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Sections

  • 1. Introduction
  • Introduction
  • Basic Operations
  • Getting Started in P2/FINANCE
  • Elements of a Financial Analysis
  • Terminology
  • Cost Item
  • Cost Category
  • Scenario
  • Analysis
  • Project
  • Format Conventions
  • P2/FINANCE Administrative Commands
  • P2/FINANCE Organization
  • Moving Between Sheets
  • Moving Between Scenarios
  • Printing
  • Help Function
  • Calc Button
  • Excel Tips
  • Spreadsheet Protection
  • Computer Specifications
  • Hardware and Software Specifications
  • Installation
  • Project Title Sheet
  • Accessing Scenarios
  • Printing Scenarios
  • Accessing Help
  • Calculating
  • Default Parameters Sheet
  • Time Value of Money
  • Global Parameters
  • Inflation Rate
  • Discount Rate
  • Income Tax Rates
  • Depreciation
  • Scenario Parameters
  • Name
  • Investment Year
  • Lifetime
  • Start Year
  • End Year
  • Initial Investment Costs Sheet
  • Salvage Value
  • Tailoring the Financial Parameters
  • Working Capital
  • Annual Operating Costs Sheet
  • Escalation Rate
  • Accessing Other Scenarios
  • Scenario Summary Report
  • Tax Deduction Schedule
  • Incremental Cash Flow Analysis Sheet
  • Incremental Profitability Analysis Sheet
  • Net Present Value (NPV)
  • Internal Rate of Return (IRR)
  • Discounted Payback
  • 4. Case Studies
  • An Example of a Basic Analysis
  • Conceptualize the Analysis
  • Develop a Cost Inventory
  • Collect Cost Data
  • Enter the Financial Parameters
  • Default Parameters sheet
  • Enter the Cost Data
  • Initial Investment Costs sheet
  • Annual Operating Costs sheet
  • Generate Reports
  • Scenario Summary sheet
  • Tax Deduction Schedule sheet
  • Incremental Cash Flow Analysis sheet
  • Incremental Profitability Analysis sheet
  • Summary of Results
  • An Example of a Complex Analysis
  • Default Parameters for the Analysis
  • Appendix B: Total Cost Assessment Cost Inventory
  • Appendix C: Glossary of Financial Terms

User’s Guide

P2/FINANCE
Version 3.0
in Excel Version 5.0 for Windows

Tellus Institute
Copyright © 1996

Tellus Institute P2/FINANCE Version 3.0
in Excel Version 5.0 for Windows

User’s Guide
Tellus Institute 11 Arlington Street Boston, MA 02116-3411 USA Telephone: Fax: Email: 617-266-5400 617-266-8303 p2finance@tellus.com

Copyright © 1996 Tellus Institute, Boston, MA USA. All rights reserved. No part of this publication or associated software may be reproduced or transmitted in any form or by any means, without prior written permission. November 1996

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Acknowledgments
Tellus Institute developed P2/FINANCE Version 3.0 with funding from the US Environmental Protection Agency’s Pollution Prevention Division. We gratefully acknowledge the support provided by Susan McLaughlin (EPA Project Manager), Holly Elwood, Kathy Seikel, and Alan Ehrlich of EPA. We thank all of the reviewers of both the software and User’s Guide: Cathy Andrews, Naval Surface Warfare Center; Robert Butner, Battelle Seattle Research Center; and Keith Weitz and Aarti Sharma, Research Triangle Institute. We also thank users of earlier versions of P2/FINANCE who provided us with valuable feedback on how to improve the tool. The Tellus project team included Angela Dierks, Deborah Savage (Project Manager), Pablo Martinez, Rob Graff, Katherine Bidwell, David Miller, Dan Smith, Diana Zinkl, and Allen White.

Table of Contents
PREFACE.................................................................................................................................................................. I 1. INTRODUCTION...................................................................................................................................................2 INTRODUCTION....................................................................................................................................................... 3 BASIC OPERATIONS................................................................................................................................................. 5 GETTING STARTED IN P2/FINANCE....................................................................................................................... 6 Elements of a Financial Analysis..............................................................................................................................6 Terminology...............................................................................................................................................................6
Cost Item............................................................................................................................................................................... 7 Cost Category........................................................................................................................................................................ 7 Scenario................................................................................................................................................................................. 7 Analysis................................................................................................................................................................................. 7 Project................................................................................................................................................................................... 8 P2/FINANCE Organization...................................................................................................................................................8 Moving Between Sheets........................................................................................................................................................ 9 Moving Between Scenarios...................................................................................................................................................9 Printing.................................................................................................................................................................................. 9 Help Function........................................................................................................................................................................ 9 Calc Button.......................................................................................................................................................................... 10

Format Conventions..................................................................................................................................................8 P2/FINANCE Administrative Commands ................................................................................................................8

Excel Tips................................................................................................................................................................10 Spreadsheet Protection............................................................................................................................................11 COMPUTER SPECIFICATIONS.................................................................................................................................. 11 Hardware and Software Specifications...................................................................................................................11 INSTALLATION...................................................................................................................................................... 12 2. STEP BY STEP INSTRUCTIONS : ENTERING DATA ................................................................13 PROJECT TITLE SHEET........................................................................................................................................... 14 Accessing Scenarios................................................................................................................................................14 Printing Scenarios...................................................................................................................................................14 Accessing Help........................................................................................................................................................14 Calculating..............................................................................................................................................................14 DEFAULT PARAMETERS SHEET.............................................................................................................................. 15 Time Value of Money...............................................................................................................................................16 Global Parameters...................................................................................................................................................16
Inflation Rate.......................................................................................................................................................................17 Discount Rate......................................................................................................................................................................17 Income Tax Rates................................................................................................................................................................19 Depreciation .....................................................................................................................................................................20 Name................................................................................................................................................................................... 23 Investment Year..................................................................................................................................................................23 Lifetime............................................................................................................................................................................... 23 Start Year............................................................................................................................................................................ 24 End Year............................................................................................................................................................................. 24

Scenario Parameters...............................................................................................................................................23

Accessing Scenarios................................................................................................................................................24 Printing Scenarios...................................................................................................................................................24 Accessing Help........................................................................................................................................................24 Calculating..............................................................................................................................................................25 INITIAL INVESTMENT COSTS SHEET....................................................................................................................... 26 Salvage Value..........................................................................................................................................................28 Tailoring the Financial Parameters........................................................................................................................28 Working Capital......................................................................................................................................................29 Accessing Scenarios................................................................................................................................................30 Printing Scenarios...................................................................................................................................................30

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43 INCREMENTAL PROFITABILITY ANALYSIS SHEET ........................................................................................................................................................................................................................ 38 Accessing Other Scenarios............................................................................................ 36 Accessing Other Scenarios.........................................................................................................................................................................................................................40 Printing Scenarios.........42 Printing Scenarios..................................................................32 Initial Investment Costs sheet.........................................................................................................................................................................................................................................44 Internal Rate of Return (IRR).......................................................................................................................................................51 Initial Investment Costs sheet.........................................................................................................................................................................25 Collect Cost Data.........45 Accessing Scenarios................................................................................................44 Net Present Value (NPV).............................................................................................48 Develop a Cost Inventory...........................46 4........................................................................................................................................................................................................................... 41 Accessing Other Scenarios.................................33 3..................................51 Enter the Cost Data...................................................................................................................................................................................................................................................................................................................................30 Calculating.....................................................................................................................37 Printing Scenarios.................................................................................................................................................................................................52 Generate Reports................................................................................................................................................................................................34 Scenario Summary sheet.......................................................................................................................................................................................................................................................................... 49 Enter the Financial Parameters.......... 26 Enter the Financial Parameters........................................................................................53 Scenario Summary sheet......................................................................................................46 Printing Scenarios..................................................................25 Develop a Cost Inventory......................................................................................................................................................................... 25 Conceptualize the Analysis........................................53 Tax Deduction Schedule sheet........34 SCENARIO SUMMARY REPORT.................................................................................................................................................................................................................33 Annual Operating Costs sheet..................................................................................................................40 INCREMENTAL CASH FLOW ANALYSIS SHEET...........................46 Accessing Help....................................................................................................................................................................................................................................................................................................................................................................48 Collect Cost Data ..........................................................................................................................................................................................................................................................37 TAX DEDUCTION SCHEDULE.......................................................................................... CASE STUDIES.............................................................................................................................................................................................................................................................33 Accessing Help.....................................................................................................................................................................................................................................................................................................................................40 Accessing Help..........32 Printing Scenarios......................................................................................37 Accessing Help.................................47 AN EXAMPLE OF A BASIC ANALYSIS...............................46 Calculating...........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................54 Incremental Profitability Analysis sheet..............................................................................................33 Calculating........53 Summary of Results.....................................................................................................................................................................................32 Accessing Other Scenarios.............34 Default Parameters for the Analysis.........................................................32 Enter the Cost Data............................................33 Generate Reports................................................................................................................................... 48 Conceptualize the Analysis.............................................................................................................................................................................................................................................................................................52 Annual Operating Costs sheet........................................................................................................Accessing Help.....................................................................................................................................................................................................................................................54 Default Parameters sheet...................................................................................44 Discounted Payback..............................................................................................................................................................................................................................................................32 Tailoring the Financial Parameters............................................................................................................................................................34 ............. 31 Escalation Rate................................................................................................................................................................... CALCULATING THE BOTTOM LINE: GENERATING REPORTS......................................................................30 ANNUAL OPERATING COSTS SHEET..........................................................................................................................................................54 AN EXAMPLE OF A COMPLEX ANALYSIS.............................................................................................................................................................................................54 Incremental Cash Flow Analysis sheet............42 Accessing Help................................................

................................35 Incremental Profitability Analysis sheet.....................................35 Tax Deduction Schedule sheet..............35 APPENDICES.........................................................39 APPENDIX C: GLOSSARY OF FINANCIAL TERMS..................................Summary of Results....................................................................................................................................................................................................................................................................................... 1 6 .........................................37 APPENDIX A: ....................... 38 COPY OF THE BLANK SPREADSHEET....................................................................................................................................................................................................................................................................................................................................................................................... 38 APPENDIX B: TOTAL COST ASSESSMENT COST INVENTORY.................35 Incremental Cash Flow Analysis sheet..................................................................................................................................................................................................................................................

more complex. The Introduction explains the Total Cost Assessment framework used by P2/FINANCE. and installation procedures. as well as an introduction to the principles of financial analysis. This powerful spreadsheet-based program is designed to assist you in evaluating the profitability of pollution prevention (P2) and other investments with environmental implications. computer requirements for the software.0 programmed in Excel Version 5.0 represents a major upgrade of P2/FINANCE in which flexibility and user friendliness couple to create a more versatile financial analysis tool. This Guide is organized into three main sections. please refer to an appropriate user guide. The User’s Guide offers step-by-step instructions for installing and using P2/FINANCE.Preface Welcome to P2/FINANCE Version 3. analysis. The Case Studies demonstrate real world application of the software through two case studies: one basic analysis and a second. A grant from US Environmental Protection Agency’s Pollution Prevention Division supported the development of this version of P2/FINANCE. Version 3. For further information on these software packages. i . We recommend that you read this Guide while using the software for your first few analyses. The Guide assumes familiarity with Windows and Excel. The Step-by-Step Instructions provide detailed instructions on how to conduct a financial analysis with P2/FINANCE and define relevant financial analysis concepts. The section on Calculating the Bottom Line: Generating Reports describes the various software screens that illustrate the calculated results and the printed reports you can generate.0 for Windows.

1. Introduction

P2/FINANCE Version 3.0
Total Cost Pollution Assessment Prevention (TCA) (P2)

Introduction

Introduction
Before you make a modification to an industrial process (e.g., switch to an aqueous cleaner or purchase a solvent still to recover spent raw materials), you need to understand the financial impacts of such a modification. P2/FINANCE helps your decision-making by providing a framework for assessing the profitability of potential investments. In a P2/FINANCE analysis you estimate the costs and revenues—both Initial Investment Costs and Annual Operating Costs and revenues—of a potential pollution prevention investment or other investment with environmental implications. This information, together with other qualitative information, provides a solid foundation for making your investment decision. Pollution prevention (P2) refers to techniques that reduce pollutants at their source rather than controlling pollutants through end-of-pipe controls after they are generated. For example, if you are attempting to minimize volatile organic compound (VOC) emissions, P2 techniques may include implementing workplace practices that increase the efficiency of the use of VOCcontaining materials or reducing or eliminating VOC-containing materials altogether. A pollution control approach, on the other hand, would limit the release of VOCs into the atmosphere via control technologies such as carbon adsorption or incineration. P2 has several advantages over traditional pollution control approaches: • • • • • • It may be more effective than pollution control at reducing the amount of pollution because it reduces in-process emissions; It reduces legal liability costs by decreasing the possibility of chemical waste accidents and disposals; It may reduce costs associated with the procurement, storage, monitoring, permitting, and disposal of hazardous materials; It may enhance production efficiency, thereby decreasing production costs; It may allow firms to avoid future regulatory requirements; and It may enhance corporate image and stakeholder relations.

Companies commonly think of environmental investments from a “must-do” perspective, as a costly diversion from profit-adding projects. Total Cost Assessment (TCA) is an approach to overcoming these obstacles to P2 investments, putting them on the same footing as other potential uses of a firm’s limited capital resources. TCA differs from conventional practices in four key ways:

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P2/FINANCE Version 3.0
Analysis Structure Enhanced On-line Help Flexibility

Introduction

• • • •

Expands the inventory of costs, savings, and revenues to include indirect, less tangible items typically omitted from project profitability analyses; Highlights the accurate allocation of costs and savings to specific process and product lines rather than lumping them into overhead accounts; Extends the time horizon of the analysis to account for longer-term costs and savings typical of P2 investments; and Uses profitability indicators capable of capturing longer-term costs and savings and the time value of money.

In short, P2/FINANCE helps operationalize TCA concepts by providing a tool for an expanded cost/savings inventory, accurate cost allocation, longer time horizons, and multiple profitability indicators.1 Together, these elements help provide a clear picture of the true profitability of a P2 project. In a P2/FINANCE analysis, you define the financial parameters (e.g., tax rate, inflation rate) for the project and then input cost and revenue data for both your business-as-usual operations (Base Scenario) and a proposed investment (Alternative Scenario). In each project, you may define two Alternative Scenarios to compare with a single Base Scenario. P2/FINANCE generates four reports Scenario Summary, Tax Deduction Schedule, Incremental Cash Flow Analysis, and Incremental Profitability Analysis. Each offers a different perspective to assist you in understanding the economics of a potential P2 investment. Version 3.0 of P2/FINANCE contains significant enhancements to Version 2.2 in terms of flexibility and specificity. Using this version, you can define investments that occur over multiple years, specify an escalation rate for individual Annual Operating Cost categories, and select a different depreciation method for each Initial Investment Cost category. P2/FINANCE provides this flexibility while maintaining a user-friendly structure, enabling first-time users to easily input cost data and calculate profitability. P2/FINANCE contains on-line help screens to walk you through the steps of a TCA analysis. Each sheet of the software contains a help screen that briefly describes the function of the sheet and defines relevant financial analysis concepts. As these help screens provide basic instructions only, we encourage you to refer to the User’s Guide for more detailed instructions.

For a more detailed explanation of TCA, see: 1) Allen White, “Accounting for Pollution Prevention,” EPA Journal, July-September 1993, pp. 23-25. 2) Deborah E. Savage and Allen L. White, “New Applications of Total Cost Assessment,” Pollution Prevention Review, Winter 1994-95, pp. 7-15. 3) Allen White, Monica Becker, and James Goldstein, Total Cost Assessment: Accelerating Industrial Pollution Prevention Through Innovative Project Financial Analysis With Applications to the Pulp and Paper Industry , December 1991.
1

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P2/FINANCE Version 3.0

Introduction

ConceptObtaining Interested parties may request a free copy of P2/FINANCE Version 3.0 ualize theP2/ from the US Environmental Protection Agency’s Pollution Prevention Analysis FINANCE Information Clearinghouse at (202) 260-1023 or ppic@epamail.epa.gov.

The software also is available from EPA’s web site: http://es.inel.gov/partners/acctg. Some technical support is available from Tellus Institute. To obtain assistance, telephone 617-2665400 and request P2/FINANCE Technical Support. Email inquiries may be sent to p2finance@tellus.com.

Basic Operations
P2/FINANCE helps you make decisions about how to most effectively use limited capital resources. It calculates the profitability of a potential investment by weighing the initial cost of the investment against the revenues or operating cost savings generated by the investment. A typical financial analysis using P2/FINANCE includes the following steps: • • • • Conceptualize the Analysis; Enter the Financial Parameters; Enter the Cost Data; and Generate Reports. Steam Water Electricity Gas Oil Sewerage

Your first step in P2/FINANCE is to conceptualize, or design, the analysis. Are you considering an expansion of your current capacity? Are you considering a process modification? As you envision the analysis, consider the broad categories of costs that either occur one time as part of the initial investment (e.g., Site Preparation costs) or might change on an annual basis as a result of the investment (e.g., Utility costs). To assist you in developing this list of cost categories, refer to the generic cost/savings inventory found in Appendix A. Using this generic inventory, ask yourself two questions about each cost Financial Parameters category: 1) Are such costs relevant to the analysis? and 2) Are such costs significant ? For Initial Investment Cost each cost category that you deem to be both relevant and significant, identify the specific cost Annual Operating Costs items (e.g., electricity, gas) within that cost category related to the analysis. With your customized TCA cost inventory in hand, prioritize the cost items, choosing to most accurately quantify those items that make best use of your limited resources. Cost items that you decide not to include in the quantitative analysis should be noted as qualitative considerations, so that you continue to keep the broader picture in view.
Enter the Financial Params.

