worksheet II, you should proceed to Chapter 6.
Chapter 6 guides you through the financial protocol with
instructions on how to (1) complete the right-hand block of the
Tier 2 Cost Worksheet (i.e., annualized cash flows), and
(2) calculate the annualized cost savings, net present value, and
internal rate of return of each alternative PP practice relative to
current practice. These values will allow you to assess the
economic feasibility of your PP alternative(s) taking into account
liabilities, in addition to usual and hidden costs.
-------
4-7
A.
PENALITIES AND FINES
B.
FUTURE LIABILITIES
Bl
Treatment or Storage in Tanks
62
Transportation
BS
Disposal ia Landfills
B4
Other
Worksheet II
Tier 2 • Liability Costs
~ Current Practice
CD Alternative Practice
O Incremental
Escalation
Rata
(r^. %)
FirM Yaar
of Cash Flow
(lf yaar«|
Llfstlm®
-------
CHAPTER 5
HER 3 COST PROTOCOL:
LESS TANGIBLE COSTS
This chapter outlines the steps for assessing the less tangible costs of pollution generation and,
conversely, the less tangible benefits of pollution prevention. The steps and approach outlined below will
assist you in completing the middle block of the Tier 3 worksheet (Worksheet III) attached at the back of
this chapter.6
STEPS
1. Qualify less tangible benefits of pollution
prevention.
APPROACH
1. Ask yourself whether corporate commitment
to pollution prevention would favor and
strengthen consumer acceptance,
employee/union relations, and corporate
image.
2. Quantify less tangible benefits of pollution
prevention.
2.
Estimate dollar impacts on operating and
maintenance expenses and revenues of
anticipated qualitative effects.
-------
5-2
INTRODUCTION
You will need to perform the Tier 3 analysis if the PP project is not cost-justified through Tier 2.
"Less tangible" costs are included in this fourth tier of the analysis because (1) the likelihood of incurring
these costs, and conversely of benefitting from avoiding them, is relatively uncertain, and (2) the magnitude
of these costs is difficult to quantify. Like Tier 2, therefore, Tier 3 is judgmental in nature and will reflect
subjective corporate policy and not precise scientific calculations. One way to perform the Tier 3 analysis
is to determine what the Tier 3 benefits would have to be (by difference) to just match the required
financial payback (e.g., your firm's minimum acceptable rate of return). For example, if a PP project yields
an estimated 16.9 percent return through Tier 2, then the Tier 3 analysis would have to show additional
net revenues sufficient to achieve the minimum acceptable rate of return (say 18 percent). For a PP project
with annualized costs of $100,000 and a 10-year lifetime, this would mean that the net after-tax Tier 3
impact on sales, customer/community relations, etc. would have to be at least $3,000 per year. It would then
be up to the corporate decision makers to determine whether less tangible benefits associated with improved
corporate image, increased sales, etc. are worth S3,000 per year. Alternatively, EPA knows of certain firms
who, because of inability to correctly specify all Tier 3 types of impacts, have explicitly sanctioned the use
of a lower hurdle rate (e.g., 16 percent instead of 18 percent) for investment in PP projects.
STEP h QUALIFY LESS TANGIBLE BENEFITS OF POLLUTION PREVENTION
Corporate commitment to pollution prevention can have a positive impact on many intangible factors
such as product acceptance by the consumer, employee/union relations, and corporate image. Qualitatively
describe the benefits of pollution prevention in the bottom part of Worksheet III. In particular, provide
a qualitative description of which factors are significant, the basis for which they are considered to be
significant, and the anticipated impact.
