Excel Man

Users 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
Users Guide
Tellus Institute 11 Arlington Street Boston, MA 02116-3411 USA Telephone: 617-266-5400 Fax: 617-266-8303 Email: 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
Acknowledgments
Tellus Institute developed P2/FINANCE Version 3.0 with funding from the US Environmental Protection Agencys 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 Users 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.............................................................................................................................. 16 Time Value of Money...............................................................................................................................................17 Global Parameters...................................................................................................................................................17
Inflation Rate.......................................................................................................................................................................18 Discount Rate......................................................................................................................................................................18 Income Tax Rates................................................................................................................................................................20 Depreciation .....................................................................................................................................................................21 Name................................................................................................................................................................................... 24 Investment Year..................................................................................................................................................................24 Lifetime............................................................................................................................................................................... 24 Start Year............................................................................................................................................................................ 25 End Year............................................................................................................................................................................. 25
Scenario Parameters...............................................................................................................................................24
Accessing Scenarios................................................................................................................................................25 Printing Scenarios...................................................................................................................................................25 Accessing Help........................................................................................................................................................25 Calculating..............................................................................................................................................................26 INITIAL INVESTMENT COSTS SHEET....................................................................................................................... 27 Salvage Value..........................................................................................................................................................29 Tailoring the Financial Parameters........................................................................................................................29 Working Capital......................................................................................................................................................30 Accessing Scenarios................................................................................................................................................31 Printing Scenarios...................................................................................................................................................31
Accessing Help........................................................................................................................................................31 Calculating..............................................................................................................................................................31 ANNUAL OPERATING COSTS SHEET....................................................................................................................... 32 Escalation Rate........................................................................................................................................................33 Tailoring the Financial Parameters........................................................................................................................33 Accessing Other Scenarios......................................................................................................................................33 Printing Scenarios...................................................................................................................................................34 Accessing Help........................................................................................................................................................34 Calculating..............................................................................................................................................................34 3. CALCULATING THE BOTTOM LINE: GENERATING REPORTS................................35 SCENARIO SUMMARY REPORT............................................................................................................................... 37 Accessing Other Scenarios......................................................................................................................................38 Printing Scenarios...................................................................................................................................................38 Accessing Help........................................................................................................................................................38 TAX DEDUCTION SCHEDULE.................................................................................................................................. 39 Accessing Other Scenarios......................................................................................................................................41 Printing Scenarios...................................................................................................................................................41 Accessing Help........................................................................................................................................................41 INCREMENTAL CASH FLOW ANALYSIS SHEET........................................................................................................ 42 Accessing Other Scenarios......................................................................................................................................43 Printing Scenarios...................................................................................................................................................43 Accessing Help........................................................................................................................................................44 INCREMENTAL PROFITABILITY ANALYSIS SHEET ...................................................................................................45 Net Present Value (NPV).........................................................................................................................................45 Internal Rate of Return (IRR).................................................................................................................................45 Discounted Payback................................................................................................................................................46 Accessing Scenarios................................................................................................................................................47 Printing Scenarios...................................................................................................................................................47 Accessing Help........................................................................................................................................................47 Calculating..............................................................................................................................................................47 4. CASE STUDIES.....................................................................................................................................................48 AN EXAMPLE OF A BASIC ANALYSIS...................................................................................................................... 49 Conceptualize the Analysis.....................................................................................................................................49
Develop a Cost Inventory....................................................................................................................................................49 Collect Cost Data ............................................................................................................................................................... 50
Enter the Financial Parameters..............................................................................................................................52 Enter the Cost Data.................................................................................................................................................53 Generate Reports.....................................................................................................................................................54
Scenario Summary sheet.....................................................................................................................................................54 Tax Deduction Schedule sheet............................................................................................................................................55 Incremental Cash Flow Analysis sheet................................................................................................................................55 Incremental Profitability Analysis sheet..............................................................................................................................55 Default Parameters sheet.....................................................................................................................................................52 Initial Investment Costs sheet..............................................................................................................................................53 Annual Operating Costs sheet.............................................................................................................................................54
Summary of Results.................................................................................................................................................56 AN EXAMPLE OF A COMPLEX ANALYSIS................................................................................................................ 25 Conceptualize the Analysis.....................................................................................................................................25

Develop a Cost Inventory....................................................................................................................................................25 Collect Cost Data................................................................................................................................................................ 26
Enter the Financial Parameters..............................................................................................................................32 Enter the Cost Data.................................................................................................................................................33 Generate Reports.....................................................................................................................................................34
Scenario Summary sheet.....................................................................................................................................................34 Default Parameters for the Analysis....................................................................................................................................32 Initial Investment Costs sheet..............................................................................................................................................33 Annual Operating Costs sheet.............................................................................................................................................34
Summary of Results.................................................................................................................................................35
Tax Deduction Schedule sheet............................................................................................................................................35 Incremental Cash Flow Analysis sheet................................................................................................................................35 Incremental Profitability Analysis sheet..............................................................................................................................35
APPENDICES.............................................................................................................................................................37 APPENDIX A: ....................................................................................................................................................... 38 COPY OF THE BLANK SPREADSHEET...................................................................................................................... 38 APPENDIX B: TOTAL COST ASSESSMENT COST INVENTORY..................................................................................39 APPENDIX C: GLOSSARY OF FINANCIAL TERMS....................................................................................................... 1
Preface
Welcome to P2/FINANCE Version 3.0 programmed in Excel Version 5.0 for Windows. This powerful spreadsheet-based program is designed to assist you in evaluating the profitability of pollution prevention (P2) and other investments with environmental implications. Version 3.0 represents a major upgrade of P2/FINANCE in which flexibility and user friendliness couple to create a more versatile financial analysis tool. A grant from US Environmental Protection Agencys Pollution Prevention Division supported the development of this version of P2/FINANCE. The Users Guide offers step-by-step instructions for installing and using P2/FINANCE, as well as an introduction to the principles of financial analysis. We recommend that you read this Guide while using the software for your first few analyses. The Guide assumes familiarity with Windows and Excel. For further information on these software packages, please refer to an appropriate user guide. This Guide is organized into three main sections. The Introduction explains the Total Cost Assessment framework used by P2/FINANCE, computer requirements for the software, and installation procedures. 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. The Case Studies demonstrate real world application of the software through two case studies: one basic analysis and a second, more complex, analysis.
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 revenuesboth Initial Investment Costs and Annual Operating Costs and revenuesof 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 VOC-containing 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 firms limited capital resources. TCA differs from conventional practices in four key ways:
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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 reportsScenario 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 Users 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.
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Introduction
ConceptObtaining Interested parties may request a free copy of P2/FINANCE Version 3.0 ualize theP2/ from the US Environmental Protection Agencys Pollution Prevention Analysis FINANCE Information Clearinghouse at (202) 260-1023 or ppic@epamail.epa.gov.
The software also is available from EPAs 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 Operating Costs cost items (e.g., electricity, gas) within that cost category related to the analysis. Annual 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

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. As you enter cost data, reconfirm that you have included all relevant costs, even those indirectly related to the potential investment. For example, a change to painting operations may require a change in upstream degreasing operations with relevant cost implications. These second order effects can be as significant as, or even more significant than, direct first order effects. Once you have defined the financial parameters and cost data for an analysis, the next step is to generate reports in P2/FINANCE. You can access Scenario Summaries to review the contents of each scenario, Tax Deduction Schedules to take a closer look at the tax deductions allowed for each scenario, Incremental Cash Flow Analyses to calculate the discounted cash flows of the comparison between a Base and an Alternative Scenario, and the Incremental Profitability Analysis to review profitability indicators such as Net Present Value, Internal Rate of Return, and Discounted Payback.
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, defining important terms used throughout the Guide, and providing some tips on using Excel.
Elements of a Financial Analysis

