A great deal of our discussions have focused on municipal treatment applications, particularly in this chapter. However, most if not all of the principles throughout the book are readily applicable to industrial water treatment applications. Try to approach each water treatment assignment from a frst principles standpoint, and then develop design-specific cases with as much information on the chemistry, physical and thermodynamic properties of the wastewater stream and sludge to be handled. In all assignments, be sensitive to the cost issues. Engineering projects are not complete unless we have evaluated the project economics. Some cost factors for different technologies have been included in our discussions, but no real effort has been made for detailed comparisons between technologies. This really has to be performed on a case specific basis. What we can do before closing this volume is review some of the generalized project cost estimating parameters that are applicable to assessing the investments that may be needed in upgrading andor installing wastewater treatment facilities and various solid-liquid separation equipment.
TREATING TIIE SLUDGE 583
PROJECT COST ESTIMATING PRINCIPLES
Approaches to project cost estimating have changed in recent years, to the point where smart companies and engineers apply principles of Total Cost Accounting.
The term total-cost accounting (TCA) has come to be more commonly known as life-cycle costing (LCC). LCC is a method aimed at analyzing the costs and benefits associated with a piece of equipment, plant or a practice over the entire time of intended use. The idea actually originated in the federal government and was first applied in procuring weapons systems. Experience showed that the upfront purchase price was a poor measure of the total cost. Instead, costs such as those associated with maintainability, reliability, disposal and salvage value, as well as employee trainiig and education, had to be given equal weight in making financial decisions. By the same token, justifying the investment into a piece of requires that all benefits and costs be clearly defined in the most concrete terms possible, and projected over the life of each technology option. The following are important definitions and calculations you should apply when developing cost estimates for equipment and processes that you are considering in a wastewater treatment project.
PRESENT WORTH OR PRESENT VALUE
The importance of present worth, also kuown as present value, lies in the fact that time is money. The preference between a dollar now and a dollar one year from now is driven by the fact that a dollar in-hand can earn interest. Resent value can be expressed by a simple formula:
P = F/(1 + z)“ (32)
where P is present worth or present value, F is future value, i is the interest or discount rate, and n is the number of periods. As a simple example, if we have or hold $1,000, in one year at 6 percent interest compounded annually, the $1,000 would have a computed present value of:
P = $1,000/(1 + 0.06)’ = $943.40
Because our money can “work” at 6% interest, there is no difference between
$943.40 now and $1,OOO in one year because they both have the same value now.
Economically, there is an additional factor at work in present value, and that factor is pure timepreference, or impatience. However, this issue is generally ignored in business accounting, because the firm has no such emotions, and opportunities can be measured in terms of financial return.
But going back to our $1,000, if the money was received in three years, the present value would be:
P = $1,000/(1 + 0.06)’ = $839.62
In considering either multiple payments or cash into and out of a company, the
584 WATER AND WASTEWATER TREATMENT TECHNOLOGIES
present values are additive. For example, at 6 percent interest, the present value of receiving both $1,000 in one year and $1,000 in three years would be $943.40 +
$839.62 = $1,783.06. Similarly, ifone was to receive $1,000 inone year, andpay
$1,OOO in 3 years the present value would be $943.40 - $839.62 = $103.78.
It is common practice to compare investment options based on the present-value equation shown above. We may also apply one or all of the following four factors when comparing investment options: Payback period; Internal rate of return;
Benefit-to-cost ratio; and Present value of net benefit.
WHAT PAYBACK PERIOD IS
The payback period of an investment is essentially a measure of how long it takes to break even on the cost of that investment. In other words, how many weeks, months, or years does it take to earn the investment capital that was laid out for a project or a piece of equipment?
Obviously, those projects with the fastest returns are highly attractive. The technique for determining payback period again lies within present value; however, instead of solving the present-value equation for the present value, the cost and benefit cash flows are kept separate over time.
