United States Environmental Protection Agency
Pollution, Prevention and Toxic Substances (7409)
EPA 742-B-94-003
January 1994
[(See document source for EPA logo)]
Tellus Institute
11 Arlington Street
Boston, MA 02116-3411
Tel: (617) 266-5400
FAX: (617) 266-8303
Version 2.0: Copyright (c) 1993
Tellus Institute
Boston, MA, USA
All rights reserved. No part of this publication or associated software may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, without the prior written permission of the publisher.
P2/Finance, including the software disk and User's Manual, is proprietary and copyright by Tellus Institute, Boston, MA, USA. It is provided by EPA as a service to government organizations for purposes of facilitating the financial analysis of pollution prevention projects.
P2/Finance may be reproduced only for use within the recipient's organization. Reproduction, transfer an/or distribution of P2/Finance in any form whatsoever outside the recipient's organization is strictly prohibited.
The P2/Finance software is available to all federal, state and local government employees free of charge from the:
Environmental Protection Agency
Pollution Prevention Information Clearinghouse
Phone (202) 260-1023
Fax (202) 260-0178
MC 3404, 401 M St. S.W.
Washington, D.C., 20464.
All others interested in obtaining copies of the software and/or the software manual should contact the:
Tellus Institute
Phone (617) 266-5400
Fax (617) 266-8303
11 Arlington Street
Boston, MA 02116-3411
A technical support hotline is available from the Tellus Institute at no charge to users. The hotline number is (617) 266-5400 and is answered from 9:00 a.m. to 5:00 p.m. Please report any technical difficulties with the software directly to Tellus Institute at the above address.
P2/Finance is designed to simplify and quicken the task of organizing and analyzing cost data, calculating annual cash flows, and generating financial indicators for pollution prevention investments. P2/Finance is highly flexible and can be used for both small and large projects for which there are few or many cost items which need to be considered. The program accommodates numerous categories of costs and savings in a disaggregated fashion to assist the user in identifying and organizing relevant data for the analysis.
P2/Finance calculates and reports Simple Payback, Net Present Value (NPV), and Internal Rate of Return (IRR) for purposes of project screening and sensitivity analysis. Since some of the benefits of pollution prevention (i.e. liability avoidance, avoidance of capital costs for pollution control, increased revenue from improved product image, etc.) occur in years after the project is implemented, P2/Finance computes cash flows and financial indicators over a 15 year time horizon (i.e. 15 years after the initial investment).
This manual assumes familiarity with financial concepts, the use of personal computers, the purpose and use of spreadsheets, and the Lotus 1-2-3 software package. Financial calculations are described in the main text of this manual only as necessary to implement entry of data into the worksheet. More comprehensive descriptions of the financial terminology, assumptions, and methods used are found in Appendices D and E.
P2/Finance is a user-friendly, customized worksheet file developed with Lotus 1-2-3 Version 3.4a for DOS and can be run on an IBM-PC, XT, AT or compatible microcomputer which is equipped with the Lotus 1-2-3 software version 3.1 or higher. [1] A color monitor, though not required, will facilitate data entry.
[1] This system is also available in Microsoft Excel for Windows version 4.0.
There are two files on the system diskette. The P2/Finance worksheet file, called P2FINAN.WK3, is an "empty template" which must be copied for each project analysis. The second, P2FINAN.FM3, is a file containing the format specifications for P2FINAN.WK3.
First Time Users: Copy the P2FINAN.WK3 file onto another diskette or onto the hard drive of the computer. When copying in Lotus 1-2-3, P2FINAN.FM3 will be duplicated automatically when P2FINAN.WK3 is copied. When copying in DOS, it will be necessary to copy each file separately. Use these duplicate files for project analysis, keeping the master disk to generate later copies if necessary.
When you are ready to enter data into the worksheets, make copies of the P2FINAN.WK3 file (and P2FINAN.FM3 file if in DOS) under a new name, preferably one that reflects the project that you are analyzing. Note that the extension .WK3 may not be changed. If copying in DOS, the corresponding format file must have the same name and the .FM3 extension. One worksheet file pair is used per analysis.
Before beginning, it may be useful to refer to Appendices A, B, and C. Appendix A contains a detailed checklist of potential costs and revenues. Appendix B contains a copy of the blank worksheet file and Appendix C contains a factual case study to familiarize users with the system without initially having to collect or invent practice data themselves.
P2/Finance is a worksheet file consisting of nine pages in six worksheets. Figure 1 illustrates the page layout. These instructions will take you through P2/Finance in the order in which the pages and entry fields appear. First, open the file, P2FINAN.WK3. The accompanying format file, P2FINAN.FM3, will open automatically. The initial screen will appear with a P2/Finance user menu as shown below.