With a vision of the analysis in mind, your next P2/FINANCE task consists of specifying the default financial parameters for the analysis. These parameters provide a framework for the analysis and include parameters related to the project as a whole as well as those specific to Alternative individual scenarios. Many of these default financial parameters can be tailored later for the individual cost categories within each scenario. Define the Inflation Rate, Discount Rate, Income Tax Rates, default Depreciation Method, and default Depreciation Period for the project, as well as the Name, default Investment Year, and default Lifetime for each scenario.

Base

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Base

Alternative 1 Alternative 2

Tax Deduction Schedules to take a closer look at the tax deductions allowed for each scenario. your firm’s discount rate. The financial parameters include information on depreciation. and providing some tips on using Excel. Internal Rate of Return. Figures for many of the terms illustrate the relationship between the various P2/FINANCE elements.P2/FINANCE Version 3. and the timing of the Initial Investment and Annual Operating Costs. even those indirectly related to the potential investment. These second order effects can be as significant as. Incremental Cash Flow Analyses to calculate the discounted cash flows of the comparison between a Base and an Alternative Scenario. Note: Throughout the Guide “cost” is used to indicate both costs. It includes two types of information: 1) financial parameters and 2) cost and revenue data. a change to painting operations may require a change in upstream degreasing operations with relevant cost implications. inflation. the next step is to generate reports in P2/FINANCE.0 Enter the Cost Data Generate Reports Introduction Input the relevant initial investment and Annual Operating Costs and revenues for both the Base and the Alternative Scenarios. Terminology P2/FINANCE combines financial and cost elements together to create a financial analysis. and Discounted Payback. not as a formal accounting term. Profitability is used throughout the Guide as a measure of the investment’s performance. (These parameters are discussed in more detail on pages 2-3 through 2-12 of the Guide). cost savings.6 . You can access Scenario Summaries to review the contents of each scenario. For example. Elements of a Financial Analysis Financial analysis is used to estimate the profitability of a potential investment. The cost and revenue data include both Initial Investment Costs and Annual Operating Costs. defining important terms used throughout the Guide. direct first order effects. 1. As you enter cost data. and the Incremental Profitability Analysis to review profitability indicators such as Net Present Value. Terms are used consistently to differentiate these elements and their functions. or even more significant than. Getting Started in P2/FINANCE This section sets the stage for the remaining sections of the Guide by detailing the elements of a financial analysis. reconfirm that you have included all relevant costs. and revenues except where noted. Once you have defined the financial parameters and cost data for an analysis. income tax rates.

leave the Base Scenario empty.P2/FINANCE Version 3. To calculate the profitability of an investment without comparing it to business-asusual operations.7 . These changes to Alternative Scenario 1 also will carry through to Alternative Scenario 2 and the Base Scenario because cost category names must remain consistent between the Base and the Alternative Scenarios for reporting purposes. Identify the relevant cost items for each scenario. is an operating cost item. Cost Category Cost items that are similar to one another are grouped Utilities together into broader cost categories. the cost item Steam would be included in the Annual Operating Cost category called Utilities. Steam. In P2/FINANCE. Again. there are cost categories for both Initial Investment and Annual Operating Costs.0 Introduction Cost Item Cost item refers to the name of a specific cost or revenue included in the analysis. you can modify the names of the cost categories to be used in the analysis while working on Alternative Scenario 1. keeping in mind that they can vary from one scenario to another. 1. Analysis Analysis An analysis estimates the profitability of an Alternative Scenario in comparison with the Base Scenario. Cost items can be related to the Initial Investment or to Annual Operating Costs and revenues. Scenario Scenario A scenario contains all cost data and financial parameters related to a potential investment (an Alternative Scenario) or for the current business-as-usual practices (the Base Scenario). For example. for example.

Format Conventions Formats such as color and font styles are used consistently throughout P2/FINANCE and its User’s Guide. Cells with a green or blue background contain important on-screen information for the user.P2/FINANCE Version 3. P2/FINANCE uses color to indicate areas for user input throughout the software. Only cells with a yellow background allow user input. all other cells are locked and do not allow user modifications. Similarly. P2/FINANCE’s User Guide uses font styles to illustrate certain features of the software. in the statement. because the vendor disposal cost for both products does not begin until Year 4.0 Introduction Project Project A project comprises all data from the Base Scenario and Alternative Scenarios and is equivalent to an Excel worksheet file. such as the Default Parameters sheet. and some of which present data summaries or analyses. “Again. the environmental engineer defines the Start Year for that category as 4. P2/FINANCE Administrative Commands P2/FINANCE Organization P2/FINANCE consists of a series of different worksheets.8 . Bold text indicates user input. The names of these sheets and their abbreviations follow: • • • • • Project Title sheet  (Project Title) Default Parameters sheet  (Default Parameters) Initial Investment Costs sheet  (Initial Investment) Annual Operating Costs sheet  (Annual Operating) Scenario Summary sheet  (Scenario Summary) 1. For example. some of which accept data input. text phrases with the first letter of each word capitalized reflect the labels of data entry fields and other on-screen titles.” The titles of all sheets in the software. are also capitalized.” the bold text indicates that the user should input “4” into the field labeled “Start Year.

g. In some cases the tab for the sheet you want to access will not be visible on the screen.. you can print any sheet of P2/FINANCE by clicking on the relevant print boxes. Each tab corresponds to one of P2/FINANCE’s sheets. Base Scenario and Alternative Scenario 1) by clicking on the relevant scenario button at the top of the screen: The buttons say: Alt1. use the tab scrolling arrows at the bottom left of the screen. next to the Print button. The Cash Flow sheet has two alternatives: a comparison of Base vs Alt 1 and a comparison of Base vs Alt 2. Initial Investment Costs sheet). In cases where you move to a sheet that does not have different scenario sections (e. Printing A Print button will always be visible at the top of the computer screen.. Moving Between Sheets When you open P2/FINANCE. P2/FINANCE remains in your current scenario (e. The Project Title.. Project Title sheet). you enter the Project Title sheet. and Profitability Analysis sheets apply to all scenarios and therefore no scenario buttons appear on the screen for those sheets. Clicking on the Help button will bring you immediately to the on-line help screen relevant to the sheet in which you are working. For example.P2/FINANCE Version 3. even as you scroll down through a sheet.g. Using this menu. you can move between scenarios (e. To access a different P2/FINANCE sheet click on the tab buttons at the bottom of the screen. The print box for the sheet you are currently working on will already be selected.9 .0 • • • Tax Deduction Schedule sheet  (Tax Deduction) Incremental Cash Flow Analysis sheet  (Cash Flow) Incremental Profitability Analysis sheet  (Profitability Analysis) Introduction Each of these sheets is described in detail in Section 2 of this User’s Guide. The inner set of tab scrolling arrows scrolls the tab button bar one at a time..g. but you can easily un-select it. The scenario buttons will always be visible at the top of the computer screen as you scroll through a sheet. Clicking on this button will bring up a Print Selection Menu that contains brief instructions. Base Scenario. Alt2. If you are working in a sheet that does not have different scenarios 1. Help Function A Help button always appears at the top of the screen. simply click on the tab titled Initial Investment. P2/FINANCE automatically takes you to the top of the sheet. the outer set of tab scrolling arrows brings you immediately to the very beginning or the very end of the tabs button bar. The scenario buttons on this sheet therefore say Alt1 vs Base and Alt2 vs Base. and Base. Default Parameters. To locate the desired tab. to access the Initial Investment Costs sheet. Alternative Scenario 1) when you move between sheets. Moving Between Scenarios Within a given sheet (e.g.

you may want to note the default size so that you can return to it easily. If. Excel Tips Although this Guide assumes user familiarity with Excel for Windows. Excel will ask you whether you want to save the file. In either kind of sheet (with or without more than one scenario). P2/FINANCE’s default zoom size is set so that the entire width of a sheet (with the exception of the Tax Deduction and Cash Flow sheets) fits onto the screen. you must click on the Calc button. Instead. This will bring up a self-explanatory zoom menu. you can exit the help screen by clicking on the Return to Top button at the top of the screen. however. a 1 . P2/FINANCE will return to the default manual setting. but not every time you enter new data or make changes to existing data. When P2/FINANCE is ready for you to enter data or make other changes. choose Options. go to File then Exit. you can exit the help screen by clicking on any of the scenario buttons at the top of the screen.P2/FINANCE Version 3. This means that if you make any changes in the data you have entered or if you enter new data. P2/FINANCE has a default setting of “manual recalculation”. When P2/FINANCE is in this manual setting. To close a file. it will automatically recalculate only before you save. In Excel. and the Incremental Profitability Analysis sheet). the status bar at the very bottom of the screen informs you of P2/FINANCE’s current status. P2/FINANCE rarely requires you to use the Excel menus. some general tips on Excel operations appear below. If you change the zoom size. click on the File menu and then select Open. click on the Excel Tools menu. To open a P2/FINANCE file. Select “automatic” rather than “manual”. you may also exit help by using the tab buttons at the bottom of the screen to select a different sheet. P2/FINANCE is set this way so that it runs more quickly. To quit the software. The Excel menus. using the data changes you have made. To save a file. and then the Calculate folder. the Default Parameters sheet. You can also zoom in or out in any given sheet by clicking on the View menu and then selecting Zoom. print or exit the file.10 . however. P2/FINANCE will not return automatically to the default zoom size if you have saved the zoom changes. If you are using a sheet that does have different scenarios. go to File then Close. you want to change from manual recalculation to automatic recalculation.0 Introduction (the Project Title Sheet. Calc Button A Calc button always appears at the top of the screen next to the Print and Help buttons. these changes are not automatically reflected in the various mathematical sums and calculations shown on the screens. If you then close the file and re-open it later. To tell the software to update its calculations. do provide some important additional functions. go to the File menu and then select Save. If you have not saved your changes when you Close or Exit. P2/FINANCE contains special on-screen buttons for most of the common commands.

If you pull down any of the Excel file menus. the “calculate” warning does not always appear when it should -.1.11 . Spreadsheet Protection P2/FINANCE is a protected spreadsheet.0 for Windows Version 3. we have defined a set of recommended hardware and software specifications that will facilitate your use of P2/FINANCE.again due to a small bug in Excel. the status bar will for some reason continue to say “ready” and allow you to keep entering data. however. Protection of this type is necessary to maintain quality control over the program. Additionally. the recalculation will stop. the status bar should display “calculate” any time you make a change to your file. indicating that you must wait to continue your analysis. This is due to a problem in the Excel program. This is a reminder that you need to recalculate to make the various analyses reflect your new inputs. moving between sheets & scenarios or recalculating) the “Ready” message will disappear. Protection of P2/FINANCE ensures that you receive a high quality tool. Using the calculate button is therefore recommended. the file cannot be linked to other files. cells not requiring user input and cells containing formulas are locked and cannot be modified. if you do enter new data. Hardware and Software Specifications Certain minimum hardware and software specifications must be met to operate P2/FINANCE. but are not absolutely essential for its operation. (e. Table 1 lists both the minimum and recommended hardware specifications. Other combinations of Windows and Excel have not been tested.] If P2/FINANCE is operating in the default manual recalculation setting.. [note: if you press F9 to calculate (rather than clicking on the calculate button).P2/FINANCE Version 3. This means that you must be particularly careful about remembering to recalculate before using any of the calculated figures. 1 . If P2/FINANCE is working. the status bar will give a brief explanation of whatever function you have highlighted.g.0 Introduction “Ready” message will appear in the status bar. In addition to these minimum specifications. Unfortunately. Computer Specifications P2/FINANCE was programmed in Excel Version 5.

Note that the file extension.XLS file under a new name to use for a particular project. load the Installation Disk in your disk drive and type: [disk drive letter]:\p2fexcel This action unzips the spreadsheet and copies one file into a C:\P2FEXCEL directory: P2FINAN.P2/FINANCE Version 3. XLS. save the P2FINAN. Note: You may reinstall the software at any time to generate a blank spreadsheet with the name P2FINAN. may not be changed.0 programmed in Excel 5.0 Introduction Table 1. Specifications for Operating P2/FINANCE Version 3.XLS is an empty template that must be copied for each project analysis.11 4 Megabytes 2 Megabytes Yes No Recommended Specifications 486 or Pentium 3.XLS 1 .XLS. P2/FINANCE runs appreciably faster with more memory (RAM). Installation To install P2/FINANCE Version 3.12 . When you are ready to enter data into the spreadsheet.0 in Excel Version 5.0 for Windows Computer Chip Windows Version Memory (RAM) Disk Space Mouse? Color Monitor? Minimum Specifications 386 3.0 for Windows. P2FINAN.11 8 or more Megabytes 2 Megabytes Yes Yes Beyond these minimum requirements.

Step by Step Instructions: Entering Data .2.

At the top of the sheet. Enter a name for the project in the yellow field to the right of the words Project Title. If you are working in the Project Title sheet. P2/FINANCE has a default setting of “manual recalculation”. You can print other sheets by selecting them instead of or in addition to the Project Title sheet. the name of your organization. Accessing Help To access the on-line help screen for the Project Title sheet. To exit the help screen. Therefore.14 . For example. it will already be selected for you. In the remaining yellow fields. see sections on “Calculate Button” and “Excel Tips” on page 1-8. To learn how to change the default setting or to read more about the Calculate function. You may also use the tab buttons at the bottom of the screen to select a different sheet. you can enter the analysis assumptions as well as qualitative considerations related to the project in the Comments section. click on the Print button at the top of the screen to access the general Print Selection Menu. click on the Return to Top button at the top of the screen. 1996.P2/FINANCE Version 3.0 Step by Step Instructions: Entering Data Project Title Sheet On the Project Title sheet. and other information about the analysis. they are not automatically reflected in the various totals and analyses. Printing Scenarios To print the Project Title sheet. This means that if you make any input changes. From this menu. To incorporate the changes. to enter January 25. This help screen describes the information requested on the Project Title sheet and also provides general information on Total Cost Assessment and financial analysis. enter the date of the analysis. you must click on the Calc button. click on the Calc button at the top of the screen. click on the Help button at the top of the screen. enter your name. select the Project Title sheet and then click Okay. Note: P2/FINANCE automatically copies the project name and date entered here to the top of other spreadsheet pages. For example. Accessing Scenarios The Project Title sheet does not contain different sections for each scenario. enter descriptive information about the project for later reference. 2 . type: Date: 1/25/96. Calculating To recalculate totals and other analysis results after entering new data. no scenario buttons appear at the top of the screen.

Although you can tailor many of these parameters to individual cost categories. P2/FINANCE applies some of these parameters—namely.P2/FINANCE Version 3. default Depreciation Period. default Investment Year. As this command has the potential to delete previous work.0 Step by Step Instructions: Entering Data Default Parameters Sheet In addition to cost data.. State. Federal) • Depreciation Method • Depreciation Period Scenario Parameters • Name • default Investment Year • default Lifetime • default Start Year • default End Year Applied . automatically automatically automatically Apply Defaults button Apply Defaults button automatically Apply Defaults button Apply Defaults button Apply Defaults button Apply Defaults button To enter Default Parameters. After activating Apply Defaults. Inflation Rate. to Income Tax Rates for the firm. suppose you change the default Investment Year for Alternative Scenario 1 to Year 2. i. you can tailor the Default Parameters for each cost category in the Initial Investment Costs and Annual Operating Costs sheets. P2/FINANCE allows you to define a set of Default Parameters to use as a starting point. P2/FINANCE asks you twice if you are sure that you want to Apply Defaults. Discount Rate.. If you had already tailored some Initial Investment Cost categories to Year 3.15 . and default Lifetime—P2/FINANCE implements them only after you click on the Apply Defaults button visible on the sheet. to the timing of Annual Operating Costs. range from the Depreciation Method used for an investment. For these parameters. On the left. as soon as you type in the desired value and then hit the Calc button. referred to as the financial parameters for the analysis. P2/FINANCE requires general information about your firm and the proposed investment in order to calculate profitability. For example.. On the right. selecting Apply Defaults deletes ALL prior tailoring of these parameters for individual cost categories. 2 . You can define defaults for: Global Parameters • Inflation Rate • Discount Rate • Income Tax Rates (Local. the Default Parameters sheet lists Scenario Parameters. However. and Income Tax Rates—to the analysis in the same way as other data entries are applied. the Default Parameters sheet lists Global Parameters. those parameters that apply to all scenarios within the project. position your cursor on the appropriate yellow field and enter your selections..e. for those parameters that can be tailored for individual cost categories—default Depreciation Method. This additional information. clicking the Apply Defaults button reverts the Investment Year for all cost categories in the Alternative Scenario 1 to Year 2.