First, the project’s anticipated benefit and cost are tabulated for each year of the project’s lifetime. Then, these values are converted to present values by using the present-value equation, with the firm’s discount rate plugged in as the discount factor. Finally, the cumulative total of the benefits (at present value) and the cumulative total of the costs (at present value) are compared on a year-by-year basis. At the point in time when the cumulative present value of the benefits starts to exceed the cumulative present value of the costs, the project has reached the payback period. Ranking your equipment and technology options for an intended application then becomes a matter of selecting those project options with the shortest payback period. So for example, if we compare a rotary drum filter versus a centrifuge for a dewatering application, an overall payback period for each option can be determined based on capital investment for each equipment, operating, maintenance, power costs, and other factors.
Although this approach is straightforward, there are dangers in selecting technology or equipment options based upon a minimum payback-time standard. For example, because the equipment’s use generally extends far into the future, discounting makes its payoff period very long. Because the payback period analysis stops when the benefits and costs are equal, the projects with the quickest positive cash flow will dominate. Hence, for a project, with a high discount rate, the long-term costs and benefits may be so far into the future that they do not even enter into the analysis. In essence, the importance of life-cycle costing is lost in using the minimum payback-time standard, because it only considers costs and benefits to the point where they balance, instead of considering them over the entire life of the project or piece of solids-liquid separations equipment.
TREATING TIIE SLUDGE 585
THE INTERNAL RATE OF RETURN
You are likely more familiar with the term return on investment, or ROI, than internal rate of return. The ROI is defined as the interest rate that would result in a return on the invested capital equivalent to the project’s return. For illustration, if we had a water treatment project with a ROI of 30 percent, that’s financially equivalent to investing resources in the right stock and having its price go up 30 percent. As before, this method is based in the net present value of benefits and costs; however, it does not use a predetermined discount rate. Instead, the present- value equation is solved for the discount rate i. The discount rate that satisfies the zero benefit is the rate of return on the investment, and project selection is based on the highest rate. From a simple calculation standpoint, the present value equation is solved for i after setting the net present value equal to zero, and plugging in the future value, obtained by subtracting the fume costs from the future benefits over the lifetime of the project. This approach is frequently used in business; however, the net benefits and costs must be determined for each time period, and brought back to present value separately. Computationally, this could mean dealing with a large number of simultaneous equations, which can complicate the analysis.
THE BENEFIT-TO-COST RATIO
The benefit to cost (B/C) ratio is a benchmark that is determined by taking the total present value of all of the financial benefits of a water treatment project and dividing it by the total present value of all the costs of the project. If the ratio is greater than unity, then the benefits outweigh the costs, and we may conclude that the project is economically worthwhile. The present values of the benefits and costs are kept separate, and expressed in one of two ways. First, as already explained, there is the pure B/C ratio, which implies that if the ratio is greater than unity, the benefits outweigh the costs and the project is viable. Second, there is the net B/C ratio, which is the net benefit (benefits minus costs) divided by the costs. In this latter case, the decision criteria is that the benefits must outweigh the costs, which means that the net ratio must be greater than zero (if the benefits exactly equaled the costs, the net B/C ratio would be zero). In both cases, the highest B/C ratios are considered as the best projects. The B/C ratio can be misleading. For example, if the present value of a filter press’ benefits were $10,000 and costs were $6,000, the B/C ratio wouldbe $10,000/$6,000 or 1.67. But what if, upon further reassessment of the project, we find that some of the costs are not ‘true’ costs, but instead simply offsets to benefits? In this case, the ratio could be changed considerably. For argument sake, let’s say that $4,500 of the $6,000 total cost is for lower energy costs over say a thermal dewatering technology, and that $7,000 of the $10,000 in benefits is due to power savings; one could then use them to offset each other.
Mathematically then, both the numerator and denominator of the ratio could be reduced by $4,500 with the following effect:
586 WATER AND WASTEWATER TREA'IRIENT TECHNOLOGIES
($10,000 - $4,500) / ($6,000 - $4,500) = 3.7
Without changing the project, the recalculated B/C ratio would make the project seem to be considerably more attractive.
PRESENT VALUE OF NET BENEF'ITS
The present value of net benefits (PVNB) shows the worth of a project in terms of a present-value sum. The PVNB is determined by calculating the present value of all benefits; doing the same for all costs; and then subtracting the two totals. The result is an amount of money that would represent the tangible value of undertaking the project. This comparison evaluates all benefits and costs at their current or present values. If the net benefit (the benefits minus costs) is greater than zero, the project is worth undertaking; if the net is less than zero, the project should be abandoned on a financial basis. This technique is firmly grounded in microeconomic theory and is ideal for total-cost analysis (TCA).
