Section 1

Introduction

EPA/452/B-02-001
2-1

Chapter 2

Cost Estimation: Concepts and

Methodology

Daniel C. Mussatti

William M. Vatavuk

Innovative Strategies and Economics Group

Air Quality Strategies and Standards Division

Office of Air Quality Planning and Standards

U.S. Environmental Protection Agency

Research Triangle Park, NC 27711

January 2002

EPA/452/B-02-001
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Contents

2.1 Introduction ............................................................................................................................................ 2-3

2.2 Types of Cost Estimates ......................................................................................................................... 2-3

2.3 Cost Categories Defined ......................................................................................................................... 2-5

2.3.1 Elements of Total Capital Investment ........................................................................................... 2-5

2.3.2 Elements of Total Annual Cost ..................................................................................................... 2-7

2.4 Financial Concepts ............................................................................................................................... 2-10

2.4.1 Time Value of Money .................................................................................................................. 2-11

2.4.2 Interest Rates .............................................................................................................................. 2-12

2.4.3 Prices and Inflation ..................................................................................................................... 2-13

2.4.4 Financial Analysis ...................................................................................................................... 2-15

2.4.4.1 Cash Flow ......................................................................................................................... 2-15

2.4.4.2 Payback ............................................................................................................................ 2-16

2.4.4.3 Net Present Value .............................................................................................................. 2-18

2.4.4.4 Equivalent Uniform Annual Cash Flow and Annualization ............................................... 2-20

2.4.4.5 Other Financial Analysis Tools ......................................................................................... 2-21

2.4.4.6 Economic versus Accounting Costs and Benefits ............................................................. 2-22

2.5 Estimating Procedure ............................................................................................................................ 2-23

2.5.1 Facility Parameters and Regulatory Options ............................................................................... 2-24

2.5.2 Control System Design ............................................................................................................... 2-25

2.5.3Sizing the Control System............................................................................................................. 2-26

2.5.4 Estimating Total Capital Investment ........................................................................................... 2-26

2.5.4.1 General Considerations..................................................................................................... 2-26

2.5.4.2 Retrofit Cost Considerations ............................................................................................ 2-28

2.5.5 Estimating Annual Costs ............................................................................................................ 2-30

2.5.5.1 Raw Materials ................................................................................................................... 2-30

2.5.5.2 Labor ................................................................................................................................ 2-31

2.5.5.3 Maintenance Materials ..................................................................................................... 2-32

2.5.5.4 Utilities............................................................................................................................. 2-32

2.5.5.5 Waste Treatment and Disposal ......................................................................................... 2-32

2.5.5.6 Replacement Materials...................................................................................................... 2-33

2.5.5.7 Overhead ........................................................................................................................... 2-34

2.5.5.8 Property Taxes, Insurance, and Administrative Charges ................................................... 2-34

2.6 Example ................................................................................................................................................. 2-34

References .................................................................................................................................................. 2-38

APPENDIX A .............................................................................................................................................. 2-40
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2.1 Introduction

This chapter presents a methodology that will enable the user, having knowledge of the

source being controlled, to produce study-level cost estimates for a control system applied to that

source. The methodology, which applies to each of the control systems included in this Manual, is

general enough to be used with other “add-on” systems as well. Further, the methodology can

apply to estimating the costs of fugitive emission controls and for other non-stack abatement

methods.

2.2 Types of Cost Estimates

As mentioned in Chapter 1.1, the costs and estimating methodology in this Manual are

directed toward the “study” estimate with a nominal accuracy of ± 30% percent. According to

Perry’s Chemical Engineer’s Handbook, a study estimate is “... used to estimate the economic

feasibility of a project before expending significant funds for piloting, marketing, land surveys, and

acquisition ... [However] it can be prepared at relatively low cost with minimum data.”[1] Specifically,

to develop a study estimate, the following must be known:

 Location of the source within the plant;

 Rough sketch of the process flow sheet (i.e., the relative locations of the equipment

in the system);

 Preliminary sizes of, and material specifications for, the system equipment items;

 Approximate sizes and types of construction of any buildings required to house

the control system;

 Rough estimates of utility requirements (e.g., electricity);

 Preliminary flow sheet and specifications for ducts and piping;

 Approximate sizes of motors required.[1]

In addition, the user will need an estimate of the labor hours required for engineering and

drafting activities because the accuracy of an estimate (study or otherwise) depends on the amount

of engineering work expended on the project. There are four other types of estimates, three of

which are more accurate than the study estimate. Figure 2.1 below, displays the relative accuracy

of each type of cost estimation process. The other processes are:[1]

 Order-of-magnitude. This estimate provides “a rule-of-thumb procedure applied

only to repetitive types of plant installations for which there exists good cost history”.

Its error bounds are greater than ± 30%. (However, according to Perry’s, “... no

limits of accuracy can safely be applied to it.”) The sole input required for making

this level of estimate is the control system’s capacity (often measured by the

maximum volumetric flow rate of the gas passing through the system).
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 Scope, Budget Authorization, or Preliminary. This estimate, nominally of ± 20%

accuracy, requires more detailed knowledge than the study estimate regarding the

site, flow sheet, equipment, buildings, etc. In addition, rough specifications for the

insulation and instrumentation are also needed.

 Project Control or Definitive. These estimates, accurate to within ± 10%, require

yet more information than the scope estimates, especially concerning the site,

equipment, and electrical requirements.

 Firm or Contractor’s or Detailed. This is the most accurate (± 5%) of the estimate

types, requiring complete drawings, specifications, and site surveys. Consequently,

detailed cost estimates are typically not available until right before construction,

since “time seldom permits the preparation of such estimates prior to an approval

to proceed with the project.”[1]

1 Correspondence with William Vatavuk, former editor and author of the Manual, 12/24/01.

Figure 2.1: The Continuum of Accuracy for Cost Analyses

ACCURACY

± 0 % ± 5 % ± 10 % ± 30 % ± 20 %

PostConstruction

Reports

Detailed Project

Control

Scoping Study Order of Magnitude

Study-level estimates are acceptable for regulatory development because they represent a

compromise between the less accurate order-of-magnitude and the more accurate estimate types.

The former is too imprecise to be of much value, while the latter are not only very expensive to

make, but require detailed site and process-specific knowledge that most Manual users will not

have. Over time, this Manual has become the standard for air pollution control costing methodologies

for many regulatory agencies. For example, Virginia requires that the Manual to be used in making

cost estimates for BACT and other permit applications, unless the permit applicant can provide

convincing proof that another cost reference should be used.1

When used by industry to plan for the installation of a pollution control device, this Manual

offers the user an opportunity for greater accuracy than that used by regulators. Since the industrial

user will necessarily have much more detailed information than the generic cost and sizing information

used in a study estimate, the methodology employed by this Manual can provide cost estimates
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that approach those of a scoping study. However, the EPA does not claim cost estimates for

industry at a greater than study level accuracy for industrial users, even though the anecdotal

evidence from most testimonials volunteered by industrial users indicate a much greater than ±30

percent accuracy can be attained.

2.3 Cost Categories Defined

The terminology used in the earlier editions of this Manual were adapted from the American

Association of Cost Engineers.[2]. However, different disciplines give different names to the same

cost components and the objective of this edition is to reach out to a broader scientific audience.

For example, engineers determine a series of equal payments over a long period of time that fully

funds a capital project (and its operations and maintenance) by multiplying the present value of

those costs by a capital recovery factor, which produces an Equivalent Uniform Annual Cash Flow

(EUAC) value. This is identical to the process used by accountants and financial analysts, who

adjust the present value of the project’s cash flows to derive an annualized cost number.

2.3.1 Elements of Total Capital Investment

Total capital investment (TCI) includes all costs required to purchase equipment needed

for the control system (purchased equipment costs), the costs of labor and materials for installing

that equipment (direct installation costs), costs for site preparation and buildings, and certain other

costs (indirect installation costs). TCI also includes costs for land, working capital, and off-site

facilities.

Direct installation costs include costs for foundations and supports, erecting and handling

the equipment, electrical work, piping, insulation, and painting. Indirect installation costs include

such costs as engineering costs; construction and field expenses (i.e., costs for construction

supervisory personnel, office personnel, rental of temporary offices, etc.); contractor fees (for

construction and engineering firms involved in the project); start-up and performance test costs (to

get the control system running and to verify that it meets performance guarantees); and contingencies.

Contingencies is a catch-all category that covers unforeseen costs that may arise, such as “...

possible redesign and modification of equipment, escalation increases in cost of equipment, increases

in field labor costs, and delays encountered in start-up.”[2] Contingencies are not the same thing

as uncertainty and retrofit factor costs, which are treated separately in this chapter.

The elements of total capital investment are displayed in Figure 2.2. Note that the sum of

the purchased equipment cost, direct and indirect installation costs, site preparation, and buildings

costs comprises the battery limits estimate. By definition, this is the total estimate “... for a specific

job without regard to required supporting facilities which are assumed to already exist...”[2] at the

plant. This would mainly apply to control systems installed in existing plants, though it could also

apply to those systems installed in new plants when no special facilities for supporting the control

system (i.e., off-site facilities) would be required. Off-site facilities include units to produce steam,
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electricity, and treated water; laboratory buildings; and railroad spurs, roads, and other transportation

infrastructure items. Pollution control systems do not generally have off-site capital units dedicated

to them since pollution control devices rarely consume energy at that level. However, it may be

necessary—especially in the case of control systems installed in new or “grass roots” plants—for

extra capacity to be built into the site generating plant to service the system. (A venturi scrubber,

which often requires large amounts of electricity, is a good example of this.) Note, however, that

the capital cost of a device does not include utility costs, even if the device were to require an offsite facility. Utility costs are charged to the project as operating costs at a rate which covers both

the investment and operating and maintenance costs for the utility. Operating costs are discussed in

greater detail below.

a

Typically factored from the sum of the primary control device and auxiliary equipment costs.

b

Typically factored from the purchases equipment cost.

c

Usually required only at “grass roots” installations.

d

Unlike the other direct and indirect costs, costs for these items usually are not factored from the purchased

 equipment cost. Rather, they are sized and costed separately.

e

Normally not required with add-on control systems.

Figure 2.2: Elements of Total Capital Investment

Land e
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As Figure 2.2 shows, the installation of pollution control equipment may also require land,

but since most add-on control systems take up very little space (a quarter-acre or less) this cost

would be relatively small. Certain control systems, such as those used for flue gas desulfurization

(FGD) or selective catalytic reduction (SCR), require larger quantities of land for the equipment,

chemicals storage, and waste disposal. In these cases, especially when performing a retrofit

installation, space constraints can significantly influence the cost of installation and the purchase of

additional land may be a significant factor in the development of the project’s capital costs. However,

land is not treated the same as other capital investments, since it retains its value over time. The

purchase price of new land needed for siting a pollution control device can be added to the TCI,

but it must not be depreciated, since it retains its value forever. Instead, if the firm plans on dismantling

the device at some future time, then the land should be either excluded from the analysis, or the

value of the land should be included at the disposal point as an “income” to the project to net it out

of the cash flow analysis (more on cash flow analyses later, in section 2.4.4.1).

One might expect initial operational costs (the initial costs of fuel, chemicals, and other

materials, as well as labor and maintenance related to start-up) should be included in the operating

cost section of the cost analysis instead of in the capital component, but such an allocation would

be inappropriate. Routine operation of the control does not begin until the system has been tested,

balanced, and adjusted to work within its design parameters. Until then, all utilities consumed, all

labor expended, and all maintenance and repairs performed are a part of the construction phase of

the project and are included in the TCI in the “Start-Up” component of the Indirect Installation

Costs.

2.3.2 Elements of Total Annual Cost

Total Annual Cost (TAC) has three elements: direct costs (DC), indirect costs (IC), and

recovery credits (RC), which are related by the following equation:

TAC = +− D C IC R C (2.1)

Clearly, the basis of these costs is one year, as this period allows for seasonal variations in

production (and emissions generation) and is directly usable in financial analyses. (See Section

2.3.) The various annual costs and their interrelationships are displayed in Figure 2.3.