Money has two important characteristics: dollar value and time value. the time value of money remains confusing. For example. Discounting accounts for the opportunity cost of selecting one project over other investment opportunities.16 . Most people are familiar with dollar value. a $200 revenue received in Year 1 is worth more than $200 received in Year 10. The time value of money recognizes that the timing of cash flows is relevant to the profitability of a project. Table 2. Levels of Parameter Definition Default Parameters Sheet X X X X X X X Initial Investment Cost Category Annual Operating Cost Category X Inflation Rate/Escalation Discount Rate Income Tax Rates Depreciation Method Depreciation Period Investment Year Lifetime Start Year End Year X X X X X X Time Value of Money Before describing in detail each financial parameter.5%. Table 2 displays the levels at which each parameter can be defined. and Discount Rate are all described in more detail in the following section on Global Parameters. type: . The time value of money serves as the basis for the Inflation Rate. For example. You can modify some of these Global Parameters for individual cost categories.035 or 3. For many people.P2/FINANCE Version 3.5%. P2/FINANCE allows you to define financial parameters at two levels in the software: 1) on the Default Parameters sheet and 2) for individual cost categories on the Initial Investment Costs and Annual Operating Costs sheets.0 Step by Step Instructions: Entering Data Note: Enter percentages as decimals or with a percent sign (%). it is useful to discuss one key concept in project financial analysis—the time value of money. however. Global Parameters On the left of the Default Parameters sheet. to define an inflation rate of 3. 2 . Escalation Rate. The Inflation Rate. Inflation and escalation both reflect the fact that money loses value over time as prices increase. P2/FINANCE lists Default Parameters that are defined for the entire project Global Parameters. preferring to have $1000 instead of $50. Escalation and the Discount Rate. A description of each follows.

$119. You can choose either way for your analysis. For example. Applying a 4.P2/FINANCE Version 3. the difference between the total increase in prices and the Inflation Rate.5% Inflation Rate to an Annual Operating Cost of $100 inflates that cost to $104. i. In addition to this global Inflation Rate. In the first (“real”) approach. Escalation is defined on the Annual Operating Costs sheet for individual cost categories. you include an Inflation Rate in the analysis and apply a nominal Discount Rate that incorporates inflation. at “Year zero”.05). If you predict that inflation will be 5%.e. Escalation. if a printer buys a new printing press.0 Step by Step Instructions: Entering Data Inflation Rate Inflation reflects the fact that prices rise over time (e. and so on. the firm expects to see increased sales revenues via the new production line. the firm should determine the 2 . Discount Rate The practice of “discounting” is a way of accounting for a second aspect of the time value of money. then the Escalation Rate for waste disposal costs is equal to 2%. defined as a percentage. you do not include an Inflation Rate in the analysis and you apply a real Discount Rate that does not incorporate inflation. represents cost increases above the Inflation Rate. each with a different financial benefit for the firm. For example. whereas in Year 2 a sheet of the same substrate costs $1. For example. P2/FINANCE allows you to define a global Inflation Rate on the Default Parameters sheet. In the second (“nominal”) approach. you expect costs to rise at a rate lower than the global Inflation Rate. P2/FINANCE then applies that percentage to both the Annual Operating Costs and Initial Investment Costs over time in all scenarios. but make sure that the Discount Rate you choose corresponds to the inflation approach you have selected.. P2/FINANCE allows you to assign an Escalation Rate to Annual Operating Cost categories. Simply enter a percentage in the data entry field. $114. $109.50 in Year 1. P2/FINANCE allows you to choose between two approaches to financial analysis.20 in Year 2. the firm expects to see reduced raw material purchase costs and reduced waste disposal costs.17 . one sheet of printing substrate costs $1 in Year 1. If the printer instead buys a solvent distillation system. the firm foregoes the opportunity to increase production capacity by purchasing a new press with that money. A firm usually has multiple investment opportunities. When a firm invests its money in the purchase of a piece of equipment now. indicating that for a particular cost category. In order to choose between the available investment opportunities. Note: Escalation can be a negative percentage. but that waste disposal prices will increase at an annual rate of 7%. While the global Inflation Rate is defined on the Default Parameters sheet.25 in Year 4. The practice of discounting acknowledges that there are “opportunity costs” to using money.g.12 in Year 3.. waste disposal costs often rise at a rate higher than average inflation. when a printer chooses to invest in a solvent distillation system. say 3-5 years or even longer. the firm expects to see a financial return on this investment over a certain period of time.

The value of your company’s Discount Rate also depends on the approach to financial analysis you have chosen: the real approach vs. The relationship between the two types of Discount Rate is shown below: N = R + I + (R * I) where: N = Nominal Discount Rate R = Real Discount Rate I = Inflation Rate 2 . ensure that the firm recovers its “cost of capital”.g. you should use a real Discount Rate. The financial return on an investment should at least recover the cost of these investment funds. Instead of detailing the source and cost of available investment capital for every individual investment project.. As such. The Discount Rate.. The use of the weighted average cost of capital as the firm’s Discount Rate for the financial analysis of investment opportunities allows the firm to select the investment opportunities that are profitable enough. a measure that characterizes the balance between the firm’s use of equity capital and debt capital (including the tax effects of using debt capital) over a longer period of time. the chosen Discount Rate should. As discussed previously.e. the Discount Rate is used to account for the time value of money as money that a firm invests now brings returns in the future. then you should not incorporate inflation in your Discount Rate. if you have included an Inflation Rate in your financial analysis.P2/FINANCE Version 3. use a nominal Discount Rate. i. For example. Alternatively... expressed as a percentage.. at minimum.e. a loan from a bank. i. if you have not included an Inflation Rate in your financial analysis. at minimum. to cover the firm’s average money costs. make sure that your Discount Rate also incorporates inflation. i. the financial return from an investment should at least cover the cost of the money required for the investment. i.0 Step by Step Instructions: Entering Data rate of financial return that it expects from a typical investment.g. The Discount Rate of a firm should approximate the average financial return expected on a typical investment made by that firm. firms typically use a weighted average cost of capital for the firm as a whole. the money used for an equipment purchase might come from “equity capital” (e. The expected rate of return for a typical investment is called the firm’s Discount Rate.18 . the nominal approach. stock funds. on which the firm will have to pay interest).e. and hopefully reap a profit above that minimum.e.. and compare the financial benefits of the specific projects at hand to that expected rate of return and also to each other. This “weighted average cost of capital” is often used as the firm’s Discount Rate. on which the firm will have to pay dividends) or it might come from “debt capital” (e. is used to “discount” dollars received by the firm in future years as a result of an investment in Year zero.

e.L)] + S + L where: A= F= S= L= Aggregate Income Tax Rate Federal Income Tax Rate State Income Tax Rate Local Income Tax Rate P2/FINANCE applies this aggregate value to the Incremental Cash Flow Analysis (i. thus.g. The Discounted Cash Flow is then used to calculate Net Present Value and Discounted Payback on the Incremental Profitability Analysis sheet. interest and principal) in the analysis. instead of adjusting the Discount Rate for this risk.0 Step by Step Instructions: Entering Data The typical real Discount Rate for a stable business ranges from 8% to 20%. Because a Discount Rate is based on your cost of capital. it incorporates financing parameters (e. and Federal Income Tax Rates for the project by entering the appropriate percentages in the yellow fields on the Default Parameters sheet. Define a Discount Rate for the project on the Default Parameters sheet. the comparison of each Alternative Scenario with the Base Scenario) and. Increase the Discount Rate for those investments that are riskier than average. thus. Because you can deduct your state and local taxes from your federal taxable income. Define the Local. The amount to vary the Discount Rate to account for risk is often a product of intuition rather than quantitative analysis. 2 2 . the Aggregate Income Tax Rate is the same for all scenarios within a project. decrease the Discount Rate for those investments that are less risky than average. the Discount Rate is the same for all scenarios within a project. 2 If the risk associated with a proposed investment differs from the risk of investments generally made by the firm.e. Generally. P2/FINANCE uses the Discount Rate to calculate the Discounted Cash Flow on the Incremental Cash Flow Analysis sheet.19 ... P2/FINANCE applies this value to the Incremental Cash Flow Analysis (i.. the comparison of each Alternative Scenario with the Base Scenario) and. include an estimate of the legal liability related to an investment directly in the analysis.S .P2/FINANCE Version 3. For example. P2/FINANCE calculates an Aggregate Income Tax Rate using the formula: A = [F * (1 . the Discount Rate should be adjusted accordingly. avoiding the need to directly include them in the cash flow calculations. State. Income Tax Rates Taxes can play a major role in the profitability of any project and are calculated at a companywide level. The Discount Rate is one way to measure the risk associated with an investment. it is preferable to directly quantify the risk or uncertainty associated with an investment.

Using the standard IRS Depreciation Method double declining balance switching to straight line with a half-year convention (DDB)and applying a Discount Rate of 10% (assuming 0% Inflation Rate) would over time generate a tax shield of $26. enter a number in the yellow field labeled default Depreciation Period. to define the number of years over which the equipment is depreciated. However. fully deduct from taxes) some non-equipment costs (e. suppose you purchase a new dry cleaning machine for $35.000 and depreciate it over 7 years. select a default Depreciation Method and default Depreciation Period to use as a starting point for the analysis. For example.075 in Year 0 dollars. can be entered into the software as Annual Operating Costs/savings. Note: This Guide provides general information on how to estimate the depreciation impact of a potential project. consider whether the proposed investment would change your current tax rates. check with an accountant or the IRS to ensure the use of an appropriate depreciation method and period.. To define a default Depreciation Method. P2/FINANCE allows you to select “Depreciation” Methods for both Expensed Initial Investment Costs and Working Capital Initial Investment Costs. (For further information on Working Capital.g. the firm might jump to a higher tax bracket. On the Default Parameters sheet. if the investment would result in an increase in production with a corresponding increase in revenues. For example. The remaining value of the equipment in each year (Initial Investment Cost . Depreciation is the gradual deduction of the equipment costs over time. P2/FINANCE allows you to define depreciation parameters at two different levels in the software: 2 . Start-up Training) associated with the initial investment. These tax impacts.e. where applicable. Because depreciation does not account for the time value of money. The IRS defines two accelerated schedules for this purpose.cumulative depreciation) is the Remaining Book Value of the equipment.20 . You cannot depreciate or expense Working Capital Costs (e. firms may directly expense (i. Note: P2/FINANCE does not explicitly include capital gains taxation or investment tax credits. Although the IRS requires you to depreciate equipment costs over time.g. Site Preparation.P2/FINANCE Version 3. Similarly. firms benefit from depreciating equipment as quickly as possible. Depreciation The Internal Revenue Service (IRS) permits firms to shield some of their taxable income through tax depreciation of the Initial Investment Costs.. IRS specifies the method and time period to calculate the depreciation for a piece of equipment. see pages 2-17 and 2-18). these costs are recovered at the end of the Lifetime of the project. when filing your taxes.. The calculation of depreciation does not take into account the time value of money. enter one of the depreciation codes listed on the Default Parameters sheet and below.0 Step by Step Instructions: Entering Data When defining your Income Tax Rates. inventory expenses) because they do not represent real cash expenses.

Not knowing when in a year the equipment is purchased (or placed into service). DDB is the most commonly used Depreciation Method because it allows the firm to deduct a higher percentage of the Initial Investment Cost early in the Depreciation Period. DDB. this IRS convention allows firms to deduct only a half year’s value of depreciation in the first year the equipment was placed into service.5DB (150% Declining Balance switching to Straight Line) . To recapture the lost half year of depreciation. ♦ WC (Working Capital (not tax deductible)) . ♦ DDB (200% Declining Balance switching to Straight Line) .e. the IRS extends the Depreciation Period by a half year. Depreciation Methods P2/FINANCE allows the user to select a Depreciation Method for each Initial Investment Cost category from several choices: ♦ SL (Straight Line) . SL. Working Capital Costs are returned to the cash flow at the end of the project’s Lifetime. P2/FINANCE also allows the user to select from two non-Depreciation Methods: ♦ EXP (Expensed (tax deductible in the first year)) .21 . On the Initial Investment Costs sheet for each cost category to override the default Depreciation Method and default Depreciation Period for costs in that particular category.An accelerated schedule in which the equipment is depreciated at a higher rate in the beginning of its Lifetime.P2/FINANCE Version 3. If depreciation is not relevant to a particular cost category. P2/FINANCE automatically applies a half-year convention to all depreciation calculations (i. Marking a category as “WC” informs P2/FINANCE that these costs need to be added back to the cash flow at the end of the cost category’s Lifetime. On the Default Parameters sheet as a Global Parameter for the project. For example. 2 .. ♦ 1. P2/FINANCE depreciates equipment with a Depreciation Period of five years over six years with a half year’s depreciation taken in the first and sixth years.5DB). 1.Working Capital Costs are neither depreciated or expensed. and 2.Another accelerated schedule at a lower rate.These non-equipment costs are fully deducted from the cash flow as operating expenses in the year following the Investment Year.The depreciation amount is constant over the Depreciation Period.0 Step by Step Instructions: Entering Data 1.

p. 7th ed. and for milling grain Sewage treatment plants. Depreciation Period by Property Type3 Property Small tools Automobiles. D. and property used for research and experimentation Office equipment and most manufacturing equipment Machinery and equipment used for petroleum distilling and refining.0 Depreciation Period Step by Step Instructions: Entering Data The IRS has developed regulations on Depreciation Periods allowed for different types of property. office machinery.D. In general.. Table 3.P2/FINANCE Version 3.5 years 31..5 years Residential rental property Buildings and real estate placed into service before 5/13/1993. telephone and electrical distribution facilities. 718. CMA. Noreen. Ph. Garrison. the following Depreciation Periods listed in Table 3 apply.5 years 39 years Ray H. (Burr Ridge.22 . IL: Irwin. CPA and Eric W. Buildings and real estate placed into service after 5/12/1993. Managerial Accounting.B.A. and land improvements Service stations and other property with a useful life of less than 27. 1994). 3 2 . computers. Period 3 years 5 years 7 years 10 years 15 years 20 years 27.

From the default Investment Year. Second. Name Define a Name for the scenario here.. Specify an Investment Year of 2 for the latter equipment cost category. This relationship between Initial Investment Costs and Annual Operating Costs stems from financial analysis convention. Lifetime defines when Working Capital is no longer needed for the project and is available for other uses. if you purchased a paint spray booth in year 0. you define the Name. which assumes that investments occur at the end of the year (e. you would not begin accounting for Annual Operating Costs. on the Initial Investment Costs sheet. enter 0 as the default Investment Year. Simply enter a number in the yellow field for each scenario.. The return of Working Capital appears as a revenue in the analysis because the investment can. It is possible to analyze multi-year investments for which you would purchase some equipment at the end of Year 0 and then more equipment at the end of Year 2. revenues. This convention ensures that each year (after Year 0) reflects a full year of costs due to the investment.g. it defines when the equipment is salvaged (i. Lifetime P2/FINANCE allows you to define a default Lifetime for each scenario. Lifetime affects the Initial Investment Costs in two ways. and the default Lifetime for the scenario. Year 0 is the most common Investment Year. Simply enter a Lifetime value in the labeled yellow field for each scenario.g. 1996). 1995) and that depreciation and other tax impacts as well as operating costs do not start until the beginning of the following year (e. P2/FINANCE identifies the default Start Year for the Annual Operating Costs as the following year. January 1. For example.. You later can tailor the Investment Year for individual Initial Investment Cost categories.0 Step by Step Instructions: Entering Data Scenario Parameters Other Default Parameters are defined for each individual scenario.P2/FINANCE Version 3. create two equipment cost categoriesPurchased Equipment: Year 0 and Purchased Equipment: Year 2. Investment Year P2/FINANCE allows you to specify a default Investment Year for each scenario.e. Then. P2/FINANCE then copies this Name to all sheets for the scenario. December 31. For such an investment. On the Default Parameters sheet.23 . the default Investment Year. P2/FINANCE automatically defines the default Start Year and default End Year for the scenario. in 2 . and tax implications (such as depreciation) until year 1 when you would have a full year of operation. sold) so that P2/FINANCE can include the revenue from the sale as well as related taxes in the analysis. First.

sell the Working Capital to another investment. You later can tailor this default End Year value for individual Annual Operating Cost categories. if you define Year 2 as the default Investment Year and 10 as the Lifetime of the investment. click on the Print button at the top of the screen to access the general Print Selection Menu.24 . If you are working in the Default Parameters sheet. Accessing Scenarios The Default Parameters sheet does not contain different sections for each scenario. P2/FINANCE uses the default Lifetime to define the default End Year for the Annual Operating Costs. it will already be selected for you. Accessing Help To access the on-line help screen for the Default Parameters sheet. You can print other sheets by selecting them instead of or in addition to the Default Parameters sheet. In addition to these two uses. You later can modify this default Start Year on the Annual Operating Costs sheet for each cost category. P2/FINANCE automatically defines Year 4 as the default Start Year for Annual Operating Costs.0 Step by Step Instructions: Entering Data essence. P2/FINANCE automatically defines Year 12 as the default End Year for the Annual Operating Costs. For example. Initial Investment Costs occur at the end of the year and Annual Operating Costs begin in the following year. Printing Scenarios To print the Default Parameters sheet. For example.P2/FINANCE Version 3. Start Year P2/FINANCE automatically defines the default Start Year for the Annual Operating Costs as the year after the default Investment Year. click on the Help button at the top of the screen. if you define Year 3 as the default Investment Year. Therefore. According to financial analysis convention. You later can modify this default End Year on the Annual Operating Costs sheet for each cost category. You later can tailor the default Lifetime for individual Initial Investment Cost categories. From this menu. End Year P2/FINANCE automatically defines the default End Year for the Annual Operating Costs by adding the Lifetime to the Investment Year. select the Default Parameters sheet and then click Okay. This help screen defines each of the financial parameters listed on the Default 2 . no scenario buttons appear at the top of the screen.