Even though it requires a preselected discount rate, which can greatly discount long-term benefits, it assures that all benefits and costs over the entire life of the project are included in the analysis. Once you know the present value of all options with positive net values, the actual ranking of equipment and technology options using this method is straightforward; those with the highest PVNBs are funded first.
There are no hard and fast rules as to which factors one may apply in performing life-cycle costing or total-cost analysis; however, conceptually, the PVNB method is preferred. There are, however, many small-scale equipment projects where the benefits are so well defined and obvious that a comparative financial factor as simple as a ROI or the payback period will suffice.
ESTABLISHING BASELINE COSTS
To properly determine the cost of any engineering project, we first need to establish a baseline for comparative purposes. If nothing else, a baseline defines for management the option of maintaining the status quo. If we are faced with meeting a legal discharge limit, then obviously we need to do something other than status quo to remain in business. But here is where we can develop some interesting and very detailed justifications for one water treatment technology or piece of equipment over another. Changes in material consumption, utility demands, staff time, etc., for options being considered can be measured as either more or less expensive than a certain baseline. The baseline may be arbitrary for comparison. For example, we could choose as a baseline a traditional industry average. By starting with those technologies that comprise a conventional treatment plant, we have a baseline for the cost analysis. But to determine true cost benefits to your specific application, you really need to compare technologies and costs. This is an optimization exercise, and one which is well worthwhile in establishing the right level of investment for a water treatment plant or operation.
W A T I N G THE SLUDGE 587
I highly recommend you follow the methodology of McHugh (McHugh, R.T., R e Economics of Waste Minimization, McGraw-Hill Book Publishers, 1990). McHugh defines four tiers of potential costs, which the author applies to pollution prevention, but the principles and methodology are universal:
Tier 0:Usual or normal costs, such as direct labor, raw materials, energy, equipment, etc.
Tier I: Hidden costs, such as monitoring expenses, reporting and record keeping, permitting requirements, environmental impact statements, legal, etc.
E e r 2: Future liability costs, such as remedial actions, personal injury under the OSHA regulations, property damage, etc.
n e r 3: Less tangible costs, such as consumer response and confidence, employee relations, corporate image, etc.
Tier 0 and Tier 1 costs are direct and indirect costs. They include the engineering, materials, labor, construction, contingency, etc., as well as waste-collection and transportation services, raw-material consumption (increase or decrease), and production costs. Tier 2 and Tier 3 represent intangible costs. They are much more difficult to define, and include potential corrective actions under the Clean Water Act (CWA); possible more stringent discharge limitations in the future ; and benefits of improved safety and work environments. Although these intangible costs often cannot be accurately predicted, they can be very important and should not be ignored when assessing an equipment or technology option.
A present-value analysis that contains such uncertain factors generally requires a little ingenuity in assessing the full merits of an engineering project.
When analyzing the financial impact of projects, it is often useful to further categorize costs as either procurement costs or operations costs. This distinction better enables the projection of costs over time, because procurement costs are short-term, and refer to all costs required to bring a new piece of equipment or a new procedure on-line. Conversely, operations costs are long-term, and represent all costs of operating the eqyipment or performing the procedure in the post- procurement phase.
Tier 2 and 3 costs are difficult to quantify or predict. While Tier 2 costs include potential liabilities, such as changing water discharge limits, Tier 3 costs are even harder to predict -- for example, a typical Tier 3 cost could be associated with public acceptance or rejection of a particular technology. In many cases, there is a probability that can be connected with a particular event. This enters into the calculation of expected value. The expected value of an event is the probability of an event occurring, multiplied by the cost or benefit of the event. Once all expected values are determined, they are totaled and brought back to present value as done with any other benefit or expense. Hence, the expected value measures the central tendency, or the average value that an outcome would have. For example, there are a number of games at county fairs that involve betting on numbers or colors, much
588 WATER AND WASTEWATER TREATMENT TECHNOLOGIES
like roulette. If the required bet is $1, and the prize is worth $5, and there are 10 selections, the expected value of the game can be computed as:
(Benefit of Success) x (probability of Success) - (Cost of Failure) x (probability of Failure), or
($5) x (0.1) - ($1) x (0.9) = -$0.40
On the average, the player will lose -- meaning the game operator will win -- 40 cents on every dollar wagered. For tier 2 and 3 expenses, the analysis is the same.