Direct costs are those that tend to be directly proportional (variable costs) or partially

proportional (semi-variable costs) to some measure of productivity - generally the company’s

productive output, but for our purposes, the proper metric may be the quantity of exhaust gas

processed by the control system per unit time. Conceptually, a variable cost can be graphed in

cost / output space as a positive sloped straight line that passes through the origin. The slope of the

line is the factor by which output is multiplied to derive the total variable cost of the system. Semivariable costs can be graphed as a positive sloped straight line that passes through the cost axis at

a value greater than zero - that value being the “fixed” portion of the semi-variable cost and the

slope of the line being analogous to that of the variable cost line discussed above.
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Figure 2.3: Elements of Total Annual Cost

In the graphical representation of variable and semi-variable costs in Figure 2.4, the blue

line (lower line) indicates a variable cost function, with all of its value directly related to the level of

output on the X-axis. At zero output, the variable cost function returns a variable cost of zero, as

well. Alternatively, the upper, red line in Figure 2.4 shows a semi-variable cost, where even at an

output level of zero, the system will still incur a cost of $50. The key difference between the two

types of variable cost is that at an output level of zero, a semi-variable cost will still exist. An

example would be a boiler producing process steam for only sixteen hours a day. During the time

the boiler is idle, it costs less to keep the boiler running at some idle level than to re-heat it at the

beginning of the next shift. Consequently, that idle level operation cannot be attributed to production

and should be considered the fixed component of the semi-variable fuel cost of the boiler. Direct

costs include costs for raw materials (reagents or adsorbers), utilities (steam, electricity, process

and cooling water), waste treatment and disposal, maintenance materials (greases and other

lubricants, gaskets, and seals), replacement parts, and operating, supervisory, and maintenance

labor. Generally, raw materials, utilities, and waste treatment and disposal are variable costs, but

there is no hard and fast rule concerning any of the direct cost components. Each situation requires

a certain level of insight and expertise on the part of the analyst to separate out the cost components

accurately.
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Capital is depreciable, indicating that, as the capital is used, it wears out and that lost value

cannot be recovered. Depreciation costs are a variable or semi-variable cost that is also included

in the calculation of tax credits (if any) and depreciation allowances, whenever taxes are considered

in a cost analysis. (However, taxes are not uniformly applied, and subsidies, tax moratoriums, and

deferred tax opportunities distort how the direct application of a tax works.

$0

$50

$100

$150

$200

$250

Cost

Output

Figure 2.4: Graphical Comparison of Variable and Semi-variable Costs

Therefore, this Manual methodology does not consider income taxes.) Notice that when 100% of

the system costs are depreciated, no salvage value can be taken for the system equipment at the

conclusion of its useful life. This is a reasonable assumption for add-on control systems, as most of

the equipment, which is designed for a specific source, cannot be used elsewhere without

modifications. Even if it were reusable, the cost of disassembling the system into its components

(i.e., “decommissioning cost”) could be as high (or higher) than the salvage value. If a salvage value

exists and will be recouped at the end of the useful life of the control, then that value must be

included in the analysis. The exercise discussed later in this chapter employs a salvage value to

illustrate its proper use.

Indirect, or “fixed”, annual costs are independent of the level of production (or whatever

unit of measure serves as the analytical metric) and, in fact, would be incurred even if the control

system were shut down. Indirect costs include such categories as administrative charges, property

taxes, insurance, and capital recovery. A fixed cost function added to Figure 2.4 would be a

horizontal line appearing at the level of the fixed cost.
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Finally, direct and indirect annual costs can be offset by recovery credits, taken for materials

or energy recovered by the control system, which may be sold, recycled to the process, or reused

elsewhere at the site. An example of such credits is the by-product of controlling sulfur with an

FGD. As the lime or limestone reagent reacts with the sulfur in the exhaust gas stream, it becomes

transformed into CaSO4 - gypsum - which can be landfilled inexpensively (a direct cost) or collected

and sold to wallboard manufacturers (a recovery credit). These credits, must be calculated as net

of any associated processing, storage, transportation, and any other costs required to make the

recovered materials or energy reusable or resalable. Great care and judgement must be exercised

in assigning values to recovery credits, since materials recovered may be of small quantity or of

doubtful purity, resulting in their having less value than virgin material. Like direct annual costs,

recovery credits are variable, in that their magnitude is directly proportional to level of production.

A more thorough description of these costs and how they may be estimated is given in Section 2.4.

2.4 Financial Concepts

Engineers use a relatively small set of financial tools to assess alternative capital investments

and to justify their selections to upper management. Most often, the engineer’s purpose is to show

how the recommended investment will improve the company’s profitability. To a great extent, this

sort of decision is voluntary. Adding a new assembly line or changing from one type of gasket

material to another can be postponed or even rejected. This is not the case with pollution control

devices, which are necessary for compliance with State and Federal pollution standards and generally

have a deadline attached to their installation. Consequently, a decision to install device X may not

originate with the engineer. Instead, the process may actually work backward, relative to the

profitability motivated assessment of the engineer: the company’s environmental manager could

identify the need for pollution control equipment and then pass that decision on down to the

engineer.

When air quality regulations limit the source’s choice to only one control type, (e.g., when

the regulation specifies the technology to be used), this Manual serves two functions. First, it

ensures as complete a cost profile as possible has been taken for planning purposes. Second,

identification of the appropriate control technology does not include site-specific requirements that

need to be identified and costed out. This Manual provides engineering data for the proper sizing

and design specification of the control. When the environmental manager can choose between

alternative control technologies to achieve the same pollution abatement requirement, this Manual

performs a third function by “normalizing” the financial data from each alternative so that a well

reasoned selection can be made.

 To fully assess the cost of a pollution control device, the reader must understand several

financial analysis concepts. This section of the Manual discusses how these concepts fit together to

provide the analyst with insight into the cost and selection of alternative pollution control equipment.

Earlier editions of the Manual focused on the assessment of financial information from an engineering

perspective. However, EPA has learned the audience that uses the Manual extends well beyond
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the engineering discipline. Consequently, one of the key changes in this edition of the Manual

involves adjusting the financial and economic data to reach that broader audience. Wherever

earlier editions included engineering-specific names for financial terms, the engineering name remains,

but the technical term from a financial perspective has been included, as well.

Section 2.4.1 discusses how the value of money changes over time and how that led to the

derivation of interest and discount rates. Section 2.4.2 discusses the three kinds of interest rates

that are important to this Manual, and how to select the right interest rate for your analysis. Section

2.4.3 describes how persistent increases in the general level of prices (inflation) are handled in this

edition of the Manual and how to select and use a price index to translate the prices in this edition

(2001 dollars) to your future analyses.

2.4.1 Time Value of Money

The costs and benefits of an investment occur over an extended period of time rather than

at the moment of purchase. Consequently, financial analyses and benefit-cost studies must

accommodate the future effects of current decisions. If individuals placed the same value on a

dollar in the future that they placed on a dollar in the present, financial analysis could be simplified

to the summation of all future costs and incomes derived from the investment. However, as the old

saying goes: “A bird in the hand is worth two in the bush”. Not only could the promise of a future

dollar go unfulfilled, but the purchasing power of that dollar could decline. Furthermore, spending

the dollar in the present offers immediate rewards that have to be postponed if the dollar is withheld

until some future date. Therefore, individuals demand compensation to offset these concerns,

thereby increasing the value of a future payment to more than a dollar. Conversely, to take payment

today on a dollar promised for some time in the future, that same person will accept less than a full

dollar because they could enjoy its benefits immediately without the risks of inflation or nonpayment. This adjustment process is called the principle of the time value of money.

Adding more time to the delay of payment has a cumulative effect. For example, if an

investment required an adjustment of ten percent for each year the decision maker has to postpone

collection, a dollar would have to return $1.10 at the end of the first year ($1.00 times 110%), and

$1.21 for the decision maker to wait two years ($1.00 times 110% times 110%). The formula for

calculating the future value of a dollar invested today is:

F V i n = ×+ $ 1 (1 ) (2.2)

where FV is the future value of the dollar invested, i is the interest rate, and n is the number of

interest rate periods (typically years) before the investment has matured. Analogously, discounting

future payments to the present has the same “accumulative” effect. For example, if a person wanted

to be paid immediately, rather than wait one year for payment of a dollar, (at the same ten percent

interest rate used above), they would be willing to accept $0.92 ($1 divided by 110%). To be paid
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immediately for a dollar promised in two years, they would be willing to accept $0.83 ($1 divided

by [110% times 110%]). The present value (PV) of a future dollar realized in year n can be

calculated by the following formula:

( )

P V

i n = +

$ 1

1 (2.3)

2.4.2 Interest Rates

Analysts use the interest rate to estimate the time value of money. It can be thought of as a

return on investment or the cost of borrowing. A discount rate is an interest rate used to estimate

the value of current payments in lieu of waiting until some time in the future. There are three types

if interest rates that are important for this Manual: real, nominal, and social. The interest rate stated

by lending institutions is a nominal interest rate. It is the cost of borrowing and the lender will have

included in it a factor to account for anticipated changes in the general level of prices (inflation).

Removing the inflation adjustment from the nominal interest rate yields the real rate of interest - the

actual cost of borrowing. For example, say an investor borrows $100 at 10% from a bank for one

year. At the end of the year, the investor must pay back $110 dollars. However, if during that year

the inflation rate was six percent, the bank may receive $10 in interest, but it takes $106 to equal

the purchasing power of the $100 loaned out the previous year. Consequently, it only made $4 in

real interest. In equation form, the nominal interest rate (i) equals the real interest rate (i

r

) plus the

expected rate of inflation (pe):

i ir p e = + (2.4)

The interest rate employed in this Manual differs from that used in non-governmental

financial analyses. It represents a social interest rate established by the Office of Management and

Budget (OMB) for the comparison of public policy issues. Like a nominal or real interest rate, a

social rate of interest compensates for the foregone benefits associated with spending a dollar

today; but for slightly different reasons. Society as a whole has a collective rate of time preference

that equates the value of future benefits with an equivalent level of benefits enjoyed now. This rate

of preference (interest) would be the same as that which the market would assign to a completely

riskless investment. In practice, that riskless investment is represented by the long-term interest

rate on government bonds and securities. When determined in this manner, the social rate of

discounting should be appropriate for the evaluation of social projects. However, the process is

not that simple. Private funds bankroll public projects, and tax effects distort the true cost of

borrowing. Furthermore, government securities play a macroeconomic role in the maintenance of

1

This assumption introduces very little error.
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the overall economy, fluctuating with the supply of money to stimulate and impede spending as

conditions warrant. (For example, at this writing, the 30-year Treasury Bill rate of interest has

fluctuated between 4.5 and 5.5 percent within the last 30 days.) Therefore, the interest rate of

government securities may be a starting point, but they are not the same as the social discount rate.

In social terms, spending a dollar today on pollution control equipment means not making

investments that could have provided immediate improvements to social welfare. For instance, the

installation of a fabric filter baghouse on a coal-fired boiler will reduce the amount of particulate

matter (PM) emitted into the atmosphere, but the steel used to build the baghouse could have been

used to expand the factory or make ambulances or fire trucks. The social discount rate (a real

interest rate) measures these kinds of foregone alternative uses. Unlike the return on investment

for industry, which varies across industries (and even across firms within an industry), the foregone

social benefits associated with an investment remain the same across industries. Also, since a

change in the general level of prices affects everyone simultaneously, social rates of interest do not

account for inflation. OMB sets the social interest rate for governmental analyses, and it is currently

set at seven percent.1

When State, local, Tribal and other governmental authorities assess pollution control costs,

the seven percent interest rate employed in this Manual should produce estimations comparable to

those established by the Agency when it performs its own evaluations. However, the social rate of

interest is probably not appropriate for industry. When choosing between alternative air pollution

control devices, the industrial planner must not only take into consideration the costs of each

device, they must also understand how the cost of each device fits into the financial structure of

their business. Furthermore, a number of air regulations allow sources of pollution to petition for

extensions on deadlines, variances from the regulation, or exemption from installing control devices,

based upon the economic impact that equipment would have upon the source. In these cases, the

source may find it useful to apply their own interest rate to the calculation of control costs. Common

interest rates used by industry and accepted by the EPA for source petitions include the business’

current borrowing rate, the current prime rate, and other acceptable industrial rates of return.

Because industry may use an interest rate different from the EPA’s seven percent social rate for its

calculations, EPA facilitates the application of a customized interest rate in each chapter of the

Manual by providing detailed explanations of all formulas and by allowing users of the CO$T-AIR

spreadsheets and the Air Compliance Advisor program with the ability to change their interest

rates to suit their specific situation.