Financial analysis is used to estimate the profitability of a potential investment. It includes two types of information: 1) financial parameters and 2) cost and revenue data. The financial parameters include information on depreciation, inflation, income tax rates, your firms discount rate, and the timing of the Initial Investment and Annual Operating Costs. (These parameters are discussed in more detail on pages 2-3 through 2-12 of the Guide). The cost and revenue data include both Initial Investment Costs and Annual Operating Costs. Note: Throughout the Guide cost is used to indicate both costs, cost savings, and revenues except where noted. Profitability is used throughout the Guide as a measure of the investments performance, not as a formal accounting term.
Terminology
P2/FINANCE combines financial and cost elements together to create a financial analysis. Terms are used consistently to differentiate these elements and their functions. Figures for many of the terms illustrate the relationship between the various P2/FINANCE elements.
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Introduction
Cost Item
Cost item refers to the name of a specific cost or revenue included in the analysis. Cost items can be related to the Initial Investment or to Annual Operating Costs and revenues. Steam, for example, is an operating cost item. Identify the relevant cost items for each scenario, keeping in mind that they can vary from one scenario to another.
Cost Category
Cost items that are similar to one another are grouped Utilities together into broader cost categories. Again, there are cost categories for both Initial Investment and Annual Operating Costs. For example, the cost item Steam would be included in the Annual Operating Cost category called Utilities. In P2/FINANCE, you can modify the names of the cost categories to be used in the analysis while working on Alternative Scenario 1. 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.
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).
Analysis Analysis
An analysis estimates the profitability of an Alternative Scenario in comparison with the Base Scenario. To calculate the profitability of an investment without comparing it to business-as-usual operations, leave the Base Scenario empty.
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Introduction
Project
Project
A project comprises all data from the Base Scenario and Alternative Scenarios and is equivalent to an Excel worksheet file.
Format Conventions
Formats such as color and font styles are used consistently throughout P2/FINANCE and its Users Guide. 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. Cells with a green or blue background contain important on-screen information for the user. P2/FINANCEs User Guide uses font styles to illustrate certain features of the software. Bold text indicates user input. Similarly, text phrases with the first letter of each word capitalized reflect the labels of data entry fields and other on-screen titles. For example, in the statement, Again, because the vendor disposal cost for both products does not begin until Year 4, the environmental engineer defines the Start Year for that category as 4, the bold text indicates that the user should input 4 into the field labeled Start Year. The titles of all sheets in the software, such as the Default Parameters sheet, are also capitalized.
P2/FINANCE Administrative Commands

P2/FINANCE Organization
P2/FINANCE consists of a series of different worksheets, some of which accept data input, and some of which present data summaries or analyses. 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)
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P2/FINANCE Version 3.0 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 Users Guide.
Moving Between Sheets

When you open P2/FINANCE, you enter the Project Title sheet. To access a different P2/FINANCE sheet click on the tab buttons at the bottom of the screen. Each tab corresponds to one of P2/FINANCEs sheets. For example, to access the Initial Investment Costs sheet, simply click on the tab titled Initial Investment. In some cases the tab for the sheet you want to access will not be visible on the screen. To locate the desired tab, use the tab scrolling arrows at the bottom left of the screen. The inner set of tab scrolling arrows scrolls the tab button bar one at a time; the outer set of tab scrolling arrows brings you immediately to the very beginning or the very end of the tabs button bar. P2/FINANCE remains in your current scenario (e.g., Base Scenario, Alternative Scenario 1) when you move between sheets. In cases where you move to a sheet that does not have different scenario sections (e.g., Project Title sheet), P2/FINANCE automatically takes you to the top of the sheet.
Moving Between Scenarios

Within a given sheet (e.g., Initial Investment Costs sheet), you can move between scenarios (e.g., Base Scenario and Alternative Scenario 1) by clicking on the relevant scenario button at the top of the screen: The buttons say: Alt1, Alt2, and Base. The Project Title, Default Parameters, and Profitability Analysis sheets apply to all scenarios and therefore no scenario buttons appear on the screen for those sheets. The Cash Flow sheet has two alternatives: a comparison of Base vs Alt 1 and a comparison of Base vs Alt 2. The scenario buttons on this sheet therefore say Alt1 vs Base and Alt2 vs Base. The scenario buttons will always be visible at the top of the computer screen as you scroll through a sheet.
Printing
A Print button will always be visible at the top of the computer screen, even as you scroll down through a sheet. Clicking on this button will bring up a Print Selection Menu that contains brief instructions. Using this menu, you can print any sheet of P2/FINANCE by clicking on the relevant print boxes. The print box for the sheet you are currently working on will already be selected, but you can easily un-select it.
Help Function
A Help button always appears at the top of the screen, next to the Print button. Clicking on the Help button will bring you immediately to the on-line help screen relevant to the sheet in which you are working. If you are working in a sheet that does not have different scenarios
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Introduction
(the Project Title Sheet, the Default Parameters sheet, and the Incremental Profitability Analysis sheet), you can exit the help screen by clicking on the Return to Top button at the top of the screen. If you are using a sheet that does have different scenarios, you can exit the help screen by clicking on any of the scenario buttons at the top of the screen. In either kind of sheet (with or without more than one scenario), you may also exit help by using the tab buttons at the bottom of the screen to select a different sheet.
Calc Button
A Calc button always appears at the top of the screen next to the Print and Help buttons. P2/FINANCE has a default setting of manual recalculation. When P2/FINANCE is in this manual setting, it will automatically recalculate only before you save, print or exit the file, but not every time you enter new data or make changes to existing data. This means that if you make any changes in the data you have entered or if you enter new data, these changes are not automatically reflected in the various mathematical sums and calculations shown on the screens. To tell the software to update its calculations, using the data changes you have made, you must click on the Calc button. P2/FINANCE is set this way so that it runs more quickly. If, however, you want to change from manual recalculation to automatic recalculation, click on the Excel Tools menu, choose Options, and then the Calculate folder. Select automatic rather than manual. If you then close the file and re-open it later, P2/FINANCE will return to the default manual setting.
Excel Tips
Although this Guide assumes user familiarity with Excel for Windows, some general tips on Excel operations appear below. P2/FINANCE rarely requires you to use the Excel menus. Instead, P2/FINANCE contains special on-screen buttons for most of the common commands. The Excel menus, however, do provide some important additional functions. To open a P2/FINANCE file, click on the File menu and then select Open. To save a file, go to the File menu and then select Save. To close a file, go to File then Close. To quit the software, go to File then Exit. If you have not saved your changes when you Close or Exit, Excel will ask you whether you want to save the file. You can also zoom in or out in any given sheet by clicking on the View menu and then selecting Zoom. This will bring up a selfexplanatory zoom menu. P2/FINANCEs 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. If you change the zoom size, you may want to note the default size so that you can return to it easily. P2/FINANCE will not return automatically to the default zoom size if you have saved the zoom changes. In Excel, the status bar at the very bottom of the screen informs you of P2/FINANCEs current status. When P2/FINANCE is ready for you to enter data or make other changes, a 1 - 10
Introduction
Ready message will appear in the status bar. If P2/FINANCE is working, (e.g., moving between sheets & scenarios or recalculating) the Ready message will disappear, indicating that you must wait to continue your analysis. [note: if you press F9 to calculate (rather than clicking on the calculate button), the status bar will for some reason continue to say ready and allow you to keep entering data; if you do enter new data, however, the recalculation will stop. This is due to a problem in the Excel program. Using the calculate button is therefore recommended.] If P2/FINANCE is operating in the default manual recalculation setting, the status bar should display calculate any time you make a change to your file. This is a reminder that you need to recalculate to make the various analyses reflect your new inputs. Unfortunately, the calculate warning does not always appear when it should -- again due to a small bug in Excel. This means that you must be particularly careful about remembering to recalculate before using any of the calculated figures. If you pull down any of the Excel file menus, the status bar will give a brief explanation of whatever function you have highlighted.
Spreadsheet Protection
P2/FINANCE is a protected spreadsheet; cells not requiring user input and cells containing formulas are locked and cannot be modified. Additionally, the file cannot be linked to other files. Protection of this type is necessary to maintain quality control over the program. Protection of P2/FINANCE ensures that you receive a high quality tool.
Computer Specifications
P2/FINANCE was programmed in Excel Version 5.0 for Windows Version 3.1. Other combinations of Windows and Excel have not been tested.
Hardware and Software Specifications

Certain minimum hardware and software specifications must be met to operate P2/FINANCE. In addition to these minimum specifications, we have defined a set of recommended hardware and software specifications that will facilitate your use of P2/FINANCE, but are not absolutely essential for its operation. Table 1 lists both the minimum and recommended hardware specifications.
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Introduction
Table 1. Specifications for Operating P2/FINANCE Version 3.0 in Excel Version 5.0 for Windows Computer Chip Windows Version Memory (RAM) Disk Space Mouse? Color Monitor? Minimum Specifications 386 3.11 4 Megabytes 2 Megabytes Yes No Recommended Specifications 486 or Pentium 3.11 8 or more Megabytes 2 Megabytes Yes Yes
Beyond these minimum requirements, P2/FINANCE runs appreciably faster with more memory (RAM).
Installation
To install P2/FINANCE Version 3.0 programmed in Excel 5.0 for Windows, 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.XLS. P2FINAN.XLS is an empty template that must be copied for each project analysis. When you are ready to enter data into the spreadsheet, save the P2FINAN.XLS file under a new name to use for a particular project. Note that the file extension, XLS, may not be changed. Note: You may reinstall the software at any time to generate a blank spreadsheet with the name P2FINAN.XLS
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2. Step by Step Instructions:

Entering Data
Step by Step Instructions: Entering Data
Project Title Sheet

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

In addition to cost data, P2/FINANCE requires general information about your firm and the proposed investment in order to calculate profitability. This additional information, referred to as the financial parameters for the analysis, range from the Depreciation Method used for an investment, to Income Tax Rates for the firm, to the timing of Annual Operating Costs. Although you can tailor many of these parameters to individual cost categories, P2/FINANCE allows you to define a set of Default Parameters to use as a starting point. On the left, the Default Parameters sheet lists Global Parameters, those parameters that apply to all scenarios within the project. On the right, the Default Parameters sheet lists Scenario Parameters. You can define defaults for: Global Parameters Inflation Rate Discount Rate Income Tax Rates (Local, 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, position your cursor on the appropriate yellow field and enter your selections. P2/FINANCE applies some of these parametersnamely, Inflation Rate, Discount Rate, and Income Tax Ratesto the analysis in the same way as other data entries are applied, i.e., as soon as you type in the desired value and then hit the Calc button. However, for those parameters that can be tailored for individual cost categoriesdefault Depreciation Method, default Depreciation Period, default Investment Year, and default LifetimeP2/FINANCE implements them only after you click on the Apply Defaults button visible on the sheet. For these parameters, selecting Apply Defaults deletes ALL prior tailoring of these parameters for individual cost categories. For example, suppose you change the default Investment Year for Alternative Scenario 1 to Year 2. If you had already tailored some Initial Investment Cost categories to Year 3, clicking the Apply Defaults button reverts the Investment Year for all cost categories in the Alternative Scenario 1 to Year 2. As this command has the potential to delete previous work, P2/FINANCE asks you twice if you are sure that you want to Apply Defaults. After activating Apply Defaults, you can tailor the Default Parameters for each cost category in the Initial Investment Costs and Annual Operating Costs sheets.
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Note: Enter percentages as decimals or with a percent sign (%). For example, to define an inflation rate of 3.5%, type: .035 or 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. Table 2 displays the levels at which each parameter can be defined. 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, it is useful to discuss one key concept in project financial analysisthe time value of money. Money has two important characteristics: dollar value and time value. Most people are familiar with dollar value, preferring to have $1000 instead of $50. For many people, however, the time value of money remains confusing. The time value of money recognizes that the timing of cash flows is relevant to the profitability of a project. For example, a $200 revenue received in Year 1 is worth more than $200 received in Year 10. The time value of money serves as the basis for the Inflation Rate, Escalation and the Discount Rate. Inflation and escalation both reflect the fact that money loses value over time as prices increase. Discounting accounts for the opportunity cost of selecting one project over other investment opportunities. The Inflation Rate, Escalation Rate, and Discount Rate are all described in more detail in the following section on Global Parameters.
Global Parameters
On the left of the Default Parameters sheet, P2/FINANCE lists Default Parameters that are defined for the entire projectGlobal Parameters. You can modify some of these Global Parameters for individual cost categories. A description of each follows.
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Inflation Rate
Inflation reflects the fact that prices rise over time (e.g., one sheet of printing substrate costs $1 in Year 1, whereas in Year 2 a sheet of the same substrate costs $1.05). P2/FINANCE allows you to choose between two approaches to financial analysis. In the first (real) approach, you do not include an Inflation Rate in the analysis and you apply a real Discount Rate that does not incorporate inflation. In the second (nominal) approach, you include an Inflation Rate in the analysis and apply a nominal Discount Rate that incorporates inflation. You can choose either way for your analysis, but make sure that the Discount Rate you choose corresponds to the inflation approach you have selected. P2/FINANCE allows you to define a global Inflation Rate on the Default Parameters sheet. Simply enter a percentage in the data entry field. P2/FINANCE then applies that percentage to both the Annual Operating Costs and Initial Investment Costs over time in all scenarios. Applying a 4.5% Inflation Rate to an Annual Operating Cost of $100 inflates that cost to $104.50 in Year 1, $109.20 in Year 2, $114.12 in Year 3, $119.25 in Year 4, and so on. In addition to this global Inflation Rate, P2/FINANCE allows you to assign an Escalation Rate to Annual Operating Cost categories. Escalation, defined as a percentage, represents cost increases above the Inflation Rate. For example, waste disposal costs often rise at a rate higher than average inflation. If you predict that inflation will be 5%, but that waste disposal prices will increase at an annual rate of 7%, then the Escalation Rate for waste disposal costs is equal to 2%, i.e., the difference between the total increase in prices and the Inflation Rate. While the global Inflation Rate is defined on the Default Parameters sheet, Escalation is defined on the Annual Operating Costs sheet for individual cost categories. Note: Escalation can be a negative percentage, indicating that for a particular cost category, you expect costs to rise at a rate lower than the global Inflation Rate.
Discount Rate
The practice of discounting is a way of accounting for a second aspect of the time value of money. When a firm invests its money in the purchase of a piece of equipment now, at Year zero, the firm expects to see a financial return on this investment over a certain period of time, say 3-5 years or even longer. For example, if a printer buys a new printing press, the firm expects to see increased sales revenues via the new production line. If the printer instead buys a solvent distillation system, the firm expects to see reduced raw material purchase costs and reduced waste disposal costs. The practice of discounting acknowledges that there are opportunity costs to using money. For example, when a printer chooses to invest in 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, each with a different financial benefit for the firm. In order to choose between the available investment opportunities, the firm should
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determine the rate of financial return that it expects from a typical investment, and compare the financial benefits of the specific projects at hand to that expected rate of return and also to each other. The expected rate of return for a typical investment is called the firms Discount Rate. The Discount Rate, expressed as a percentage, is used to discount dollars received by the firm in future years as a result of an investment in Year zero, i.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. The Discount Rate of a firm should approximate the average financial return expected on a typical investment made by that firm. As such, the chosen Discount Rate should, at minimum, ensure that the firm recovers its cost of capital, i.e., the financial return from an investment should at least cover the cost of the money required for the investment. For example, the money used for an equipment purchase might come from equity capital (e.g., stock funds, on which the firm will have to pay dividends) or it might come from debt capital (e.g., a loan from a bank, on which the firm will have to pay interest). 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, firms typically use a weighted average cost of capital for the firm as a whole, a measure that characterizes the balance between the firms use of equity capital and debt capital (including the tax effects of using debt capital) over a longer period of time. This weighted average cost of capital is often used as the firms Discount Rate. The use of the weighted average cost of capital as the firms Discount Rate for the financial analysis of investment opportunities allows the firm to select the investment opportunities that are profitable enough, at minimum, to cover the firms average money costs, and hopefully reap a profit above that minimum. The value of your companys Discount Rate also depends on the approach to financial analysis you have chosen: the real approach vs. the nominal approach. As discussed previously, if you have not included an Inflation Rate in your financial analysis, then you should not incorporate inflation in your Discount Rate, i.e., you should use a real Discount Rate. Alternatively, if you have included an Inflation Rate in your financial analysis, make sure that your Discount Rate also incorporates inflation, i.e., use a nominal Discount Rate. 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
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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.g., interest and principal) in the analysis, avoiding the need to directly include them in the cash flow calculations. The Discount Rate is one way to measure the risk associated with an investment. 2 If the risk associated with a proposed investment differs from the risk of investments generally made by the firm, the Discount Rate should be adjusted accordingly. Increase the Discount Rate for those investments that are riskier than average; decrease the Discount Rate for those investments that are less risky than average. The amount to vary the Discount Rate to account for risk is often a product of intuition rather than quantitative analysis. Define a Discount Rate for the project on the Default Parameters sheet. P2/FINANCE applies this value to the Incremental Cash Flow Analysis (i.e., the comparison of each Alternative Scenario with the Base Scenario) and, thus, the Discount Rate is the same for all scenarios within a project. P2/FINANCE uses the Discount Rate to calculate the Discounted Cash Flow on the Incremental Cash Flow Analysis sheet. The Discounted Cash Flow is then used to calculate Net Present Value and Discounted Payback on the Incremental Profitability Analysis sheet.
Income Tax Rates