To exit the help screen. You may also use the tab buttons at the bottom of the screen to select a different sheet.25 . To incorporate the changes. Calculating To recalculate after entering new data. To learn how to change the default setting or to read more about the Calculate function. you must click on the Calc button. P2/FINANCE has a default setting of “manual recalculation”. click on the Calc button at the top of the screen. they are not automatically reflected in the various totals and analyses. see sections on “Calculate Button” and “Excel Tips” on page 1-8.0 Step by Step Instructions: Entering Data Parameters sheet. This means that if you make any input changes. 2 . click on the Return to Top button at the top of the screen.P2/FINANCE Version 3.

changes to your current process. require an initial investment. the shop would enter the Initial Investment Costs needed to transfer some of its capacity to wet cleaning in Alternative Scenario 1 and input the Initial Investment Costs related to the pollution control devices in the Base Scenario.g. i. engineering.” The term capital cost generally refers only to equipment and other direct material cost items. is not sensitive to the precise timing of Initial Investment Costs and Annual Operating Costs within a calendar year. the default Start Year for Annual Operating Costs always is the year following the default Investment Year. however. You can use the cost categories to organize these modifications. or business-as-usual activities. For example.g. such as labor associated with planning. revenues. if you purchase a rotary tiller at the end of Year 4.. An example of this broader view is P2/FINANCE’s use of the term “Initial Investment Costs” as a replacement for “capital costs. Instead. As a result of this timing convention. and thus omits indirect and non-depreciable costs. financial analysis convention assumes that Initial Investment Costs occur at the end of the year (e. Depreciation Method) that differ from the Default Parameters.0 Step by Step Instructions: Entering Data Initial Investment Costs Sheet Once you define both the Global and Scenario Parameters for the project on the Default Parameters sheet. enabling it to meet air emission limits without pollution control devices. First. To assess the profitability of such an operating change.26 . Indirect costs related to the initial investment. For example.. The shop. cost categories are used to indicate a set of financial parameters (e. i. In cases where the Base Scenario. and Incremental Cash Flow Analysis sheets for tracking and organizing cost data. 1996). you would not begin accounting for Annual Operating Costs. and training.. where feasible.e. For these cases. an auto manufacturer depreciates most equipment over seven years with the exception of small and special tools that depreciate 2 . 1995) and that depreciation and other tax impacts as well as Annual Operating Costs do not start until the beginning of the following year (e. and tax implications (e. enter Initial Investment Costs in both Alternative and Base Scenarios. In many cases. a dry cleaning shop may face a regulation that requires it to add pollution control devices to their dry cleaning machines to meet air emission limits.. identify the costs required to start up the investment by developing a cost inventory related to the initial investment. enter the Initial Investment Costs under an Alternative Scenario. Second. Total Cost Assessment (TCA) expands the definition of Initial Investment Costs to include a wider range of costs than typically considered in conventional financial methods. This convention ensures that each year (after Year 0) reflects a full year of cost impacts due to the investment.g. Cost categories serve two purposes in P2/FINANCE. include them in your analysis to enhance its accuracy. considers transferring some of its capacity from dry cleaning to wet cleaning. For example. P2/FINANCE allows you to define Initial Investment Costs for any scenarioAlternative or Base. Financial analysis estimates the profitability of an investment and as an estimate. January 1. First.. you can begin entering cost data related to the initial investment. December 31. Tax Deduction Schedule.. they are used in the Scenario Summary. Keep these other Initial Investment Costs in mind and. can impact the profitability of the investment and thus merit inclusion in the analysis. also requires an investment. only Alternative Scenarios. depreciation) until Year 5 when you would have a full year of operation. The first step on the Initial Investment Costs sheet is to define the relevant cost categories for the project. those that are depreciable.P2/FINANCE Version 3.g.e.

The Investment Year can never by greater than 15. titled Purchased Equipment . P2/FINANCE monitors the parameters defined for each cost category and gives an error message (P2F #ERR) in the TOTAL field for a cost category when the defined combination of parameters is not allowed. Because the cost items are not used for reporting purposes by the program.0 Step by Step Instructions: Entering Data over three years. • • • • • • With a Depreciation Method of DDB.P2/FINANCE Version 3. they can vary from scenario to scenario. or SL. define two purchased equipment categoriesone with a 7 year Depreciation Period. Note: For each cost item. The only exception to this sign convention is Salvage Value. P2/FINANCE inflates Initial Investment Costs that do not occur in Year 0. the Depreciation Period must be greater than 0. titled Purchased Equipment . 2 . using the global Inflation Rate and the Investment Year defined for that cost category.3 Years. To accommodate both Depreciation Periods in a single scenario. The Depreciation Period can never be less than 0 or text. Within a project. the names of Initial Investment Cost categories must remain consistent from scenario to scenario because P2/FINANCE tracks costs in the Scenario Summary. 1. For example. enter the relevant cost item names within each cost category. enter costs as positive values and revenues as negative values. you can modify the names of cost categories only in Alternative Scenario 1.5DB.7 Years and the other with a 3 year Depreciation Period. Tax Deduction Schedule. and Incremental Cash Flow Analysis sheets by cost category.27 . the choice of DDB as the Depreciation Method with a Depreciation Period of 0 yields P2F #ERR. P2/FINANCE automatically adjusts the names of cost categories in other scenarios to reflect changes made in Alternative Scenario 1. a revenue that is entered in the Salvage Value field as a positive value. The Lifetime can never be less than 1 or text. In P2/FINANCE. The Investment Year can never be less than 0 or text. Therefore. Having defined the cost categories. The Depreciation Method must be one of the five P2/FINANCE codes. Several rules govern parameters defined at the category level. always enter the Initial Investment Cost in Year 0 dollars regardless of the year in which the cost occurs.

445 and includes this value as a revenue related to the investment...0 Step by Step Instructions: Entering Data Salvage Value If your investment has resale potential at the end of its Lifetime. you can change the following Default Parameters to more accurately reflect the profitability of an investment: Investment Year. you can reduce your taxable income by the difference between the two values. Salvage Value < Book Value). default Depreciation Method.28 . any revenue received from the resale of fully depreciated equipment is taxable.000 (in Year 0 dollars). Continue this approach with the Lifetime and Depreciation Period parameters until you have groups of cost items that share the same financial parameters. you purchase a printing press in Year 0 for $500. assuming an annual Inflation Rate of 5%.P2/FINANCE Version 3. Because it is unlikely that the Salvage Value of a piece of equipment would exceed its original purchase price.e. If neither of these are relevant for the cost items within a particular cost category. Similarly. If the equipment is sold before it has been fully depreciated. 2 .Book Value) is included in the Tax Calculation on both the Tax Deduction Schedule and Incremental Cash Flow Analysis sheets.. Salvage Value also impacts the taxes related to an investment. P2/FINANCE does not consider capital gains taxation. P2/FINANCE inflates the Salvage Value and includes it on the Incremental Cash Flow Analysis sheet as a revenue in the Lifetime year (i. include its Salvage Value (in Year 0 dollars) on the Initial Investment Costs sheet. In Year 10.e. Salvage Value . if the salvaged equipment is sold for more than its Book Value (i.. and default Depreciation Period. you are evaluating a multiyear investment in which the majority of Initial Investment Costs occur in Year 0 with the exception of some related equipment costs that will not occur until Year 2. Lifetime. the Taxable Gain (Loss) on Salvaged Equipment depends on the difference between the inflated Salvage Value of the equipment and its Remaining Book Value at the end of its Lifetime.e.e. Then within each of these sets.000 and believe that you can sell it at the end of its 10 year Lifetime for $50. Note: Salvage Value is the only revenue you enter as a positive value in P2/FINANCE. Tailoring the Financial Parameters For each Initial Investment Cost category. Salvage Value > Book Value). For example. This difference (i. P2/FINANCE only uses Lifetime to determine when to cash in Salvage Value and Working Capital. Because IRS depreciation equations do not account for Salvage Value. separate the costs first by Investment Year. you have to pay taxes on the difference. To evaluate such an investment. In addition to its revenue-generating potential. Investment Year + Lifetime). you do not have to make sure that all cost items share the same Lifetime. If the salvaged equipment is sold for less than its Book Value (i. P2/FINANCE inflates the Salvage Value to $81. separate all of the costs by Depreciation Method. In the cost category where you have defined the equipment cost. enter its resale value in the yellow Salvage Value field as a positive value. For example. Organize cost items that require the same financial parameters into corresponding cost categories.

its costs should be included in the analysis as Working Capital. or increasing production capacity. These temporary investments can be recovered by the company at the end of the Project’s Lifetime. Because P2/FINANCE adopts the financial analysis convention that investments occur at the end of the year (e.P2/FINANCE Version 3. it may be necessary to purchase $3000 worth of inventory in substrates and inks when you bring a new press on-line at the end of Year 0. if you incur an expensed cost in Year 2. P2/FINANCE ignores Salvage Value entries because only equipment can be salvaged. For example.e. During the project. taxes payable. If you select WC as the Depreciation Method for an Initial Investment Cost category. P2/FINANCE ignores Salvage Value and the Depreciation Period. a release of the tied-up funds) at the end of the project’s Lifetime included as Recovery of Working Capital on the Incremental Cash Flow Analysis sheet. P2/FINANCE does not depreciate or expense WC cost categories and it returns the inflated value of the Working Capital to the cash flow as a revenue in the Lifetime year (i.0 Step by Step Instructions: Entering Data One example of a situation in which you would want to tailor the Default Parameters for an individual cost category is when you have Initial Investment Costs that can be directly expensed. the time value of money must be accounted for through the application of an Inflation Rate and a Discount Rate.e. When you select the EXP method.g.. P2/FINANCE allows you to select a “Depreciation” Method. For example. EXP. To include a Working Capital Initial Investment Cost in a scenario. inventory and cash requirements.. these investments are “tied up” in the project and are not available for other investments. accounts payable. it does not expense these Initial Investment Costs until the year following the Investment Year. If developing an inventory. knowing that you can recover these costs by selling the inventory at the end of the project’s Lifetime. 2 . it cannot be depreciated. such as Site Preparation and Startup Training. The WC code tells P2/FINANCE how to treat the Initial Investment Costs within that category. you would incur a cost at the end of Year 0 (included on the Initial Investment Costs sheet) and see a revenue (i. is directly linked to the proposed project. these other Working Capital impacts are typically minimal and can be omitted from the analysis. For a particular project. P2/FINANCE also ignores the Depreciation Period when you select EXP. Because Working Capital is recovered by the company. Investment Year + Lifetime) for that category. In this example. though. for Initial Investment Costs that should be fully deducted from the cash flow as operating expenses. December 31). your firm may need to temporarily set aside funds for project start-up. If the company’s operations are stable and the proposed project is not expected to have a significant impact on the company’s revenues. enter WC as the Depreciation Method for an Initial Investment Cost category. however. An investment in inventories is a common Working Capital Initial Investment Cost that is relevant for the financial analysis of a project. When beginning a new process. on the other hand.29 . Working Capital can be estimated as a percentage of the expected change in revenues due to the project. Working Capital You also may need to tailor the Default Parameters for Initial Investment Cost categories that denote Working Capital. developing a new product. Some Initial Investment Costs do not have to be depreciated.. Working Capital on a facility-wide basis includes the amount of capital tied up in accounts receivable. P2/FINANCE does not expense it for tax purposes until Year 3.

P2/FINANCE has a default setting of “manual recalculation”. Alternative 2. see sections on “Calculate Button” and “Excel Tips” on page 1-8. Accessing Help To access the on-line help screen for the Initial Investment Costs sheet.P2/FINANCE Version 3. To exit the help screen. This help screen defines each of the components of the Initial Investment Costs sheet. select the Initial Investment Costs sheet and the scenario(s) you want and then click Okay. click on the Help button at the top of the screen.30 . and Base. it will already be selected for you. 2 .0 Step by Step Instructions: Entering Data Accessing Scenarios The Initial Investment Costs sheet contains three sections. Printing Scenarios To print a section of the Initial Investment Costs sheet. click on the Print button at the top of the screen to access the general Print Selection Menu. The buttons say: Alt1. click on the relevant scenario button at the top of the screen. You can print other sheets by selecting them instead of or in addition to the Initial Investment Costs sheet. one for each scenario Alternative 1. To learn how to change the default setting or to read more about the Calculate function. click on the Calc button at the top of the screen. they are not automatically reflected in the various totals and analyses. From this menu. and Base. If you are working in the Initial Investment Costs sheet. which allow you to move between sheets within a scenario. To move between scenarios. This means that if you make any input changes. you must click on the Calc button. The scenario buttons allow you to move between scenarios. Calculating To recalculate after entering new data. You may also use the tab buttons at the bottom of the screen to select a different sheet. click on one of the scenario buttons at the top of the screen. differing from the tab buttons at the bottom of the screen. Alt2. To incorporate the changes.

Thus. 1996). Cost categories serve two purposes in P2/FINANCE. enter costs as positive values and revenues as negative values. Enter the Annual Operating Costs associated with the investment in the Alternative Scenario and costs for business-as-usual operations in the Base Scenario. Within a project. For example.P2/FINANCE Version 3. Tax Deduction Schedule. December 31. the names of the cost categories must remain consistent from scenario to scenario because P2/FINANCE tracks costs on the Scenario Summary. Therefore. After defining the cost categories. The financial parameters that you can modify for Annual Operating Cost categories include Start Year.. End Year. Tax Deduction Schedule. only include in the financial analysis those costs that are likely to change as a result of the investment. using the global Inflation Rate and any Escalation Rate defined for the cost category. In general.. Several rules govern parameters defined at the category level. and Incremental Cash Flow Analysis sheets by cost category. if you do not expect labor costs to change with the purchase of a new paint gun cleaner. enter the relevant cost item names within each cost category.. • Text may not be entered into any of the parameter fields. and Incremental Cash Flow Analysis sheets for tracking and organizing cost data. they can vary from scenario to scenario.e. Note: For each cost item. P2/FINANCE automatically defines the default Start Year for Annual Operating Costs as the year following the default Investment Year. In P2/FINANCE. First.0 Step by Step Instructions: Entering Data Annual Operating Costs Sheet In a financial analysis. January 1. they are used on the Scenario Summary. then omit the cost of labor from the analysis.g. Second. the Initial Investment Costs are weighed against the expected Annual Operating Costs (i. Because the cost item names are not used for reporting purposes. P2/FINANCE automatically adjusts the names of cost categories in other scenarios to reflect changes made in Alternative Scenario 1. Financial analysis convention assumes that all Initial Investment Costs occur at the end of the year (e. 2 . always enter the cost in Year 0 dollars regardless of the year in which the cost occurs. the annual operating revenues or cost savings) associated with the investment.31 . You can modify this Start Year for individual Annual Operating Cost categories as needed. the first step on the Annual Operating Costs sheet is to define the relevant cost categories for the project. P2/FINANCE inflates the Annual Operating Costs. and Escalation Rate. you can later modify the names of cost categories only in Alternative Scenario 1. 1995) and that depreciation and operating costs do not start until the beginning of the following year (e. As on the Initial Investment Costs sheet. You can use the cost categories to organize these modifications. cost categories are used to indicate a set of financial parameters that differ from the Default Parameters.g. P2FINANCE monitors the parameters defined for each cost category and gives an error message (P2F #ERR) in the TOTAL field for a cost category when the defined combination of parameters is not allowed.

Organize cost items that require the same financial parameters into cost categories. Alternative 2. type 0. one for each scenarioAlternative 1. Therefore. separate the costs first by the years over which they will occur (i.P2/FINANCE Version 3. and Escalation. enter $50. and Base. Enter an Escalation Rate in the yellow Escalation Rate field below the cost category name as a decimal number. For example. The ability to tailor the financial parameters allows you to include Annual Operating Costs that do not occur on an annual basis.05 or 5%. Costs within a cost category are first inflated using the global Inflation Rate and then escalated using the Escalation Rate specific to the cost category. and Base. differing from the tab buttons at the bottom of the screen. To organize the costs by financial parameters they share. suppose you want to include a liability cost of $50. Tailoring the Financial Parameters For each Annual Operating Cost category. Escalation Rate Because the global Inflation Rate represents an average increase in prices for all goods. Accessing Other Scenarios The Annual Operating Costs sheet contains three sections. Start Year must never be greater than the End Year. it does not always capture the expected change in costs over time for particular cost items. To move between scenarios. P2/FINANCE allows you to apply an additional Escalation Rate to an Annual Operating Cost category.5%.000. Then.000 (in Year 0 $) in Year 6 in the Base Scenario.e. To enter an Escalation Rate of 5%. Note: P2/FINANCE allows you to define both negative and positive Escalation Rates. For example.0 • • • Step by Step Instructions: Entering Data Start Year and End Year must be greater than 0. suppose you are considering a multi-year investment where some Annual Operating Costs occur from Year 1 to Year 5. set the Waste Disposal Escalation Rate to 1. Create a Annual Operating Cost category titled Liability. if you expect Waste Disposal costs to rise by 5% each year and have set the global Inflation Rate at 3.32 . you can change the following Default Parameters to more accurately reflect the profitability of an investment: Start Year.. Start Year must never be greater than 15. within each of these sets. The scenario buttons allow you to move between scenarios. while another set of Annual Operating Costs occur from Year 6 to Year 10. the Escalation Rate for a specific category and the global Inflation Rate are additive. click on the relevant scenario button at the top of the screen. which allow you to move between sheets within a scenario. organize the costs by Escalation Rate until each group of cost items shares the same financial parameters. End Year. and define the Start Year as 6 and the End Year as 6. The buttons say: Alt1. 2 .5%. Year 1 to 5 and Year 6 to 10). Alt2. For example.