Although i is very difficult to say with certainty that intangible factors will affect costs, it is
reasonable to assume that they may. For example, by publicizing PP efforts, a service or product may be
better accepted by the consumer, resulting in more articles being sold. Firms may improve employee/union
relations by reduc ng or eliminating the amount of waste managed in the workplace, thereby making the
workplace safer and reducing the likelihood of potentially costly employee/union demands for health benefits
and safety improvements. Finally, if a firm can use an innovative pollution prevention program to
distinguish itself from its competitors, for example, by being nominated for a local, state, or private
environmental excellence award, the firm may receive favorable publicity or attention that can seive to
further promote its services or products. Each of these factors - consumer acceptance, employee/union
relations, and corporate image - can be favorably affected by an innovative PP effort.
STEP 2: QUANTIFY LESS TANGIBLE BENEFITS OF POLLUTION PREVENTION
If your firm has performed marketing analyses or has other relevant information, you may be able
to quantify the benefits of pollution prevention. Worksheet III allows you to adjust the estimates of
expenses and/or revenues calculated in previous tiers in order to reflect the less tangible benefits of
pollution prevention. As with previous tiers, you will need to enter the escalation rate, the first year of
cash flow, lifetime, and the adjustment to the cash flow estimate. For example, if your PP alternative will
result in a two percent increase in sales, you will report the corresponding net (i-e., after subtracting total
additional costs of production) increase in sales as an adjustment to the cash flow estimate for operating
revenues.
-------
After completing Worksheet III, you should proceed to Chapter
6. Chapter 6 guides you through the financial protocol with
instructions on how to (1) complete the right-hand block of the
Tier 3 Cost Worksheet (i.e., annualized cash flows), and
(2) calculate the annualized cost savings, net present value, and
internal rate of return of each alternative PP practice relative to
current practice. These values will allow you to assess the
economic feasibility of your PP alternative(s) taking into account
less tangible costs, in addition to future liabilities, and usual and
hidden costs.
-------
5-4
ITEM DESCRIPTION
A. ADJUSTMENT TO
EXPENSES
Worksheet III
Tier 3 • Less Tangible Costs
~ Current Practice
~ Alternative Practice
0 Incremental
CASH FLOW INFORMATION
ANNUALIZED CASH FLOW-SJ
B. ADJUSTMENT TO
OPERATING REVENUES
Escalation
flat®
First Y®«r
of Cash FlQw
(ir y»**)
L« timn
(n, y ®r»)
Cain Flow 1
Eitimat* i
(C.Jjl |
r * 5%
0
' « 10"%
a
f¦ M 1S%
a
rd*
I
1
In thousands of ytar-0 dollars
TIER 3 COST FACTORS
Consumer Acceptance
~ ~
YES NO
Justification (Pltast justify)
Justification (Pltast iuttify)
Employee/Union Relations
YES NO
Justification (Pltast /unify)
Corporate Image
~ . ~.
YES: NO
-------
CHAPTER 6
FINANCIAL PROTOCOL
This chapter presents the financial protocol for evaluating the economic feasibility of your PP
alternative based on the cash flow estimates obtained using the cost protocol. You will evaluate financial
indicators commonly used by firms; these financial indicators allow you to compare costs occurring at
different times in the future. Specifically, Chapter 6 will show you how to estimate the net present value,
internal rate of return, and annualized cost savings of your PP alternative at each tier of the analysis.
You will perform the financial calculations after completing each of the four tieis of the cost
calculations, i.e., after each of Chapters 2 through 5. That is, you will estimate key financial indicators of
the economic feasibility of your PP alternative on the basis of your costs estimates throoeh Tier 0, 1, 2,
and 3.1 For the Her 2 analysis, for example, you will estimate key financial indicators taking into account
(Tier 0) usual costs, (Tier 1) hidden regulatoiy costs, and (Tier 2) liability costs.
STEPS
For the tier whose cost calculations you have
just completed:
1. For the current practice and the PP alternative,
evaluate annualized cash flows associated with
each cash flow item.
2. Evaluate incremental annualized cash flows; i.e.,
annualized cash flows for the PP alternative
relative to the current practice.
3. Evaluate key financial indicators of your PP
alternative; i.e., after-tax total annualized savings,
net present value (NPV), and internal rate of
return (IRR).
