p.1 

OAR Box 1828 

Prepped by Ollie Stewart 

Document Number: 

161) ll-K- (B) -160 

Docket Number: 

A-83-27 

Printed 11/12/2008 11:12:53 AM Sheet 161 of 325 
P.2 

ENERGY AND ENVIRONMENTAL ANALYSIS, INC. 

II-K-CB)-160 

1655 NORTH PORT MYER DRIVE ARLINGTON, VIRGINIA 22209 703/528-1900 

January 14, 1985 

Mr. Robert Short 

Economic Analysis Branch 

U.S. Environmental Protection Agency 

Mail Drop-12 

Research Triangle Park, NC 27711 

Subject: EPA Contract NO. 68-02-4202, Work Assignment #3 

Dear Robert: 

Provisions of Tax Equity and Fiscal Responsibility Act of 1982 

(TEFRA) have not yet been incorporated into the after-tax NPV factors 

used in IFCAM. The TEFRA revisions to the Federal tax code do not 

affect the after-tax NPV factors used in IFCAM for new industrial 

oil/ga s boilers, but they do slightly alte r the after-tax NPV factor for 

new industria l coal boiler capita l costs. 

The current industria l coal boiler after-tax NPV factor for capita l 

costs in IFCAM is 0.5261 (reference Table 4-2, p. 4-10 in Description of 

the Industrial Fuel Choice Analysis Model, September 1984 draft). The 

revised factor, which incorporates the TEFRA provisions, is 0.5583. 

Therefore, IFCAM is slightly understating the tota l industria l coal 

boiler after-tax NPV in the fuel choice analysis. Incorporation of this 

revised factor in IFCAM may lower projected coal demand (because it 

increases the tota l coal after-tax NPV) or i t may have no impact on the 

projected fuel mix, emissions and annualized costs because there may not 

be any marginal, knife-edge fuel choice decisions. 

TEFRA revised the Accelerated Cost Recovery System annual 

percentages for five-year recovery period property acquired afte r 1985. 

The old values are 20, 32, 24, 16 and 8 percent. The revised values are 

15, 22, 21, 21 and 21 percent. TEFRA also reduced the basis for 

depreciation by 50 percent of the amount of ITC taken when the regular 

ITC (10 percent for five-year recovery period property placed in service 

after 1980) is selected. 

The attached table presents the derivation of the revised after-tax 

NPV factor for new industria l coal boiler capital expenses. 

The draft September 1984 Description of the Industrial Fuel Choice 

Analysis Model should be revised to acknowledge this omission. 

TH/ce 

cc: Dr. A. We he 

Sincerely, 

Tim Hogan (j 

MANAGEMENT / ECONOMIC- / ENGINEERING 
**-

DERIVATION OF THE AFTER TAX NPV FACTOR FOR 

COAL BOILER CAPITAL EXPENSES3 

Year 

l

h 

2h 

3 

4 

5 

6 

7 

Depreciation 

(0.0611) 

(0.0853) 

(0.0776) 

(0.0739) 

(0.0703) 

Expensible 

construction 

0.0500 

Depreciable 

capital . 

investment ITC 

0.4500 (0.0450) 

0.4500 (0.0450) 

Cash flowf 

0.4550 

0.4050 

(0.0611) 

(0.0853) 

(0.0776) 

(0.0739) 

(0.0703) 

Discounted 

cash flow9 

0.4550 

0.3750 

(0.0524) 

(0.0677) 

(0.0570) 

(0.0503) 

(0.0443) 

0.5583 

aTotal capital cost is 1.0. 

Only 85.5 percent (100 percent less expensible costs, 10 percent, and less 

one-half of the investment credit, 4.5 percent) of the capital cost is 

assumed to be depreciable. Nominal depreciation charges are adjusted for 

inflation to derive annual real depreciation credits. The annual 

recovery factors (ARF) are 0.15, 0.22, 0.21, 0.21, and 0.21, respectively 

for i = 1-5. Depreciation credits = (Cl-tax rate] x D. ) - 0., or - D./2 

for i = 1-5. Di = 0.855 x ARF^d.OS) 7 for i = 1-5.

 7 

c(l-tax rate) x 10 percent of the total capital cost = 0.5 x 0.1 x 1.0 -

0.05. 

Total capital cost less expensible construction costs allocated evenly 

over the two-year construction period, or (1.0-[0.1 x 1.0])/2 = 0.45. 

investment Tax Credit (ITC) is 10 percent of the depreciable capital cost. 

Sum of depreciation, expensible construction, depreciable capital investment and ITC. 

9Cash flow^d.OS)1 '1 . 

Construction period. Boiler is placed in service at the beginning of 

year 3.