[(See document source for Figure 1. Worksheet and Page Layout in the P2/Finance Worksheet File)]
Alt-M Return to Main Menu
Alt-G Access GOTO menu (Go to a worksheet in the worksheet file)
Alt-P Access PRINT menu (Print worksheet)
Alt-Z Access ZOOM menu (Change number of rows and columns displayed)
Note: When using any of the above options, it is essential that the user not have a Lotus 1-2-3 menu at the top of the screen. If a Lotus 1-2-3 menu is displayed, remove it by clicking the mouse pointer on the worksheet. If you happen to utilize any P2/Finance user menu while a Lotus 1-2-3 menu is displayed, you will hear a beep and the screen may flash. Press escape until there are no menus displayed at the top of the screen.
Alt-M allows the user to return to the above menu from any worksheet in the worksheet file.
Alt-G yields a menu of the six worksheets contained in the P2/Finance worksheet file.
Alt-P is described in Step 6, Printing a Worksheet.
Alt-S is described in Step 6, Saving the Worksheet File.
Alt-Z will yield a menu allowing the user to change the size of the font in which the worksheets are displayed. It will not, however, affect printed copies.
P2/Finance contains many entries for capital, operating, and future liability costs and savings. On color monitors, all text and data entry cells are highlighted in yellow. On black and white monitors, and on all printed copies, the cells which allow text and data entry are shown as outlined boxes. Cells which are not highlighted in yellow (or are not boxed) are "locked" and do not allow text or data entry. If the user attempts to enter data into or otherwise edit any locked cells, the message "Protected cell-Pres F1 (HELP)", will appear on the bottom left corner of the screen. The user can press F1 if an explanation is desired, or press the ESC key to delete the message and proceed with data entry into yellow (or boxed) cells.
Cost entries which are not relevant to the project may be left blank. Costs may also be summed manually and then entered into the worksheets in an aggregate form, if desired. However, data cannot be entered into Total columns.
Text which appears in bright green or yellow cells at the top of data entry pages on the screen are data entry and formatting reminders.
As formatted, the worksheets handle positive or negative numbers (entered or calculated) of up to 15 digits on the Operating Costs page, and up to 10 digits on other pages. If number with more digits are entered or calculated, error symbols (****) will appear in some cells in the worksheets. To denote a negative number a minus sign or parentheses should be used. Lotus 1-2-3 will denote negative numbers with parentheses. Dollar signs and commas will be added automatically where appropriate.
P2/Finance performs many functions and calculations automatically. When this occurs, a description of the function is given, in italics, below the instruction note in this manual.
Title Page Worksheet, Page 1
The title page contains entry fields for the date, project title, preparer's name, organization's name, and comments. The date format to be used is month/day/year, e.g. 12/01/92. The default name "Blank Worksheet file" should be replaced with the appropriate project name. P2/Finance automatically will copy the project name and date on the top of pages 2-9. The remaining yellow-highlighted (boxed) fields can be filled as desired.
Capital Worksheet, Pages 2 and 3
Capital costs are one time costs for the project, which include:
A number or letter code can be entered in the Ref. column to refer to back-up documentation for the project analysis. The number 1, for example, can be entered into the Ref. column to refer to an attached cost estimate from an equipment vendor for a piece of equipment listed in the first column of the same row. Also, the user can enter information or reminders in the Notes column to indicate, for example, that tax is included in purchased equipment price or that the sales tax figure is based upon a 5% tax rate.
Enter cost estimates for all other capital costs for Materials, Utility Connections and New Utility Systems, Site Preparation, Construction/Installation, Engineering/Contractor, Start-up/Training, Contingency, Permitting, Initial Charge for Catalysts and Chemicals, Working Capital, and Salvage Value in the spaces provided on pages 2 and 3 of the worksheet file. All of the capital cost categories, such as Purchased Equipment, provide blank lines to allow the user to customize subcategories for each project. In addition, the user should feel free to overwrite the default subcategories shown in yellow cells with those appropriate for the project. It is not possible, however, to add lines. In the event that there are not enough spaces for relevant cost items, it is suggested that the user aggregate some cost items manually before entering data into the worksheet.
P2/Finance automatically will calculate total costs for each cost category and enter the results in the column marked Totals. All capital cost items except Working Capital and Salvage Value are depreciated for tax purposes in the cash flow and financial indices calculations on pages 6 through 9. Working Capital is treated as a one-time expense at the beginning of the project and both Working Capital and Salvage Value are treated as one-time revenues later in the project life. Because Working Capital is cashed in as a revenue at the end of the project operating period, the sum of the values entered for Working Capital on page 3 is automatically adjusted for inflation for the year in which it is cashed out. The Salvage Value entered is used for depreciation calculations and is not adjusted for inflation; the entries for Salvage Value on page 3 should therefore be an estimate of the actual future salvage value in the final depreciation year.
Note: In some cases, an investment in pollution prevention may allow avoidance of a capital expenditure in the future for a new pollution control device, retrofit of an existing device, waste handling, or a storage system. The financial analysis of the pollution prevention investment should include savings associated with any avoided future capital expenditure. Step 5 on page 10 of this manual provides instructions for inclusion of such savings in the analysis.