4. Assess whether your PP alternative is
economically feasible.
APPROACH
1. Using equations provided, complete the right-
hand block of the cost worksheet (Worksheet
0, I, II, or III) for current and alternative
practices.
2. Complete the cost summaiy worksheet; i.e.,
Worksheet IV.
3. Complete the financial worksheet (Worksheet
V) using the equations provided.
4. Compare your estimates of financial indicators
to standard financial criteria or hurdles for
investing in pollution prevention or similar
projects.
1 You need not perform higher
economically feasible at the lower tier
tier analysis (e.g., Tier 2 or Tier 3 analysis)
(e.g., through Tier 1 or Tier 2 costs).
if your PP project is
-------
6-2
STEP 1: EVALUATE ANNUALIZED CASH FLOWS FOR EACH CASH FLOW ITEM
Concept and Purpose
This section first discusses the concept and rationale for discounting and annualizing future cash
flows. Because annualization requires the selection of a "discount rate," this section then explains how to
choose the discount rate.
Discounting and Annualization
In order to properly evaluate the economic merits of your PP alternative relative to your current
practice, it is important to make sure that all costs are considered on an equal basis. In particular, you
must take into account the lifetime of equipment purchased and the cost or earnings potential of money.
For example, your PP alternative may require equipment costing $100 while it would save annual labor and
supplies costs of $25 per year. Over four years, the total dollar savings would equal the cost of the
equipment. Because you could otherwise invest the money (e.g., in a savings account earning 5-1/4%
interest), your PP alternative in this case would be attractive only if the equipment lifetime is longer than
4 years. If the lifetime of your new equipment is less (e.g., 2 years) then you may be financially better off
not changing your current practice and instead investing the money in the savings account. To account for
lifetime and other considerations, this financial protocol uses a general approach based on "discounting" and
"annualization" of cash flows. The result of this approach is an estimate of the average, uniform cash flow
that would be needed each year to obtain the same net present value (value in dollars today) of the cash
flows of a PP alternative.
Choosing t ie Discount Rate. rrf
As you may have already noted, all Worksheets (i.e., Worksheets 0 through Y) contain four columns
for estimating annualized cash flows: three columns for discount rate values of 5 percent, 10 percent, and
15 percent, and a fourth column for an unspecified value of the discount rate. This is done to give you
maximum flexibility in choosing your own discount rate.
You will need to do the calculations for a discount rate value equal to your firm's minimum
acceptable rate of return, i.e., the minimum return on investment that your firm expects before investing
in a new project. See Action 2 of this step for information on how to determine your firm's minimum
acceptable rate of return.
You will also need to determine the Internal Rate of Return (IRR) of your PP project, i.e., the
discount rate value that gives you total annualized savings through the tier equal to $0. Typically, you will
do the financial calculations many times, using a different value of the discount rate every time, until you
determine the discount rate that will give you total annualized savings through the tier of SO- This is the
IRR of your PP project. Step 3 of this chapter explains how you can determine the economic feasiblity of
your PP alternative using the minimum acceptable rate of return and the Internal Rate of Return.
Actions
f 1) Combine Common Cash Plows
You may combine certain cash flows before annualizing them in order to reduce the number of
calculations that are required to complete the financial protocol. Specifically, you may combine cash flows
under the same cash flow category (e.g., expenses) provided these cash flows have the same:
• escalation rate, ie
• beginning year, t,
-------
6-3
• lifetime, n
• cash flow type (i.e., one-time or recurring).
For purposes of calculating annualized cash flows (see Action 3 in this step), there are two types of
cash flows: "one-time" and "recurring." One-time cash flows happen only once. For example, the initial
purchase and the salvage value of any equipment are both "one-time" costs; they do not occur repeatedly.