Taxes can play a major role in the profitability of any project and are calculated at a companywide level. Define the Local, State, and Federal Income Tax Rates for the project by entering the appropriate percentages in the yellow fields on the Default Parameters sheet. Because you can deduct your state and local taxes from your federal taxable income, P2/FINANCE calculates an Aggregate Income Tax Rate using the formula:
A = [F * (1 - S - L)] + S + L where: A= F= S= L= Aggregate Income Tax Rate Federal Income Tax Rate State Income Tax Rate Local Income Tax Rate
Generally, it is preferable to directly quantify the risk or uncertainty associated with an investment. For example, include an estimate of the legal liability related to an investment directly in the analysis, instead of adjusting the Discount Rate for this risk.
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P2/FINANCE applies this aggregate value to the Incremental Cash Flow Analysis (i.e., the comparison of each Alternative Scenario with the Base Scenario) and, thus, the Aggregate Income Tax Rate is the same for all scenarios within a project. When defining your Income Tax Rates, consider whether the proposed investment would change your current tax rates. For example, if the investment would result in an increase in production with a corresponding increase in revenues, the firm might jump to a higher tax bracket. Note: P2/FINANCE does not explicitly include capital gains taxation or investment tax credits. These tax impacts, where applicable, can be entered into the software as Annual Operating Costs/savings.
Depreciation
The Internal Revenue Service (IRS) permits firms to shield some of their taxable income through tax depreciation of the Initial Investment Costs. Depreciation is the gradual deduction of the equipment costs over time. IRS specifies the method and time period to calculate the depreciation for a piece of equipment. The remaining value of the equipment in each year (Initial Investment Cost - cumulative depreciation) is the Remaining Book Value of the equipment. The calculation of depreciation does not take into account the time value of money. For example, suppose you purchase a new dry cleaning machine for $35,000 and depreciate it over 7 years. Using the standard IRS Depreciation Methoddouble 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 $26,075 in Year 0 dollars. Because depreciation does not account for the time value of money, firms benefit from depreciating equipment as quickly as possible. The IRS defines two accelerated schedules for this purpose. Although the IRS requires you to depreciate equipment costs over time, firms may directly expense (i.e., fully deduct from taxes) some non-equipment costs (e.g., Site Preparation, Start-up Training) associated with the initial investment. You cannot depreciate or expense Working Capital Costs (e.g., inventory expenses) because they do not represent real cash expenses; these costs are recovered at the end of the Lifetime of the project. (For further information on Working Capital, see pages 2-17 and 2-18). P2/FINANCE allows you to select Depreciation Methods for both Expensed Initial Investment Costs and Working Capital Initial Investment Costs. Note: This Guide provides general information on how to estimate the depreciation impact of a potential project. However, when filing your taxes, check with an accountant or the IRS to ensure the use of an appropriate depreciation method and period. On the Default Parameters sheet, select a default Depreciation Method and default Depreciation Period to use as a starting point for the analysis. To define a default Depreciation Method, enter one of the depreciation codes listed on the Default Parameters sheet and below. Similarly, to
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define the number of years over which the equipment is depreciated, enter a number in the yellow field labeled default Depreciation Period. P2/FINANCE allows you to define depreciation parameters at two different levels in the software: 1. On the Default Parameters sheet as a Global Parameter for the project; and 2. 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. Depreciation Methods P2/FINANCE allows the user to select a Depreciation Method for each Initial Investment Cost category from several choices: SL (Straight Line) - The depreciation amount is constant over the Depreciation Period. DDB (200% Declining Balance switching to Straight Line) - An accelerated schedule in which the equipment is depreciated at a higher rate in the beginning of its Lifetime. 1.5DB (150% Declining Balance switching to Straight Line) - Another accelerated schedule at a lower rate. P2/FINANCE automatically applies a half-year convention to all depreciation calculations (i.e., SL, DDB, 1.5DB). Not knowing when in a year the equipment is purchased (or placed into service), this IRS convention allows firms to deduct only a half years value of depreciation in the first year the equipment was placed into service. To recapture the lost half year of depreciation, the IRS extends the Depreciation Period by a half year. For example, P2/FINANCE depreciates equipment with a Depreciation Period of five years over six years with a half years depreciation taken in the first and sixth years. If depreciation is not relevant to a particular cost category, P2/FINANCE also allows the user to select from two non-Depreciation Methods: EXP (Expensed (tax deductible in the first year)) - These non-equipment costs are fully deducted from the cash flow as operating expenses in the year following the Investment Year. WC (Working Capital (not tax deductible)) - Working Capital Costs are neither depreciated or expensed. Working Capital Costs are returned to the cash flow at the end of the projects Lifetime. Marking a category as WC informs
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P2/FINANCE that these costs need to be added back to the cash flow at the end of the cost categorys Lifetime. 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. Depreciation Period The IRS has developed regulations on Depreciation Periods allowed for different types of property. In general, the following Depreciation Periods listed in Table 3 apply. Table 3. Depreciation Period by Property Type3 Property Small tools Automobiles, office machinery, computers, and property used for research and experimentation Office equipment and most manufacturing equipment Machinery and equipment used for petroleum distilling and refining, and for milling grain Sewage treatment plants, telephone and electrical distribution facilities, and land improvements Service stations and other property with a useful life of less than 27.5 years Residential rental property Buildings and real estate placed into service before 5/13/1993. Buildings and real estate placed into service after 5/12/1993. Period 3 years 5 years 7 years 10 years 15 years 20 years 27.5 years 31.5 years 39 years
Ray H. Garrison, D.B.A., CPA and Eric W. Noreen, Ph.D., CMA, Managerial Accounting, 7th ed. (Burr Ridge, IL: Irwin, 1994), p. 718.
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Scenario Parameters
Other Default Parameters are defined for each individual scenario. On the Default Parameters sheet, you define the Name, the default Investment Year, and the default Lifetime for the scenario. P2/FINANCE automatically defines the default Start Year and default End Year for the scenario.
Name
Define a Name for the scenario here. P2/FINANCE then copies this Name to all sheets for the scenario.
Investment Year
P2/FINANCE allows you to specify a default Investment Year for each scenario. Simply enter a number in the yellow field for each scenario. You later can tailor the Investment Year for individual Initial Investment Cost categories. Year 0 is the most common Investment Year. 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. For such an investment, enter 0 as the default Investment Year. Then, on the Initial Investment Costs sheet, create two equipment cost categoriesPurchased Equipment: Year 0 and Purchased Equipment: Year 2. Specify an Investment Year of 2 for the latter equipment cost category. From the default Investment Year, P2/FINANCE identifies the default Start Year for the Annual Operating Costs as the following year. This relationship between Initial Investment Costs and Annual Operating Costs stems from financial analysis convention, which assumes that investments occur at the end of the year (e.g., December 31, 1995) and that depreciation and other tax impacts as well as operating costs do not start until the beginning of the following year (e.g., January 1, 1996). For example, if you purchased a paint spray booth in year 0, you would not begin accounting for Annual Operating Costs, revenues, and tax implications (such as depreciation) until year 1 when you would have a full year of operation. This convention ensures that each year (after Year 0) reflects a full year of costs due to the investment.
Lifetime
P2/FINANCE allows you to define a default Lifetime for each scenario. Simply enter a Lifetime value in the labeled yellow field for each scenario. Lifetime affects the Initial Investment Costs in two ways. First, it defines when the equipment is salvaged (i.e., sold) so that P2/FINANCE can include the revenue from the sale as well as related taxes in the analysis. Second, Lifetime defines when Working Capital is no longer needed for the project and is available for other uses. The return of Working Capital appears as a revenue in the analysis
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because the investment can, in essence, sell the Working Capital to another investment. You later can tailor the default Lifetime for individual Initial Investment Cost categories. In addition to these two uses, P2/FINANCE uses the default Lifetime to define the default End Year for the Annual Operating Costs. You later can tailor this default End Year value for individual Annual Operating Cost categories.
Start Year
P2/FINANCE automatically defines the default Start Year for the Annual Operating Costs as the year after the default Investment Year. According to financial analysis convention, Initial Investment Costs occur at the end of the year and Annual Operating Costs begin in the following year. For example, if you define Year 3 as the default Investment Year, P2/FINANCE automatically defines Year 4 as the default Start Year for Annual Operating Costs. You later can modify this default Start Year on the Annual Operating Costs sheet for each cost category.
End Year
P2/FINANCE automatically defines the default End Year for the Annual Operating Costs by adding the Lifetime to the Investment Year. For example, if you define Year 2 as the default Investment Year and 10 as the Lifetime of the investment, P2/FINANCE automatically defines Year 12 as the default End Year for the Annual Operating Costs. You later can modify this default End Year on the Annual Operating Costs sheet for each cost category.
Accessing Scenarios
The Default Parameters sheet does not contain different sections for each scenario. Therefore, no scenario buttons appear at the top of the screen.
Printing Scenarios
To print the Default Parameters sheet, click on the Print button at the top of the screen to access the general Print Selection Menu. From this menu, select the Default Parameters sheet and then click Okay. If you are working in the Default Parameters sheet, it will already be selected for you. You can print other sheets by selecting them instead of or in addition to the Default Parameters sheet.
Accessing Help
To access the on-line help screen for the Default Parameters sheet, click on the Help button at the top of the screen. This help screen defines each of the financial parameters listed on the 2 - 25
Default Parameters sheet. To exit the help screen, click on the Return to Top 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.
Calculating
To recalculate after entering new data, click on the Calc button at the top of the screen. P2/FINANCE has a default setting of manual recalculation. This means that if you make any input changes, they are not automatically reflected in the various totals and analyses. To incorporate the changes, you must click on the Calc button. To learn how to change the default setting or to read more about the Calculate function, see sections on Calculate Button and Excel Tips on page 1-8.
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Initial Investment Costs Sheet