Operating Worksheet, Page 4
Operating costs and savings occur each year after the investment for the life of the investment. They include the costs of raw materials, waste management, utilities, labor, regulatory compliance, and others. To compute cash flows and financial indicators it is necessary to calculate the net annual operating cost for the project, in other words, the difference between the annual operating cost for the current process and the annual operating cost for the alternative process. This difference is the change in annual costs that will result from the project under consideration. Therefore, it is important to remember that you do not need to estimate operating costs that remain the same (e.g. if the project will not affect labor costs, it is not necessary to estimate and include labor costs for the current and alternative processes).
Operating costs, savings, and revenues are entered into page 4, Operating Costs. Cost categories, such as:
P2/Finance allows you to enter operating cost data in two ways. Use Method 1 if you choose to enter operating cost and revenue data for both the current and alternative processes. Method 2 should be used if you choose to enter only incremental (i.e. an increase or decrease in) costs, savings, and revenues for the alternative process over the current process.
Method 1: Entering operating costs, savings, and revenues for both the current and alternative processes.
Note: Costs (cash outflows) should be entered as positive values and savings/revenues (cash inflows) should be entered as negative values. Negative values should be entered with a minus sign.
Starting with the Direct Materials category, enter a brief description of the raw materials and supplies used in the current process in the Item column and enter their corresponding annual costs in the Annual Cost column. Do the same for all other Current Process and Alternative Process cost categories on page 4.
If revenue will be affected by the project because of an expected increase or decrease in sales, product price (i.e. market value), production rate, or production of a marketable by-product, enter revenue for the current process and alternative process in the Revenues - Sale of Product and Revenues - Marketable By-products categories at the bottom of page 4. Again, not that revenues must be entered as negative numbers.
P2/FINANCE automatically will total the operating costs for the current and alternative processes and report the Total columns, subtract the category totals of the alternative process from the current process and report the difference in the right-most column of page 4, which is entitled Difference = (Curr.-Alt.).
Method 2: Entering incremental operating costs, savings, and revenues for the alternative practice only.
Using Method 2, you will enter numbers only in the Alternative Process Annual Cost column.
Note: Costs (cash outflows) and decreases in revenue should be entered as positive values; savings and revenue increases (cash inflows) should be entered as negative values. Negative values should be entered with a minus sign.
In the Annual Cost column for the Alternative Process, enter estimates of the change in annual costs or savings in each category, remembering that costs/revenue decreases for the alternative system should be entered as positive numbers and savings/revenue increases should be entered as negative numbers.
If revenue will be affected by the project, either because of an expected increase or decrease in sales, product price (i.e. market value), production rate, or production of a marketable by-product, enter revenue increases or decreases for the alternative process in the Revenues - Sale of Product and Revenues -Marketable By-products entries at the bottom of page 4.
P2/Finance automatically will total the operating costs for the current process (all zeroes using Method 2) and the alternative process (the incremental changes entered by the user), and report the Total columns, subtract the category totals of the alternative process from the current process and report the difference in the right-most column of page 4, which is entitled Difference = (Curr.-Alt.).
Summary Worksheet, Page 5
The Capital and Operating Cost Summary has three functions:
Step 4a - Reviewing Capital Cost Data
On page 5, the Summary worksheet, you will see that the left-hand side of the page contains capital cost data. Begin by reviewing the capital cost summary (Purchased Equipment through Salvage Value) taken from costs entered on pages 2 and 3 of P2/Finance. If these numbers appear incorrect, recheck the numbers that you entered on pages 2 and 3.
Step 4b - Entering Capital Cost Financial Parameters -- Equity, % and Debt, %
If the capital cost of the project will be entirely funded by equity, then enter a 1.0 in the $ column of the Equity, % row to represent 100%.
Note: Entries reported by P2/Finance as % (e.g. Equity, %) must be entered as a decimal number. For example, if equity financing is 50%, then you must enter the number as 0.5 (not 50), enter 1.0 for 100%, and so on.
If the capital cost will be completely debt-financed (i.e. through loans) enter 0 in the $ column in the Equity, % row. If the project will be funded by a mix of equity and debt, enter the cell a decimal number which corresponds to the percent funded by equity.
P2/Finance automatically will enter a number in the $ column of the Debt, % row which is the % debt incurred for the project based on the Equity, %, value you entered. If the project will be wholly or partially financed by debt, you must enter a decimal number in the $ column adjacent to Interest Rate or Debt, % and Debt Repayment, years. If there will be no debt financing, you may leave the default values from the blank worksheet in these two boxes. Leaving the default values will not affect any calculations performed by P2/Finance in cases where no debt financing is used.
P2/Finance automatically will calculate and report, in dollars, Equity Investment, Debt Principal, Interest on Debt, and Total Financing in the corresponding cells of the $ column.
Depreciation Period, years and Operating Period, years. Enter the depreciation period for the investment and the operating period for the process into the corresponding cells in the $ column. The Operating Period, years is used only to determine when Working Capital is cashed out; Work Capital is cashed out during the final operating year.
