APPENDIX F, U.S. EPA Facility Pollution Prevention Guide, EPA/600/R-92/088 ECONOMIC EVALUATION EXAMPLE The following example presents a profitability analysis for a relatively large hypothetical pollution prevention project. This project represents the installation of a package unit that improves plant production while reducing raw material consumption and disposal costs. The analysis was done on a personal computer using a standard spreadsheet program. The salient data used in this evaluation are summarized below. Capital Costs  The delivered price of the equipment is quoted by the vendor at $170,000. This includes taxes and insurance.  Materials costs (piping, wiring, and concrete) are estimated at $35,000.  Installation labor is estimated at $25,000.  Internal engineering staff costs are estimated at $7,000. Outside consultant and contractor costs are estimated at $15,000.  Miscellaneous environmental permitting costs are estimated at $15,000.  Working capital (including chemical inventotories, materials, and supplies) is estimated at $5,000.  Startup costs are estimated by the vendor at $3,000.  A contingency fund of $20,000 for unforeseen costs and/or overruns is included.  Planning, design, and installation are expected to take 1 year. Financing  The project will be financed 60% by retained earnings and 40% by a bank loan.  The bank loan will be repaid over 5 years of equal install- ments of principal plus interest at an annual percentage rate of 13%. Interest accrued during installation will be added into the total capital costs.  All capital costs, except working capital and interest accrued during construction, will be depreciated over 7 years using the double-declining balance method, switching to the straight-line method when the charges by this method become greater.  The marginal income tax rate is 34%.  Escalation of all costs is assumed to be 5% per year for the life of the project.  The firm's cost of capital is 15%. Operating Costs and Revenues  The pollution prevention project is estimated to decrease raw materials consumption by 300 units per year at a cost of $50 per unit. The project will not result in increased pro- duction. However, it will produce a marketable by-product to be recovered at a rate of 200 units per year and a price of $25 per unit.  The project will reduce the quantity of hazardous waste disposed by 200 tons per year. The following items make the total unit disposal costs: Costs per ton of waste Offsite disposal fees $500 State generator taxes 10 Transportation costs 25 Other costs 25 TOTAL DISPOSAL COSTS $560  Incremental operating labor costs are estimated on the basis that the project is expected to require 1 hour of operator's time per 8-hour shift. There are 3 shifts per day and the plant operates 350 days per year. The wage rate for opera- tors is $12.50 per hour.  Operating supplies expenses are estimated at 30% of operating labor costs.  Maintenance labor costs are estimated at 2% of the sum of the capital costs for equipment, materials, and installation. Maintenance supplies costs are estimated at 1% of these costs.  Incremental supervision costs are estimated at 30% of the combined costs of operating and maintenance labor.  The following overhead costs are estimated as a percentage of the sum of operating and maintenance labor and supervision costs. Labor burden and benefit 28% Plant overhead 25% Headquarter overhead 20%  Escalation of all costs is assumed to be 5% per year for the life of the project.  The project life is expected to be 8 years.  The salvage value of the project is expected to be zero after 8 years. Results The four-page printout in Figures F-1 through F-4 presents the pollution prevention project profitability spreadsheet program. Figure F-1 represents the input section of the program. Each of the numbers in the first three columns represents an input variable in the program. The righthand side of Figure F-1 is a summary of the capital requirement. This includes a calculation of the interest accrued during construction and the financing structure of the project. Figure F-2 is a table of the revenues and operating cost items for each of the 8 years of the project's operating life. These costs are escalated by 5% each year for the life of the project. Figure F-3 presents the annual cash flows for the project. The calculation of depreciation charges and the payment of interest and repayment of loan principal are also shown here. The calculation of the internal rate of return (IRR) and the net present value (NPV) are based on the annual cash flows. Because the project is leveraged (financed partly by a bank loan), the equity portion of the investment is used as the initial cash flow. The NPV and the IRR are calculated on this basis. The IRR calculated this way is referred to as the "return on equity." The program is structured to present the NPV and IRR after each year of the project's operating life. In the example, after 6 years, the IRR is 19.92% and the NPV is $27,227. Figure F-4 is a cash flow table based entirely on equity financing. Therefore, there are no interest payments or debt principal repayments. The NPV and the IRR in this case are based on the entire capital investment in the project. The IRR calcu- lated this way is referred to as the "return on investment." The results of the profitability analysis for this project are summarized below: Method of Financing IRR NPV 60% equity/40% debt 26.47% $84,844 100% equity 23.09% $81,625 The IRR values are greater than the 15% cost of capital, and the NPVs are positive. Therefore, the project is attractive and should be implemented. (The figures are deleted from this electronic version of this manual. For a printed copy of U.S. EPA's Facility Pollution prevention Guide, EPA/600/R-92/088, please contact U.S. EPA Pollution Prevention Researech Branch by phone: 513/569-7215 or FAX: 513/569-7111. A copy may also be requested from Ohio EPA, Office of Pollution Prevention by calling 614/ 644-3469 or by FAX: 614/728-1245.)