Once you define both the Global and Scenario Parameters for the project on the Default Parameters sheet, you can begin entering cost data related to the initial investment. In many cases, only Alternative Scenarios, i.e., changes to your current process, require an initial investment. For these cases, enter the Initial Investment Costs under an Alternative Scenario. In cases where the Base Scenario, or business-as-usual activities, also requires an investment, enter Initial Investment Costs in both Alternative and Base Scenarios. For example, 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. The shop, however, considers transferring some of its capacity from dry cleaning to wet cleaning, enabling it to meet air emission limits without pollution control devices. To assess the profitability of such an operating change, 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. P2/FINANCE allows you to define Initial Investment Costs for any scenarioAlternative or Base. First, identify the costs required to start up the investment by developing a cost inventory related to the initial investment. 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. An example of this broader view is P2/FINANCEs use of the term Initial Investment Costs as a replacement for capital costs. The term capital cost generally refers only to equipment and other direct material cost items, i.e., those that are depreciable, and thus omits indirect and non-depreciable costs. Indirect costs related to the initial investment, such as labor associated with planning, engineering, and training, can impact the profitability of the investment and thus merit inclusion in the analysis. Keep these other Initial Investment Costs in mind and, where feasible, include them in your analysis to enhance its accuracy. Financial analysis estimates the profitability of an investment and as an estimate, is not sensitive to the precise timing of Initial Investment Costs and Annual Operating Costs within a calendar year. Instead, financial analysis convention assumes that Initial Investment Costs occur at the end of the year (e.g., December 31, 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.g., January 1, 1996). For example, if you purchase a rotary tiller at the end of Year 4, you would not begin accounting for Annual Operating Costs, revenues, and tax implications (e.g., depreciation) until Year 5 when you would have a full year of operation. This convention ensures that each year (after Year 0) reflects a full year of cost impacts due to the investment. As a result of this timing convention, the default Start Year for Annual Operating Costs always is the year following the default Investment Year. The first step on the Initial Investment Costs sheet is to define the relevant cost categories for the project. Cost categories serve two purposes in P2/FINANCE. First, they are used in the Scenario Summary, Tax Deduction Schedule, and Incremental Cash Flow Analysis sheets for tracking and organizing cost data. Second, cost categories are used to indicate a set of financial parameters (e.g., Depreciation Method) that differ from the Default Parameters. You can use the cost categories to organize these modifications. For example, an auto manufacturer depreciates 2 - 27
most equipment over seven years with the exception of small and special tools that depreciate over three years. To accommodate both Depreciation Periods in a single scenario, define two purchased equipment categoriesone with a 7 year Depreciation Period, titled Purchased Equipment - 7 Years and the other with a 3 year Depreciation Period, titled Purchased Equipment - 3 Years. 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, Tax Deduction Schedule, and Incremental Cash Flow Analysis sheets by cost category. Therefore, you can modify the names of cost categories only in Alternative Scenario 1; P2/FINANCE automatically adjusts the names of cost categories in other scenarios to reflect changes made in Alternative Scenario 1. Having defined the cost categories, enter the relevant cost item names within each cost category. Because the cost items are not used for reporting purposes by the program, they can vary from scenario to scenario. P2/FINANCE inflates Initial Investment Costs that do not occur in Year 0, using the global Inflation Rate and the Investment Year defined for that cost category. Note: For each cost item, always enter the Initial Investment Cost in Year 0 dollars regardless of the year in which the cost occurs. In P2/FINANCE, enter costs as positive values and revenues as negative values. The only exception to this sign convention is Salvage Value, a revenue that is entered in the Salvage Value field as a positive value. 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. For example, the choice of DDB as the Depreciation Method with a Depreciation Period of 0 yields P2F #ERR. Several rules govern parameters defined at the category level. With a Depreciation Method of DDB, 1.5DB, or SL, the Depreciation Period must be greater than 0. The Depreciation Period can never be less than 0 or text. The Depreciation Method must be one of the five P2/FINANCE codes. The Investment Year can never be less than 0 or text. The Investment Year can never by greater than 15. The Lifetime can never be less than 1 or text.
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Salvage Value
If your investment has resale potential at the end of its Lifetime, include its Salvage Value (in Year 0 dollars) on the Initial Investment Costs sheet. 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. Note: Salvage Value is the only revenue you enter as a positive value in P2/FINANCE. P2/FINANCE inflates the Salvage Value and includes it on the Incremental Cash Flow Analysis sheet as a revenue in the Lifetime year (i.e., Investment Year + Lifetime). For example, you purchase a printing press in Year 0 for $500,000 and believe that you can sell it at the end of its 10 year Lifetime for $50,000 (in Year 0 dollars), assuming an annual Inflation Rate of 5%. In Year 10, P2/FINANCE inflates the Salvage Value to $81,445 and includes this value as a revenue related to the investment. In addition to its revenue-generating potential, Salvage Value also impacts the taxes related to an investment. Because IRS depreciation equations do not account for Salvage Value, any revenue received from the resale of fully depreciated equipment is taxable. If the equipment is sold before it has been fully depreciated, 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. If the salvaged equipment is sold for less than its Book Value (i.e., Salvage Value < Book Value), you can reduce your taxable income by the difference between the two values. Similarly, if the salvaged equipment is sold for more than its Book Value (i.e., Salvage Value > Book Value), you have to pay taxes on the difference. This difference (i.e., Salvage Value - Book Value) is included in the Tax Calculation on both the Tax Deduction Schedule and Incremental Cash Flow Analysis sheets. Because it is unlikely that the Salvage Value of a piece of equipment would exceed its original purchase price, P2/FINANCE does not consider capital gains taxation.
Tailoring the Financial Parameters