Recurring cash flows are cash flows that are paid out or received on a repeating basis. For example, the
annual cost of purchasing chemicals or of maintaining equipment are both recurring, because they are
incurred every year of the project lifetime. Exhibit 6-1 identifies the type of cash flow for each cash flow
item in the cost worksheets. Note that the types of cash flow are distinct from the cash flow categories
recognized in the cost worksheets (i.e., depreciable capital expenditures, expenses, operating revenues, and
liabilities). For example, some expenses are one-time expenses such as permitting costs, while others are
recurring expenses such as operating and maintenance costs of labor and supplies. Place the totals for
combined cash flows into the cost worksheet (i.e.s Worksheet O, I, II, or III, and proceed to the calculation
of annualized cash flows (Action 2 in this step).
(2) Determine Your Finn's Minimum Acceptable Rate of Return
You need to pinpoint the minimum rate of return that your company is willing to accept before
investing in pollution prevention projects. Technically, the minimum acceptable rate of return is the after-
tax cost of raising money from investors and lenders. If the project has a high, enough return to provide
investors and lenders with the money they expect, they will continue to invest, and your firm should
continue to invest in projects that provide that rate of return.
If yours is a moderately large, multi-plant company, then you are likely to have a finance department
with guidelines on investment decisions. In this case, you should consult with your finance managers about
the hurdles they use for decisions regarding investment projects. These hurdles typically are described in
the form of minimum rate of return. Your firm may be willing to accept a lower rate of return on a PP
project simply because of the difficulty in quantifying the benefits of Tier 3 (see Chapter 5, Introduction).
If you are a small firm with no structured policy guidelines for investment decisions, then you need
to find out what other similar businesses do (e.g., check with your trade association). In the absence of any
information, a minimum rate of return of 12 to 17 percent may be acceptable provided inflation is no
greater than about 5 percent.
(3) Calculate Annualized Cash Flows
For each cash flow item or combination of cash flow items (as per Action 1), calculate annualized
cash flows for various values of the discount rate using Equations (6.1) through (6.6) and Exhibits 6-1
through 6-3 as appropriate. In particular, calculate annualized cash flows for a discount rate equal to your
firm's minimum acceptable rate of return (see Action 2 above). Report your estimates of annualized cash
flow in the right-hand block of the cost worksheet; i.e., Worksheet 0,1, II, or III depending on whether you
have just completed Tier 0, 1, 2, or 3 of the cost protocol.
Estimating Annualized Cash Flows
The annualized cash flow (ACF) is technically defined as the uniform amount that, over the period
considered, returns the same net present value as the actual cash flow. A common example is a fixed-rate
mortgage. The 'net present value" is the current amount of the loan, which is the amount of cash that the
bank is providing for the loan. The "annualized cash flow" is the amount of the annual loan payment
needed to repay the loan. From the bank's standpoint, the repayment stream has the same value as the
amount of the loan, after considering the interest that can be earned on comparable loans.
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6-4
EXHIBIT 6-1
TYPE OF CASH flow for each cash flow item
Cost Cost Type of Cash Flow
Tiers Worksheet One-Time Recurring
Tier 0 0 A1 to A6, B1 to B6 B7 to B14, CI to C2
Tier 1 I A1 to A4, B5 B1 to B4, B6 to B14
Tier 2
Tier 3
"One-time" cash flows are those that occur only once, such as
purchasing equipment or selling equipment for salvage.
"Recurring" costs are those that happen every year, or on a
repeating basis, such as annual maintenance costs, or the costs
of labor and consumable supplies. References in the exhibit are
to the line numbers of the specific cost worksheets.
II Bl, B3 A, B2
III None All
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6-5
For each cash flow item in the cost worksheets (Worksheets 0, I, II, or III), you can calculate the
annualized cash flow using the following formula:
where
ACF = PVF1 x AF x CF (6.1)
ACF is the Annualized Cash Flow,
PVF1 is a Present Value Factor,
AF is an Annualization Factor, and
CF is the Cadi Flow Estimate.