2.4.3 Prices and Inflation

The prices in the Manual were not standardized. Some chapters had prices developed in

the late 1990s, and other chapters had prices developed from as far back as 1985. Because these

differences were not explicitly discussed in these earlier additions, the Agency attempted to

1 www.epa.gov/ttn/catc/products.html#cccinfo 2 U.S. Office of Management and Budget, Circular A-94: Guidelines and Discount Rates for Benefit Cost

Analysis of Federal Programs. October 29, 1992. Prior to 1992, the OMB-determined social discount rate was

10%.
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standardize all prices in this sixth edition of the Manual to reduce the chance for analytical error.

Over the past two years, new values for equipment costs were developed by re-surveying affected

industries and vendors. This effort updated all the costs to at least 1990.

To develop the costs used in each of the chapters of this Manual, we surveyed the largest

possible group of vendors to determine an industry average price for each cost component. In

many cases, this involved contact with hundreds of vendors and the assimilation of large amounts

of data. In other cases, the pollution control equipment was supplied by only a few vendors, which

limited the independence of our models. And, in still other cases, the number of existing manufacturers

or the highly site-specific nature of their installation made it difficult for us to develop completely

unbiased prices for some components.

Updating costs is an on-going effort at EPA with a goal of standardizing all costs to one

base year. Each chapter of the Manual fully discloses the limitations of the costing information

found in that chapter. This allows the analyst may make any adjustment they deem necessary.

Real and nominal prices act in the same way as real and nominal interest rates. Nominal

prices are actual prices (i.e., the sticker price) and represent the value of a particular good at a

particular point in time. Real prices remove the effect of inflation. Adjusting nominal prices to real

prices involves establishing a base year for comparison purposes and then creating an adjustment

factor for each year’s prices relative to those in the base period. This adjustment factor is a price

index (PI) that can then be used to adjust nominal prices to an equivalent base year value; derived

through the following formula:

P I = price in given year

price in base year (2.5)

The Federal government and industry develop a variety of indexes tailored to the analysis

of specific price issues. The most recognizable of these indexes are the Consumer Price Index

(CPI) and the Producer Price Index (PPI), which investigate the change in prices across the entire

economy. However, these indexes are often too general for the specific needs of industry. For

pollution control purposes, OAQPS has developed and maintained the Vatavuk Air Pollution

Control Cost Indexes (VAPCCI) which provides an estimate of the change in prices for the purchase

of pollution control devices. The VAPCCI can be found on the Internet, at the OAQPS web site

and the Technology Transfer Network (TTN) web site. 1 Other indexes are also available from

industry and academic sources through the Internet, industry publications, trade journals, and

financial institutions. When choosing the right price index for your analysis, employ the “ABC

Principle” - that the index is Accepted by industry or financial institutions, it is Bias-free, and it is

Conservative. Bias is a statistical sampling or testing error caused by systematically favoring some

outcomes over others. It is a reflection of the judgement and opinion of the analyst but is not the

same thing as “professional judgement.” Bias most commonly appears as a “self-fulfilling prophesy”

that incorrectly validates an incorrect assumption on the analyst’s part. “Conservative” often gets

interpreted as “careful” - an intentional over- or under-estimation of the actual value to avoid the
2-15

negative effects of errors. Selection of an index employing these standards will most likely not

cause estimation error or be challenged by persons or agencies overseeing your work.

2.4.4 Financial Analysis

Once you have amassed all of the necessary information on the design, installation, operation,

and revenue of a possible capital investment, what does that tell you about how that investment will

affect the overall financial health of your firm? When comparing two different investment opportunities,

how do you distill all of these data into one comprehensive and coherent form so that an informed

decision can be made? This section deals with a number of the concepts and operations that will

help you answer these questions.

When alternative investment opportunities exist - or, for our purposes, when more than

one pollution control device may be used - the selection of the most appropriate alternative depends

on that alternative’s effect on the firm’s profitability. Consequently, financial analysts have created

a set of tools that provide insight into the potential financial consequences associated with an

investment. While no single tool works in all instances, applying several of these tools can provide

the financial manager with sufficient insight for a meaningful decision to be made.

Survey evidence indicates most analysts use more than one tool to make financial decisions.2

The remainder of this section discusses each of these tools and describes their relative strengths

and weaknesses. The most fundamental analysis needed is that of cash flow, which formalizes the

expected inflows of revenue and outflows of expenses associated with an investment alternative.

Pollution control devices do not typically generate revenues, but environmental cost accountants

still begin their evaluation of pollution control alternatives through cash flow analysis as a precursor

to the application of other tools.3 The next section discusses cash flow analysis and how it applies

to pollution control equipment. Probably the most important tool in the analyst’s arsenal is net

present value (NPV) since it acts as the foundation for a number of related analyses, including

benefits/cost analysis. The sections after cash flow analysis discuss these common financial analysis

tools. At the end of this chapter is an exercise that applies these concepts.

2.4.4.1 Cash Flow

Incomes and expenditures take place over the life of an investment (its planning horizon),

the amounts and timing of which constitute the cash flows of the project. Pollution control system

costing always includes expenditures but may not necessarily have incomes. For a control to be

income generating, it must reduce production cost (through fewer inputs or product reformulation),

or it must capture and recover a pollutant with recyclable characteristics (e.g., solvent recovery).

2 c.f., R.S. Kaplan and A.A. Atkinson, Advanced Management Accounting, 2nd ed., Engelwood Cliffs, NJ:

Prentice Hall, 1989.

3 U.S.Environmental Protection Agency, Environmental Cost Accounting for Capital Budgeting: A Benchmark

Survey of Management Accounting, #EPA742-R-95-005. Washington D.C., U.S. EPA Office of Pollution

Prevention and Toxics, 1995.
2-16

For illustration purposes, consider a hypothetical series of cash flows for a project with an operational

life of ten years. The data for this figure can be found in Table 2.1, below and will be used as the basis

for further financial discussion to follow.

Table 2.1: Hypothetical Cash Flow

Year

0 1 2 3 4 5 6 7 8 9 10

Expenses -250 -33 -30 -30 -30 -30 -30 -30 -32 -34 -39

Revenues 0 50 65 65 65 65 65 65 62 58 50

Net Cash Flow -250 17 35 35 35 35 35 35 30 24 11

Figure 2.5 is the cash flow information in graphical form. Expenses are solid red bars extending

below the line and incomes are solid blue bars above it. Figure 2.5 displays net cash flow - the difference

between incomes and expenses - as white bars on the graph. Typical of many equipment-related cash

flows, the greatest cost occurs at time zero, when the control is purchased and installed. In the first years

of operation, costs tend to be relatively high for operating and maintaining new equipment, due to

balancing and breaking-in conditions. After that, costs tend to drop and remain fairly constant until the

equipment approaches the end of its useful life, when operations and maintenance costs tend to rise

again. In the hypothetical example, the control generates income that offsets the costs of operations and

maintenance during the life of the equipment. This is not the typical situation for pollution control devices,

but is used in this hypothetical example because it allows us to illustrate other financial concepts.

2.4.4.2 Payback

Probably the simplest form of financial analysis is the payback period analysis, which simply

takes the capital cost of the investment and compares that value to the net annual revenues that investment

would generate. If net annual revenues are the same every year, the revenue can simply be divided into

the total capital investment to calculate the payback period. If the annual net revenues differ, then the

values need to be summed sequentially until the revenue exceeds total capital investment. The payback

decision rule is to select that investment with the shortest payback time. For instance, consider the

hypothetical example above. It has a capital investment of $250, and costs between $30 and $39 per

year to operate and maintain. The project also has an expected revenue generating capacity of between

$50 and $65 per year, for annual net revenues of between $11 and $35 per year. If all revenues and

expenses were equal, say to the steady state values of $65 and $30, respectively, the project would
2-17

have had a net annual revenue of $35 per year, suggesting the investment would “pay itself back”

in a little more than seven years ($250 divided by $35/yr). However, with uneven revenues and

costs, we have to sum the net revenues to determine when they exceed the initial capital cost - in

year eight, for the hypothetical example.

For most pollution control devices, payback analysis is not possible because the device

does not produce revenue. However, for a limited number of devices (FGD units, VOC recovery

devices, etc.), the device may produce a saleable product that produces a revenue stream. In

these cases, payback is a very limited tool and offers only the grossest of estimates with regard to

relative profitability, for the following reasons. First, payback ignores the magnitude and direction

of cash flows in all of the years in the planning horizon beyond the payback period. A project that

paid for itself in five years and produced revenues in all years after payback would have the same

payback value as one that paid back in the same time yet incurred huge losses in all subsequent

years!

Second, payback does not take into account the time value of money. Consider the example

above. Applying the social discount rate of seven percent, the capital investment will never pay for

itself. The net revenues for the ten years of the payback period in real “year zero” dollars are

$15.89, $30.57, $28.57, $26.70, $24.95, $23.32, $21.80, $17.46, $13.05, $5.59, respectively,

leaving the payback of investment short in real terms by more than 20 percent! 1

Next, even if the payback analysis is performed in real terms rather than in nominal terms,

Figure 2.5: Hypothetical Cash Flow Diagram

1 Apply the discounting factors found in Appendix A at the end of this chapter to derive these values.

2 The author invites the reader to construct the appropriate cash flow analyese spreadsheets as an exercise.

-300

-250

-200

-150

-100

-50

0

50

100

0 1 2 3 4 5 6 7 8 9 10

Year

Dollars

Expenses

Revenues

Net Cash Flow
2-18

the process still fails when comparing dissimilar projects. Payback considers all projects with

equal payback periods to be equally feasible, regardless of other characteristics. Referring again

to our hypothetical example, assume the equipment has a useful life of ten years and a payback

value of seven. Furthermore, consider a second alternative investment, again with a payback

period of seven years, but now the equipment has a useful life of only seven years. For simplicity

sake, assume all years for both investments have a net revenue of $35.2 While payback considers

both projects to be equal, the second project would actually cost more over the ten year period

because it would have to be replaced at the end of its useful life. Therefore, when using the

payback method, the analyst must be sure to standardize all of the alternatives to the length of the

longest planning horizon among the choices.

2.4.4.3 Net Present Value

To evaluate alternative pollution control devices, the analyst must be able to compare them

in a meaningful manner. Since different controls have different expected useful lives and will result

in different cash flows, the first step in comparing alternatives is to normalize their returns using the

principle of the time value of money discussed in section 2.4.1. The process through which future

cash flows are translated into current dollars is called present value analysis. When the cash flows

involve income and expenses, it is also commonly referred to as net present value analysis. In

either case, the calculation is the same: adjust the value of future money to values based on the

same (generally year zero of the project) , employing an appropriate interest (discount) rate and

then add them together. The decision rule for NPV analysis is that projects with negative NPVs

should not be undertaken; and for projects with positive NPVs, the larger the net present value,

the more attractive the project.

Derivation of a cash flow’s net present value involves the following steps:

• Identification of alternatives - for example, the choice between a fabric filter bag house

and an electrostatic precipitator (ESP) for removing particulate matter (PM) from a

flue gas stream.

• Determination of costs and cash flows over the life of each alternative - each of the

subsequent chapters of this Manual offer detailed costing information on specific air

pollution control devices and equipment, and the supplemental programs that support

the Manual, the Air Compliance Advisor (ACA) program, and the CO$T-Air

spreadsheets provide the same costing information electronically.

• Determination of an appropriate interest (discount) rate - for States, local, Tribal, and

other environmental management organizations, the EPA’s seven percent social discount

rate will probably be the most appropriate. Industrial users of this Manual should

consult with their financial officers and / or trade association for input. Section 2.3.2 in

this chapter, discusses some of the issues that govern industry’s choice of an appropriate

interest rate. If no private defendable discount rate can be identified, then the industry

analyst should fprobably use the Agency’s social rate for its own analyses.
2-19

• For each alternative: Calculate a discounting factor for each year over the life of the

equipment - For example, the EPA’s seven percent discount rate produces discount

factors of: 0.9346, 0.8734, 0.8163, 0.7629, and 0.7130 for the 1st, 2nd, 3rd, 4th, and

5th years of a piece of equipment’s life, respectively. Table A.1 in Appendix A displays

discount factors for interest rates from 5.5 to 15 percent, in half-percent increments

for 25 years.