Income Tax Rate, %. Enter a corporate income tax rate as a decimal number into the cell in the $ column of the Income Tax Rate, % row. P2/Finance accepts only one tax rate for the analysis, and applies this rate to all taxable income (i.e. savings) for the project. You may combine federal and state income tax rates into a single tax rate if appropriate.
Escalation Rate, %. The escalation, or inflation rate, will be used to inflate operating costs, working capital, and future liability estimates over the project lifetime. P2/Finance accepts only one inflation rate which is used for all annually recurring costs and savings. Enter the escalation rate as a decimal number in the $ column in the yellow (boxed) cell below Income Tax Rate, %.
Cost of Capital, %. Cost of capital, or discount rate, is used to calculate discounted cash flow and Net Present Value. Enter a decimal number in the corresponding cell in the $ column.
Step 4c - Reviewing Operating Cost Data.
The right-hand section of page 5 contains operating cost data for the project. Notice that operating costs are summarized and reported by category: Direct Materials through Insurance, Revenues - Sale of Product and Revenues - Marketable By-Products. If you used Method 1 to enter operating costs, then costs will be reported in the Current, Alternative, and Difference columns. If you used Method 1 to enter operating costs, then costs will be reported in the Current, Alternative, and Difference columns. If you used Method 2, costs will be reported in the Alternative and Difference columns only.
This page provides you with the opportunity to add Maintenance, Overhead, and Labor Burden costs if these items are not already included in the operating cost estimates entered on Page 4. Most of these numbers are calculated by P2/Finance as a percentage of Capital costs or as a percentage of Total Labor costs, with the percentages entered by the user. If you choose to add these costs, enter one or more decimal values in the appropriate yellow (boxed) cell. If you choose not to add these costs on this page, be sure to enter zeroes for the percentage values in the boxes. For Current Maintenance costs, the costs are not calculated as percentage of capital, and should be entered directly into the yellow (boxed) cells in the Current column of the Labor, % and Materials, % rows.
P2/Finance automatically will calculate and enter dollar estimates for Maintenance, in the Alternative, and Difference columns. For Overhead, and Labor Burden, P2/Finance will automatically calculate and enter the values in the Current, Alternative, and Difference columns. P2/Finance will then determine the Total recurring annual cost for the current process, the alternative process, and the difference between the two. The difference represents the annual savings or cost for the project.
Step 4d - Entering Estimates of Avoided Future Liability Costs
By implementing a pollution prevention project, you may avoid future liability costs associated with fines and penalties, personal injury, or property damage. These are costs beyond those covered by insurance policies. You may include avoided liability estimates for up to 4 different years of the investment, by entering the year (i.e. year 1, year 2) in which you might expect the liability cost to be incurred in the Year Expected column and the corresponding avoided liability estimates in the Cost (Curr.-Alt.) column. The liability estimates entered should be in current (year zero) dollars as they will be automatically adjusted for inflation for the year in which they occur. A space for documentation reference numbers is provided in the Ref. column.
Note: Avoided liability cost estimates should be entered as positive values.
If, for example, the company has incurred a fine of $25,000 once every four years for an exceedance of an effluent standard and you expect that the pollution prevention project will eliminate these fines, you may enter $25,000 for years 4, 8, and 12 of the investment. Or if the pollution prevention project will eliminate a wastestream, and you estimate that the wastestream could cause a liability of $500,000 in year 10 of the investment for remedial work at a disposal site, you may enter the $500,000 and 10 into the cells the first row of the Cost (Curr.-Alt.) and Year Expected columns, respectively.
P2/Finance will automatically copy Cost values entered under Future Liability into the appropriate cells in the Liability row on pages 6 through 8.
Fifteen yr Worksheet, Pages 6-8 and Profit Anal Worksheet, Page 9.
Pages 6, 7 and 8 calculate and report the cash flows of the project. The cash flow analysis is carried out over a 15 year period following the initial investment. Cash flow for years 1-5 is reported on page 6, years 6-10 on page 7, and years 11-15 on page 8.
Note: As discussed in Step 2, it is possible to include an avoided capital cost estimate into the analysis. This cost must be entered directly into the report on page 6, 7 or 8. Simply enter the estimate, as a negative number, into the Investment row of the Capital Costs ($) section in the column of the Operating Year in which you would have expected the cost to be incurred (i.e. 0-15). If the cost estimate is in current year (i.e. today's) dollars, multiply the estimate by the Escalation Factor (top of page, under Operating Year) for that year before entering the number. For example, if you expect to avoid $150,000 (current year dollars) in capital expenditures in the fourth year after the investment, enter - 182400, which was calculated from - 150,000* 1.216, in the Investment row of the Operating Year 4 column.
A Profitability Analysis Summary is contained on page 9. It lists financial indicators of the investment including:
P2/Finance automatically will calculate and report, in dollars, Net Present Value (NPV), Internal Rate of Return (IRR), and Simple Payback for your Year of Choice in the designated cells in the table.