Tlie annualized cash flow (ACF) is the constant amount that would have to be paid or received every
year to have a value equal to the economic value of the PP alternative. Because the amount does not
increase with inflation, it is considered to be in "nominal" dollars. In other words, an ACF of $100 would
mean that the PP alternative has the same value as an investment that would provide a check each year of
$100 over the lifetime of the PP alternative. With a fixed-rate mortgage, for example, the monthly payments
are in "nominal" dollars - the payments stay the same in spite of any inflation.
The cash flow estimate (CF) is in the fourth column of the middle block of the cost worksheets
(Worksheets 0, I, II, and III). Because it has the potential to rise with inflation, it is considered in "year-
0" or "current" year dollars. For example, assume that a cash flow estimate corresponds to paying a
technician for 10 hours of labor per year. In developing the cash flow estimate CF, you would use the
current pay rate for a technician, multiplied by 10 hours. The financial calculations described in this chapter
account for the fact that inflation will lead to increased wage levels, and higher labor costs in the future,
for 10 hours of labor per year.
PVF1 and AF are "dimensionless." That is, they are simply factors that are used to transform the
actual cash flow estimation to annualized cash flow estimates; they do not have a unit of measure, or
"dimension," such as dollars. The equations and tables for determining both the present value factor and
the annualization factor are provided next.
The present value factor PVF1 depends on the beginning year, lifetime, discount rate, escalation
rate, and the type of cash flow. For a one-time cash flow, the present value factor is equal to:
PVF1 « pfi (6.2)
For a recurring cash flow, the present value factor is equal to:
PVF1 - p° x PVF2 (6.3)
where PVF2 = (l-pn) / (1-p) (6.4)
and p = (l+re)/(l+rrf) (6.5)
The parameters in Equations (6.2) through (6.5) are defined as follows:
t2- is the first year of cash flow (the first year it starts or the only year it occurs);
Tr is the escalation rate (the estimated rate at which prices will rise, or the inflation rate); and
Td is the discount rate (the rate that will allow you to annualize your cash flows).
Exhibit 6-2 presents pre-calculated values of PVP2 for ranges of values of the parameter p and
lifetime n. You may use this exhibit instead of Equations (6-4) and (6-5) to determine PVF2.
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6-6
EXHIBIT 6-2
TABLE OF VALUES OF PRESENT VALUE FACTOR 2 (FVF2)
Lifetime Parameter p = (l+re)/(l+rrf)
n, Yrs)
0.85
0.89
0.93
0.97
1.01
1.05
1.09
1.13
1.17
2
1.85
1.89
1.93
1.97
2.01
2.05
209
2.13
2.17
4
3.19
3.39
3.60
3.82
4.06
4.31
4.57
4.85
5.14
6
4.15
4.57
5.04
5.57
6.15
6.80
7.52
8.32
9.21
8
4.85
5.51
6.29
7.21
8.29
9.55
11.03
12.76
14.77
10
5.35
6.26
7.37
8.75
10.46
12.58
15.19
18.42
22.39
12
5.72
6.85
8.31
10.21
12.68
15.92
20.14
25.65
32.82
14
5.98
7.31
9.11
11.57
14.95
19.60
26.02
34.88
47.10
16
6.17
7.68
9.81
12.86
17.26
23.66
33.00
46.61
66.65
18
6.31
7.98
10.42
14.07
19.61
28.13
41.30
61.73
93.41
20
6.41
8.21
10.94
15.21
22.02
33.07
51.16
80.95
130.03
22
6.48
8.39
11.39
16.28
24.47
38.51
62.87
105.49
180.17
24
6.53
8.54
11.78
17.29
26.97
44.50
76.79
136.83
248.81
26
6.57
8.65
12.12
18.23
29.53
51.11
93.32
176.85
342.76
28
6.60
8.74
12.41
19.13
32.13
58.40
112.97
227.95
471.38
30
6.62
8.82
12.67
19.97
34.78
66.44
136.31
293.20
647.44
Values on this table were calculated using Equation (6.4). To use the table, first calculate p. For
example, if you estimate that costs will escalate at 4 percent (re = 4%) and are using a discount
rate of 12 percent (r^ = 12%), then p = (l+0.04)/(l+0.12) = 0.93. Then, find the row
corresponding to he expected equipment life (n), and follow it horizontally to the column
corresponding to p. The value you read is PVF2. For example, if the estimated lifetime (n) is 10
years and p is 0.93, then PVF2 equals 7.37.