To exit the help screen. Accessing Help To access the on-line help screen for the Annual Operating Costs sheet. you must click on the Calc button. it will already be selected for you. You may also use the tab buttons at the bottom of the screen to select a different sheet. To incorporate the changes. click on the Print button at the top of the screen to access the general Print Selection Menu. 2 . they are not automatically reflected in the various totals and analyses. From this menu. You can print other sheets by selecting them instead of or in addition to the Annual Operating Costs sheet. The help screen defines each of the components of the Annual Operating Costs sheet.0 Step by Step Instructions: Entering Data Printing Scenarios To print a section of the Annual Operating Costs sheet. P2/FINANCE has a default setting of “manual recalculation”.33 . If you are working in the Annual Operating Costs sheet. Calculating To recalculate after entering new data. This means that if you make any input changes. select the Annual Operating Costs sheet and the scenario(s) you want and then click Okay. see sections on “Calculate Button” and “Excel Tips” on page 1-8. click on the Help button at the top of the screen. click on the Calc button at the top of the screen. To learn how to change the default setting or to read more about the Calculate function. click on the Return to Top button at the top of the screen.P2/FINANCE Version 3.

Calculating the Bottom Line: Generating Reports .3.

P2/FINANCE provides an Incremental Cash Flow Analysis that compares an Alternative Scenario to the Base Scenario. taxes. you can generate four types of reports that are detailed below. 1. P2/FINANCE provides an Incremental Profitability Analysis that includes three financial indicators: Net Present Value. Internal Rate of Return. It incorporates inflation. escalation. 3 . 2.e.0 Reports Calculating the Bottom Line: Generating After defining all of the elements of your scenario(s) (i. the results of which P2/FINANCE uses to calculate the financial indicators listed on the Incremental Profitability Analysis sheet. P2/FINANCE provides a Tax Deduction Schedule that details depreciation calculations along with other tax deductions that are incorporated into the Incremental Cash Flow Analysis. and discounting. This report contains a Tax Calculation and a Cash Flow Calculation. It does not include any calculations and can be used as a way to check data entry accuracy.P2/FINANCE Version 3. 3. financial parameters and cost data). P2/FINANCE provides a Scenario Summary with information on the cost data and parameters that you entered for the scenario. and Discounted Payback.35 . depreciation. 4..

The names of the Annual Operating Cost categories appear in the left column. Next to the Cost for each cost category appears its Salvage Value (also in Year 0 dollars).36 . Lifetime. It lists the parameters defined at the cost category level as well as the Default Parameters for the scenario. These Global Parameters affect all scenarios within a project and. Alternative 2.0 Reports Calculating the Bottom Line: Generating Scenario Summary Report The Scenario Summary depicts the scenario as it was defined by the user without performing any of the calculations or inflating the values.P2/FINANCE Version 3. Inflation Rate. followed by the sum of Initial Investment Costs for that category.. In the Global Parameters section. and default End Year. The Annual Operating Costs section of the Scenario Summary lists information entered on the Annual Operating Costs sheet for the scenario. default Depreciation Method. End Year. with the exception of default Depreciation Method and default Depreciation Period. P2/FINANCE lists the name of the scenario in the top left corner and the Date at the middle top. and Depreciation Method defined for each cost category. and Escalation Rate defined for each cost category. The Initial Investment Costs section provides a quick check on the data and financial parameters for the investment portion of a scenario. The financial parameters follow with Start Year. followed by the sum of the Annual Operating Costs for that category (in Year 0 dollars). Each Scenario Summary Report contains four sections: • • • • Initial Investment Costs Annual Operating Costs Global Parameters Scenario Parameters The Initial Investment Costs section of the Report lists information entered on the Initial Investment Costs sheet for the scenario. default Start Year. 3 . and Base. P2/FINANCE reports the default Investment Year. A Scenario Summary exists for each scenarioAlternative 1. The Annual Operating Costs section provides a quick check on the data and financial parameters for the operating cost portion of a scenario. P2/FINANCE reports the Project Title. P2/FINANCE lists all costs in Year 0 dollars (i. cannot be tailored to a particular scenario or cost category. Aggregate Income Tax Rate. and default Depreciation Period. those parameters that relate to an individual scenario. uninflated dollars) on the Scenario Summary.e. The Scenario Parameters section lists the remaining Default Parameters defined on the Default Parameters sheet. Discount Rate. The Global Parameters section lists some of the Default Parameters defined on the Default Parameters sheet. The names of the Initial Investment Cost categories appear in the left column. In the Scenario Parameters section. The financial parameters follow with Investment Year. default Lifetime. Depreciation Period.

The buttons say: Alt1. If you are working in the Scenario Summary sheet. You can print other sheets by selecting them instead of or in addition to the Scenario Summary sheet. To move between scenarios. one for each scenario Alternative 1. click on the Print button at the top of the screen to access the general Print Selection Menu.0 Reports Calculating the Bottom Line: Generating Note: The financial parameters defined for a specific cost category always override the Default Parameters at either the global or scenario level. click on the Help button at the top of the screen. Printing Scenarios To print a section of the Scenario Summary sheet. click the relevant scenario button at the top of the screen. You may also use the tab buttons at the bottom of the screen to select a different sheet.37 . select the Scenario Summary sheet and the scenario(s) you want and then click Okay. differing from the tab buttons at the bottom of the screen. which allow you to move between sheets within a scenario. Accessing Help To access the on-line help screen for the Scenario Summary sheet. it will already be selected for you. and Base. The help screen defines each of the components of the Scenario Summary sheet. Alternative 2. 3 . Accessing Other Scenarios The Scenario Summary sheet contains three sections. To exit the help screen. The scenario buttons allow you to move between scenarios. From this menu. click on the Return to Top button at the top of the screen. and Base.P2/FINANCE Version 3. Alt2.

P2/FINANCE lists the Name of the scenario in the top left corner and the Date in the top right corner.38 . over a period of 15 years.P2/FINANCE Version 3. The top row of data lists the tax deduction allowed in that year through depreciation or expensing of the initial cost. it reports the Initial Investment Cost in the Investment Year and tracks the Remaining Book Value for that category after the depreciation has been taken. For each scenario. The Deduction Detail section appears differently for each cost classification: • Depreciable Initial Investment Costs • Expensed Initial Investment Costs • Working Capital Initial Investment Costs For Depreciable Initial Investment Costs (i. P2/FINANCE lists the cost category name in the left column with its Depreciation Method in parenthesis. DDB. The bottom row serves two functions. or 1.e.5DB for a Depreciation Method). The Expensed Initial Investment Costs reported for each year equals the sum of all cost categories with a “Depreciation” Method of EXP. those categories that have either SL. DDB. Note: The Tax Deduction Schedule reports all costs in inflated and escalated dollars. P2/FINANCE reports the Initial Investment Cost in the 3 .0 Reports Calculating the Bottom Line: Generating Tax Deduction Schedule The Tax Deduction Schedule describes in detail the depreciation and other tax deduction calculations for each scenario and serves as input into the Incremental Cash Flow Analysis sheet. The Working Capital Initial Investment Costs reported for each year equals the sum of all cost categories with a “Depreciation” Method of WC. Each Tax Deduction Schedule contains three sections: • • • Cost Summary Deduction Detail Deduction Summary The Cost Summary section of the Report classifies the Initial Investment Costs in each year into three types based on the Depreciation Method defined in each cost category: • • • Depreciable Initial Investment Costs Expensed Initial Investment Costs Working Capital Initial Investment Costs The Depreciable Initial Investment Costs reported for each year equals the sum of all cost categories with a Depreciation Method of SL. The Deduction Detail section of the Tax Deduction Schedule reports the annual tax deduction for each cost category. P2/FINANCE generates a Tax Deduction Schedule that reports the tax deductions related to each cost category in every year. or 1..5DB. Two rows of data appear for each cost category.

0 Reports Calculating the Bottom Line: Generating bottom row in the Investment Year. not a true cash flow. However. Therefore. Depreciation calculations do not account for the Salvage Value of the equipment.e. P2/FINANCE inflates the Salvage Value to the Lifetime year and calculates: Salvage Value . the IRS allows you to deduct a tax loss from your taxable income. P2/FINANCE fully expenses the cost. P2/FINANCE reports the inflated Initial Investment Cost in the bottom row of the Investment Year column. if you sell the equipment for less than its Remaining Book Value. Note: IRS requirements that firms takes a half year of depreciation at the beginning and end of the depreciation period extend the depreciation period by one year.e.. The Deduction Summary section of the Tax Deductions Schedule summarizes the annual tax deductions related to: • Total Depreciation 3 . P2/FINANCE takes only a half year of depreciation in the Salvage Value year. those categories that list WC as their Depreciation Method). all other years report “NA” in the bottom row to indicate that tax deductions are not applicable. Any revenue received for the sale of depreciable assets above the Remaining Book Value of that asset is taxable. reporting the deduction in the top row. In the first year of depreciation (i. Investment Year + Lifetime). you sell a piece of equipment after it has been fully depreciated. there may be situations when you would want to sell the equipment before it has been fully depreciated.. P2/FINANCE compares the inflated Salvage Value of the equipment with its Remaining Book Value in the Lifetime year (i. the IRS requires you to pay taxes on the difference.e. P2/FINANCE calculates a full year of depreciation in each year until the final year of depreciation (i. For an investment at the end of Year 2 with a Depreciation Period of 5 years. However. For Expensed Initial Investment Costs (i. depreciation actually takes place over 6 years with half year’s depreciation in years 3 and 8. After that first year of depreciation.e. P2/FINANCE reports a half year of depreciation (based on the selected Depreciation Method) in the top row and subtracts that depreciation from the Initial Investment Cost to calculate the Remaining Book Value. in which case you must pay taxes on the revenue generated from this sale. Investment Year + Depreciation Period + 1) in which P2/FINANCE takes the remaining half year of depreciation..e.. In such cases.. the year after the Investment Year for the cost category).Book Value = Taxable Gain (Loss) on Salvaged Equipment.39 . the inflated Salvage Value. but. For Working Capital Initial Investment Costs (i.P2/FINANCE Version 3. Working Capital costs return to the firm in the form of a revenue at the end of the category’s Lifetime.e. the tax implications of Salvage Value must be calculated separately. Therefore. resale at the end of its useful life. you can no longer depreciate it.. which it reports in the bottom row. i. with no Remaining Book Value in the bottom row. have no impact on taxes.e. P2/FINANCE reports the inflated Initial Investment Cost in the bottom row of the Investment Year column. To calculate the impact of Salvage Value on your taxable income.. i. After salvaging the equipment. In the following year. If you sell the equipment for more than its Remaining Book Value. Working Capital Initial Investment Costs can be neither depreciated nor expensed because Working Capital refers only to an internal allocation of costs. those categories that list EXP as their Depreciation Method). Most often. again.

P2/FINANCE simply adds the depreciation or expensing for all of the cost categories. Therefore. differing from the tab buttons at the bottom of the screen. The scenario buttons allow you to move between scenarios. Accessing Help To access the on-line help screen for the Tax Deduction Schedule sheet. You can print other sheets by selecting them instead of or in addition to the Tax Deduction Schedule sheet. To exit the help screen. the Taxable Gain increases it. and Base. This help screen defines each of the components of the Tax Deduction Schedule sheet. click on the Help button at the top of the screen. 3 .P2/FINANCE Version 3. click on the Return to Top button at the top of the screen. select the Tax Deduction Schedule sheet and the scenario(s) you want and then click Okay. it will already be selected for you. You may also use the tab buttons at the bottom of the screen to select a different sheet. Alt2. and Base.40 . Accessing Other Scenarios The Tax Deduction Schedule sheet contains three sections. which allow you to move between sheets within scenarios. From this menu. To move between scenarios. The buttons say: Alt1.0 Reports • • Calculating the Bottom Line: Generating Expensed Initial Investment Costs Taxable Gain (Loss) on Salvaged Equipment To calculate these first two values. P2/FINANCE calculates the Taxable Gain (Loss) by subtracting the Remaining Book Value in the Lifetime year from the inflated Salvage Value. Printing Scenarios To print a section of the Tax Deduction Schedule sheet. Alternative 2. If you are working in the Tax Deduction Schedule sheet. While depreciation and expensing lower your taxable income. click on the Print button at the top of the screen to access the general Print Selection Menu. click on the relevant scenario button at the top of the screen. P2/FINANCE subtracts it from the other tax deductions to calculate the Total Tax Deductions in each year. one for each scenario Alternative 1.

0 Reports Calculating the Bottom Line: Generating Incremental Cash Flow Analysis Sheet The Incremental Cash Flow Analysis reports the incremental Discounted Cash Flow for each Alternative Scenario as compared to the Base Scenario. P2/FINANCE subtracts both Depreciation and Expensed Initial Investment costs from the Annual Operating (Costs) / Savings in each year and then adds the Taxable Gain (Loss) on Salvaged Equipment. subtracting the Base Costs from the Alternative Costs. discounting. P2/FINANCE inflates and reports the incremental Annual Operating Costs in each year.41 . The Tax Deduction Schedule details the calculations for depreciation and other tax deductions that are summarized in this section of the Incremental Cash Flow Analysis.P2/FINANCE Version 3.e. The Incremental Annual Operating (Costs) / Savings section summarizes the Annual Operating (Costs) / Savings for the analysis. in this incremental section. higher Base costs are positive). The Incremental Tax Calculation section incorporates depreciation and other tax deductions to calculate the incremental taxes related to the Alternative Scenario. Each Incremental Cash Flow Analysis presents data over fifteen years in four sections: • • • • Incremental Initial Investment Costs Incremental Annual Operating (Costs)/ Savings Incremental Tax Calculation Incremental Cash Flow Calculation The Incremental Initial Investment Costs section summarizes the Initial Investment Costs for the analysis. To calculate the incremental taxable income for the Alternative Scenario. P2/FINANCE inflates and reports the incremental Initial Investment Cost in each year.Base) differently than the Incremental Annual Operating (Costs) / Savings (Base . Each Analysis incorporates the effects of taxes.Alt) because the analysis weighs the initial costs due to the Alternative (i.. P2/FINANCE calculates the Total Annual Operating (Costs) / Savings in each year by summing all of the cost categories. For each cost category.. higher Alt costs are positive) against the operating savings due to that Alternative (i. For each cost category. Note: P2/FINANCE calculates the Incremental Initial Investment Costs (Alt . P2/FINANCE calculates the Total Initial Investment Costs in each year by summing all of the cost categories. P2/FINANCE applies the Aggregate Income Tax Rate (defined on the Default Parameters sheet) to the Taxable Income to calculate the Incremental Income Tax for the Alternative Scenario as compared to the Base Scenario. and Discounted Payback (described on Pages 3-10 through 3-12 in this section). Internal Rate of Return. subtracting the Alternative Costs from the Base Costs. 3 .e. and inflation on the project’s cash flows and serves as the basis for calculating the profitability indicators—Net Present Value. in this incremental section. P2/FINANCE lists the Name of the project in the top left corner and the Date in the top right corner.

P2/FINANCE includes the Working Capital Initial Investment cost as part of the total Initial Investment Costs for the investment. accounts payable.P2/FINANCE Version 3. differing from the tab buttons at the bottom of the screen. taxes payable.e.42 . P2/FINANCE also applies a Discount Rate to the incremental After-Tax Cash Flow to calculate the incremental Discounted Cash Flow in each year. Instead. Unlike the other costs associated with a project. Because it is only an internal allocation of funds. Two more costs are added into the cash flow at this point to calculate the After-Tax Cash Flow: Recovery of Working Capital and Salvage Value. In the Initial Investment Costs sheet you can define a Salvage Value for each cost category.. To account for the Recovery of Working Capital. Printing Scenarios 3 . click on the relevant scenario comparison button at the top of the screen. For this reason. one that is payable to an external party). at the end of the investment’s Lifetime the Working Capital is free for use in a different project. The Incremental Cash Flow sheet compares each Alternative Scenario with the Base Scenario. it is an internal allocation of funds. this sheet does not contain a separate section for the Base Scenario. P2/FINANCE then includes the inflated revenue from the Salvage Value in the Lifetime year for that category. P2/FINANCE calculates the incremental Cumulative Cash Flow for each year as the sum of annual incremental After-Tax Cash Flows to date. The buttons say: Alt1 vs Base and Alt2 vs Base.0 Reports Calculating the Bottom Line: Generating The Incremental Cash Flow Calculation section calculates the incremental Discounted Cash Flow using data from the top three sections of the analysis. inventories and cash requirements associated with an investment. Salvage Value equals the expected revenue from the resale of equipment at the end of the equipment’s lifetime. P2/FINANCE includes the inflated Working Capital as a one-time revenue at the end of the Lifetime defined for the Working Capital cost category. which allow you to move between sheets within a scenario. one for each combination of Alternative and Base Scenario. Accessing Other Scenarios The Incremental Cash Flow Analysis sheet contains two sections. Working Capital has no impact on the taxes calculated for the firm. The incremental Discounted Cash Flow accounts for the time value of money. Working Capital does not reflect an actual project expense (i. Working Capital provides for accounts receivable. and serves as the basis for calculating two of P2/FINANCE’s three profitability indicators. To calculate the After-Tax Cash Flow in a single year. P2/FINANCE subtracts both the Income Tax (from the Incremental Tax Calculation) and the Initial Investment Costs from the Annual Operating (Costs) / Savings for the Alternative Scenario. The scenario comparison buttons allow you to move between scenarios. Having calculated the After-Tax Cash Flow. To move between these two sections.