A print macro file is contained within the P2/FINAN.WK3 file to simplify the printing of pages 1-9. The printer configuration is set to HP Laserjet 4, output device LPT1, lower tray. To change these settings, consult your Lotus 1-2-3 user's manual. To print the desired page(s) press Alt-P to access the print menu and select the desired worksheet(s):
Pressing Alt-S will automatically save the file with its current name. If, after making changes to the worksheet file, you want to avoid copying over your original file, you must use the File/Save options under the Lotus 1-2-3 menu to enter a new name for the file.
P2/Finance List
P2/Finance List
10/25/93: Page 1
Project Title: Blank Worksheet File
Prepared by:
Organization:
Comments:
P2/Finance
Pollution Prevention Financial Analysis and Cost Evaluation System
Version 2.0 Copyright 1993
Tellus Institute
Boston, MA
[(See document source for Capital Costs sample spreadsheet)]
[(See document source for Costs sample spreadsheet)]
[(See document source: Capital and Operating Cost Summary)]
[(See document source: Profitability Analysis Summary)]
The following case study illustrates the difference between a company's financial analysis of a pollution prevention project and a Total Cost Assessment (TCA) of the same project. The "Company Analysis" is the financial analysis performed independently by the company to evaluate the profitability of a pollution prevention project. In contrast, the "TCA" is a more comprehensive financial analysis of the same project, developed collaboratively by the company and Tellus, to illustrate the differences in profitability when a more comprehensive approach is used. This case study describes the project under consideration and assesses both qualitatively and quantitatively the differences in the Company Analysis vs. the TCA.
A specialty paper mill is part of a larger corporation of pulp, paper, and coating mills. The mill is not integrated, i.e. does not manufacture pulp. Most of the pulp used by the mill is purchased via pipeline from a neighboring bleached kraft mill. The mill supplements this pulp with a small amount of purchased market pulp. The mill produces approximately 190 tons per year of a variety of uncoated, on-machine and off-machine coated papers, carbonizing, book and release base paper. The coating used is a latex (i.e. non-solvent) formulation containing clay, styrene butadiene, starch, and polymers.
Papermachine white water, a mixture of water and residual fiber and filler (clay and calcium carbonate) that drains out of a sheet of paper as it travels across the paper machine, is typically captured by a white water collection system dedicated to one papermachine. Some or all white water is usually recycled back into the papermaking system to recapture water, fiber and filler. In some cases white water is passed through a saveall screening device to separate fiber and filler from water; fiber, filler and water are then recycled back into the system. The saveall produces a clear stream of water that can be used in numerous papermachine operations.
In this mill, two paper machines, sharing a common white water system, produce a variety of paper grades made with either acid, neutral, or alkaline sizing chemistry.1
[Footnote 1: Sizing is added to pulp to reduce water absorbency in the final paper. The pH (i.e. acidity or alkalinity) of the pulp must be adjusted according to the type of paper desired and sizing used.]
Machine 1 has a saveall system that filters fiber and filler prior to discharging into the joint white water system. This material is recycled back into the papermaking system. When the machines are using different sizing chemistry, e.g. when Machine 1 is producing acid-sized paper and Machine 2 is producing alkaline-sized paper, the mixed white water from both machines is not reusable, and must be sewered. Under these conditions, a large flow of potentially reusable water from both machines, and fiber and filler from Machine 2, is low to the sewer.
Prompted primarily by the lack of spare water effluent pumping capacity and a desire to better understand the rather complex, old white water piping system, the mill commissioned a study titled "White Water Recycle Feasibility Study". The study had several objectives: "...to review the design and operation of the mill and recommend changes that would help reduce peak effluent flows, reduce BOD in the effluent and reduce total fresh water intake on a mill wide scale." The resulting report contained detailed engineering drawings of the fresh water, white water, and paper machine systems and a recommendation for process modifications.
The recommendation made in the feasibility study was the installation of a second saveall to handle the whitewater from Machine 2, and the splitting of the whitewater systems so that each machine would have a dedicated system. This would permit fiber, filler and water reuse on both machines at all times, thereby conserving raw materials and reducing water consumption, wastewater generation, and energy use for fresh and wastewater pumping and freshwater heating. The project would require installation of a new saveall, a new pump, piping, and controls. Available pulping and stock storage capacity could be used to pulp separately for each machine.
The feasibility study also contained a capital estimate for the project of $1,469,404. The estimate includes:
The Company Analysis consists of the capital estimate, and only those operating costs and savings that the company typically includes in project financial analyses for projects of this type. These are:
Table C-1 summarizes the cost categories addressed in the Company Analysis and the TCA for this project, and Table C-2 reports the results of the financial analysis.
As shown in Table C-2, the inclusion in the TCA Analysis of savings associated with freshwater pumping, treatment, and heating, and waste water pumping dramatically increases the annual savings and financial indicators above the Company Analysis base case. These savings, which would typically not be indicated in the mill's calculation of profitability, bring the project in line with the mill's 2 year payback rule-of-thumb. By excluding these savings in the Company Analysis, the project looks reasonably "profitable" only over the longer time horizon of 15 years.