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6-7
The annualization factor is a function of the discount rate and lifetime. The annualization factor
is equal to the following:
AF = [rd x (l + rrf)"] / [(l+rrf)" - 1] (6.6)
Exhibit 6-3 presents pre-calculated values of AF for various values of the discount rate rj, and lifetime n.
You may use this exhibit instead of Equation (6.6) to determine AF.
(4) Sum Annualized Cash Flows by Category
When all the annualized cash flows have been calculated on the cost worksheet, add them together
in order to obtain total annualized cash flows for each of the cash flow categories on the worksheet. For
instance, after calculating annualized cash flows for all cash flow items on Worksheet 0, sum all annualized
cash flows under depreciable capital expenditures, expenses, and revenues and report these sums in lines
A, B, and C, respectively.
STEP 2: EVALUATE INCREMENTAL ANNUALIZED CASH FLOWS
Concept and Purpose
You use this step to determine the incremental annualized cash flows for your PP alternative relative
to your current practice; i.e., the cash flows of your PP alternative minus "hose of your current practice.
If you have completed the cost protocol (Tier 0, 1, 2 or 3) incrementally, then you need not complete
Worksheet IV and you may proceed to Step 3 directly.
Actions
(I) Report Total Annualized Cash Flows by Category on Worksheet IV.
If you performed the tier just completed using two worksheets for current and alternative practice,
transcribe onto Worksheet IV the annualized cash flows by cash flow category. Do this for the alternative
and current practices and for different values of the discount rate. For example, upon completing Tier 0,
copy the total annualized cash flows from lines A, B, and C of the Tier 0 worksheets (Worksheet 0
completed once for alternative and once for current practices) onto lines a, b, and c of the cost summaiy
worksheet (alternative and current blocks of Worksheet IV, respectively).
STEP 3: EVALUATE KEY FINANCIAL INDICATORS OF YOUR PP ALTERNATIVE
Concept and Purpose
This step will guide you through the calculation of key financial indicators of the economic feasibility
of your PP alternative. You will calculate the following financial indicators:
• total annualized savings (TAS);
• net present value (NPV); and
• internal rate of return (IRR).