• For each year’s cash flows, sum all incomes and expenses to determine the net

 cash flow for that year in nominal terms (see section 2.4.4.1).

• Multiply each years’ net cash flow by the appropriate discount factor.

• Sum the discounted net cash flows to derive the net present value.

• Compare the net present values from each alternative. Higher net present values

indicate better investment opportunities, relative to the other alternatives in the

decision set.

The net present value of a stream of cash flows over the life of an investment can be

calculated using equation 2.6:

( )

NPV NCF

i

i t t

t

n

= − +





 

 ∑  − = 0 1 1 (2.6)

where NCFtrepresents the net cash flow for year t, and i is the interest rate.

However, net present value analysis has limitations. Consider a hypothetical firm investigating

the installation of two alternative air pollution controls. One alternative would be to retrofit existing

equipment that has only five years of useful life remaining. The other strategy would be to salvage

existing equipment and replace it with new state-of-the-art components that pollute less. This

strategy would have a useful life of 20 years. If the retrofitting process has a higher net present

value, does that mean it is the better choice? Not necessarily, because the new equipment would

have to be purchased in five years, anyway, resulting in two sets of investments. If the new equipment

strategy had a higher NPV, would it be a better choice? Not necessarily, since the firm would have

to scrap existing equipment to install the new system. Furthermore, timing the installation of the

state-of-the-art controls with the replacement of the fully depreciated equipment postpones the

investment for five years (allowing it to decline in value in real terms) and avoids scrapping equipment

that is still useful.
2-20

One solution to the timing problem described above would be to extend the retrofit

alternative by adding 15 years’ worth of equipment replacement at the end of the retrofit period.

This would provide a more meaningful comparison, since it would be for similar time periods and

would also include the two expenditures for equipment necessary for the retrofit to occur. Another

solution would be to augment the information received from net present value analysis by employing

other financial analysis tools.

Calculating NPV is not difficult, but it does require some subjective decision-making by

the analyst to establish the appropriate discount rate or rates to apply. Since market forces typically

incorporate inflation adjustments into investment returns and borrowing costs, often the discount

rate is keyed to a standard reference rate. As with choosing a cost index, when choosing the

appropriate rate for a present value analysis, apply the “ABC Principle” - that the rate is Accepted,

Bias-free, and Conservative. As a general rule of thumb, the higher the discount rate, the less

expensive (more discounted) the present value will be. Therefore, the ideal discount rate would be

one that which matches the highest rate of return the firm can obtain by investing, or the lowest rate

at which it can borrow money, whichever is higher. If the analyst chooses a discount rate lower

than this “ideal” rate, then the net present value of the investment will appear high, relative to other

investment opportunities and the firm will run the risk of taking on an investment decision that has

been artificially inflated to make it more attractive. Conversely, if the discount rate chosen is too

high, then the net present value of the investment will appear unfavorable, relative to other investment

opportunities and the firm risks rejecting a potentially favorable investment. The same arguments

hold for pollution control decisions. When applying for a permit to build or operate a source of

pollution, the application of an inappropriate discount rate can lead to erroneous petitions for

waivers or variances. Therefore, the EPA pays particular attention to the interest / discount rates

used in operating and new source review permits.

2.4.4.4 Equivalent Uniform Annual Cash Flow and Annualization

When you purchase a new home, you do not immediately pay for the cost of construction,

maintenance, upkeep, and all of the other expenses you will incur over the next thirty years. Instead,

you probably borrowed the money from a lender to make the initial purchase and will pay annual

expenses as the occur. Net present value analysis allows us to evaluate between investments by

summing the present value of al future incomes and expenses, but that does not give us an insight

into the expected cash flows that will actually occur. So, instead of paying up front for all the future

costs of installation, maintenance, and operation of a pollution control device (NPV analysis),

what if the payments could be equalized (in constant net present value dollars) over the life of the

control? A common engineering tool for this sort of evaluation is called the equivalent uniform

annual cash flow (EUAC) method.[3] EUAC works best when the is only one capital investment

to incorporate and annual cash flows are constant or normalized to one year, typically year zero.

When comparing EUACs for competing systems, analysts should avoid comparing systems with

widely differing useful lives. Comparing EUACs for systems with lives differing by two or three

years may be reasonable, but beyond that range, comparisons become problematic. This Manual

does not recommend the use of EUAC by itself and only when the useful lives of alternative

controls are very similar.
2-21

Annualization is a process similar to EUAC but is not limited to constant cash flows. It

involves determining the net present value of each alternative equipment investment and then

determining the equal (in nominal terms) payment that would have to be made at the end of each

year to attain the same level of expenditure. In essence, annualization involves establishing an

annual “payment” sufficient to finance the investment for its entire life, using the formula:

( )

PMT NPV

i

i = − +





 





1 1 -n (2.7)

where PMT is the equivalent uniform payment amount over the life of the control, n, at an interest

rate, i. NPV indicates the present value of the investment as defined above in equation 2.6.

Engineering texts call this payment the capital recovery cost (CRC), which they calculate

by multiplying the NPV of the investment by the capital recovery factor (CRF):

CRC = × NPV CRF (2.8)

where CRF is defined according to the formula:

CRF = i (1 + i)

(1 + i) 1

n

n −





 



 (2.8a)

The CRF equation is a transformation of the PMT form in equation 2.7 and returns the same

information. Table A.2 in Appendix A lists the CRF for discount rates between 5.5 percent and 15

percent for annualization periods from one to 25 years.

2.4.4.5 Other Financial Analysis Tools

Many firms make investment decisions based upon the return on investment (ROI) of the

proposed capital purchase, rather than the magnitude of its net present value. In and of itself, the

ROI of an investment opportunity is of little use. For most pollution control investments, ROI

analysis does not provide much in the way of useful information because, like a payback analysis,

it must have positive cash flows to work properly. Calculated by dividing annual net income by the

investment’s capital cost, results in a percentage of the investment that is returned each year. The

decision rule one should apply for ROI analysis is if the resulting percentage is at least as large as

some established minimum rate of return, then the investment would be worth while. However,

different industries require different rates of return on investments, and even within an industry,

many different rates can be found. Analysts should consult with their firm’s financial officers or an

industrial association to determine what percentage would apply.
2-22

2

 Retrofit factors for specific applications (coal-fired boiler controls) have been developed. See references

[14] and [15].

In its simplest terms, internal rate of return (IRR) is a special case of net present value

analysis used to separate “good” investment opportunities from “bad”. In fact, many trade

organizations publish standard IRR rates for their particular industry. Projects with an IRR less

than the industry standard should be rejected as not providing sufficient income to make them

worth while; and projects with IRRs greater than the industry standard should be considered good

investment opportunities. NPV analysis is actually a series of current values, each one associated

with a different interest rate. For each interest rate chosen, the NPV of the same investment will

differ, increasing from a negative NPV at very low interest rates to a positive NPV at higher rates.

For each investment analyzed, the interest rate that results in a net present value of exactly zero is

the investment’s IRR. However, the application of IRR depends on having positive cash flows,

which again limits their use in analyzing pollution control alternatives; but, when there are positive

cash flows, IRR can provide useful information.

Twenty years ago, IRR was not easily used because there is no direct method for deriving

it. Instead, a project’s IRR had to be determined manually by an iterative process that could take

many hours to perform. Today, although the mathematical processes behind determining an IRR

have not changed, the convenience of computers have made it much easier to perform. Most

spreadsheet programs available today offer an IRR calculator within their financial tools. One of

the biggest problems with applying the internal rate of return methodology happens when the

relevant cash flow switches between positive and negative. When this occurs it is possible to

derive two or more different IRRs for the same project. When that happens, IRR is not applicable

for determining the acceptance of independent projects or for identifying the best investment risk

out of a group of potential projects.

The benefit-cost ratio of an investment is defined as the ratio of the discounted benefits to

the discounted cost, each evaluated at the same constant dollar rate - generally in year zero dollars.

With benefits in the numerator of the ratio, the criterion for accepting a project on the basis of the

benefit-cost ratio is whether or not the benefit-cost ratio is greater than or equal to one (i.e.,

benefits are greater than costs). However, as with the payback analysis and financial tools that rely

on incomes, benefit cost ratios can be problematic when applied to pollution control devices and

evaluated from a strict financial standpoint.

2.4.4.6 Economic versus Accounting Costs and Benefits

From a strict financial standpoint, many of the tools discussed above do not have an

application to industry when evaluating pollution control devices. This is not the case when the

analysis is being performed at the regulatory level. In these cases, all of the above tools can prove

beneficial - provided the analyst includes the appropriate set of costs and benefits (incomes).

Clearly, benefit cost analysis is a powerful regulatory tool for evaluating pollution control equipment

when assessed from an economic perspective, where the external costs and benefits of the device
2-23

can be more easily quantified. That is because economic costs are not the same as accounting

costs and economic benefits are not the same as accounting benefits.

Accounting costs are those costs included in a financial statement, ledger, or other accounting

record. They “account for” the transfer of funds between one entity and another. However, economic

costs are a much broader cost category. While they include accounting costs, other typical economic

costs a regulator may encounter when assessing pollution control issues would include external

costs - the cost incurred by others and not part of the accounting system of the firm. For example,

a boiler may produce large particles of unburned or partially burned fuels (soot). While the owner

of the boiler pays for the cost of that fuel through higher fuel costs, it does not include the cost of

cleaning that soot off of buildings and houses upwind of the plant. The owner also does not have to

pay for the asthma medicine for affected people who suffer respiratory problems because of that

soot, nor does it compensate them for the discomfort of that asthma attack. The first of these

economic costs is fairly straight forward and the economic literature has many examples of how to

approximate it. The second is a health issue that can also be approximated, although only after a

great deal of study and analysis. The third cost, compensation for discomfort, is a psychic cost and

is extremely difficult to quantify. However these and many other similar costs should be considered

by the regulatory analyst when assessing the usefulness of a pollution control alternative.

Similar to economic and accounting costs, accounting benefits (revenues, avoided

production costs) are a subset of economic benefits. Pollution control devices reduce pollution

and their installation reduces the occurrence of these economic costs, so the regulatory analyst

would include among the benefits of the device the avoided economic costs derived from the

pollutant. In other words, a soot free building does not have to pay for cleaning - and that avoided

cost is considered a benefit of the device. Similarly, not having an asthma attack is also considered

a benefit of the device. When we perform an economic assessment of a pollution control device,

we such as a bag house for capturing soot before it enters the atmosphere, we look at the benefit

of avoiding these economic costs.

When performing an economic assessment of a pollution control alternative, the analyst

can apply economic costs and benefits to payback (to establish a “social payback” period), net

present value analysis (for benefit cost analyses or to compare to the social discount rate through

ROI or IRR). Without going into detail on the science of economic assessment, the analyst should

be able to go back to each of the discussions above and readily see how to apply these simple

accounting tools to an economic study.

2.5 Estimating Procedure

The estimating procedure used in the Manual consists of five steps: (1) obtaining the

facility parameters and regulatory options for a given facility; (2) roughing out the control system

design; (3) sizing the control system components; (4) estimating the costs of these individual

components; and (5) estimating the costs (capital and annual) of the entire system.
2-24

2.5.1 Facility Parameters and Regulatory Options

Obtaining the facility parameters and regulatory options involves not only assembling the

parameters of the air pollution source (i.e., the quantity, temperature, and composition of the

emission stream(s)), but also compiling data for the facility’s operation. (Table 2.2 lists examples of

these.) We identify two facility parameters: intensive (with values independent of quantity or

dimensions) and extensive (size-dependent variables, such as the gas volumetric flow rate).

Regulatory options are usually specified by others (generally a regulatory authority) and

are often technology driven, typically defining allowable ways to achieve a predetermined emission

limit. These options range from “no control” to a requirement for the system to reach the maximum

control technically achievable. The options allowed will depend, firstly, on whether the emission

source is a point source (a stack or other identifiable primary source of pollution), a fugitive source

(a process leak or other source of pollution that could not reasonably pass through a stack, chimney,

vent, or other functionally-equivalent opening) or an area fugitive source (an unenclosed or partly

enclosed area, such as a storage pile or a construction site). Stacks are normally controlled by

“add-on” devices - the primary focus of this Manual. (However, some of these devices can be

used to control process fugitive emissions in certain cases, such as a fabric filter used in conjunction

with a building evacuation system.) Add-on pollution controls are normally used to meet a specified

emission limit, although in the case of particulate emissions, they may also be required to meet an

opacity level.