From this menu.43 . To exit the help screen.P2/FINANCE Version 3. You may also use the tab buttons at the bottom of the screen to select a different sheet. You can print other sheets by selecting them instead of or in addition to the Incremental Cash Flow Analysis sheet. it will already be selected for you. This help screen defines each of the components of the Incremental Cash Flow Analysis sheet. click on the Return to Top button at the top of the screen. click on the Help button at the top of the screen. Accessing Help To access the on-line help screen for the Incremental Cash Flow Analysis sheet. If you are working in the Incremental Cash Flow Analysis sheet. 3 .0 Reports Calculating the Bottom Line: Generating To print a section of the Incremental Cash Flow Analysis sheet. click on the Print button at the top of the screen to access the general Print Selection Menu. select the Incremental Cash Flow Analysis sheet and the comparison(s) you want and then click Okay.

Net Present Value (NPV) Net Present Value (NPV) over a given period of time equals the sum of the Discounted Cash Flows and requires a firm’s Discount Rate for calculation..000) or $1. -$5. hence. the one with the most positive NPV is the most profitable. NPV is the strongest of the three indicators because it has few limitations and can be used in all types of analyses. P2/FINANCE calculates NPV for 5. IRR is calculated via an iterative process (i. 10. If multiple projects are under consideration. If the IRR is higher than the company’s Discount Rate.000 + $2.P2/FINANCE Version 3.000 + $2. This information helps firms make well-informed decisions as to how to re-invest in their business or modify current practices to reduce costs or increase revenues. 3 . then the project is profitable. Internal Rate of Return. In Year 0 your Discounted Cash Flow (DCF) equals -$5. The project’s NPV in year 3 equals the sum of the DCFs in each year (i.000 + $2.000. the software chooses Discount Rates until it finds one that makes the NPV equal to zero). NPV is a very useful indicator because it is a direct measure of the project’s profitability in dollars and therefore most directly relates to the company’s interest in higher cash flows. You can compare the IRR to your company’s Discount Rate or to the IRR calculated for other projects. One of the important components of Total Cost Assessment (TCA) is the use of multiple financial indicators in measuring profitability.000. For example. Years 0 through 3. plus a time horizon you specify at the top of the Incremental Profitability Analysis sheet.44 .e. and Discounted Payback. P2/FINANCE offers three indicators: Net Present Value.e. and 15 year horizons. depend significantly on the value of the Discount Rate. In general. the one with the highest IRR is the most profitable. Internal Rate of Return (IRR) Internal Rate of Return (IRR) is equal to the Discount Rate that makes the Net Present Value (NPV) of the Discounted Cash Flows equal to zero for a given time period of interest.0 Reports Calculating the Bottom Line: Generating Incremental Profitability Analysis Sheet The Incremental Profitability Analysis sheet reports three common financial indicators that measure the profitability of the analysis. By considering all three indicators you can minimize these limitations and gain a deeper understanding of the project’s profitability. A project is profitable if its NPV is greater than zero.000 and in all subsequent years the imaging system generates a DCF of $2. It does. however. When comparing multiple investments. suppose you invest in a digital paint mixing system costing $5.000.. Each indicator has specific strengths and weaknesses.

and each requires an initial investment of $50. (IRR will not be calculated if there is more than one change in the mathematical sign of the cash flow. which. when you are comparing investments with significantly different magnitudes of costs and revenues.0 Reports Calculating the Bottom Line: Generating IRR is a useful indicator because it is easy to interpret and considers equally all of the cash flows of the investment. A project’s Discounted Payback equals the time when the Net Present Value of the investment equals zero. Discounted Payback Discounted Payback is one of several types of payback calculations. Knowing that payback for a ozonation system is 4 years while payback for a conventional cleaning system is 6 years can help guide decision-making. For example. However. whereas Investment B continues to earn revenues for 20 years. instead reporting NA. To avoid confusion with this indicator. IRR does have its limitations. when you have recovered your investment costs. capital costs in multiple years or widely fluctuating operating costs and revenues). Investment A is more profitable than Investment B because you recover the Initial Investment Cost earlier with Investment A. In addition. In fact. you should avoid using this indicator. Ignoring these later cash flows can mislead you as to the true profitability of the investment. and 15 year horizons. but ignores all cash flows after this threshold. plus a time horizon you specify at the top of the Incremental Profitability Analysis sheet. Payback calculations typically do not incorporate the time value of money through discounting. However. and discounting. As an example. whereas Investment B generates $20. B can have an IRR of 173% and A an IRR of 85% over the first five years. Investment A generates $25.g.000 in revenues for the next three years. However. It considers the cash flows that take place before the investment is paid back. Many companies base their investment decisions on payback because it is easy to understand and use. Using payback principles. P2/FINANCE does not calculate IRR for extremely complex analyses. This example 3 . which would allow for multiple IRR values). measure the time it takes for a company to break even on an investment. Despite these benefits. in general. P2/FINANCE calculates IRR for 5. you should use NPV because it is a direct measure of the dollars the investment will generate.. Investment A generates revenues for only three years. i. a method that includes inflation. IRR can be misleading because it does not directly measure the magnitude of the cash flow or investment but instead measures the return on the investment. A and B. this does not necessarily indicate that B is more profitable for the company.000 and Investment B requires only $500. suppose you are considering two investments.000 in revenues for the next 20 years. but A would generate more than four times as much revenue. Suppose you are considering two investments: Investment A requires an initial outlay of $50. P2/FINANCE calculates Discounted Payback. if you are performing a complex analysis (e. One limitation is that payback does not account for all of the cash flows of a project. Therefore.P2/FINANCE Version 3. you should be aware of certain limitations of this indicator before using it. escalation. 10.45 . Even if Investment B has a higher IRR than Investment A.e.000..

3 . click on the Help button at the top of the screen. see sections on “Calculate Button” and “Excel Tips” on page 1-8. If you are working in the Incremental Profitability Analysis sheet. select the Incremental Profitability Analysis sheet and then click Okay. You can print other sheets by selecting them instead of or in addition to the Incremental Profitability Analysis sheet. A second limitation is that complex scenarios can have multiple paybacks when Annual Operating Costs vary significantly from year to year or when there are Initial Investment Costs in multiple years. For P2 projects. P2/FINANCE has a default setting of “manual recalculation”. Therefore. click on the Return to Top button at the top of the screen. This means that if you make any input changes. This help screen defines each of the financial indicators reported on the Incremental Profitability Analysis sheet. P2/FINANCE does not calculate a Discounted Payback for scenarios that are too complex. they are not automatically reflected in the various totals and analyses. Accessing Scenarios The Incremental Profitability Analysis sheet does not contain different sections for each scenario.P2/FINANCE Version 3. To learn how to change the default setting or to read more about the Calculate function. you must click on the Calc button. Calculating To recalculate after entering new data. click on the Calc button at the top of the screen. To exit the help screen. To incorporate the changes. no scenario buttons appear at the top of the screen.46 . You may also use the tab buttons at the bottom of the screen to select a different sheet. it will already be selected for you. this can be an especially significant limitation because many Annual Operating Costs may occur several years after the Initial Investment Cost. Accessing Help To access the on-line help screen for the Incremental Profitability Analysis sheet. instead it reports NA. click on the Print button at the top of the screen to access the general Print Selection Menu. From this menu. Printing Scenarios To print the Incremental Profitability Analysis sheet.0 Reports Calculating the Bottom Line: Generating illustrates that an investment’s payback does not necessarily reflect its overall profitability because payback only measures the time it takes to reach the break-even point of an investment.

4. Case Studies .

Table 4.An Example of a Basic Analysis This case study illustrates how P2/FINANCE can be used for a relatively basic project analysis. Cost/Savings Inventory for Waste Oil Burner Analysis Initial Investment Costs  Burner Equipment (incl. tax) In-house Engineering Utility Connections (Electricity)  In-house Training  Heating Permit  Related Equipment  Installation Fees Annual Operating Costs Maintenance Operating Labor Waste Disposal Labor Waste Disposal Fees Heating Costs Storage Space Looking back over the cost inventory. as shown in Table 4. The shop compares the Initial Investment Costs and Annual Operating Costs associated with the waste oil burner with the Annual Operating Costs of its current oil handling process—off-site waste disposal. The shop hopes that the waste oil burner can reduce both off-site waste disposal costs and facility heating costs. delivery. Similarly. thereby eliminating the need for any in-house engineering labor. Through discussions with the equipment vendor. Conceptualize the Analysis In this example. the manager initially foresaw a need to do some electrical work to install the burner. This example is based on a factual case study that has been modified to better illustrate some of P2/FINANCE’s features. but later realizes that he can relocate the burner to a different 4 . an auto maintenance shop that has been sending its waste engine oil off-site for disposal evaluates the purchase of an on-site waste oil burner as an alternative. Develop a Cost Inventory The shop manager begins the analysis by developing an inventory of costs and savings that he thinks might change with the switch to a waste oil burner. the manager learns that any engineering services required for the waste oil burner are included in its purchase price. To help develop this inventory. the shop manager narrows down the list of relevant Initial Investment Costs to those cost items he will quantify for the analysis and marks those items with an  in Table 4.48 . the shop manager refers to the Total Cost Assessment Cost Inventory provided in Appendix A of this Guide.

the shop manager begins the data collection process. Collect Cost Data With this inventory in hand. Through discussions with other shops that have installed waste oil burners. According to the shop’s billing records. To simplify the analysis. This fee includes the cost of disposal and applicable manifesting (paperwork) fees.5 hours of management labor per scheduled pick-up. The Base Scenario therefore includes the business-as-usual estimates for these cost items. Assuming a fully burdened labor cost (i. 4 . The scenario includes only Annual Operating Costs because no Initial Investment Costs are required for businessas-usual continuation of oil pick-up by an external waste vendor. leading the shop manager to decide against quantifying this cost. Base Scenario: Current Oil Handling Process The Base Scenario reflects the shop’s usual off-site waste disposal arrangement.e. the manager learns that the labor required to operate the unit under normal conditions is negligible. the manager chooses to include the loss of shop floor space only as a qualitative consideration in the analysis.e.0 Case Studies corner of the shop that already has suitable electrical connections. the shop generally pays its waste disposal vendor $1000 annually to pick up waste oil on an as-needed basis. a cost that includes employee benefits) of $30/hour. the shop temporarily collects waste oil in mobile 5 gallon storage containers on the shop floor and then transfers these into a 500 gallon double-walled above ground storage tank located just outside the facility..P2/FINANCE Version 3. the ten waste oil pickups per year require five labor hours for an annual cost of $150. floor space for the burner) was a relevant Annual Operating Cost that the shop owner felt was difficult to quantify.Vendor Fees For business-as-usual. Waste Oil Handling . eliminating the need for this expenditure. Waste Oil Handling . using billing records to determine current expenditures and talking to the vendor and other shops about the expected costs of the waste oil burner.. Storage space (i. The shop manager also narrows down its list of relevant Annual Operating Costs and marks those he plans to quantify with an .In-house Labor The shop manager estimates the in-house labor associated with business-as-usual waste oil pick-ups to equal approximately 0.49 . Annual Operating Costs The proposed investment in a waste oil burner impacts current costs related to waste disposal and heating.

The shop depreciates equipment using DDB over 5 years. This scenario includes the Initial Investment Costs related to the purchase and start up of a waste oil burner as well as its Annual Operating Costs.331 for purchase of the necessary equipmenta ceilinghung UL listed burner. a stand. The shop manager decides that one technician in addition to himself should attend the training session. and materials. Start-up Training Labor With the purchase of the waste oil burner equipment. resulting in a total delivery charge of $ 292. Such a permit costs $15. 4 . and a heating permit from the city.82 million BTUs/hour for heating the facility in the winter months. The total cost of the waste oil burner (excluding delivery charges) is $5. Installation Fees The vendor will install the equipment for a fee of $ 970.50 . The installation cost is also depreciated over 5 years using DDB.592.722 hundred cubic feet of natural gas) to heat the facility during the previous year.808. which corresponds to a one-time permit fee of $ 89. There is a $73 delivery charge for each item.P2/FINANCE Version 3. EXP. Alternative Scenario 1: Waste Oil Burner In this scenario. the equipment has a lifetime of 10 years and no salvage value.50 per every $1000 spent on capital. EXP. and a support package of the necessary hardware and brackets. labor. Initial Investment Costs Alternative Scenario 1 requires the purchase of a waste oil burner (including delivery charges). installation of the burner. Additional equipment needed to operate the waste oil burner include a 115V AC @ 60 Hz hookup and an air compressor for a total of $ 291. the shop uses one gas-fired boiler with a maximum heat input rating of 1. using the Depreciation Method. a 500 gallon storage tank. at a total internal labor cost (including labor burden) of $55. at a total cost of $17. but instead can expense it. The permit fee is directly expensed. According to the vendor. The shop is not required to depreciate this cost. the purchase of a waste oil burner replaces the shop’s current off-site waste disposal arrangement. start-up training labor time. Waste Oil Burner and Other Equipment The equipment vendor quoted a cost of $4. the vendor offers a one-hour training session for at least two people in the shop.613 million BTUs (equivalent to 24.0 Building Heating System Case Studies Currently. Heating Permit The vendor reminds the manager that the shop will have to obtain a heating permit from the city in order to operate the oil burner on-site. the shop used approximately 2. using the Depreciation Method. Based on its billing records.

Enter the Financial Parameters Having collected all of the relevant cost data for the analysis. the shop manager begins to enter the data into P2/FINANCE.In-house Labor The purchase of a waste oil burner would also eliminate all in-house labor costs associated with waste oil handling for vendor pick-ups. the manager knows that this quantity of waste oil will generate a maximum of 462 million BTUs of heat.300 gallons of waste per year.Vendor Fees The purchase of a waste oil burner would eliminate all costs associated with disposal of waste oil. the manager would purchase a maintenance contract from the vendor for $ 220 each year. In addition. To minimize the inhouse labor required.P2/FINANCE Version 3. He enters other important general information on this sheet including a brief discussion of the cost items that he decided not to quantify when he was developing the cost inventory. Default Parameters sheet The shop manager opens the Default Parameters sheet of P2/FINANCE by clicking on the Default Parameters tab button at the bottom of the screen. he chooses to not explicitly consider inflation and escalation in the cash flow analysis and therefore 4 . For the Global Parameters. Waste Oil Handling .660 per year.51 . including manifesting and disposal fees.7% of the annual heating requirement for the facility. This quantity of heat corresponds to 17. Based on a heat value table provided by the vendor. Maintenance Costs The purchase of a burner will require some burner maintenance effort each year. the waste oil burner generates an additional Annual Operating Cost  burner maintenance. and will lower the facility heating bill to about $14. Heating Costs The shop manager uses the shop’s waste shipment manifests to estimate that the shop generates about 3. he enters Waste Oil Burner Analysis as the Project Title.0 Case Studies Annual Operating Costs Alternative Scenario 1 impacts the shop’s operating costs related to waste disposal and heating for the facility. Waste Oil Handling . On the Project Title sheet. such as the increased space needs of the waste oil burner.

the manager defines the Name. therefore also has a default Investment Year of 0 and a default Lifetime of 10. he modifies the parameters for that cost category. In the Initial Investment Costs sheet. Installation Fees. giving an Aggregate Income Tax Rate of 29. and 23. 4 . and Heating Permits. 6% for State. and default Lifetime for each scenario. The Base Scenario. He defines the following four Initial Investment Cost categories: Waste Oil Burner and Other Equipment . he types an entry for One-hour session for two people and enters a cost of $55. based on vendor assurances that the waste oil burner will function problem-free for at least 10 years. Because the shop can directly expense the training costs associated with the investment. he inputs the cost developed through his earlier data collection efforts. has a default Investment Year of 0 and a default Lifetime of 10. and 3) Delivery charge. the shop manager clicks on the Apply Defaults button to apply these parameters to all of the cost categories on the Initial Investment Costs and Annual Operating Costs sheets. the manager defines double declining balance (DDB) as the default Depreciation Method and 5 years as the default Depreciation Period. The manager also assumes that the cash flow changes resulting from the investment will not alter the shop’s current Income Tax Rates: 2% for Local. For example. he defines the following three cost items: 1) Burner. under the cost category Start-up Training Labor. For the Scenario Parameters.P2/FINANCE Version 3. the shop manager enters a Discount Rate of 15%.4% for Federal. The Alternative Scenario 1. and storage tank. Starting in Alternative Scenario 1. For example. the manager moves to the Alternative Scenario 1 section of this sheet by clicking on the Alt1 button at the top of the screen. Because the names of the Initial Investment Cost categories must remain consistent through the scenarios within a project. default Investment Year. To accompany these uninflated cash flows. the manager modifies the cost category titles to reflect the cost data for the analysis. stand. Start-Up Training Labor. For each cost item. Waste Oil Burner. He then deletes all of the remaining default cost category titles on the sheet.52 . the manager inputs a brief description of the cost items within each Initial Investment Cost category.5%. the shop manager changes the default Depreciation Method to EXP and deletes the Depreciation Period. under Waste Oil Burner and Other Equipment. On the advice of the shop’s accountant. After consulting with staff from the state Small Business Development Center. the manager also needs to choose a (real) Discount Rate that does not include the effect of inflation. P2/FINANCE automatically copies these cost category titles to the other scenarios. 2) AC hookup and air compressor. Current Oil Handling Process. Where necessary. In this scenario. Enter the Cost Data Initial Investment Costs sheet The shop manager then opens the Initial Investment Costs sheet by clicking on the Initial Investment tab button at the bottom of the screen. After entering all of the relevant data on the Default Parameters sheet.0 Case Studies sets the Inflation Rate to 0%.

the manager types a brief note in each cost category indicating that there are no Initial Investment Costs and inputs a $ value of 0. For example. under the cost category Waste Oil Handling . For example. inputs the dollar value of the cost. He then deletes all of the remaining default cost category titles on the sheet. the manager modifies the cost category titles to reflect the cost data for the analysis. the manager types No burner or other equipment and inputs $0 as the cost. To make this clear. and Maintenance. He defines the following four Annual Operating Cost categories: Waste Oil Handling . the manager inputs a description of the cost items within each Annual Operating Cost category and for each cost item. Heating. For example. In this scenario. the manager inputs a brief description of the cost items within each Annual Operating Cost category. Generate Reports Having completed all of the necessary data entry. the shop manager reviews the four reports available with P2/FINANCE. He first checks the accuracy and completeness of the data he just entered by moving to the Alternative Scenario 1 section of this sheet by clicking on the Alt1 button at the top of the screen.In-house Labor. To make any changes to the data for this scenario. he defines a cost item. In the Base Scenario. Scenario Summary sheet The manager opens the Scenario Summary sheet by clicking on the Scenario Summary tab button at the bottom of the screen. the manager moves to the Base Scenario by clicking on the Base button at the top of the screen. P2/FINANCE automatically copies these cost category titles to the other scenarios. he either clicks 4 . After finishing data input related to the Alternative Scenario 1.53 . For each cost item.000. he moves to the section for Alternative Scenario 1 by clicking on the Alt1 button at the top of the screen. he types an entry for Reduced gas boiler costs and enters a cost of $14. Vendor contract for burner maintenance. Vendor payments (10 pickups/year) and inputs a cost of $1. he inputs the cost developed through his earlier data collection efforts. under the cost category Heating.P2/FINANCE Version 3.0 Case Studies After finishing data input related to the Alternative Scenario 1. he defines the cost item. the manager moves to the Base Scenario by clicking on the Base button at the top of the screen. Starting in Alternative Scenario 1.Vendor Fees.660. Waste Oil Handling . for the Waste Oil Burner and Other Equipment cost category. Once in the sheet. Annual Operating Costs sheet The shop manager opens the Annual Operating Costs sheet by clicking on the Annual Operating tab button at the bottom of the screen.Vendor Fees. under Maintenance. The Base Scenario does not require an Initial Investment Cost because it reflects the shop’s current off-site waste disposal arrangement. Because the names of the Annual Operating Cost categories must remain consistent through the scenarios within a project. For example.