In order to calculate these financial indicators accurately, you must account for tax effects on your change
in cash flow. Once tax is accounted for, you then may directly calculate the TAS and NPV at any discount
rate, and iteratively calculate the IRR. Worksheet V does three things, it: (1) takes the incremental
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6-8
EXHIBIT 6-3
TABLE OF VALUES OF ANNUALIZATION FACTOR (AF)
Lifetime Discount Rate (r<*, %)
n, Yrs)
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
2
0.5188
0.5378
0.5569
0.5762
0.5956
0.6151
0.6348
0.6545
4
0.2658
0.2820
0.2986
0.3155
0.3327
0.3503
0.3681
0.3863
6
0.1815
0.1970
0.2130
0.2296
0.2467
0.2642
0.2823
0.3007
8
0.1395
0.1547
0.1707
0.1874
0.2048
0.2229
0.2415
0.2606
10
0.1143
0.1295
0.1457
0.1627
0.1806
0.1993
0.2186
0.2385
12
0.0975
0.1128
0.1293
0.1468
0.1652
0.1845
0.2045
0.2253
14
0.0855
0.1010
0.1178
0.1357
0.1548
0.1747
0.1954
0.2169
16
0.0766
0.0923
0.1094
0.1278
0.1474
0.1679
0.1893
0.2114
18
0.0697
0.0855
0.1030
0.1219
0.1420
0.1632
0.1852
0.2078
20
0.0641
0.0802
0.0981
0.1175
0.1381
0.1598
0.1822
0.2054
22
0.0596
0.0760
0.0942
0.1140
0.1351
0.1573
0.1802
0.2037
24
0.0559
0.0725
0.0911
0.1113
0.1329
0.1554
0.1787
0.2025
26
0.0528
0.0696
0.0885
0.1092
0.1311
0.1541
0.1777
0.2018
28
0.0501
0.0671
0.0864
0.1075
0.1298
0.1531
0.1769
0.2012
30
0.0478
0.0651
0.0847
0.1061
0.1288
0.1523
0.1764
0.2008
Values on this table were calculated using Equation (6.6). Generally, your firm selects a discount
rate based on the cost of raising additional money from investors and by borrowing. Typical project
lifetimes depend on the expected lifetime of the equipment. In some cases, equipment may become
obsolete and be replaced before wearing out. If you expect that to happen, you should use the
expected time before the equipment will be replaced.
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annualized cash flows (developed either incrementally in the cost worksheet or by subtraction in Worksheet
IV), (2) estimates the tax effects on cash flows, and (3) allows the direct calculation of the net savings for
the tier just completed. The worksheet then allows the calculation of the IRR.
Actions
(1) Report the Incremental Annual Cash Flows on Worksheet V.
If you completed Worksheet IV, (i.e., you performed the tier just completed using current and
alternative practice worksheets), subtract each cell in the current block from the corresponding cell in the
alternative block and transcribe the difference into the corresponding cell in Worksheet V. For example,
the hypothetical facility in Tier 0 (see Appendix D, Section D.2.2) subtracted 0 from -4.41 and arrived at -
4.41 (corresponding to alternative less current on line a, r
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6-10
FD » 0.14 / (1+Td) + 0.25 / (l+Td)2 + 0.17 / (l+rrf)3
+ 0.13 / (1+r^4 + 0.09 / (1+r^5 + 0.09 / (1+rj)6
+ 0.09 (l+rrfy + 0.04 i (1-Hrrff (6.8)
Exhibit 6-4 displays values of the depreciation factor (FD) for various values of the discount rate tj. You
may this exhibit instead of Equation (6.8) to determine FD.
(3) Calculate the Net Savings for the Tier
For each discount rate, add lines a through f and place the total into line g. This total is the net
annualized savings (losses if negative) of your PP alternative for the tier just analyzed, i.e., taking into
account he cash flow items reflected in the tier.
(4) Calculate the Total Savings through the Tier
For each discount rate, add line g to the total savings through the previous tier. The sum is the total
annualized savings through the tier just completed, i.e., taking into account all cash flows reflected in this
tier and all previous tiers. By definition, net savings for Tier 0 and total savings through Tier 0 are the
same. On the other hand, total savings through, say, Tier 2 are the sum of net savings for Tier 2 (line g
of Worksheet V, Tier 2) and total savings through Tier 1 (Worksheet V, Tier 1).
(5) Calculate Net Present Values for the Tier and through the Tier
To calculate the net present values, divide the total annualized savings by the annualization factor
(Equation (6.6) or Exhibit 6-3). When employing this equation make sure that the lifetime (n) is set equal
to the project lifetime, usually equal to the longest lifetime of any capital equipment purchased.