Table 2.2: Facility Parameters and Regulatory Options

Facility Parameters Regulatory Options

Intensive No control

Facility status (new or existing, location)

Gas Characteristics (temperature, pressure, ìAdd-onî devices

 moisture control) Emission limits

Pollutant concentration(s) and/or particle Opacity limits

 size distribution

Extensive Process modification

Facility capacity Raw material changes

Facility life Fuel substitution

Exhaust gas flow rate

Pollutant emission rate(s) Source/Feedstock pretreatment

Coal desulfurization

Wet dust suppression
2-25

2.5.2 Control System Design

Roughing out the control system design involves deciding what kinds of systems will be

priced (a decision that will depend on the pollutants to be controlled, exhaust gas stream conditions,

and other factors), and what auxiliary equipment will be needed. When specifying the auxiliary

equipment, several questions need to be answered:

• What type of hood (if any) will be needed to capture the emissions at the source?

• Will a fan be needed to convey the exhaust through the system? Does the system

require any other auxiliary equipment, such as a pump to inject liquids into the

exhaust gas stream?

• Does the exhaust stream pose any hazard to the materials of the hoods, ducts,

fans, and other auxiliary equipment? Is the exhaust caustic or acidic? Is it abrasive?

Does the treatment of the exhaust render it caustic or acidic?

• Does the exhaust stream require any pre-treatment (e.g., cyclone or another precleaner) before it enters the control device?

• Will the captured pollutants be disposed of or recycled? How will this be done?

• Can the on-site capacity (e.g., utilities, stockpiling space) accommodate the added

requirements of the control system?

The kinds of auxiliary equipment selected will depend on the answers to these and other

site-specific questions. However, regardless of the source being controlled, each system will likely

contain, along with the control device itself, the following auxiliaries:

 Hood, or other means for capturing the exhaust;

 Ductwork, to convey the exhaust from the source to, through, and from the control

system;

 Fan system (fan, motor, starter, inlet/outlet dampers, etc.), to move the exhaust

through the system and to prevent pressure drop within the system due to the

pollution control system;

 Stack, for dispersing the cleaned gas into the atmosphere.
2-26

2.5.3 Sizing the Control System

Once the system components have been selected, they must be sized. Sizing is probably

the most critical step because the assumptions made in this step will more heavily influence capital

investment than any other. Table 2.3 lists examples of these parameters. Also listed in Table 2.3 are

general parameters which must be specified before the purchased cost of the system equipment

can be estimated. Note that, unlike the control device parameters, these parameters may apply to

any kind of control system. They include materials of construction (which may range from carbon

steel to various stainless steels to fiberglass- reinforced plastic), presence or absence of insulation,

and the economic or useful life of the system. As indicated in Section 2.4.2, this last parameter is

required for estimating the annual capital recovery costs. The lifetime not only varies according to

the type of the control system, but with the severity of the environment in which it is installed. Each

of the control-specific chapters of this Manual and the Air Compliance Advisor (ACA) program

include a comprehensive list of the specific parameters that must be considered for each device.

Table 2.3: Examples of Typical Control Device Parameters [11]

General Device-Specific

Material of construction: carbon steel Gas-to-cloth ratio (ìcritical parameterî): 3.0 to 1

Insulated? Yes Pressure drop: 6.0 in w.c. (inches water column)

Economic life: 20 years Construction: standard (vs. custom)

Redundancya: none Duty: continuous (vs. intermittent)

Filter type: shaker

Bag material: polyester, 16-oz.

a Refers to whether there are any extra equipment items installed (e.g., fans) to function in case the basic items become

inoperative, so as to avoid shutting down the entire system.

2.5.4 Estimating Total Capital Investment

2.5.4.1 General Considerations

The fourth step is estimating the purchased equipment cost of the control system equipment.

As discussed in Section 2.2, total direct cost includes purchased equipment cost, which in turn, is

the sum of the base equipment cost (control device plus auxiliaries), freight, instrumentation, and

sales tax. The values of these installation factors depend on the type of the control system installed

and are, therefore, listed in the individual Manual chapters dedicated to them. These costs are

available from this Manual for the most commonly used add-on control devices and auxiliary

equipment, with each type of equipment covered in a separate chapter (see Table of Contents and

the discussion in Chapter 1). Total Direct Cost also includes Direct Installation Cost, which contains

many of the cost categories included in Section 2 of this Manual, Generic Equipment and Devices.
2-27

Most of the costs in each of the subsequent sections of this Manual were derived from

data obtained from control equipment vendors. For many control devices there are many vendors,

which allowed us to offer highly representative costs, based upon the average cost of components

submitted by those vendors in response to Agency survey efforts. [7] For items that are mass

produced or “off-the-shelf” equipment, vendors provided a written quotation listing their costs,

model designations, date of quotation, estimated shipment date, and other information. For other

equipment there are not many vendors or we did not receive many responses to our inquiries. In

these cases, we offer costs that are as representative as possible and the cost discussion in that

control’s particular chapter offers an appropriate caveat to the analyst.

For some controls, no amount of vendor data would have made our cost numbers more

accurate because the control in question is either so large or so site-specific in design that suppliers

design, fabricate, and construct each control according to the specific needs of the facility. For

these devices (specifically, SCR reactors and FGD units), the Manual deviates from its standard

approach of providing study level costs and, instead, provides a detailed description of the factors

that influence the TCI for the analyst to consider when dealing with a vendor quotation. For these

kinds of controls, the vendor may still give quotations, but will likely take much longer to do so and

may even charge for this service, to recoup the labor and overhead expenses of his estimating

department. When performing a cost analysis, the cost of the quotation is a part of the TCI.

Generally, vendor quotes are “F.O.B.” (free-on-board) the vendor, meaning that no taxes,

freight, or other charges are included. For these equipment, the analyst must take care to identify

and include the cost of transportation, taxes, and other necessary charges in the TCI (see Figure

2.1). The costs of freight, instrumentation, and sales tax are calculated differently from the direct

and indirect installation costs. These items are developed by multiplying the base equipment cost

(F.O.B. the vendor) by an industry-accepted factor. Unlike other estimating factors that differ

from system to system, installation factors are essentially equal for all control systems. Table 2.4,

below, displays values for these factors.

Table 2.4: Cost Ranges for Freight, Sales Tax, and Instrumentation

% of Total Equipment Cost, FOB

Cost Range Typical

Freight 0.01 ñ 0.10 0.05

Sales Tax 0 ñ 0.08 0.03

Instrumentation 0.05 ñ 0.30 0.10
2-28

To some extent, the application of an appropriate factor requires the subjective application

of the analyst’s best judgement. For example, the range in freight costs is, in part, a function of the

distance between the vendor and the site. The lower end of the factor range represents shorter

distance deliveries, while the upper end of the range would reflect freight charges to remote locations

such as Alaska and Hawaii.[6] The sales tax factors simply reflect the range of local and state tax

rates currently in effect in the United States.[8] In some locations, and for many institutional and

governmental purchases, sales taxes do not apply; (hence the zero value at the low end of the sales

tax factor range). The range of instrumentation factors is also quite large. For systems requiring

only simple continuous or manual control, the lower factor would apply. However, if the control is

intermittent and/or requires safety backup instrumentation, the higher end of the range would be

applicable.[6] Finally, some “package” control systems (e.g., incinerators covered in Chapter 3)

have built-in controls, with instrumentation costs included in the base equipment cost. In those

cases, the instrumentation factor to use would, of course, be zero.

2.5.4.2 Retrofit Cost Considerations

Probably the most subjective part of a cost estimate occurs when the control system is to

be installed on an existing facility. Unless the original designers had the foresight to include additional

floor space and room between components for new equipment, the installation of retrofitted pollution

control devices can impose an additional expense to “shoe-horn” the equipment into the right

locations. For example, an SCR reactor can occupy tens of thousands of square feet and must be

installed directly behind a boiler’s combustion chamber to offer the best environment for NOx

removal. Many of the utility boilers currently considering an SCR reactor to meet the new federal

NOx limits are over thirty years old - designed and constructed before SCR was a proven technology

in the United States. For these boilers, there is generally little room for the reactor to fit in the

existing space and additional ductwork, fans, and flue gas heaters may be needed to make the

system work properly.

To quantify the unanticipated additional costs of installation not directly related to the

capital cost of the controls themselves, engineers and cost analysts typically multiply the cost of the

system by a retrofit factor. The proper application of a retrofit factor is as much an art as it is a

science, in that it requires a good deal of insight, experience, and intuition on the part of the analyst.

The key behind a good cost estimate using a retrofit factor is to make the factor no larger than is

necessary to cover the occurrence of unexpected (but reasonable) costs for demolition and

installation. Such unexpected costs include - but are certainly not limited to - the unexpected

magnitude of anticipated cost elements; the costs of unexpected delays; the cost of re-engineering

and re-fabrication; and the cost of correcting design errors.

The magnitude of the retrofit factor varies across the kinds of estimates made as well as

across the spectrum of control devices. At the study level, analysts do not have sufficient information

to fully assess the potential hidden costs of an installation. At this level, a retrofit factor of as much

as 50 percent can be justified. Even at detailed cost level (± 5 percent accuracy), vendors will not

be able to fully assess the uncertainty associated with a retrofit situation and will include a retrofit
2-29

factor in their assessments. For systems installed at the end of the stack, such as flares, retrofit

uncertainty is seldom a factor. In these cases, an appropriate retrofit factor may be one or two

percent of the TCI. In complicated systems requiring many pieces of auxiliary equipment, it is not

uncommon to see retrofit factors of much greater magnitude can be used.

Since each retrofit installation is unique, no general factors can be developed. A general

rule of thumb as a starting point for developing an appropriate retrofit factor is: The larger the

system, the more complex (more auxiliary equipment needed), and the lower the cost level (eg.

study level, rather than detailed), the greater the magnitude of the retrofit factor. Nonetheless,

some general information can be given concerning the kinds of system modifications one might

expect in a retrofit:

1. Auxiliary equipment. The most common source of retrofit-related costs among

auxiliary equipment types comes from the ductwork related costs. In addition, to

requiring very long duct runs, some retrofits require extra tees, elbows, dampers,

and other fittings. Furthermore, longer ducts and additional bends in the duct cause

greater pressure drop, which necessitates the upgrading or addition of fans and

blowers.

2. Handling and erection. Because of a “tight fit,” special care may need to be taken

when unloading, transporting, and placing the equipment. This cost could increase

significantly if special means (e.g., helicopters) are needed to get the equipment on

roofs or to other inaccessible places.

3. Piping, Insulation, and Painting. Like ductwork, large amounts of piping may be

needed to tie in the control device to sources of process and cooling water, steam,

etc. Of course, the more piping and ductwork required, the more insulation and

painting will be needed.

4. Site Preparation. Site preparation includes the surveying, clearing, leveling, grading,

and other civil engineering tasks involved in preparing the site for construction.

Unlike the other categories, this cost may be very low or zero, since most of this

work would have been done when the original facility was built. However, if the

site is crowded and the control device is large, the size of the site may need to be

increased and then site preparation may prove to be a major source of retrofitrelated costs.

5. Off-Site Facilities. Off-site facilities should not be a major source of retrofit costs,

since they are typically used for well-planned activities, such as the delivery of

utilities, transportation, or storage.
2-30

6. Engineering. Designing a control system to fit into an existing plant normally requires

extra engineering, especially when the system is exceptionally large, heavy, or

utility-consumptive. For the same reasons, extra supervision may be needed when

the installation work is being done.

7. Lost Production. The shut-down for installation of a control device into the system

should be a well-planned event. As such, its cost should be considered a part of

the indirect installation cost (start-up). However, unanticipated problems with the

installation due to retrofit-related conditions can impose significant costs on the

system. (For example, consider a pollution control device to be installed in the

middle of a stack. After shutting down the plant, removing a section of the stack

reveals it has been worn too thin to weld the device to it, necessitating the fabrication

and replacement of a major portion of the stack.) The net revenue (i.e., gross

revenue minus the direct costs of generating it) lost during this unanticipated shutdown

period is a bonafide retrofit expense.