For example, there is a great deal of data available from Occupational Safety and Health Administration (OSHA) studies regarding employee injury in the worlrplace.
If one technology poses a higher risk to occupational exposure than another, then the probability of injury and a cost can be found, and the benefit of the project can be computed.
The concept of expected value is not complicated, though the calculations can be cumbersome. For example, even though each individual’s chance of injury may be small, the number of employees, their individual opportunity costs, the various probabilities for each task, etc., could mean a large number of calculations.
However, if one considers the effect of the sum of these small costs, or the large potential costs of having to replace a technology or consider significant upgrades within 5 years, then the expected value computations can be quite important in the financial analysis.
REVENUES, EXPENSES, AND CASH FLOW
Because it is the goal of any business to make a profit, the costs-and-benefits cash flows for each option can be related to the basic profit equation:
REVENUES - EXPENSES = PROFITS
The most important aspect of this is that profits can be increased by either an increase in revenues or a decrease in expenses. Water treatment operations are by and large end-of-pipe treatment technologies, and hence from the standpoint industry applications that must treat water, the investments required increase expenditures and decrease profit. Municipal facilities view their roles differently, because their end-product is clean water which is saleable, plus they may have add- on revenues when biosolids are developed and sold into local markets. There are different categories of revenues and expenses, and it is important to distinguish between them.
Obviously, revenue is money coming into the company; from the sale of goods or services, from rental fees, from interest income, etc. The profit equation shows that an increase in revenue leads to a direct increase in profit, and vice versa if all other revenues and expenses are held constant. Note that we are going to assume that the condition of other expenseshevenues are held constant in the discussions below.
mATINGTHESLUDGE 5 s
Revenue impacts must be closely examined. For example, companies often can cut wastewater treatment costs if water use (and, in turn, the resulting wastewater flow) is limited to nonpeak times at the wastewater treatment facility. However, this limitation on water use could hamper production. Consequently, even though the company’s actions to regulate water use could reduce wastewater charges, revenue could also be decreased, unless alternative methods could be found to maintain total production. Conversely, a change in a production procedure as a result of a technology change could increase revenue. For example, moving from liquid to dry paint stripping can not only reduce water consumption, but also affect production output. Because clean-up time from dry paint-stripping operations (such as bead blasting) is generally much shorter than from using a hazardous, liquid based stripper, it could mean not only the elimination of the liquid waste stream (this is a pollution prevention example), but also less employee time spent in the cleanup operation. In this case, production is enhanced and revenues are increased by the practice. Another potential revenue effect is the generation of marketable by- products such as biosolids. Such opportunities bring new, incremental revenues to the overall operation of the plant. The point to remember is that the project has the potential to either increase or decrease revenues and profits - and that’s the reason for doing a financial analysis.
Expenses are monies that leave the company to cover the costs of operations, maintenance, insurance, etc. There are several major cost categories:
0 Insurance expenses Depreciation expenses
0 Interest expenses
0 Labor expenses.
0 Training expenses
0 Auditing and demo expenses
0 Floor-space expenses
Each of these should be carefully considered in your analysis.
Znsurunce Expenses. Depending upon the project, insurance expenses could either increase or decrease. Insurance premiums can be increased depending on the technology option chosen for a plant design.
Depreciation Expenses. By purchasing capital equipment with a limited life the entire cost is not charged against the current year. Instead, depreciation expense calculations spread the equipment’s procurement costs (including delivery charges, installation, start-up expenses, etc.) over a period of time by taking a percentage of the cost each year over the life of the equipment. For example, if the expect life of a piece of equipment is 10 years, each year the enterprise would charge an accounting expense of 10 percent of the procurement cost of the equipment. This is known as the method of straight-line depreciation. Although there are other methods available, all investment projects under consideration at any given time should use a single depreciation method to accurately compare alternative projects’
expense. and revenue effects. Because straight-line depreciation is easy to compute,