Tax Deduction Schedule sheet To open the Tax Deduction Schedule sheet. he moves to the Alternative Scenario 1 section by clicking on the Alt1 button at the top of the screen. In this sheet. he reviews the depreciation calculations related to the waste oil burner investment. Given the manager’s conservative assumptions about the cost of 4 . P2/FINANCE automatically moves you to the same scenario in which you were working in the Scenario Summary sheet. He focuses on the Tax Calculation and the Cash Flow Calculation at the bottom of the sheet. Incremental Cash Flow Analysis sheet To open the Incremental Cash Flow Analysis sheet. Once inside the sheet. Here. he checks the accuracy and completeness of the Base Scenario. He then uses all three profitability indicators to determine whether the shop should invest in the Waste Oil Burner Project. the shop manager clicks on the Tax Deduction tab button at the bottom of the screen.54 . After reviewing the contents of Alternative Scenario 1. the shop manager clicks on the Cash Flow tab button at the bottom of the screen. the shop manager moves to the Base Scenario by clicking on the Base button at the top of the screen. he inputs an optional time horizon of 3 years over which he can evaluate the profitability of the investment. he does not review the Base Scenario section of this sheet. the shop manager clicks on the Profitability Analysis tab button at the bottom of the screen. Once inside the sheet. Here. Because the Base Scenario does not require an investment. Here he reviews the impact the investment would have on the shop’s cash flows. Summary of Results The shop manager focuses most of his attention on the investment’s Net Present Value (NPV) because he knows that it has the least limitations and gives the most accurate picture of the investment’s profitability. if you are in the Alternative Scenario 1 section of the Scenario Summary sheet and you choose to open the Initial Investment Costs sheet.0 Case Studies on the Initial Investment tab button for the Initial Investment Costs sheet or on the Annual Operating tab button for the Annual Operating Costs sheet. P2/FINANCE automatically moves you to the Alternative Scenario 1 section of the Initial Investment Costs sheet. For example. he moves to the section that reflects the comparison of the Alternative Scenario 1 and the Base Scenario by clicking on the Alt1 vs Base button at the top of the screen. The Discounted Payback measure indicates that the NPV becomes positive between Years 2 and 3.P2/FINANCE Version 3. Incremental Profitability Analysis sheet To open the Incremental Profitability Analysis sheet.

0 Case Studies the investment and its expected savings. 4 .P2/FINANCE Version 3. he feels confident that a waste oil burner would be a wise investment for the shop and decides to propose this investment to the owner of the shop.55 .

Cost/Savings Inventory for Batch Still Solvent Recovery Analysis Initial Investment Costs  Building  In-house Engineering  Contractor Engineering  Equipment Purchase Installation) (including Installation) Annual Operating Costs  Virgin Raw Materials Costs  Off-site Hauling & Disposal Costs  Waste Shipment Manifesting Labor  Direct Operating Labor  Utilities  Permit Renewal Liability Using this cost inventory.An Example of a Complex Analysis This case study illustrates the use of P2/FINANCE to assess the profitability of a more complex. she refers to the Total Cost Assessment Cost Inventory provided in Appendix A of this Guide. is based on a real case study that has been modified to better illustrate P2/FINANCE’s features. a large multinational chemicals manufacturer evaluates a hard-piped. To help develop this inventory. batch distillation solvent recovery system that would allow recovery of solvents from the chemical wastes of three product lines and reuse of those solvents within the manufacturing process. Develop a Cost Inventory The firm’s environmental engineer begins the analysis by developing an inventory of costs and savings that potentially might change with the investment in a batch still solvent recovery system. the environmental engineer then decides to identify those costs she will quantify for the analysis (marked by a ). Although some of the cost items she chooses to quantify are much less significant than others. Conceptualize the Analysis In this example. Here. Most of the cost data are readily available via facility records or simple labor time estimates made by facility personnel. She is in general agreement with Purchasing staff and upper management that the less hazardous waste 4 . she decides to include them all in the analysis to illustrate that she has considered them in thinking through the project. as shown in Table 5. The one relevant cost item the environmental engineer chooses not to quantify is liability. the firm compares the purchase of the batch still with its business-as-usual waste handling practicesoff-site waste disposal and treatment. multi-year investment. Table 5. again. This example.25 .

Purchasing records indicate that virgin raw materials for the manufacture of Product A cost $234.000 annually in the business-asusual Base Scenario. and the internal labor required to maintain vendor relationships (e. Virgin Raw Materials . Collect Cost Data With this inventory in hand.26 . the waste from which could also be handled by the batch still solvent recovery system.generated..Start Year 1 The purchase of a batch still recovery system would reduce virgin solvent purchase costs by allowing recovery and recycle of solvents within the facility.000. These costs apply to Years 1-15. the better. vendor disposal fees. The scenario includes only Annual Operating Costs because no Initial Investment Cost is required for business-as-usual continuation of pick-up by waste disposal vendors. and the less shipped off-site. The annual purchase cost for Product B virgin raw materials is $ 157.Start Year 1 4 . waste manifesting labor. on-site solvent recovery system. She decides to postpone quantifying liability until after she sees the results of the rest of the analysis. Annual Operating Costs Currently. Vendor Disposal . the environmental engineer begins the data collection process by using billing records. Year 1 Annual Operating Costs The following Year 1 costs reflect the Annual Operating Costs for the facility’s two current product lines . but is not sure how best to quantify the potential dollar value of the liability “avoided” via the purchase of a hard-piped.g. Annual Operating Costs expected to change with the investment in a batch still include the annual cost of virgin raw materials. the firm manufactures two products (Product A and Product B) at the facility. Product X. site visits). contract negotiations. Base Scenario: Off-site Waste Disposal and Treatment The Base Scenario reflects the business-as-usual costs of the firm’s off-site waste disposal and treatment arrangement for waste from the three product lines. talking to the vendor. The facility also plans to bring a new product on-line in Year 2. the better. and requesting labor time estimates from production staff at the facility.

the sum of these activities translates into an annual cost of $ 4.Start Year 2 In the business-as-usual Base Scenario. These costs apply to Years 1-15.200 annually for Product B. Manifesting Labor . The head of the Purchasing Office estimates the annual off-site shipment and disposal cost for Product X waste to equal approximately $ 862. The environmental engineer correctly decided not to include the new revenues from Product X anywhere in the incremental analysis because the revenues from Product X will not be affected by the purchase of a batch solvent still. because the vendor disposal cost for this product is expected to rise at a rate higher than inflation.e.. waste disposal costs associated with Product X also have a Start Year of 2 and an End Year of 15. 4 . the environmental engineer adds an Escalation Rate of 2. Vendor Disposal .e. The environmental staff member responsible for this task estimates that manifesting for Product A requires approximately 22 hours per year of his time. The manufacturing supervisor estimates that virgin raw materials for this product will cost about $414. Because the vendor disposal costs for both products are expected to rise at a rate higher than inflation. Maintenance of Vendor Relationships . Assuming a labor cost of $55 per hour.Start Year 2 Beginning in Year 2.The purchase of a batch still recovery system would impact the off-site waste disposal and treatment costs for each of the product lines. She defines the Start Year for this new Annual Operating Cost as Year 2 and the End Year as 15. manifesting costs $ 968 annually for Product A and $ 2.000. Assuming a fully burdened labor cost (i. Year 2 Annual Operating Costs These include the additional Annual Operating Costs associated with the introduction of a new product line at the facilityProduct X. Product A requires an annual off-site disposal cost of $104. i. Again. including employee benefits) of $44 per hour.400.000 in travel costs for site visits.0% to costs within this category.Start Year 1 The preparation of hazardous waste shipment manifests for these two product lines requires inhouse labor. These activities also require $2. These costs apply to Years 1-15.000 and Product B requires an annual off-site disposal cost of $283.Start Year 1 Under the business-as-usual Base Scenario. Product X. the revenues will be the same for Alternative Scenario 1 as for the Base Scenario. These costs apply to Years 1-15. under the business-as-usual Base Scenario..000.000 annually. while manifesting for Product B requires 50 hours per year. the facility expects to bring a new product on-line. the head of the facility’s Purchasing Office spends approximately 10 days per year maintaining the firm’s relationships with multiple waste disposal and treatment vendors through contract negotiations and site visits. the environmental engineer calculates that.27 . From the facility’s waste manifest records. Virgin Raw Materials .

preparation of hazardous waste shipment manifests will require approximately $3. The initial investment for the solvent recovery system would occur over a period of approximately 1. hard-pipe the new system to the manufacturing lines. Year 0 At the end of Year 0. train personnel in the operation of the still.the environmental engineer adds an Escalation Rate of 2. Engineering and Planning Costs . During the latter part of Year 0.5 years using the Straight Line ( SL) Depreciation Method. the firm would complete the construction of the building. and the manufacturing supervisor. the firm completes 75% of the necessary construction. Alternative Scenario 1: Batch Still Recovery System Alternative Scenario 1 reflects the cost to the firm of bringing a batch still recovery system on-site to allow recovery and reuse of solvents in its manufacturing processes. the firm completes approximately 75% of the new building and supporting facilities to house the batch still at a cost of $1. Maintenance of Vendor Relationships . Manifesting Labor .Start Year 2 When the firm brings the third product line on-site.Inv.Start Year 2 When the high volume Product X comes on line.000 annually. Year 0 4 .Inv. Initial Investment Costs With the assistance of the facility manager. purchase and install the distillation equipment.057. an equipment vendor. During Year 1.5 years.500. Year 0 Investments The first step in the project is the construction of the building to house the batch still.28 . It is assumed that. at the end of Year 0. The scenario includes the Initial Investment Costs associated with the batch still as well as its Annual Operating Costs. the firm would focus on the construction of a building to house state-of-the-art batch still equipment. the environmental engineer obtains reasonable estimates for the Initial Investment Costs and the timing of the batch still project. Construction Costs .500 annually of internal labor. and perform start-up runs and quality control tests. the cost of maintaining vendor relationships will increase by approximately $4.0% to the costs within this cost category. The firm defines the Lifetime of the building as 50 years. The firm depreciates this cost over 31.

000. Equipment Installation Costs . pressure gauges). This equipment has an estimated Lifetime of 15 years and a Salvage Value at the end of that Lifetime of $50. flame arrestors). Year 1 4 .5 years using the Straight Line (SL) Depreciation Method.The facility hires an outside engineering firm to take responsibility for the primary construction of the building.. Engineering and Planning Costs .Equipment-Inv. flow meters.Inv. and storage tanks. they have the same Lifetime of 50 years. valves (e.29 . The firm depreciates this cost over 31. they have the same Lifetime of 50 years..Inv. Again. Training Costs . relief valves). Engineering Costs . These items cost a total of $853.Inv. the facility completes the construction of the building and purchases the batch still solvent recovery equipment. on-site training session offered by the equipment manufacturer.500 at the end of Year 1. Year 1 Equipment installation requires $770. Purchased Equipment Costs .000. instruments (e. Construction Costs . heat exchangers.g. These engineering and planning labor costs are depreciated over 31. Year 1 The firm sends three operators to a free one-week.250 of contractor labor and is depreciated using the Depreciation Method and Depreciation Period of DDB over 5 years.Inv.500.g. Because these engineering services are required for construction of the building. and other special items (e. Year 1 Investments In Year 1. the Lifetime of the building is 50 years..5 years using the Straight Line (SL) Depreciation Method. Because these engineering services are required for construction of the building. The firm also must purchase piping materials.500 and are depreciated using the Depreciation Method and Depreciation Period of DDB over 5 years. Year 1 The firm completes remaining engineering and planning tasks with in-house labor for a cost of $157. Year 1 The firm finishes the remaining construction of the new building and supporting facilities to house the batch still for $352. a molecular sieve unit. The new system is hard piped to the existing manufacturing processes and trial runs are performed. odor abatement equipment.250. This Initial Investment Cost is also expensed using the EXP Depreciation Method.Inv. The cost of their time equals $ 5.5 years using the Straight Line (SL) Depreciation Method.g. These engineering services at the end of Year 0 total $ 399. Year 1 Operation of the solvent recovery system requires several different types of major equipmentdistillation vessels. and also are depreciated over 31.

Start Year 1 The purchase of a batch still recovery system would reduce virgin solvent purchase costs by allowing recovery and recycle of solvents within the facility. For a fully burdened (i. The annual purchase cost for Product B virgin raw materials is $ 157. and includes the Annual Operating Costs associated with the batch still for Years 2 . and waste manifesting at the facility. The batch still system lowers the annual costs of virgin raw materials.The final testing of the equipment requires both in-house and contract engineering expertise towards the end of Year 1. Start Year 1 Annual Operating Costs These costs mirror the business-as-usual costs defined in the Base Scenario.12. Manifesting Labor .e. Annual Operating Costs The batch still begins operations at the very end of Year 1.500. the system increases the cost of utilities.000. In-house engineering costs $247. the firm must take into account the fact that Product X will be manufactured at the facility beginning in Year 2. while manifesting for Product B requires about 50 hours per year. The environmental staff member responsible for this task estimates that manifesting for Product A requires approximately 22 hours per year of his time. Product A has an annual off-site disposal cost of $104. the environmental engineer defines an Escalation Rate of 2.Start Year 1 The preparation of hazardous waste shipment manifests for the waste from the two product lines requires in-house labor. Concurrently. because the batch still system is still under construction during Year 1.000.500. maintenance of vendor relationships.Start Year 1 The purchase of a batch still recovery system would impact the off-site waste disposal and treatment costs for each of the product lines. permit fees. These costs apply only to Year 1.30 .000 annually in the business-asusual Base Scenario. and miscellaneous supplies. In addition. benefits included) 4 . Contractor engineering costs $232. Both are depreciated using DDB over 5 years. vendor disposal. direct operating labor. Product B has an annual off-site disposal cost of $283. These costs apply only to Year 1. Therefore. Purchasing records indicate that virgin raw materials for the manufacture of Product A cost $234. under the business-as-usual Base Scenario.0%. Vendor Disposal .000. Because the vendor disposal costs for both products are expected to rise at a rate higher than inflation. The environmental engineer goes to the facility’s waste manifest records to determine that. Virgin Raw Materials . the firm assumes the business-as-usual Annual Operating Costs for Year 1.

