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For more
information, contact David Eppstein by email at
deppstein@masco.harvard.edu,
or by calling 617-632-2860.
11.0 PRETREATMENT SYSTEM ECONOMIC ANALYSIS
Before
the purchase of any pretreatment system, economic and
environmental impacts related to the installation and operation
of competing proposed systems should be evaluated. The results
of bench-scale feasibility and treatability tests, along with
those of on-site pilot tests, can provide insights into the
expected costs of competing pretreatment systems. The various
pretreatment system costs can also be compared with the
implementation of source reduction options, alternative
wastewater disposal, and a "do nothing" approach that
may involve various levels of regulatory agency enforcement
actions.
In the
economic analysis, it is common practice to apply accounting
techniques in which economic impacts are separated into direct
costs and indirect costs. These cost categories are used to
calculate various economic measures for input into an investment
decision process.
11.1
Direct Costs
Direct
costs refer to expenditures that are directly associated with
the delivery, installation, and operation of the pretreatment
system. Direct costs include the following:
Capital
Expenses
-
Equipment
and installation materials.
-
Facility
- building floor space; site preparation; and HVAC,
plumbing, and electrical requirements.
-
Engineering,
procurement, and installation labor.
-
Permit
and inspection fees.
Operation
and Maintenance Costs
-
Labor.
-
Waste
disposal (hazardous and nonhazardous) including
transportation and storage.
-
Equipment
spare parts and facility maintenance.
-
Annual
permit fees, monitoring and reporting costs (see below).
11.2
Indirect Costs
Indirect
costs are those not directly associated with a production line
or product, such as administrative costs. In traditional
accounting, these types of costs are frequently included in the
category of plant overhead. Often, regulatory costs (including
the costs of permitting and monitoring) were considered as
indirect costs.
The
traditional practice of classifying manufacturing costs into
direct labor, direct material, and plant overhead generally
masked many relevant environmental costs needed for a thorough
economic evaluation. For purposes of both source reduction
analyses and pretreatment system evaluations, hidden
environmental costs should be extracted from the overhead
category and applied directly to the wastestream or pretreatment
system being evaluated.
Operation
and maintenance costs, which may have to be extracted from the
overhead cost category, can include both labor and material
costs as follows:
-
Spill/leak
incident reporting
-
Monitoring
-
Manifesting
and disposal costs
-
Labeling
and labeling supplies
-
Inspections
-
Permitting
-
Right-to-Know
training and training supplies
-
Insurance
and liability protection
-
Protective
equipment
-
Laboratory
services and other analytical costs
11.3
Payback Period
In
evaluations of source reduction projects, the calculation of
payback period is the simplest method for evaluating the
associated capital investments. The payback period is calculated
as a ratio of the required investment to the estimated cost
savings rate. A payback period is usually expressed in months or
years and represents the time that the cost savings will take to
recover initial cash outlays. For pretreatment systems, it is
often difficult to calculate a payback period because cost
savings (such as penalties and fines for noncompliance) may be
intangible. Sometimes the cost of a pretreatment system can be
compared with that of shipping the untreated discharge for
offsite disposal.
If the
payback period is much less than the economic lifetime of the
project, then the project should be considered financially
acceptable. If the payback period is equal to or greater than
the economic lifetime of the project, then the proposal is
financially unacceptable. However, since the payback period is
not a very sophisticated economic measure, payback period
calculations are usually not the sole method of project
evaluations.
11.4
Depreciation
Depreciation
is an accounting method used to recover the costs of assets such
as a facility structure, equipment, and fixtures. Some of each
asset cost is charged as an expense in each accounting period
that the asset provides service to the business. The financial
manager of the facility should be consulted when deciding to use
depreciation in an economic analysis, because each company
usually has a specific method of calculating depreciation.
11.5
The Time Value of Money
Financial
analysts and company managers usually obtain a better comparison
of costs of various project options by evaluating costs over
time. The evaluation period is usually the projected economic
lifetime of the project. If money is spent or received at
different points in time, the value of the money will vary. For
example, because of expected inflation and investment
performance, a sum of money received today is worth much more
than that same sum of money received ten years from now.
Therefore,
sums of money paid or received at different times need to be
discounted accordingly to make them comparable with each other.
It is common practice to adjust the sums mathematically to
reflect their current value. A factor called the Discount Rate,
which varies by company, is usually used to specify the time
value of money for a company.
Two
common economic analysis methods that account for the time value
of money are called Net Present Value and Rate of Return. For
example, two projects can be compared by calculating their Net
Present Values. The project having the higher Net Present Value
would be favored. Also, a project having a positive Net Present
Value would be a profitable venture.
The
calculation of the Rate of Return of a source reduction project
is a way to measure the potential profitability of the project.
If the calculated Rate of Return meets company investment
policies, a proposed project may easily receive the needed
approvals for implementation.
11.6
Qualitative Considerations
A full
assessment of a proposal requires a consideration of
non-monetary factors. Factors with costs that cannot be
quantified and verified should be described in a narrative. A
rule-of-thumb whether a factor is quantitative is as
follows:
-
Is
the factor verifiable?
-
Is
the factor defensible?
-
Is
the factor relevant to the project?
An
evaluation of qualitative factors that can affect
pretreatment system selection would include some of the
following:
Intangible
Factors
Potential
Liability
In the
qualitative assessment, owners/operators of a facility should
attempt to characterize the nature and extent of the changing or
variable factors. Some factors to be considered are the
sensitivity of customers to the company’s continued use of
toxics in product manufacture, the fact that a similar company
experienced a decrease in market share attributable to toxics
use, or shareholder reaction to the company’s announcement of
cleaner production processes.
If a
company is publicly owned, has shareholders, or is dependent on
venture capital and bank financing, its concerns are also the
concerns of "outside interests." Detailed estimations
of potential liability may be problematic because of various
regulatory disclosure requirements and the difficulty of making
reliable liability estimates.
The
Securities and Exchange Commission and the Financial Accounting
Standards Board have disclosure requirements regarding potential
liability. Recent legal precedents suggest that attempts at
estimating liability values can sometimes lead to unrealistic or
unreliable estimates. Moreover, a cost estimate of environmental
liability may require the company to make a cash allocation to a
reserve account to cover the potential liability.
Therefore,
the estimate of a company’s potential liability should be
restricted to a non-monetary characterization of risk. In other
words, a company should characterize potential sources of risk
within the company without attaching a loss figure. The
discussion of potential liability in the qualitative section of
the plan might cite the risk source (i.e., hazardous
waste storage) and the potential consequences of an event.
For
example, when discussing the risk associated with the onsite
storage of trichloroethylene (TCE), the case for the
implementation of a source reduction program can be furthered.
Storage of TCE would increase the probability of a TCE
explosion, a TCE spill incident, or an acute employee exposure.
The preparation of a list of these possible events may be
sufficient for purposes of qualitative project evaluations.
For
pretreatment systems, both the quantitative and qualitative
evaluations of a project can take place well before pretreatment
system vendors are contacted. The evaluations would provide
guidance on whether source reduction, pretreatment systems,
and/or alternate wastewater disposal methods should be used to
solve a sewer discharge problem.
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