X = Cost(s) Included
P = Cost(s) Partially Included
| Company | TCA | |
|---|---|---|
| Capital Costs | ||
| Purchased Equipment | X | X |
| Materials (e.g., Piping, Elec.) | X | X |
| Utility Systems | X | X |
| Site Preparation | X | X |
| Installation (labor) | X | X |
| Engineering/Contractor | X | X |
| Contingency | X | X |
| Operating Costs | ||
| Direct Costs* | ||
| Raw Materials/Supplies | P | X |
| Labor | X | X |
| Utilities | ||
| Indirect Costs* | ||
| Energy | P | X |
| Water | X | |
| Sewerage (POTW) | X | X |
*We use the term "Direct costs" to mean costs that are typically allocated to a product or process line (i.e. not charged to an overhead account) and are typically included in project financial analysis. "Indirect costs" here mean costs that are typically charged to an overhead account and typically not included in project financial analysis.
| Company Analysis | TCA | |
|---|---|---|
| Total Capital Costs | $1,469,404 | $1,469,404 |
| Annual Savings (BIT)* | $350,670 | $911,240 |
| Financial Indicators | ||
| Net Present Value - Years 1-5 | $476,408 | $783,232 |
| Net Present Value - Years 1-10 | $47,240 | $2,072,306 |
| Net Present Value - Years 1-15 | $359,544 | $2,849,725 |
| Internal Rate of Return - Years 1-5 | 1% | 37% |
| Internal Rate of Return - Years 1-10 | 17% | 46% |
| Internal Rate of Return - Years 1-15 | 21% | 48% |
| Simple Payback (years) | 4.2 | 1.6 |
*Annual operating cash flow before interest and taxes.
Some uncertainty exists in the wastewater treatment cost estimate. Because the mill does not have its own wastewater treatment facility, wastewater from the mill is pumped to a neighboring mill for treatment. In the per ton flow, Total Suspended Solids (TSS) and Biological Oxygen Demand (BOD) for the subject mill is reportedly higher than the industry average. The neighboring mill has asked the subject mill to reduce wastewater flow, although no such measures have been put into effect to date. The treatment charge is based on TSS or BOD so the subject mill has not direct economic incentive to reduce TSS and BOD in its wastewater. The contract between the mills establishes a ceiling for wastewater flow, BOD and TSS from the mill. Currently, the subject mill is meeting its flow limit, but is substantially exceeding its contract limits on BOD and TSS.
The treatment contract will be renegotiated in 1993, but it is not clear whether, or how, the terms will be changed. However, the mill's environmental engineer speculated that the charge rate formula might be changed to include a BOD or TSS variable, and that the overall cost could increase. To test the sensitivity of the project analysis to these potential changes, the TCA was recalculated twice, doubling and tripling the wastewater treatment costs. In both cases, the financial indicators change slightly: 50% IRR (years 1-10) and 1.5 payback for double the cost, and 53% (years 1-10) IRR and 1.4 payback for triple the treatment cost. While there is no dramatic change in projected profitability, a tripling of wastewater treatment costs, may make this project somewhat more competitive with other projects competing for capital in a particular budget year. This may be especially true if the firm applies its rule-of-thumb, 2 year payback criteria as a screening test for the project.
Detailed reports of the Company Analysis, the TCA, and associated cost calculation documentation follow.
| Costing and Financial Analysis Documentation | ||
|---|---|---|
| Capital Costs | ||
| Purchased Equipment | $345,985 | |
| Saveall and White Water Pump | ||
| Materials | $374,822 | |
| Piping, Electrical, Instruments and Structural | ||
| Installation | $397,148 | |
| Engineering | $211,046 | |
| Contingency | $140,403 | |
| Operating Costs | ||
| Current Process | White Water and Fiber Reuse | |
| Raw Materials | ||
| Fiber and Filler Loss (includes freight) | Fiber and Filler Loss (includes freight) | |
| Estimated solids loss = 1,500 tons/yr | Estimated recoverable solids = 1,200 tons/year | |
| White water solids = 67% fiber, 33% filler | Estimated solids loss = 1,500 - 1,200 = 300 tons/yr | |
| Fiber loss | Fiber loss | |
| 1,500 tons/yr * 0.67 = 1005 tons/yr | 300 tons/yr * 0.67 = 201 tons/yr | |
| Fiber cost | Fiber cost | |
| $445/ton | $445/ton | |
| Lost fiber cost | Lost fiber cost | |
| 1005 tons/yr * $445/ton = $447,220/year | 201 tons/yr * $445/ton = $89,450/year | |