For each Initial Investment Cost category, you can change the following Default Parameters to more accurately reflect the profitability of an investment: Investment Year, Lifetime, default Depreciation Method, and default Depreciation Period. Organize cost items that require the same financial parameters into corresponding cost categories. For example, you are evaluating a multi-year 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. To evaluate such an investment, separate the costs first by Investment Year. Then within each of these sets, separate all of the costs by Depreciation Method. Continue this approach with the Lifetime and Depreciation Period parameters until you have groups of cost items that share the same financial parameters. P2/FINANCE only uses Lifetime to determine when to cash in Salvage Value and Working Capital. If neither of these are relevant for the cost items within a particular cost category, you do not have to make sure that all cost items share the same Lifetime.
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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. Some Initial Investment Costs do not have to be depreciated, such as Site Preparation and Startup Training. P2/FINANCE allows you to select a Depreciation Method, EXP, for Initial Investment Costs that should be fully deducted from the cash flow as operating expenses. Because P2/FINANCE adopts the financial analysis convention that investments occur at the end of the year (e.g., December 31), it does not expense these Initial Investment Costs until the year following the Investment Year. For example, if you incur an expensed cost in Year 2, P2/FINANCE does not expense it for tax purposes until Year 3. When you select the EXP method, P2/FINANCE ignores Salvage Value entries because only equipment can be salvaged. P2/FINANCE also ignores the Depreciation Period when you select EXP.
Working Capital
You also may need to tailor the Default Parameters for Initial Investment Cost categories that denote Working Capital. When beginning a new process, developing a new product, or increasing production capacity, your firm may need to temporarily set aside funds for project start-up. These temporary investments can be recovered by the company at the end of the Projects Lifetime. During the project, though, these investments are tied up in the project and are not available for other investments; however, the time value of money must be accounted for through the application of an Inflation Rate and a Discount Rate. An investment in inventories is a common Working Capital Initial Investment Cost that is relevant for the financial analysis of a project. For example, 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, knowing that you can recover these costs by selling the inventory at the end of the projects Lifetime. In this example, you would incur a cost at the end of Year 0 (included on the Initial Investment Costs sheet) and see a revenue (i.e., a release of the tied-up funds) at the end of the projects Lifetime included as Recovery of Working Capital on the Incremental Cash Flow Analysis sheet. Because Working Capital is recovered by the company, it cannot be depreciated. Working Capital on a facility-wide basis includes the amount of capital tied up in accounts receivable, accounts payable, taxes payable, inventory and cash requirements. For a particular project, Working Capital can be estimated as a percentage of the expected change in revenues due to the project. If the companys operations are stable and the proposed project is not expected to have a significant impact on the companys revenues, these other Working Capital impacts are typically minimal and can be omitted from the analysis. If developing an inventory, on the other hand, is directly linked to the proposed project, its costs should be included in the analysis as Working Capital. To include a Working Capital Initial Investment Cost in a scenario, enter WC as the Depreciation Method for an Initial Investment Cost category. The WC code tells P2/FINANCE how to treat the Initial Investment Costs within that category. 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.e., Investment Year + Lifetime) for that category. If you select WC as the Depreciation Method for an Initial Investment Cost category, P2/FINANCE ignores Salvage Value and the Depreciation Period.
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Accessing Scenarios
The Initial Investment Costs sheet contains three sections, one for each scenario Alternative 1, Alternative 2, and Base. To move between scenarios, click on the relevant scenario button at the top of the screen. The buttons say: Alt1, Alt2, and Base. The scenario buttons allow you to move between scenarios, differing from the tab buttons at the bottom of the screen, which allow you to move between sheets within a scenario.
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. From this menu, select the Initial Investment Costs sheet and the scenario(s) you want and then click Okay. If you are working in the Initial Investment Costs sheet, it will already be selected for you. You can print other sheets by selecting them instead of or in addition to the Initial Investment Costs sheet.
Accessing Help
To access the on-line help screen for the Initial Investment Costs sheet, click on the Help button at the top of the screen. This help screen defines each of the components of the Initial Investment Costs sheet. To exit the help screen, click on one of the scenario buttons at the top of the screen. You may also use the tab buttons at the bottom of the screen to select a different sheet.
Calculating
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Annual Operating Costs Sheet

In a financial analysis, the Initial Investment Costs are weighed against the expected Annual Operating Costs (i.e., the annual operating revenues or cost savings) associated with the investment. Enter the Annual Operating Costs associated with the investment in the Alternative Scenario and costs for business-as-usual operations in the Base Scenario. In general, only include in the financial analysis those costs that are likely to change as a result of the investment. For example, if you do not expect labor costs to change with the purchase of a new paint gun cleaner, then omit the cost of labor from the analysis. Financial analysis convention assumes that all Initial Investment Costs occur at the end of the year (e.g., December 31, 1995) and that depreciation and operating costs do not start until the beginning of the following year (e.g., January 1, 1996). Thus, P2/FINANCE automatically defines the default Start Year for Annual Operating Costs as the year following the default Investment Year. You can modify this Start Year for individual Annual Operating Cost categories as needed. As on the Initial Investment Costs sheet, the first step on the Annual Operating Costs sheet is to define the relevant cost categories for the project. Cost categories serve two purposes in P2/FINANCE. First, they are used on the Scenario Summary, Tax Deduction Schedule, and Incremental Cash Flow Analysis sheets for tracking and organizing cost data. Second, cost categories are used to indicate a set of financial parameters that differ from the Default Parameters. You can use the cost categories to organize these modifications. The financial parameters that you can modify for Annual Operating Cost categories include Start Year, End Year, and Escalation Rate. Within a project, the names of the cost categories must remain consistent from scenario to scenario because P2/FINANCE tracks costs on the Scenario Summary, Tax Deduction Schedule, and Incremental Cash Flow Analysis sheets by cost category. Therefore, you can later modify the names of cost categories only in Alternative Scenario 1; P2/FINANCE automatically adjusts the names of cost categories in other scenarios to reflect changes made in Alternative Scenario 1. After defining the cost categories, enter the relevant cost item names within each cost category. Because the cost item names are not used for reporting purposes, they can vary from scenario to scenario. P2/FINANCE inflates the Annual Operating Costs, using the global Inflation Rate and any Escalation Rate defined for the cost category. Note: For each cost item, always enter the cost in Year 0 dollars regardless of the year in which the cost occurs. In P2/FINANCE, enter costs as positive values and revenues as negative values. 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. Several rules govern parameters defined at the category level. Text may not be entered into any of the parameter fields. 2 - 32
Start Year and End Year must be greater than 0. Start Year must never be greater than 15. Start Year must never be greater than the End Year.
Escalation Rate
Because the global Inflation Rate represents an average increase in prices for all goods, it does not always capture the expected change in costs over time for particular cost items. P2/FINANCE allows you to apply an additional Escalation Rate to an Annual Operating Cost category. 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. Therefore, the Escalation Rate for a specific category and the global Inflation Rate are additive. For example, if you expect Waste Disposal costs to rise by 5% each year and have set the global Inflation Rate at 3.5%, set the Waste Disposal Escalation Rate to 1.5%. Enter an Escalation Rate in the yellow Escalation Rate field below the cost category name as a decimal number. To enter an Escalation Rate of 5%, type 0.05 or 5%. Note: P2/FINANCE allows you to define both negative and positive Escalation Rates.
Tailoring the Financial Parameters

For each Annual Operating Cost category, you can change the following Default Parameters to more accurately reflect the profitability of an investment: Start Year, End Year, and Escalation. Organize cost items that require the same financial parameters into cost categories. For example, suppose you are considering a multi-year investment where some Annual Operating Costs occur from Year 1 to Year 5, while another set of Annual Operating Costs occur from Year 6 to Year 10. To organize the costs by financial parameters they share, separate the costs first by the years over which they will occur (i.e., Year 1 to 5 and Year 6 to 10). Then, within each of these sets, organize the costs by Escalation Rate until each group of cost items shares the same financial parameters. The ability to tailor the financial parameters allows you to include Annual Operating Costs that do not occur on an annual basis. For example, suppose you want to include a liability cost of $50,000 (in Year 0 $) in Year 6 in the Base Scenario. Create a Annual Operating Cost category titled Liability, enter $50,000, and define the Start Year as 6 and the End Year as 6.
Accessing Other Scenarios

The Annual Operating Costs sheet contains three sections, one for each scenario Alternative 1, Alternative 2, and Base. To move between scenarios, click on the relevant scenario button at the top of the screen. The buttons say: Alt1, Alt2, and Base. The scenario buttons allow you to move between scenarios, differing from the tab buttons at the bottom of the screen, which allow you to move between sheets within a scenario. 2 - 33
Printing Scenarios
To print a section of the Annual Operating Costs sheet, click on the Print button at the top of the screen to access the general Print Selection Menu. From this menu, select the Annual Operating Costs sheet and the scenario(s) you want and then click Okay. If you are working in the Annual Operating Costs sheet, it will already be selected for you. You can print other sheets by selecting them instead of or in addition to the Annual Operating Costs sheet.
Accessing Help
To access the on-line help screen for the Annual Operating Costs sheet, click on the Help button at the top of the screen. The help screen defines each of the components of the Annual Operating Costs sheet. To exit the help screen, click on the Return to Top 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.
Calculating
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3. Calculating the Bottom Line:

Generating Reports
P2/FINANCE Version 3.0 Reports
Calculating the Bottom Line: Generating
After defining all of the elements of your scenario(s) (i.e., financial parameters and cost data), you can generate four types of reports that are detailed below. 1. P2/FINANCE provides a Scenario Summary with information on the cost data and parameters that you entered for the scenario. It does not include any calculations and can be used as a way to check data entry accuracy. 2. 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. 3. P2/FINANCE provides an Incremental Cash Flow Analysis that compares an Alternative Scenario to the Base Scenario. It incorporates inflation, depreciation, escalation, taxes, and discounting. This report contains a Tax Calculation and a Cash Flow Calculation, the results of which P2/FINANCE uses to calculate the financial indicators listed on the Incremental Profitability Analysis sheet. 4. P2/FINANCE provides an Incremental Profitability Analysis that includes three financial indicators: Net Present Value, Internal Rate of Return, and Discounted Payback.
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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. It lists the parameters defined at the cost category level as well as the Default Parameters for the scenario. A Scenario Summary exists for each scenarioAlternative 1, Alternative 2, and Base. P2/FINANCE lists the name of the scenario in the top left corner and the Date at the middle top. 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. The names of the Initial Investment Cost categories appear in the left column, followed by the sum of Initial Investment Costs for that category. P2/FINANCE lists all costs in Year 0 dollars (i.e., uninflated dollars) on the Scenario Summary. Next to the Cost for each cost category appears its Salvage Value (also in Year 0 dollars). The financial parameters follow with Investment Year, Lifetime, Depreciation Period, and Depreciation Method 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 Annual Operating Costs section of the Scenario Summary lists information entered on the Annual Operating Costs sheet for the scenario. The names of the Annual Operating Cost categories appear in the left column, followed by the sum of the Annual Operating Costs for that category (in Year 0 dollars). The financial parameters follow with Start Year, End Year, and Escalation Rate defined for each cost category. The Annual Operating Costs section provides a quick check on the data and financial parameters for the operating cost portion of a scenario. The Global Parameters section lists some of the Default Parameters defined on the Default Parameters sheet. These Global Parameters affect all scenarios within a project and, with the exception of default Depreciation Method and default Depreciation Period, cannot be tailored to a particular scenario or cost category. In the Global Parameters section, P2/FINANCE reports the Project Title, Inflation Rate, Discount Rate, Aggregate Income Tax Rate, default Depreciation Method, and default Depreciation Period. The Scenario Parameters section lists the remaining Default Parameters defined on the Default Parameters sheet, those parameters that relate to an individual scenario. In the Scenario Parameters section, P2/FINANCE reports the default Investment Year, default Lifetime, default Start Year, and default End Year.
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Note: The financial parameters defined for a specific cost category always override the Default Parameters at either the global or scenario level.

The Scenario Summary sheet contains three sections, one for each scenarioAlternative 1, Alternative 2, and Base. To move between scenarios, click the relevant scenario button at the top of the screen. The buttons say: Alt1, Alt2, and Base. The scenario buttons allow you to move between scenarios, differing from the tab buttons at the bottom of the screen, which allow you to move between sheets within a scenario.
Printing Scenarios
To print a section of the Scenario Summary sheet, click on the Print button at the top of the screen to access the general Print Selection Menu. From this menu, select the Scenario Summary sheet and the scenario(s) you want and then click Okay. If you are working in the Scenario Summary sheet, it will already be selected for you. You can print other sheets by selecting them instead of or in addition to the Scenario Summary sheet.
Accessing Help
To access the on-line help screen for the Scenario Summary sheet, click on the Help button at the top of the screen. The help screen defines each of the components of the Scenario Summary sheet. To exit the help screen, click on the Return to Top 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.
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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. For each scenario, P2/FINANCE generates a Tax Deduction Schedule that reports the tax deductions related to each cost category in every year, over a period of 15 years. P2/FINANCE lists the Name of the scenario in the top left corner and the Date in the top right corner. 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, DDB, or 1.5DB. The Expensed Initial Investment Costs reported for each year equals the sum of all cost categories with a Depreciation Method of EXP. The Working Capital Initial Investment Costs reported for each year equals the sum of all cost categories with a Depreciation Method of WC. Note: The Tax Deduction Schedule reports all costs in inflated and escalated dollars. The Deduction Detail section of the Tax Deduction Schedule reports the annual tax deduction for each cost category. P2/FINANCE lists the cost category name in the left column with its Depreciation Method in parenthesis. Two rows of data appear for each cost category. The top row of data lists the tax deduction allowed in that year through depreciation or expensing of the initial cost. The bottom row serves two functions; 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. 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.e., those categories that have either SL, DDB, or 1.5DB for a Depreciation Method), P2/FINANCE reports the Initial Investment Cost in the
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bottom row in the Investment Year. In the first year of depreciation (i.e., the year after the Investment Year for the cost category), 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, which it reports in the bottom row. After that first year of depreciation, P2/FINANCE calculates a full year of depreciation in each year until the final year of depreciation (i.e., Investment Year + Depreciation Period + 1) in which P2/FINANCE takes the remaining half year of depreciation. 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. For an investment at the end of Year 2 with a Depreciation Period of 5 years, depreciation actually takes place over 6 years with half years depreciation in years 3 and 8. Depreciation calculations do not account for the Salvage Value of the equipment, i.e., resale at the end of its useful life. Therefore, the tax implications of Salvage Value must be calculated separately. Any revenue received for the sale of depreciable assets above the Remaining Book Value of that asset is taxable. Most often, you sell a piece of equipment after it has been fully depreciated, in which case you must pay taxes on the revenue generated from this sale, i.e., the inflated Salvage Value. However, there may be situations when you would want to sell the equipment before it has been fully depreciated. In such cases, P2/FINANCE takes only a half year of depreciation in the Salvage Value year. After salvaging the equipment, you can no longer depreciate it. To calculate the impact of Salvage Value on your taxable income, P2/FINANCE compares the inflated Salvage Value of the equipment with its Remaining Book Value in the Lifetime year (i.e., Investment Year + Lifetime). If you sell the equipment for more than its Remaining Book Value, the IRS requires you to pay taxes on the difference. However, if you sell the equipment for less than its Remaining Book Value, the IRS allows you to deduct a tax loss from your taxable income. P2/FINANCE inflates the Salvage Value to the Lifetime year and calculates: Salvage Value - Book Value = Taxable Gain (Loss) on Salvaged Equipment. For Expensed Initial Investment Costs (i.e., those categories that list EXP as their Depreciation Method), P2/FINANCE reports the inflated Initial Investment Cost in the bottom row of the Investment Year column. In the following year, P2/FINANCE fully expenses the cost, reporting the deduction in the top row, with no Remaining Book Value in the bottom row. For Working Capital Initial Investment Costs (i.e., those categories that list WC as their Depreciation Method), P2/FINANCE reports the inflated Initial Investment Cost in the bottom row of the Investment Year column. Working Capital Initial Investment Costs can be neither depreciated nor expensed because Working Capital refers only to an internal allocation of costs, not a true cash flow. Therefore, all other years report NA in the bottom row to indicate that tax deductions are not applicable. Working Capital costs return to the firm in the form of a revenue at the end of the categorys Lifetime, but, again, have no impact on taxes. The Deduction Summary section of the Tax Deductions Schedule summarizes the annual tax deductions related to: Total Depreciation
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Expensed Initial Investment Costs Taxable Gain (Loss) on Salvaged Equipment
To calculate these first two values, P2/FINANCE simply adds the depreciation or expensing for all of the cost categories. P2/FINANCE calculates the Taxable Gain (Loss) by subtracting the Remaining Book Value in the Lifetime year from the inflated Salvage Value. While depreciation and expensing lower your taxable income, the Taxable Gain increases it. Therefore, P2/FINANCE subtracts it from the other tax deductions to calculate the Total Tax Deductions in each year.