Due to the uncertain nature of many estimates, analysts may want to add an additional

contingency (i.e., uncertainty) factor to their estimate. However, the retrofit factor is a kind of

contingency factor and the cost analyst must be careful to not impose a double penalty on the

system for the same unforseen conditions. Retrofit factors should be reserved for those items

directly related to the demolition, fabrication, and installation of the control system. A contingency

factor should be reserved (and applied to) only those items that could incur a reasonable but

unanticipated increase but are not directly related to the demolition, fabrication, and installation of

the system. For example, a hundred year flood may postpone delivery of materials, but their arrival

at the job site is not a problem unique to a retrofit situation.

2.5.5 Estimating Annual Costs

Determining the total annual cost is the last step in the estimating procedure. As mentioned

in Section 2.3 the TAC is comprised of three components—direct and indirect annual costs and

recovery credits. Unlike the installation costs, which are factored from the purchased equipment

cost, annual cost items are usually computed from known data on the system size and operating

mode, as well as from the facility and control device parameters.

Following is a more detailed discussion of the items comprising the total annual cost.

(Values/factors for these costs are also given in the chapters for the individual devices.)

2.5.5.1 Raw Materials

Raw materials are generally not required with control systems. Exceptions would be

chemicals used in gas absorbers or venturi scrubbers as absorbents or to neutralize acidic exhaust

gases (e.g., hydrochloric acid). Chemicals may also be required to treat wastewater discharged by

scrubbers or absorbers before releasing it to surface waters. If the source uses the same raw
2-31

materials for production, the analyst must be careful to include only are only those costs that are

attributable to the raw materials needed by the control device. Quantities of chemicals required are

calculated via material balances, with an extra 10 to 20% added for miscellaneous losses. Costs

for chemicals are available from the Chemical Marketing Reporter and similar publications.

2.5.5.2 Labor

The amount of labor required to operate and maintain a pollution control system depends

on its size, complexity, level of automation, and operating mode (i.e., batch or continuous). The

labor is usually figured on an hours-per-shift basis. As a rule, though, data showing explicit

correlations between the labor requirement and capacity are hard to obtain. One non-linear

correlation found in the literature is shown below:[11]

L

L

V

V

y

2

1

2

1

= 



 



 (2.9)

where

L1

, L2 = labor requirements for systems 1 and 2

V1, V2 = capacities of systems 1 and 2 (as measured by the gas flow rate, for instance)

 y = 0.2 to 0.25 (typically)

The exponent in Equation 2.9 can vary considerably. Conversely, in many cases, the amount of

operator labor required for a system will be approximately the same regardless of its size.

Maintenance labor is calculated in the same way as operating labor and is influenced by

the same variables. The maintenance labor rate, however, is normally higher than the operating

labor rate, mainly because more skilled personnel are required. Many cost studies use a flat ten

percent premium over the operations labor wage rate for maintenance labor costs.[12] A certain

amount must also be added to operating labor to cover supervisory requirements. Generally, cost

estimates include supervisory labor as a flat fifteen per cent of the operating labor requirement.[12]

To obtain the annual labor cost, multiply the operating and supervisory labor requirements(laborhr/operating-hr) by the respective wage rates (in $/labor-hr) and the system operating factor (number

of hours per year the system is in operation). Wage rates also vary widely, depending upon the

source category, geographical location, etc. These data are tabulated and periodically updated by

the U.S. Department of Labor, Bureau of Labor Statistics, in its Monthly Labor Review and in

other publications. This Manual uses labor rates that are representative of the industries at the

national level. The supplemental CO$T-AIR spreadsheets and the Air Compliance Advisor (ACA)

incorporate these rates as defaults. For regulatory cost assessments, these wages (adjusted for

inflation through an appropriate cost index) should be adequate for study level purposes. For

industry users of this manual, the CO$T-AIR spreadsheets and the ACA can be customized to

include site-specific labor rates and improve the accuracy of the analysis.
2-32

Finally, note that the wage rates used by the Manual and its supplemental programs are

base labor rates, which do not include payroll and plant overhead. Wages found in reports from

the Bureau of Labor Statistics or some other reliable source may or may not include overhead.

The analyst must be careful to apply overhead and other wage adjustment factors uniformly. (See

the discussion on Overhead, below.)

2.5.5.3 Maintenance Materials

Maintenance also requires maintenance materials—oil, other lubricants, duct tape, etc.,

and a host of small tools. The costs for these items can be figured individually, but since they are

normally so small, they are usually factored from the maintenance labor. Reference [11] suggests a

factor of 100% of the maintenance labor to cover the maintenance materials cost.

2.5.5.4 Utilities

This cost category covers many different items, ranging from electricity to compressed air.

Of these, only electricity is common to all control devices, where fuel oil and natural gas are

generally used only by incinerators; water and water treatment, by venturi scrubbers, quenchers,

and spray chambers; steam, by carbon adsorbers; and compressed air, by pulse-jet fabric filters.

Techniques and factors for estimating utility costs for specific devices are presented in their respective

sections. However, because nearly every system requires a fan to convey the exhaust gases to and

through it, a general expression for computing the fan electricity cost (Ce

) is given here:[6]

Ce = 0 746

6356

. Q P s p ∆ θ e

η (2.10)

where

Q = gas flow rate (actual ft3 /min, acfm)

P = pressure drop through system (inches of water, column) (Values for P are

given in the chapters covering the equipment items.)

s = specific gravity of gas relative to air (1.000, for all practical purposes)

= operating factor (hr/yr)

 = combined fan and motor efficiency (usually 0.60 to 0.70)

pe = electricity cost ($/kwhr)

A similar expression can be developed for calculating pump motor electricity requirements.

2.5.5.5 Waste Treatment and Disposal

Though often overlooked, there can be a significant cost associated with treating and/or

disposing of waste material captured by a control system that neither can be sold nor recycled to

the process. Liquid waste streams, such as the effluent from a gas absorber, are usually processed
2-33

before being released to surface waters. The type and extent of this processing will, of course,

depend on the characteristics of the effluent. For example, the waste can first be sent to one (or

more) clarifiers, for coagulation and removal of suspended solids. The precipitate from the clarifier

is then conveyed to a rotary filter, where most of the liquid is removed. The resulting filter cake is

then disposed of, via landfilling, for example.

The annual cost of this treatment can be relatively high—$1.00 to $2.00/thousand gallons

of treated material or more.[13] The (non-hazardous) solid waste disposal costs (via landfilling,

for example) typically would add another $20 to $30/ton of disposed material.[14] This, however,

would not include transportation to the disposal site. Disposal of hazardous waste (which may not

be landfilled) can be much more costly—$200 to $300/ton or more. More information on these

technologies and their costs is found in References [13] and [14].

2.5.5.6 Replacement Materials

The cost or maintenance materials is a component of the operations and maintenance

function of the system and is not the same thing as the system’s replacement materials cost, which

is the cost of such items as carbon (for carbon absorbers), bags (for fabric filters) and catalyst (for

catalytic incinerators), along with the labor for their installation. Because replacement materials last

for more than a year but are consumed by the system, they cannot be included in the general

maintenance and operations costs, which are annual in nature. Instead, these costs must be annualized

by first determining the life of the material, then applying the appropriate capital recovery factor to

that cost to determine its annualized value (see section 2.4.5.3, above). The annual cost of the

replacement materials is a function of the initial parts cost, the parts replacement labor cost, the life

of the parts, and the interest rate, as follows:

CRC = C + C CRF p p pl p ( ) (2.11)

where

CRC

p = capital recovery cost of replacement parts ($/yr)

 C

p = initial cost of replacement parts, including sales taxes and freight ($)

 Cpl = cost of parts-replacement labor ($)

 CRF

p = capital recovery factor for replacement parts (defined in Section 2.3).

The useful life of replacement materials is generally less than the useful life of the rest of the

control system - typically two to five years. Consequently, the annualization of the system’s

replacement materials must be done separately from the annualization of the control system itself.

Furthermore, the annualized cost of the pollution control system should be performed net of the

cost of the replacement materials needed at the beginning of operations to prevent double counting.

Replacement materials labor will vary, depending upon the amount of the material, its workability,

accessibility of the control device, and other factors. The cost of replacement materials labor

should be included in the cost of the materials before annualization.
2-34

2.5.5.7 Overhead

This cost is easy to calculate, but often difficult to comprehend. Much of the confusion

surrounding overhead is due to the many different ways it is computed and to the several costs it

includes, some of which may appear to be duplicative.

There are, generally, two categories of overhead, payroll and plant. Payroll overhead

includes expenses directly associated with operating, supervisory, and maintenance labor, such as:

workmen’s compensation, Social Security and pension fund contributions, vacations, group

insurance, and other fringe benefits. Some of these are fixed costs (i.e., they must be paid regardless

of how many hours per year an employee works). Payroll overhead is traditionally computed as a

percentage of the total annual labor cost (operating, supervisory, and maintenance).

Conversely, plant (or “factory”) overhead accounts for expenses not necessarily tied to

the operation and maintenance of the control system, including: plant protection, control laboratories,

employee amenities, plant lighting, parking areas, and landscaping. Some estimators compute

plant overhead by taking a percentage of all labor plus maintenance materials [11], while others

factor it from the total labor costs alone.[2]

For study estimates, it is sufficiently accurate to combine payroll and plant overhead into a

single indirect cost. This is done in this Manual. Also, overhead is factored from the sum of all labor

(operating, supervisory, and maintenance) plus maintenance materials, the approach recommended

in reference [11]. The factors recommended therein range from 50 to 70% [11] An average value

of 60% is used in this Manual. For more accurate assessments by industrial users of the Manual,

the CO$T-AIR spreadsheets and the ACA allow for customization of these factors.

2.5.5.8 Property Taxes, Insurance, and Administrative Charges

These three indirect operating costs are factored from the system total capital investment,

at 1, 1, and 2%, respectively. Property taxes and insurance are self-explanatory. Administrative

charges covers sales, research and development, accounting, and other home office expenses. (It

should not be confused with plant overhead, however.) For simplicity, the three items are usually

combined into a single, 4% factor. This is standard approach used in in all OAQPS cost analyses

and by this Manual.

2.6 Example

All-American Electrical (AAE) 1 operates a single 600 MWe tangentially fired high sulfur

bituminous coal-fired boiler to produce steam to power it generators. It emits an uncontrolled

90,000 tons of sulfur per year, and because it is planning on a major renovation, it must install

devices to reduce its sulfur emissions to less than 900 tons per year (99 percent removal efficiency).

After careful study of the available technologies, AAE has determined that either a wet limestone
2-35

flue gas desulfurization (FGD) unit or a wet buffered lime FGD would be the most logical choice to

achieve such a high removal rate. For simplification purposes we will assume either device would

have an operating life of five years, after which the scrubbers could be sold as scrap for a salvage

value of about $500,000. Table 2.5, below, displays the capital and annual costs associated with

each of the alternative devices.

Table 2.5: Capital, O&M, and Parasitic Energy Costs of Alternative FGD Controls

Wet Limestone FGD Wet Buffered Lime FGD

Capital Cost $200,000,000 $180,000,000

Annual O&M Costs

 Fixed O&M Costs a $2,000,000 $2,100,000

 Reagent $1,200,000 $3.750,000

 Auxiliary Power $1,300,000 $1,150,000

Annual Gypsum Sales $1,200,000 $600,000

Parasitic Power b $950,000 $375,000

Salvage Value (after 10 years) $500,000 $500,000

a Estimated at 1% of capital cost

b In many systems, the insertion of a pollution control device causes the system to lose productive capacity. This can be

caused by the device creating obstructions in the flue, temperature losses that create imbalances, or other physical changes

that affect performance. these losses are collectively termed “parasitic power” losses.

From the information in Table 2.5, neither device can be shown to be superior to the

other. It costs $20 million less to install a wet buffered lime scrubber, but a buffered lime FGD

would cost over three times as much each year for the purchase of the lime, relative to the cost

of the reagent in a limestone FGD. Each FGD has similar fixed O&M costs, but because a

buffered lime FGD uses much less reagent, it requires less power to run - about half the power

demand and about 40 percent of the productive loss of the limestone FGD. While these factors

indicate

the wet buffered lime FGD may be a better alternative, the use of less reagent also means the

production of less gypsum by-product - for about half the expected revenue generating

capability of a limestone system. To make our selection, we must rely upon our financial tools.