400. These costs apply only to Year 2.labor costs of $44 per hour. Reduced annual virgin raw material costs for Product A are estimated to be $ 35.000 per year. Vendor Disposal . Utilities . Direct Labor .Start Year 2 With the batch still. Virgin Raw Materials . For Product B the estimate is $23.500. Maintenance of Vendor Relationships . the facility will reduce its waste disposal vendor costs to $ 15.100. because the vendor disposal costs for both products are expected to rise at a rate higher than inflation. the environmental engineer defines an Escalation Rate of 2. These costs apply only to Year 1. B.300 for Product X. $330 for Product B.0%. Manifesting Labor . with the batch still in place and operational. These costs apply only to Year 1. and X being on-line.450 for Product B.Start Year 2 With the batch still. These costs apply to Years 2-15. $42. This cost applies to Years 2-15. electricity and nitrogen gas at an additional cost of $ 15. the facility will reduce its virgin raw material purchase costs because the solvents recovered by the distillation system can be reused as raw materials in the manufacturing process.200 for Product B. When Product X is first manufactured in Year 2. the firstyear virgin raw material cost will be $414. the head of the facility’s Purchasing Office spends about 10 days per year maintaining the firm’s relationships with multiple waste disposal and treatment vendors through contract negotiations and site visits. this corresponds to an annual cost of $ 968 for Product A and $2.Start Year 2 With the batch still. This activity also requires $2.Start Year 1 Under the business-as-usual Base Scenario.000 in travel costs for the site visits. These costs apply to Years 2-15. and $660 for Product X. Again. the facility also will reduce its annual internal labor costs associated with waste manifesting to $145 for Product A.000 as it would be in the absence of a solvent recovery still.31 . this translates into a total annual cost of $4.Start Year 2 4 .Start Year 2 The batch still requires steam. Start Year 2 Annual Operating Costs These costs relate to Products A.600 for Product A. At a labor cost of $55 per hour (including benefits). and $129.

giving an Aggregate Income Tax Rate of 37. and default Depreciation Period. 8% for State. has a 4 .500.One and a half operators are needed to run the batch still at an annual direct operating labor cost of $95. which equal 32. the environmental engineer defines the Name. Initial Investment Year. the environmental engineer goes to the facility controller for advice on Inflation Rate.000. Batch Still Recovery System . the controller selects DDB as the default Depreciation Method and 5 as the default Depreciation Period. they will fall to only $ 62. This cost applies to Years 2-15.100. its purchase would reduce the total cost for inspections and contract negotiations to about $ 2. the environmental engineer enters the data into P2/FINANCE.9%. Recycling Permit Renewal . As Scenario Parameters. a task of two days per year at a fully burdened cost of $880 per year.Start Year 2 The batch still will require the annual renewal of a recycling permit. This cost applies to Years 2-15. For Product B they will continue to be $23.Start Year 3 The reduced annual virgin raw material costs for Product A will continue to be $ 35.000 per year. Default Parameters for the Analysis The environmental engineer opens the Default Parameters sheet of P2/FINANCE by clicking on the Default Parameters tab button at the bottom of the screen. he recommends a Discount Rate of 18% in the analysis. Maintenance of Vendor Relationship . and Lifetime for each scenario. default Depreciation Method. Discount Rate. she enters Batch Still Solvent Recovery as the Project Title and other general information about the analysis.100.32 . On the Project Title sheet. For Product X.Start Year 2 Because the batch still will reduce reliance on external waste disposal vendors.5% for Federal. and 0% for Local. These costs apply to Years 3-15. Start Year 3 Annual Operating Costs Virgin Raw Materials . The controller assumes that the investment would not alter the facility’s current Income Tax Rates. Alternative Scenario 1. To correspond with this Inflation Rate. The controller recommends an analysis Inflation Rate of 3%. Although the Depreciation Method and Depreciation Period used for Initial Investment Costs will vary by category for this complex analysis. To define the Global Parameters for the analysis. Enter the Financial Parameters Having collected all of the relevant cost data for the analysis. This cost applies to Years 2-15.

For each cost item. she defines the cost item. The Base Scenario does not require any initial investment because it reflects the shop’s current off-site waste disposal arrangement. Year 1). Year 1) cost category. as recommended by the facility controller. Off-Site Waste Disposal and Treatment. For example. the environmental engineer clicks the Apply Defaults button to apply these parameters to all cost categories on the Initial Investment Costs and Annual Operating Costs sheets.5. Year 1). and Engineering Costs Equipment (Inv. She also changes the Lifetime of the investment to 50 years. under Purchased Equipment (Inv. Year 1) . she modifies the parameters for that cost category. etc. P2/FINANCE automatically copies these cost category titles to the other scenarios. Enter the Cost Data Initial Investment Costs sheet The environmental engineer opens the Initial Investment Costs sheet by clicking on the Initial Investment tab button at the bottom of the screen. Construction (Inv. In the Initial Investment Costs sheet.500. valves. Year 0) . The Lifetime of 15 years is the project Lifetime customarily chosen by this large firm for projects of this size. for the Equipment Installation (Inv. heat exchangers. Engineering and Planning (Inv.057. she types No equipment installation and inputs $0 as the cost. storage tanks. She changes the default Depreciation Method to SL and the default Depreciation Period to 31. She defines the following nine Initial Investment Cost categories: Construction (Inv. odor abatement equipment.default Investment Year of 0 and a default Lifetime of 15. Starting in Alternative Scenario 1. she types an entry for Construction of building (75%) and enters a cost of $1. she modifies the cost category titles to reflect the cost data for the analysis. piping materials. She then deletes all of the remaining default cost category titles on the sheet. under Construction (Inv. After finishing data input related to the Alternative Scenario 1. instruments. the environmental engineer moves to the Base Scenario by clicking on the Base button at the top of the screen. For example.33 . the manager moves to the Alternative Scenario 1 section of the sheet by clicking on the Alt1 button at the top of the screen. has a default Investment Year of 0 and a default Lifetime of 15. After entering these data on the Default Parameters sheet. she types a brief note in each cost category indicating that there are no Initial Investment Costs and inputs a $ value of 0. Training (Inv. Distillation vessels. the environmental engineer inputs a brief description of the cost items within each Initial Investment Cost category. Equipment Installation (Inv. Engineering and Planning (Inv. To make this clear. Purchased Equipment (Inv. In this scenario. molecular sieve unit. Year 0). 4 . Year 1). For example. Year 1) . Because the names of the Initial Investment Cost categories must remain consistent through the scenarios within a project. Base Scenario. Where necessary. she inputs the cost developed through her earlier data collection efforts. Year 0). Year 1) . Year 1) .

she types an entry for Product A raw materials with a cost of $234. the environmental engineer inputs a brief description of the cost items within each Annual Operating Cost category. she defines a cost item. Scenario Summary sheet The environmental engineer opens the Scenario Summary sheet by clicking on the Scenario Summary tab button at the bottom of the screen. She defines the following twelve Annual Operating Cost categories: Virgin Raw Materials (Start Year 1). P2/FINANCE automatically moves you to the same scenario in which you were working in the Scenario Summary sheet. For each cost item. To make any changes to the data for this scenario. She then deletes all of the remaining default cost category titles on the sheet. she inputs a description of the cost items within each Annual Operating Cost category and for each cost item.internal labor with a cost of $2. inputs the dollar value of the cost. Recycling Permit Renewal (Start Year 2) . Maintenance of Vendor Relationship (Start Year 2). Direct Labor (Start Year 2). if you are in the Alternative Scenario 1 section of the 4 . she either clicks on the Initial Investment tab button for the Initial Investment Costs sheet or on the Annual Operating tab button for the Annual Operating Costs sheet. Manifesting Labor (Start Year 1). In this scenario. she defines the cost items. she inputs the cost developed through her earlier data collection efforts. Once in the sheet. the environmental engineer modifies the cost category titles to reflect the cost data for the analysis. After finishing data input related to the Alternative Scenario 1. Because the names of the Annual Operating Cost categories must remain consistent through the scenarios within a project. the environmental engineer reviews the four reports that P2/FINANCE develops. For example. Vendor Disposal (Start Year 2). For example. the environmental engineer moves to the Base Scenario by clicking on the Base button at the top of the screen. Where necessary. Virgin Raw Materials (Start Year 2). P2/FINANCE automatically copies these cost category titles to the other scenarios. Manifesting Labor (Start Year 2).internal labor with a cost of $968 and Product B . Product A . Utilities (Start Year 2). She first checks the accuracy and completeness of the data she just entered by moving to the Alternative Scenario 1 section of this sheet by clicking on the Alt1 button at the top of the screen. Generate Reports Having completed all of the necessary data entry. For example. For example. In the Base Scenario. under Virgin Raw Materials (Start Year 1).Annual Operating Costs sheet The environmental engineer opens the Annual Operating Costs sheet by clicking on the Annual Operating tab button at the bottom of the screen.000 and Product B raw materials with a cost of $157. Vendor Disposal (Start Year 1). she modifies the parameters for the cost category. Maintenance of Vendor Relationships (Start Year 1) .000. she moves to the section for Alternative Scenario 1 by clicking on the Alt1 button at the top of the screen. and Virgin Raw Materials (Start Year 3). under Maintenance of Vendor Relationships (Start Year 1) .34 .200. Starting in Alternative Scenario 1. Internal labor costs and Travel costs. under Manifesting Labor (Start Year 1).

she inputs an optional time horizon of 12 years over which she can evaluate the profitability of the investment. She then uses all three profitability indicators to determine whether the shop should invest in the Batch Still Solvent Recovery Project. she moves to the section that reflects the comparison of the Alternative Scenario 1 and the Base Scenario by clicking on the Alt1 vs Base button at the top of the screen. She focuses on the Tax Calculation and the Cash Flow Calculation at the bottom of the sheet. the environmental engineer clicks on the Tax Deduction tab button at the bottom of the screen. Once inside the sheet. Once inside the sheet. Summary of Results The environmental engineer reviews the profitability indicators associated with this investment. Here. she reviews the depreciation calculations related to the batch still investment. the environmental engineer clicks on the Cash Flow tab button at the bottom of the screen. she moves to the Base Scenario by clicking on the Base button at the top of the screen. Incremental Profitability Analysis sheet To open the Incremental Profitability Analysis sheet.Scenario Summary sheet and you choose to open the Initial Investment Costs sheet. the environmental engineer clicks on the Profitability Analysis tab button at the bottom of the screen. Incremental Cash Flow Analysis sheet To open the Incremental Cash Flow Analysis sheet. she moves to the Alternative Scenario 1 section by clicking on the Alt1 button at the top of the screen. Here. After reviewing the contents of Alternative Scenario 1. she does not review the Base Scenario section of this sheet. the engineer has not included the potential reduction in liability associated with the investment in the quantitative analysis and believes that these additional cost savings may improve 4 .35 . P2/FINANCE automatically moves you to the Alternative Scenario 1 section of the Initial Investment Costs sheet. Here she reviews the impact the investment would have on the firm’s cash flows. Because the Base Scenario does not require an investment. The investment does not meet the firm’s usual investment criteria because its IRR during the time horizon from Year 0 to Year 5 is less than the firm’s Discount Rate. she checks the accuracy and completeness of the Base Scenario. Tax Deduction Schedule sheet To open the Tax Deduction Schedule sheet. However. In this sheet.

The staff widely recognize that the potential avoided liability and the long-term inherent production flexibility (i. and the production manager.36 . approves the Batch Still Solvent Recovery project. she includes a thorough qualitative discussion of relevant liability issues in the quantitative report that she submits to the firm’s Vice President of Manufacturing. after review of the quantitative analysis and discussions with the environmental engineer. the firm’s legal and purchasing staff. sound businessdecision. The Vice-President of Manufacturing.. Therefore.e. 4 . the ability to treat new product waste streams on-site) of the Batch Still Solvent Recovery project adds value to the borderline quantitative profitability of the project and makes it a justifiable.the project’s desirability to upper management.

37 Appendices C .C .37 .

Appendix A: Copy of the Blank Spreadsheet .

Materials) In-house Planning In-house Engineering/Design Procurement Vendor/Contractor Fees Site Preparation (Labor. Materials) In-house . Materials) In-house Equipment Rental Vendor/Contractor Fees Start-up/Training (Labor.Appendix B: Inventory Total Cost Assessment Cost INITIAL INVESTMENT COSTS Purchased Equipment Process Equipment Storage and Materials Handling Equipment Safety/Protective Equipment Monitoring/Control Equipment Laboratory/Analytical Equipment Spare Parts Utility Connections/Systems Electricity Steam Water Fuel Plant Air Inert Gas Refrigeration Sewerage General Plumbing Planning/Engineering (Labor. Materials) In-house Demolition & Clearing Old Equipment/Rubbish Disposal Grading/Landscaping Equipment Rental Vendor/Contractor Fees Construction/Installation (Labor.

Trials/Manufacturing Variances Process/Equipment Training Safety/Environmental Training Vendor/Contractor Fees Permitting In-house Permit Fees Vendor/Contractor Fees Buildings & Land Working Capital Raw Materials Other Materials & Supplies Product Inventory Contingency .

Storage) Raw Materials Solvents Catalysts Utilities Electricity Steam Water Fuel Plant Air Inert Gas Refrigeration Sewerage Direct Labor (Wage/Salary. Delivery. Benefits) Operating Supervision Manufacturing Clerical Maintenance Waste Management (Labor. Materials) Permitting Training Monitoring/Inspections Testing Generator Fees/Taxes Labeling Manifesting Recordkeeping Reporting Product Quality (Labor. Materials) QA/QC Product Rejects/Returns Revenues .ANNUAL OPERATING COSTS Direct Materials (Purchase. Materials) On-site Handling & Storage On-site Pre-treatment On-site Treatment Hauling Off-site Treatment Off-site Disposal Regulatory Compliance (Labor.Product Change in Product Throughput .

By-product Marketable By-products Marketable Pollution Permits Insurance Workers’ Health Insurance Workers’ Compensation Pollution Liability Insurance Future Liability Fines/Penalties Legal Costs Personal Injury Property/Natural Resource Damage Remediation .Change in Market Share Revenues .

I 2 The point at which cumulative incremental annual of an 1+k cash flows (1+k) n investment aggregate to 0. etc. annual reports filed with government agencies.. where: CF1 is cash flow in period 1 CF2 is cash flow in period 2. the discount rate is used in Net Present Value (NPV) calculations to express the value of a future expenditure in the present year. A statement of the firm's planned investments. Required by authoritative pronouncement. costs. and availability of capital The dollars coming to the firm (cash inflow) or paid out by the firm (cash outflow) resulting from a given investment.. regulatory including: corporate annual reports. In profitability analysis. allocated costs.. degree of cost disaggregation. The Break-Even-Point designates the end (1+k) of a project's investment Payback Period (see Incremental Cash Flow and Payback Period). overhead vs. cost tracking.. A process within an internal cost accounting system of assigning costs and revenues to cost and profit centers for purposes of product pricing. The internal procedure used to track and allocate production costs Payback = Investment and revenues to a product or process. ROI = Annual Net Income Investmentrule or custom. and performance evaluation. Capital Budget Cash Flow (from an investment) Cost Accounting System Cost Allocation Discount Rate Discounted Cash Flow Rate of Return (DCRR) Financial Accounting Financial Reporting The process that culminates in the preparation of financial reports relative to the enterprise as a whole for use by parties both internal and external to the enterprise. Defines specific cost/profit Annual Net Income centers. prospectuses. generally based upon I is initial outlay investment estimates of future sales. The discount rate (or Cost of Capital) is the required rate of return on a capital investment. NPV = CF1 + CF2 + .Appendix C: Glossary of Financial Terms Annual Cash Flow Break-Even-Point For an investment. descriptions of an enterprise's social or environmental impact. C. production and or research andcost k is cost of capital or discount rate development (R&D) needs. See Internal Rate of Return. The discount rate is expressed as a percentage. the sum of cash inflows and outflows for a given year (see Cash Flow). CFn .1 .

accumulation. interpretation. that is. The computed IRR of an investment is compared to a company's desired rate of return. measurement. required for project approval. Includes: NPV. e. ROI. and Statement of Cash Flows. or 2 year payback. A method of managerial accounting which accounts for both the direct and indirect costs of an item. and communication of financial information used by management to plan. or minimum acceptable rate of return. The discount rate at which the net savings (or NPV) on a project are equal to zero. evaluate. Incremental cash flow is calculated by taking the difference between the cash flow for the current alternative practice. Statements include the Balance Sheet. analysis.. The internally defined threshold. The cash flow of an alternative practice (e. The process of identification. Full cost accounting uses historical data to assign all costs to a process.g. IRR. or "capital budgeting technique". product or product line. 15% ROI. and control all activities within an organization to ensure appropriate use. Full Cost Accounting Hurdle Rate Incremental Cash Flow an investment) practice and the Internal Rate of Return (IRR) Managerial Accounting Measure of Profitability Net Present Value (NPV) C..2 . An investment is profitable if the NPV of the cash flow it generates in the future exceeds its cost. if the NPV is positive.g. most often for purposes of pricing. An index that helps to answer the question: are the future savings/revenues of a project likely to justify a current expenditure? Synonyms: "decision rule". Capital budgeting is one component of managerial accounting. The present value of the future cash flows of an investment less the investment's current cost. preparation. or "financial index". and accountability for its resources.Financial Statements The principal means through which financial information is communicated to those outside an enterprise. after a pollution (of prevention investment has been implemented) relative to the current practice. payback. or "profitability index". Income Statement.

e.g. liability costs.. and less tangible benefits of an investment. Project Financial Analysis Project Justification Process Project Justification Costing (i.Payback Period The amount of time required for an investment to generate enough cash flow to just cover the initial capital outlay for that investment. C. calculating the costs and savings) and calculating cash flow and/or profitability measures of a project. A document prepared in the project justification process which comprising a written description of the project. NPV and IRR.. a project financial analysis. e. calculated as the ratio of annual net income (less depreciation) over the initial investment amount.3 . short and long term costs. 10-15 years. A measurement of investment performance. d) use of measures of profitability which capture the long-term profitability of the project. b) inclusion in a project financial analysis of direct and indirect costs. A generic term for a series of steps which are necessary to get approval for a project. and a discussion of benefits and risks which are not quantified in the financial analysis.g. c) evaluation of project costs and savings over a long time horizon. A TCA approach includes: a) internal allocation of environmental costs to product lines or processes through full cost accounting.e. Return on Investment (ROI) Total Cost Assessment (TCA) A comprehensive financial analysis of the costs and savings of a pollution prevention project..

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