Costing and Financial Analysis of Pollution Prevention Projects

Prepared by:
The Northeast Waste Management Officials' Association (NEWMOA) and the Massachusetts Office of Technical Assistance

Prepared for:
Prepared under grant from the North-East Hazardous Substances Research Center (EPA funded)

Application:
Financial analysis:
Environmental impact analysis: ---
Waste management/P2:
Environmental cost listing/database: ---
Cost estimation: ---
Alternative product/process comparison: ---

This method provides the format for the financial evaluation of pollution prevention options. The training manual in the updated version has industry-related examples.

Development/publication date and updates:
1992. Updated version, "Improving your competitive position," published in 1994, and comes in two styles - a Training Manual and an Instructors Guide.

Public availability:
Available

Purpose and current use:
NEWMOA has sold the manual and has also used it in training sessions organized through contract with Waste Reduction Institute for Training and Applications (WRITAR). NEWMOA has used the manual in training workshops in various EPA regions around the country. It has also been used in some industry conferences.

Cost information:
Old manual:

Training manual: $15
Instructors Guide: $30.

System requirements:
Spreadsheet formats, case studies

Summary of methodology

The method consists of both a quantitative and qualitative analysis of the pollution prevention project. Quantitatively, costs are lumped into three major categories:

  1. Direct material,
  2. Direct labor, and
  3. Overhead

Overheads include indirect materials and labor, including hidden environmental costs. Qualitatively, the method considers:

  1. Intangible factors
  2. Potential liability

Intangible factors include market share, employee/union relations, and shareholder relations, corporate image, community image). Potential liability includes disposal, storage, transportation, real property damage, civil actions, toxic tort suits, economic loss from remediation, and fines/penalties.

Life-cycle stages covered

Raw material acquisition ---
Manufacturing stage
Use/reuse/maintenance
Recycle/waste management

Type of costs considered

Conventional
Potentially hidden
Contingent
External ---

The method looks at conventional and hidden costs of inputs and outputs, and liability costs of outputs (qualitatively). The updated manual also discusses the assessment of potentially hidden less tangible factors such as public image, shareholder relations, etc. These have also been defined as potentially hidden costs. It does not include external, that is, social costs into the analysis.

Method of cost estimation

The evaluation involves six steps:

  1. Gathering complete, relevant cost information from the current process
  2. Estimating relevant cost information for the proposed pollution prevention projects
  3. Listing all differential costs resulting from the options
  4. Applying financial analysis tool(s)
  5. Interpreting the quantitative result
  6. Considering the qualitative factors

The method calculates the total annual amount, represented as: (wage rate) x (number of hours spent for the activity) x (number of occurrences of the activity per year)

Generation of financial indicators

Net present value (NPV)
Payback period
Internal rate of return (IRR)
Benefits cost ratio ---
Other

The updated manual describes all these indicators along with methods of calculation. It also describes the accounting rate of return as an indicator. Capital budgeting, cash flow, and the economic lifetime of the project are considered in cost calculations. Discounted cash flow methods are used.

Attributes

The method performs qualitative analyses of activities not accounted for by conventional costs. The updated manual has been published in two parts. The manual itself contains basic course material. The Instructors Guide additionally contains teaching notes, exercises, overheads, and more case studies.

Limitations

Social (external) costs are not taken into account. The liability and potentially hidden less tangible costs (e.g., public image, etc.) that are taken into account are not quantified. The method does not assist in life-cycle costing.

Basis for evaluation:
The information provided here is based on a profile of the tool presented in Weitz et al. (1994). Subsequent reviews were done by incorporating updated information from reports and through telephone communications with NEWMOA in May, 1995.

Contact information:
Available from NEWMOA.

Terri Goldberg (Pollution Prevention Program Manager)
NEWMOA
129 Portland Street, Suite 502
Boston, MA 02114-2014

617-367-8939
617-367-8558

The Massachusetts Office of Technical Assistance
Executive Office of Environmental Affairs
100 Cambridge Street, Suite 2109
Boston, MA 02202
617-727-3260

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