(6) Calculate the Interned Rate of Return
A common method of evaluating projects is to determine the "intern;;! rate of return," or IRR. The
internal rate of return is the discount rate where the net annualized costs or savings are zero. For example,
assume that you could invest $1,000 today, and receive $1,200 in one year. The IRR for the investment
would be 20 percent. That is, jf your discount rate were exactly 20 percent, you would be indifferent
between keeping the $1,000, and investing it to receive $1,200 in one year. The actual value to you either
way is identical. If your discount rate were 16 percent, however, you would want to invest the money,
because he rate of return on the investment is higher than the rate you require for other investments, or
than the rate you must pay lenders and investors for money. If your actual discount rate were 25 percent,
you wou d not wan: to invest the money, because it costs you more to obtain the money to invest than you
would receive by investing.
At any given tier of the cost protocol, the IRR is the discount rate for which the total savings
through that tier are equal to zero. To calculate the IRR, you need to repea all the calculations completed
to this point for different judiciously selected values of the discount rate, until the estimated total savings
through the tier are calculated to be zero. The discount rates for which you already have calculated
annualized cash flows and net and total savings should provide you with good data points on which to base
your first guess of the IRR.
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6-11
EXHIBIT 6-4
TABLE OF VALUES OF DEPRECIATION FACTOR (FD)
Discount Rate Depreciation Factor
(*d) (FD)
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
17.5%
20.0%
22.5%
25.0%
27.5%
30.0%
0.9159
0.8426
0.7784
0.7219
0.6719
0.6274
0.5877
0.5521
0.5200
0.4910
0.4646
0.4406
This exhibit was calculated using Equation (6.8).
The exhibit clearly shows that FD decreases as
the discount rate increases. That is, as the
discount rate increases, the present value of the
stream of depreciation allowances over seven
years decreases.
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6-12
STEP 4: EVALUATE ECONOMIC FEASIBILITY OF YOUR PP ALTERNATIVE
Concept and Purpose
You have finished calculating key financial indicators for the PP alternative through the tier just
completed. You must now compare these estimates of total savings, net present value, and IRR to financial
criteria or hurdles for investing in new projects. You may either (1) conclude that your PP alternative is
or is not economically feasible or (2) move to the next tier of the cost protocol.
Actions
(1) Compare Estimates of Financial Indicators to Financial Criteria
If, for a discount rate value equal to the minimum rate of return, the total annualized savings (or,
equivalently, the net present value) through the tier are positive, then your PP alternative is economically
feasible on the basis of the cash flow items considered up through the tier just completed. Alternatively,
if the IRR of your PP alternative is greater than or equal to your firm's minimum acceptable rate of return,
then you* PP alternative is economically feasible.
(2) Conclude Analysis or Afcve to Next Tier of the Cost Protocol
If Action 2 above concludes that your PP alternative is
economically feasible, or if you have just completed Tier 3 of the
cost protocol, then the analysis of your PP alternative can stop
here for all practical purposes. Otheiwise, move to the next tier
of the cost protocol, which will help you take into account other
types of costs and cost savings than those considered thus far. If
you are moving to Tier 1, 2, or 3 of the cost protocol, go to
Chapter 3, 4, or 5 of this manual, respectively.
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6-13
Worksheet IV
Cost Summary
(In thousands of year-0 dollars,
Tier
ITEM DESCRIPTION
CASH IFILOV^
Alternative
r = S%
o
r * 10%
rd= «y.
a.
DEPRECIABLE CAPITAL
EXPENDITURES
b.
EXPENSES
c.
OPERATING REVENUES
d.
PENALTIES AND FINES
e.
FUTURE LIABILITIES
Current
a. DEPRECIABLE CAPITAL
EXPENDITURES
b. EXPENSES
c. OPERATING REVENUES
d. PENALTIES AND FINES
e. FUTURE LIABILITIES
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6-14
Worksheet V
Financial Worksheet Tier'—'
(In thousands of year-0 dollars)
ITEM DESCRIPTION
Alternative Less Current
a. DEPRECIABLE CAPITAL
EXPENDITURES
b. EXPENSES
c.' OPERATING' REVENUES
d. PENALTIES AND FINES
e. FUTURE LIABILITIES
r» 5*.
0
r
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