| Filler loss | Filler loss | |
| 1,500 tons/yr * 0.33 - 495 tons/yr | 300 tons/yr * 0.33 = 99 tons/yr | |
| Filler cost | Filler cost | |
| $161/ton | $161/ton | |
| Lost filler cost | Lost filler cost | |
| 495 tons/yr * $161/ton = $79,700/year | 99 tons/yr * $161/ton = $15,940/year | |
| Freshwater Treatment | ||
| Annualized freshwater use = 1.5MMGD | 0.5MMGD freshwater > = $12,960 | |
| Chemical | Costs $/MG | |
| Alum | 0.025 | |
| Sodium aluminate | 0.009 | |
| Polymer | 0.034 | |
| Sodium hypochlorite | 0.003 | |
| Total | $0.071 | |
| 1.5 MMGD * 365 days/yr *($0.071*1000)/MMG = $38,870/year | ||
| Flocculating Agents for Saveall | ||
| Avg. white water flow through saveall | 600 GPM (864 MGD) | |
| Chemical Costs: Cationic polymer cost | $0.056/Mgal | |
| Anionic polymer cost | $0.035/Mgal | |
| Total | $0.091/Mgal | |
| 864MGD * $0.091/Mgal * 365 days/yr = $28,700/year | ||
| Key | |
|---|---|
| M | thousand |
| M/M | million |
| GD | gallons/day |
| Freshwater Pumping | ||
|---|---|---|
| Annualized freshwater use = 1.5MMGD | 0.5MMGD freshwater > = $43,250/year | |
| Energy Costs | $/period* $/MG | |
| Variable freshwater pumping | ||
| 133,098 | 0.234 | |
| Miscellaneous | ||
| 1,479 | 0.0026 | |
| Total | $134,577 | |
| $0.237 *Period | 8 months, 1990 | |
| Total freshwater use | 566,460 MG | |
| 1.5MMGD * 365 days/yr * (0.237*1000) MMG = $129,760/year | ||
| Freshwater Heating | ||
| 1.5MMGD freshwater comes in at 57&186; F, must be raised to 95&186; F | ||
| 0.5 MMGD freshwater > | $196,700/yr | |
| 1.5MMGD * 1 Btu/lb F * 8.4 lb/gal * (95&186; - 57&186; F) | 4.788 x 108 Btu/day | |
| Fuel cost (No. 6) | $0.39/gal | |
| Estimated boiler efficiency | 82.5% | |
| 4.788 x 108 Btu/day * 1 gal No. 6 fuel/1.4 x 105 Btu * $0.39/gal * 1/0.825 * 365 days/yr | $590,100/yr | |
| Wastewater Pumping | ||
| 4.0MMGD * 365 days/yr * $150/MMGD = $219,000/yr | 3.0MMGD > = $164,250/yr | |
| Wastewater Treatment | ||
| Average, annualized wastewater discharge rate = 4.0MMGD | 3.0MMGD > = $204,760/yr | |
| Wastewater treatment cost | $187/MMG | |
| 4.0 MMGD * 365 days/yr * $187/MMG = $273,020/yr | ||
| Energy for Equipment Operation | ||
| Electricity cost | $0.08/kWh | |
| New Equipment | ||
| HP Drive Pump | 1 | |
| Scoop Pump | 1 | |
| Pressure Pump | 40 | |
| Feed Pump | 20 | |
| Recovered Stock Chest Agitator Motor | 5 | |
| Recovered Stock Chest Pump | 25 | |
| Clear White Water Chest Pump | 125 | |
| White Water Surge Pump | 125 | |
| Total | 342 HP | |
| 342 HP * 0.6 * 0.746kWh/HP * 8,760hr/yr * $0.08/kWh - $107,280 | ||
| Key | |
|---|---|
| M | thousand |
| M/M | million |
| GD | gallons/day |
| Equipment Operation - Saveall | |
|---|---|
| 4 hours/week labor $15/hour - fully loaded wage rate | |
| 4 hrs/week * 52 weeks/yr * $15/hr = $3,120/yr |
1/1/93
Project Title: WW/Fiber (Company Analysis)
Prepared By: Risk Analysis Group
Organization: Tellus Institute
Comments: This spreadsheet incorporates the data from the company's original financial analysis of the whitewater/fiber recycle project.
P2/Finance
Pollution Prevention Financial Analysis and Cost Evaluation System
Version 2.0 Copyright 1993
Tellus Institute
Boston, MA
[(See document source: Capital Costs)]
[(See document source: Operating Costs)]
[(See document source: Capital and Operating Cost Summary)]
[(See document source: Profitability Analysis Summary)]
1/1/93
Project Title: WW/Fiber (Total Cost Assessment, Method 1)
Prepared By: Risk Analysis Group
Organization: Tellus Institute
Comments: This spreadsheet incorporates the data from a Total Cost Assessment of the whitewater/fiber recycle project.
Method 1 was used for entering the TCA data, i.e. operating costs and revenues were entered for both the current and alternative processes.
P2/Finance
Pollution Prevention Financial Analysis and Cost Evaluation System
Version 2.0 Copyright 1993
Tellus Institute
Boston, MA
[(See document source: Capital Costs)]
[(See document source: Operating Costs)]
[(See document source: Capital and Operating Cost Summary)]
[(See document source: Profitability Analysis Summary)]
1/1/93
Project Title: WW/Fiber (Total Cost Assessment, Method 2)
Prepared By: Risk Analysis Group
Organization: Tellus Institute
Comments: This spreadsheet incorporates the data from a Total Cost Assessment of the whitewater/fiber recycle project.