The exercise does not lend itself to a payback analysis, even though there are revenues

to be generated from the sale of the scrubber’s byproduct. So long as annual costs exceed

annual revenues, payback will not an alternative because there will be no net revenue to help

offset the capital costs of the project. Furthermore, even if one were to ignore the cost

component of the cash flow, the revenues from most pollution control devices are so low that

their payback values are meaningless. For instance, the limestone and buffered lime scrubbers in

this exercise have a simple payback (without considering costs) of 167 and 300 years,
2-36

respectively. Consequently, the analyst must look to the more sophisticated tools available: cash

flow analysis and net present value.

Table 2.6 shows the hypothetical cash flows from each alternative control in nominal dollars.

You will notice that the cost for O&M and the revenues from selling the gypsum by-product are

constant over time. That is because we have ignored any inflation rate change in prices and have

created our cash flow analysis in real terms. This is the preferred way to approach this kind of

analysis, since it relies on the most accurate information available (current prices) and does not try

to extrapolate those prices into the future. Because we will perform our cash flow analysis in real

dollars, we must use the real interest rate to determine net present values. We will assume AAE

can borrow funds at will at a nominal interest rate of nine percent and that informed sources expect

the inflation rate over the relevant range to be, on average, four percent. Consequently, the real

rate of interest is (nine percent minus four percent) five percent. Using real dollars for revenues

and costs and then using nominal interest rates for our discounting factors (nine percent) would

have led to an understatement of the net present value of the projects, making them appear less

beneficial to AAE.

Translating the costs in each future year to year zero values means applying the factors

found in Table A.1 from Appendix A. From the 10 percent column, we applied the factors 0.90909,

0.82645, 0.75131, 0.68301, and 062092, respectively, to the net costs of years 1, 2, 3, 4, and 5

to determine the year zero costs, and then sum all of the values to derive the net present value for

each control alternative. Based upon the information developed in the cash flow analysis and the

NPV calculation, which control device is the best one for AAE to install? The answer is still not

evident! Even with a twenty million dollar capital cost savings, the net present value of the wet

buffered lime FGD is only about a half million dollars more expensive than the wet limestone FDG!

This is a function of the other cash flow components - the higher operating cost of the buffered lime

system versus the higher revenue generating capacity of the limestone FGD, both of which work to

almost completely eliminate the capital cost advantage of the buffered lime scrubber. Clearly,

relying on just the sticker price of the two units could have driven us to a potentially bad decision.

So now what? Payback analysis does not offer any help, (nor will IRR, which also relies upon a

positive net cash flow to work). Cash flow analysis tells us that, within our study-level estimation

range, the two devices are almost identical. That in and of itself is important information, because

the environmental engineer can be fairly certain that whichever device they choose, the affect of

that choice on his company will be about the same. That leaves them free to look at other

considerations: Twice as much limestone means twice as much storage and twice as much stockpiling

of the gypsum by-product. Is that an important factor? Limestone is more caustic than buffered

lime, but it takes less equipment to operate the system. Should the engineer opt for simplicity in

design or potentially higher rates of repair? These are the sort of considerations that can now come

into play in making a decision, now that the relative values of each device has been determined.
2-37

This does not mean that our process has failed. Far from it. If our input assumptions have

been made correctly, then we have determined that from a cost standpoint, there does not seem to

be an appreciably different risk to choosing one device over the other. However, other considerations

may play a roll in making the choice clearer. For instance, the limestone scrubber will produce

about twice as much gypsum as the wet buffered lime scrubber. Does the storage, transportation,

or marketability of that amount of gypsum create a problem? Likewise, it takes about three times

as much limestone to remove the same amount of sulfur, relative to the amount of lime needed, but

the lime costs between five and seven times as much as the limestone. Do these considerations

clarify the choice? Finally, the power demands for each device differ significantly, both in terms of

operation and in lost productive capacity. Perhaps these considerations will make one device

more attractive to the firm. The bottom line is that there is no clear-cut “cookbook” process

through which the analyst will be able to make the right informed decision each time, and the

formalized costing methodology employed by the Manual is only a part of that process. However,

if the Manual’s methodology is followed rigorously and in an unbiased manner, then the analyst can

feel safe about the ROM-level cost of his alternative projects and can then move on to a more

formal cost determination with the help of an engineering or consulting firm.

2.6: Cash Flow Analyses Exercise (in thousands of dollars)

0 1 2 3 4 5 6 7 8 9 10

Limestone Scrubber

Income

Gypsum Sales 0 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200

Salvage Value 0 0 0 0 0 0 0 0 0 0 500

Expenses

Capital Investment 200,000 0 0 0 0 000000

Annual O&M Costs 0 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500

Parasitic Power 0 950 950 950 950 950 950 950 950 950 950

Net Annual Cost -200,000 -4,250 -4,250 -4,250 -4,250 -4,250 -4,250 -4,250 -4,250 -4,250 -3,750

Present Value -200,000 -4,048 -3,855 -3,671 -3,496 -3,330 -3,171 -3,020 -2,877 -2,740 -2,302

NPV -232,510

Buffered Lime Scrubber

Income

Gypsum Sales 0 600 600 600 600 600 600 600 600 600 600

Salvage Value 0 0 0 0 0 0 0 0 0 0 500

Expenses

Capital Investment 180,000 0 0 0 0 000000

Annual O&M Costs 0 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000

Parasitic Power 0 375 375 375 375 375 375 375 375 375 375

Net Annual Cost -180,000 -6,775 -6,775 -6,775 -6,775 -6,775 -6,775 -6,775 -6,775 -6,775 -6,275

Present Value -180,000 -6,452 -6,145 -5,852 -5,574 -5,308 -5,056 -4,815 -4,586 -4,367 -3,852

NPV -232,008
2-38

References

[1] Perry, Robert H., and Chilton, Cecil H., Perry’s Chemical Engineers’ Handbook (Fifth

Edition), McGraw-Hill, New York, 1973, pp. 25-12 to 25-16.

[2] Humphries, K. K. and Katell, S., Basic Cost Engineering, Marcel Dekker, New York,

1981, pp. 17-33.

[3] Grant, E.L., Ireson, W.G., and Leavenworth, R.S., Principles of Engineering Economy,

Sixth Edition, John Wiley & Sons, New York, 1976.

[4] CEIS (OAQPS) Cost Guidance Memo #2: “Implementing OMB Circular A-94:

Guidelines and Discount Rates for Benefit Cost Analysis of Federal Programs,” March

18, 1993.

[5] Scheraga, Joel D., Draft of “Supplemental Guidelines on Discounting in the Preparation of

Regulatory Impact Analyses”, Office of Policy, Planning and Evaluation, U.S. EPA,

March 31, 1989.

[6] Vatavuk, W.M. and Neveril, R.B., “Estimating Costs of Air-Pollution Control Systems—

Part I: Parameters for Sizing Systems,” Chemical Engineering, October 6, 1980, pp. 165-

168.

[7] Pollution Equipment News 1996 Buyer’s Guide, Rimbach Publishing, Pittsburgh, 1996.

[8] Internal Revenue Service, Form 1040, 1985.

[9] Shattuck, D.M., et al., Retrofit FGD Cost-Estimating Guidelines. Electric Power

Research Institute, Palo Alto, CA (CS-3696, Research Project 1610-1), October 1984.

[10] Kaplan, N., et al., “Retrofit Costs of SO2

 and NOx Control at 200 U.S. Coal-Fired

Power Plants,” Pittsburgh Coal Conference, 1990.

[11] Peters, M.S. and Timmerhaus, K.D., Plant Design and Economics for Chemical Engineers

(Third Edition), McGraw-Hill, New York, 1980.

[12] Vatavuk, W.M. and Neveril, R.B., “Estimating Costs of Air Pollution Control Systems—

Part II: Factors for Estimating Capital and Operating Costs,” Chemical Engineering,

November 3, 1980, pp. 157-162.
2-39

[13] Vatavuk, W.M. and Neveril, R.B., “Estimating Costs of Air-Pollution Control Systems—

Part XVII: Particle Emissions Control,” Chemical Engineering, April 2, 1984, pp. 97-99.

[14] The RCRA Risk-Cost Analysis Model, U.S. Environmental Protection Agency, Office of

Solid Waste, January 13, 1984.
2-40

APPENDIX A

Net Present Value and Capital Recovery Factor Tables
2-41

Table A.1 displays the amount an individual would be willing to accept today for a dollar

promised in the future. Select the year in which the dollar is supposed to be paid from the leftmost

column and the discount rate from the top row. The value where the column and row intersect is

the present value of that future dollar. For instance, if you were promised a dollar twelve years

from now, and you believed the interest rate over that period would be 9.5 percent, then you

would be willing to accept 33.7 cents for that dollar today.

Table A.1: Present Value Factors for a Dollar to Be Paid Now Instead of in a Future Year

5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% 10.00%

1 0.94787 0.9434 0.93897 0.93458 0.93023 0.92593 0.92166 0.91743 0.91324 0.90909

2 0.89845 0.89 0.88166 0.87344 0.86533 0.85734 0.84946 0.84168 0.83401 0.82645

3 0.85161 0.83962 0.82785 0.8163 0.80496 0.79383 0.78291 0.77218 0.76165 0.75131

4 0.80722 0.79209 0.77732 0.7629 0.7488 0.73503 0.72157 0.70843 0.69557 0.68301

5 0.76513 0.74726 0.72988 0.71299 0.69656 0.68058 0.66505 0.64993 0.63523 0.62092

6 0.72525 0.70496 0.68533 0.66634 0.64796 0.63017 0.61295 0.59627 0.58012 0.56447

7 0.68744 0.66506 0.64351 0.62275 0.60275 0.58349 0.56493 0.54703 0.52979 0.51316

8 0.6516 0.62741 0.60423 0.58201 0.5607 0.54027 0.52067 0.50187 0.48382 0.46651

9 0.61763 0.5919 0.56735 0.54393 0.52158 0.50025 0.47988 0.46043 0.44185 0.4241

10 0.58543 0.55839 0.53273 0.50835 0.48519 0.46319 0.44229 0.42241 0.40351 0.38554

11 0.55491 0.52679 0.50021 0.47509 0.45134 0.42888 0.40764 0.38753 0.36851 0.35049

12 0.52598 0.49697 0.46968 0.44401 0.41985 0.39711 0.3757 0.35553 0.33654 0.31863

13 0.49856 0.46884 0.44102 0.41496 0.39056 0.3677 0.34627 0.32618 0.30734 0.28966

14 0.47257 0.4423 0.4141 0.38782 0.36331 0.34046 0.31914 0.29925 0.28067 0.26333

15 0.44793 0.41727 0.38883 0.36245 0.33797 0.31524 0.29414 0.27454 0.25632 0.23939

16 0.42458 0.39365 0.3651 0.33873 0.31439 0.29189 0.2711 0.25187 0.23409 0.21763

17 0.40245 0.37136 0.34281 0.31657 0.29245 0.27027 0.24986 0.23107 0.21378 0.19784

18 0.38147 0.35034 0.32189 0.29586 0.27205 0.25025 0.23028 0.21199 0.19523 0.17986

19 0.36158 0.33051 0.30224 0.27651 0.25307 0.23171 0.21224 0.19449 0.17829 0.16351

20 0.34273 0.3118 0.2838 0.25842 0.23541 0.21455 0.19562 0.17843 0.16282 0.14864

21 0.32486 0.29416 0.26648 0.24151 0.21899 0.19866 0.18029 0.1637 0.1487 0.13513

22 0.30793 0.27751 0.25021 0.22571 0.20371 0.18394 0.16617 0.15018 0.1358 0.12285

23 0.29187 0.2618 0.23494 0.21095 0.1895 0.17032 0.15315 0.13778 0.12402 0.11168

24 0.27666 0.24698 0.2206 0.19715 0.17628 0.1577 0.14115 0.1264 0.11326 0.10153

25 0.26223 0.233 0.20714 0.18425 0.16398 0.14602 0.13009 0.11597 0.10343 0.0923
2-42

10.50% 11.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00% 14.50% 15.00%

1 0.90498 0.9009 0.89686 0.89286 0.88889 0.88496 0.88106 0.87719 0.87336 0.86957

2 0.81898 0.81162 0.80436 0.79719 0.79012 0.78315 0.77626 0.76947 0.76276 0.75614