Method 2 was used for entering the TCA data, i.e. operating costs, savings and revenues were entered for both the current and alternative processes.
P2/Finance
Pollution Prevention Financial Analysis and Cost Evaluation System
Version 2.0 Copyright 1993
Tellus Institute
Boston, MA
[(See document source: Capital Costs)]
[(See document source: Operating Costs)]
[(See document source: Capital and Operating Cost Summary)]
[(See document source: Profitability Analysis Summary)]
| Annual Cash Flow | For an investment, the sum of cash inflows and outflows for a given year (see cash flow). |
| Break-Even-Point | The point at which cumulative incremental annual cash flows of an investment aggregate to 0. The Break-Even-Point designates the end of a project's investment Payback Period (see Incremental Cash Flow and Payback Period). |
| Capital Budget | A statement of the firm's planned investments, generally based upon estimates of future sales, costs, production and research and development (R&D) needs, and availability of capital. |
| Cash Flow (from an investment) | The dollars coming to the firm (cash inflow) or paid out by the firm (cash outflow) resulting from a given investment. |
| Cost Accounting System | The internal procedure used to track and allocate production costs and revenues to a product or process. Defines specific cost/profit centers, overhead vs. allocated costs, degree of cost disaggregation. |
| Cost Allocation | A process within an internal cost accounting system of assigning costs and revenues to cost and profit centers for purposes of product pricing, cost tracking, and performance evaluation. |
| Discount Rate | The discount rate (or Cost of Capital) is the required rate of return on a capital investment. In profitability analysis, the discount rate is used in Net Present Value (NPV) calculations to express the value of a future expenditure in the present year. The discount rate is expressed as a percentage. |
| Discounted Cash Flow Rate of Return (DCRR) | See Internal Rate of Return. |
| Financial Accounting | The process that culminates in the preparation of financial reports relative to the enterprise as a whole for use by parties both internal and external to the enterprise. |
| Financial Reporting | Required by authoritative pronouncement, regulatory rule or custom, including: corporate annual reports, prospectuses, annual reports filed with government agencies, descriptions of an enterprise's social or environmental impacts. |
| Financial Statements | The principal means through which financial information is communicated to those outside an enterprise. Statements include the balance sheet, income statement, and statement of cash flows. |
| Full Cost Accounting | A method of managerial accounting which accounts for both the direct and indirect costs of an item. Full cost accounting uses historical data to assign all costs to a process, product or product line, most often for purposes of pricing. |
| Hurdle Rate | The internally defined threshold, or minimum acceptable rate of return, required for project approval, e.g. 15% ROI, or 2 year payback. |
| Incremental Cash Flow (of an Investment) | The cash flow of an alternative practice (e.g. after a pollution prevention investment has been implemented) relative to the current practice. Incremental cash flow is calculated by taking the difference between the cash flow for the current practice and the alternative practice. |
| Internal Rate of Return (IRR) | The discount rate at which the net savings (or NPV) on a project are equal to zero. The computed IRR of an investment is compared to a company's desired rate of return. |
| Managerial Accounting | The process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control all activities within an organization to ensure appropriate use, and accountability for its resources. Capital budgeting is one component of managerial accounting. |
| Measure of Profitability | An index that helps to answer the question: Are the future savings/revenues of a project likely to justify a current expenditure? Synonyms: "decision rule", or "financial index", or "profitability index", or "capital budgeting technique". Includes: NPV, IRR, payback, ROI. |
| Net Present Value (NPV) | The present value of the future cash flows of an investment less the investment's current cost. NPV = CF1 + CF2 + CFn - I 1+k (1=k)2 (1+k)n where: CF1 is cash flow in period 1, CF2 is cash flow in period 2, etc. I is initial outlay or investment cost k is cost of capital or discount rate. An investment is profitability if the NPV of the cash flow it generates in the future exceeds its cost, that is, if the NPV is positive. |
| Payback Period | The amount of time required for an investment to generate enough cash flow to just cover the initial capital outlay for that investment. |
| Payback = Investment/Annual Net Income Project Financial Analysis | Costing (i.e. calculating the costs and savings) and calculating cash flow and/or profitability measures of a project. |
| Project Justification Process | A generic term for a series of steps which are necessary to get approval for a project. |
| Project Justification | A document prepared in the project justification process which comprising a written description of the project, a project financial analysis, and a discussion of benefits and risks which are not quantified in the financial analysis. |
| Return on Investment (ROI) | A measurement of investment performance, calculated as the ratio of annual net income (minus depreciation) over the initial investment amount. |
| ROI = Annual Net Income/Investment Total Cost Assessment (TCA) | A comprehensive financial analysis of the costs and savings of a pollution prevention project. A TCA approach includes:
|
P2/Finance will, however, continue cash flow calculations until the last year shown on the Fifteen yr worksheet, (i.e. year 15).
Last Updated: January 16, 1996