3 0.74116 0.73119 0.7214 0.71178 0.70233 0.69305 0.68393 0.67497 0.66617 0.65752

4 0.67073 0.65873 0.64699 0.63552 0.6243 0.61332 0.60258 0.59208 0.58181 0.57175

5 0.607 0.59345 0.58026 0.56743 0.55493 0.54276 0.53091 0.51937 0.50813 0.49718

6 0.54932 0.53464 0.52042 0.50663 0.49327 0.48032 0.46776 0.45559 0.44378 0.43233

7 0.49712 0.48166 0.46674 0.45235 0.43846 0.42506 0.41213 0.39964 0.38758 0.37594

8 0.44989 0.43393 0.4186 0.40388 0.38974 0.37616 0.36311 0.35056 0.3385 0.3269

9 0.40714 0.39092 0.37543 0.36061 0.34644 0.33288 0.31992 0.30751 0.29563 0.28426

10 0.36845 0.35218 0.33671 0.32197 0.30795 0.29459 0.28187 0.26974 0.25819 0.24718

11 0.33344 0.31728 0.30198 0.28748 0.27373 0.2607 0.24834 0.23662 0.2255 0.21494

12 0.30175 0.28584 0.27083 0.25668 0.24332 0.23071 0.2188 0.20756 0.19694 0.18691

13 0.27308 0.25751 0.2429 0.22917 0.21628 0.20416 0.19278 0.18207 0.172 0.16253

14 0.24713 0.23199 0.21785 0.20462 0.19225 0.18068 0.16985 0.15971 0.15022 0.14133

15 0.22365 0.209 0.19538 0.1827 0.17089 0.15989 0.14964 0.1401 0.1312 0.12289

16 0.2024 0.18829 0.17523 0.16312 0.1519 0.1415 0.13185 0.12289 0.11458 0.10686

17 0.18316 0.16963 0.15715 0.14564 0.13502 0.12522 0.11616 0.1078 0.10007 0.09293

18 0.16576 0.15282 0.14095 0.13004 0.12002 0.11081 0.10235 0.09456 0.0874 0.08081

19 0.15001 0.13768 0.12641 0.11611 0.10668 0.09806 0.09017 0.08295 0.07633 0.07027

20 0.13575 0.12403 0.11337 0.10367 0.09483 0.08678 0.07945 0.07276 0.06666 0.0611

21 0.12285 0.11174 0.10168 0.09256 0.08429 0.0768 0.07 0.06383 0.05822 0.05313

22 0.11118 0.10067 0.09119 0.08264 0.07493 0.06796 0.06167 0.05599 0.05085 0.0462

23 0.10062 0.09069 0.08179 0.07379 0.0666 0.06014 0.05434 0.04911 0.04441 0.04017

24 0.09106 0.0817 0.07335 0.06588 0.0592 0.05323 0.04787 0.04308 0.03879 0.03493

25 0.0824 0.07361 0.06579 0.05882 0.05262 0.0471 0.04218 0.03779 0.03387 0.03038

Table A.1: Continued
2-43

Table A.2 displays the annual payment you would have to make for a specific number of

years to equal the present value of a single dollar borrowed today. Select the number of years you

will make payments from the leftmost column and the discount rate from the top row. The value

where the column and row intersect is annual payment on that borrowed dollar. For example, if

you plan on making equal payments for twelve years at 9.5 percent interest to repay a dollar

borrowed toaday, you would make annual payments of 14.3 cents.

Table A.2: Capital Recovery Factors for Equal Payments on a Dollar over a Number of Years

5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% 10.00%

1 1.055 1.06 1.065 1.07 1.075 1.08 1.085 1.09 1.095 1.1

2 0.54162 0.54544 0.54926 0.55309 0.55693 0.56077 0.56462 0.56847 0.57233 0.57619

3 0.37065 0.37411 0.37758 0.38105 0.38454 0.38803 0.39154 0.39505 0.39858 0.40211

4 0.28529 0.28859 0.2919 0.29523 0.29857 0.30192 0.30529 0.30867 0.31206 0.31547

5 0.23418 0.2374 0.24063 0.24389 0.24716 0.25046 0.25377 0.25709 0.26044 0.2638

6 0.20018 0.20336 0.20657 0.2098 0.21304 0.21632 0.21961 0.22292 0.22625 0.22961

7 0.17596 0.17914 0.18233 0.18555 0.1888 0.19207 0.19537 0.19869 0.20204 0.20541

8 0.15786 0.16104 0.16424 0.16747 0.17073 0.17401 0.17733 0.18067 0.18405 0.18744

9 0.14384 0.14702 0.15024 0.15349 0.15677 0.16008 0.16342 0.1668 0.1702 0.17364

10 0.13267 0.13587 0.1391 0.14238 0.14569 0.14903 0.15241 0.15582 0.15927 0.16275

11 0.12357 0.12679 0.13006 0.13336 0.1367 0.14008 0.14349 0.14695 0.15044 0.15396

12 0.11603 0.11928 0.12257 0.1259 0.12928 0.1327 0.13615 0.13965 0.14319 0.14676

13 0.10968 0.11296 0.11628 0.11965 0.12306 0.12652 0.13002 0.13357 0.13715 0.14078

14 0.10428 0.10758 0.11094 0.11434 0.1178 0.1213 0.12484 0.12843 0.13207 0.13575

15 0.09963 0.10296 0.10635 0.10979 0.11329 0.11683 0.12042 0.12406 0.12774 0.13147

16 0.09558 0.09895 0.10238 0.10586 0.10939 0.11298 0.11661 0.1203 0.12403 0.12782

17 0.09204 0.09544 0.09891 0.10243 0.106 0.10963 0.11331 0.11705 0.12083 0.12466

18 0.08892 0.09236 0.09585 0.09941 0.10303 0.1067 0.11043 0.11421 0.11805 0.12193

19 0.08615 0.08962 0.09316 0.09675 0.10041 0.10413 0.1079 0.11173 0.11561 0.11955

20 0.08368 0.08718 0.09076 0.09439 0.09809 0.10185 0.10567 0.10955 0.11348 0.11746

21 0.08146 0.085 0.08861 0.09229 0.09603 0.09983 0.1037 0.10762 0.11159 0.11562

22 0.07947 0.08305 0.08669 0.09041 0.09419 0.09803 0.10194 0.1059 0.10993 0.11401

23 0.07767 0.08128 0.08496 0.08871 0.09254 0.09642 0.10037 0.10438 0.10845 0.11257

24 0.07604 0.07968 0.0834 0.08719 0.09105 0.09498 0.09897 0.10302 0.10713 0.1113

25 0.07455 0.07823 0.08198 0.08581 0.08971 0.09368 0.09771 0.10181 0.10596 0.11017
2-44

10.50% 11.00% 11.50% 12.00% 12.50% 13.00% 13.50% 14.00% 14.50% 15.00%

1 1.105 1.11 1.115 1.12 1.125 1.13 1.135 1.14 1.145 1.15

2 0.58006 0.58393 0.58781 0.5917 0.59559 0.59948 0.60338 0.60729 0.6112 0.61512

3 0.40566 0.40921 0.41278 0.41635 0.41993 0.42352 0.42712 0.43073 0.43435 0.43798

4 0.31889 0.32233 0.32577 0.32923 0.33271 0.33619 0.33969 0.3432 0.34673 0.35027

5 0.26718 0.27057 0.27398 0.27741 0.28085 0.28431 0.28779 0.29128 0.29479 0.29832

6 0.23298 0.23638 0.23979 0.24323 0.24668 0.25015 0.25365 0.25716 0.26069 0.26424

7 0.2088 0.21222 0.21566 0.21912 0.2226 0.22611 0.22964 0.23319 0.23677 0.24036

8 0.19087 0.19432 0.1978 0.2013 0.20483 0.20839 0.21197 0.21557 0.2192 0.22285

9 0.17711 0.1806 0.18413 0.18768 0.19126 0.19487 0.19851 0.20217 0.20586 0.20957

10 0.16626 0.1698 0.17338 0.17698 0.18062 0.18429 0.18799 0.19171 0.19547 0.19925

11 0.15752 0.16112 0.16475 0.16842 0.17211 0.17584 0.1796 0.18339 0.18722 0.19107

12 0.15038 0.15403 0.15771 0.16144 0.16519 0.16899 0.17281 0.17667 0.18056 0.18448

13 0.14445 0.14815 0.1519 0.15568 0.1595 0.16335 0.16724 0.17116 0.17512 0.17911

14 0.13947 0.14323 0.14703 0.15087 0.15475 0.15867 0.16262 0.16661 0.17063 0.17469

15 0.13525 0.13907 0.14292 0.14682 0.15076 0.15474 0.15876 0.16281 0.1669 0.17102

16 0.13164 0.13552 0.13943 0.14339 0.14739 0.15143 0.1555 0.15962 0.16376 0.16795

17 0.12854 0.13247 0.13644 0.14046 0.14451 0.14861 0.15274 0.15692 0.16112 0.16537

18 0.12586 0.12984 0.13387 0.13794 0.14205 0.1462 0.15039 0.15462 0.15889 0.16319

19 0.12353 0.12756 0.13164 0.13576 0.13993 0.14413 0.14838 0.15266 0.15698 0.16134

20 0.12149 0.12558 0.1297 0.13388 0.1381 0.14235 0.14665 0.15099 0.15536 0.15976

21 0.11971 0.12384 0.12802 0.13224 0.13651 0.14081 0.14516 0.14954 0.15396 0.15842

22 0.11813 0.12231 0.12654 0.13081 0.13512 0.13948 0.14387 0.1483 0.15277 0.15727

23 0.11675 0.12097 0.12524 0.12956 0.13392 0.13832 0.14276 0.14723 0.15174 0.15628

24 0.11552 0.11979 0.1241 0.12846 0.13287 0.13731 0.14179 0.1463 0.15085 0.15543

25 0.11443 0.11874 0.1231 0.1275 0.13194 0.13643 0.14095 0.1455 0.15008 0.1547

Table A.2: Continued
TECHNICAL REPORT DATA

(Please read Instructions on reverse before completing)

1. REPORT NO.

 452/B-02-001

2. 3. RECIPIENT'S ACCESSION NO.

4. TITLE AND SUBTITLE

The EPA Air Pollution Control Cost Manual

5. REPORT DATE

January, 2002 

6. PERFORMING ORGANIZATION CODE

7. AUTHOR(S)

 Daniel Charles Mussatti

 

8. PERFORMING ORGANIZATION REPORT NO.

9. PERFORMING ORGANIZATION NAME AND ADDRESS

 U.S. Environmental Protection Agency

 Office of Air Quality Planning and Standards

 Air Quality Standards and Strategies Division

 Innovative Strategies and Economics Group

 Research Triangle Park, NC 27711

10. PROGRAM ELEMENT NO.

11. CONTRACT/GRANT NO.

 

12. SPONSORING AGENCY NAME AND ADDRESS

 Director

 Office of Air Quality Planning and Standards

 Office of Air and Radiation

 U.S. Environmental Protection Agency

 Research Triangle Park, NC 27711

13. TYPE OF REPORT AND PERIOD COVERED

Final

14. SPONSORING AGENCY CODE

EPA/200/04

15. SUPPLEMENTARY NOTES

Updates and revises EPA 453/b-96-001, OAQPS Control Cost Manual, fifth edition (in English only)

16. ABSTRACT

In Spanish, this document provides a detailed methodology for the proper sizing and costing of numerous air

pollution control devices for planning and permitting purposes. Includes costing for volatile organic

compounds (VOCs); particulate matter (PM); oxides of nitrogen (NOx); SO2, SO3, and other acid gasses;

and hazardous air pollutants (HAPs). 

17. KEY WORDS AND DOCUMENT ANALYSIS

a. DESCRIPTORS b. IDENTIFIERS/OPEN ENDED TERMS c. COSATI Field/Group

Economics

Cost

Engineering cost

Sizing

Estimation

Design

Air Pollution control

Incinerators

Absorbers

Adsorbers

Filters

Condensers

Electrostatic Precipitators

Scrubbers

18. DISTRIBUTION STATEMENT

 Release Unlimited

19. SECURITY CLASS (Report)

 Unclassified

21. NO. OF PAGES

1,400

20. SECURITY CLASS (Page)

 Unclassified

22. PRICE

EEPA Form 2220-1 (Rev. 4-77) PA Form 2220-1 (Rev. 4-77) PREVIOUS EDITION IS OBSOLETE