The Tax Deduction Schedule sheet contains three sections, one for each scenario Alternative 1, Alternative 2, and Base. To move between scenarios, click on the relevant scenario button at the top of the screen. The buttons say: Alt1, Alt2, and Base. The scenario buttons allow you to move between scenarios, differing from the tab buttons at the bottom of the screen, which allow you to move between sheets within scenarios.
Printing Scenarios
To print a section of the Tax Deduction Schedule sheet, click on the Print button at the top of the screen to access the general Print Selection Menu. From this menu, select the Tax Deduction Schedule sheet and the scenario(s) you want and then click Okay. If you are working in the Tax Deduction Schedule sheet, it will already be selected for you. You can print other sheets by selecting them instead of or in addition to the Tax Deduction Schedule sheet.
Accessing Help
To access the on-line help screen for the Tax Deduction Schedule sheet, click on the Help button at the top of the screen. This help screen defines each of the components of the Tax Deduction Schedule sheet. To exit the help screen, click on the Return to Top 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.
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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. Each Analysis incorporates the effects of taxes, discounting, and inflation on the projects cash flows and serves as the basis for calculating the profitability indicatorsNet Present Value, Internal Rate of Return, and Discounted Payback (described on Pages 3-10 through 3-12 in this section). P2/FINANCE lists the Name of the project in the top left corner and the Date in the top right corner. 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. For each cost category, P2/FINANCE inflates and reports the incremental Initial Investment Cost in each year, subtracting the Base Costs from the Alternative Costs. P2/FINANCE calculates the Total Initial Investment Costs in each year by summing all of the cost categories. The Incremental Annual Operating (Costs) / Savings section summarizes the Annual Operating (Costs) / Savings for the analysis. For each cost category, P2/FINANCE inflates and reports the incremental Annual Operating Costs in each year, subtracting the Alternative Costs from the Base Costs. P2/FINANCE calculates the Total Annual Operating (Costs) / Savings in each year by summing all of the cost categories. Note: P2/FINANCE calculates the Incremental Initial Investment Costs (Alt - Base) differently than the Incremental Annual Operating (Costs) / Savings (Base - Alt) because the analysis weighs the initial costs due to the Alternative (i.e., in this incremental section, higher Alt costs are positive) against the operating savings due to that Alternative (i.e., 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. 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. To calculate the incremental taxable income for the Alternative 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. 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.
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The Incremental Cash Flow Calculation section calculates the incremental Discounted Cash Flow using data from the top three sections of the analysis. 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. 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. Working Capital provides for accounts receivable, accounts payable, taxes payable, inventories and cash requirements associated with an investment. Unlike the other costs associated with a project, Working Capital does not reflect an actual project expense (i.e., one that is payable to an external party). Instead, it is an internal allocation of funds. For this reason, at the end of the investments Lifetime the Working Capital is free for use in a different project. P2/FINANCE includes the Working Capital Initial Investment cost as part of the total Initial Investment Costs for the investment. To account for the Recovery of Working Capital, 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. Because it is only an internal allocation of funds, Working Capital has no impact on the taxes calculated for the firm. Salvage Value equals the expected revenue from the resale of equipment at the end of the equipments lifetime. In the Initial Investment Costs sheet you can define a Salvage Value for each cost category. P2/FINANCE then includes the inflated revenue from the Salvage Value in the Lifetime year for that category. Having calculated the After-Tax Cash Flow, P2/FINANCE calculates the incremental Cumulative Cash Flow for each year as the sum of annual incremental After-Tax Cash Flows to date. P2/FINANCE also applies a Discount Rate to the incremental After-Tax Cash Flow to calculate the incremental Discounted Cash Flow in each year. The incremental Discounted Cash Flow accounts for the time value of money, and serves as the basis for calculating two of P2/FINANCEs three profitability indicators.

The Incremental Cash Flow Analysis sheet contains two sections, one for each combination of Alternative and Base Scenario. To move between these two sections, click on the relevant scenario comparison button at the top of the screen. The buttons say: Alt1 vs Base and Alt2 vs Base. The Incremental Cash Flow sheet compares each Alternative Scenario with the Base Scenario; this sheet does not contain a separate section for the Base Scenario. The scenario comparison buttons allow you to move between scenarios, differing from the tab buttons at the bottom of the screen, which allow you to move between sheets within a scenario.
Printing Scenarios
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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. From this menu, select the Incremental Cash Flow Analysis sheet and the comparison(s) you want and then click Okay. If you are working in the Incremental Cash Flow Analysis sheet, it will already be selected for you. You can print other sheets by selecting them instead of or in addition to the Incremental Cash Flow Analysis sheet.
Accessing Help
To access the on-line help screen for the Incremental Cash Flow Analysis sheet, click on the Help button at the top of the screen. This help screen defines each of the components of the Incremental Cash Flow Analysis sheet. To exit the help screen, click on the Return to Top 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.
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Incremental Profitability Analysis Sheet

The Incremental Profitability Analysis sheet reports three common financial indicators that measure the profitability of the analysis. 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. One of the important components of Total Cost Assessment (TCA) is the use of multiple financial indicators in measuring profitability. P2/FINANCE offers three indicators: Net Present Value, Internal Rate of Return, and Discounted Payback. Each indicator has specific strengths and weaknesses. By considering all three indicators you can minimize these limitations and gain a deeper understanding of the projects profitability.
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 firms Discount Rate for calculation. A project is profitable if its NPV is greater than zero. For example, suppose you invest in a digital paint mixing system costing $5,000. In Year 0 your Discounted Cash Flow (DCF) equals -$5,000 and in all subsequent years the imaging system generates a DCF of $2,000. The projects NPV in year 3 equals the sum of the DCFs in each year (i.e., Years 0 through 3; hence, -$5,000 + $2,000 + $2,000 + $2,000) or $1,000. If multiple projects are under consideration, the one with the most positive NPV is the most profitable. P2/FINANCE calculates NPV for 5, 10, and 15 year horizons, plus a time horizon you specify at the top of the Incremental Profitability Analysis sheet. NPV is a very useful indicator because it is a direct measure of the projects profitability in dollars and therefore most directly relates to the companys interest in higher cash flows. It does, however, depend significantly on the value of the Discount Rate. In general, NPV is the strongest of the three indicators because it has few limitations and can be used in all types of analyses.
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. IRR is calculated via an iterative process (i.e., the software chooses Discount Rates until it finds one that makes the NPV equal to zero). You can compare the IRR to your companys Discount Rate or to the IRR calculated for other projects. If the IRR is higher than the companys Discount Rate, then the project is profitable. When comparing multiple investments, the one with the highest IRR is the most profitable.
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IRR is a useful indicator because it is easy to interpret and considers equally all of the cash flows of the investment. P2/FINANCE calculates IRR for 5, 10, and 15 year horizons, plus a time horizon you specify at the top of the Incremental Profitability Analysis sheet. Despite these benefits, IRR does have its limitations. For example, if you are performing a complex analysis (e.g., capital costs in multiple years or widely fluctuating operating costs and revenues), you should avoid using this indicator. To avoid confusion with this indicator, P2/FINANCE does not calculate IRR for extremely complex analyses, instead reporting NA. (IRR will not be calculated if there is more than one change in the mathematical sign of the cash flow, which would allow for multiple IRR values). In addition, 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. Suppose you are considering two investments: Investment A requires an initial outlay of $50,000 and Investment B requires only $500. Even if Investment B has a higher IRR than Investment A, this does not necessarily indicate that B is more profitable for the company. In fact, B can have an IRR of 173% and A an IRR of 85% over the first five years, but A would generate more than four times as much revenue. Therefore, when you are comparing investments with significantly different magnitudes of costs and revenues, you should use NPV because it is a direct measure of the dollars the investment will generate.
Discounted Payback
Discounted Payback is one of several types of payback calculations, which, in general, measure the time it takes for a company to break even on an investment. Payback calculations typically do not incorporate the time value of money through discounting. However, P2/FINANCE calculates Discounted Payback, a method that includes inflation, escalation, and discounting. A projects Discounted Payback equals the time when the Net Present Value of the investment equals zero, i.e., when you have recovered your investment costs. Many companies base their investment decisions on payback because it is easy to understand and use. 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. However, you should be aware of certain limitations of this indicator before using it. One limitation is that payback does not account for all of the cash flows of a project. It considers the cash flows that take place before the investment is paid back, but ignores all cash flows after this threshold. Ignoring these later cash flows can mislead you as to the true profitability of the investment. As an example, suppose you are considering two investments, A and B, and each requires an initial investment of $50,000. Investment A generates $25,000 in revenues for the next three years, whereas Investment B generates $20,000 in revenues for the next 20 years. Using payback principles, Investment A is more profitable than Investment B because you recover the Initial Investment Cost earlier with Investment A. However, Investment A generates revenues for only three years, whereas Investment B continues to earn revenues for 20 years. This
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example illustrates that an investments 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. For P2 projects, this can be an especially significant limitation because many Annual Operating Costs may occur several years after the Initial Investment Cost. 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. P2/FINANCE does not calculate a Discounted Payback for scenarios that are too complex; instead it reports NA.
Accessing Scenarios
The Incremental Profitability Analysis sheet does not contain different sections for each scenario. Therefore, no scenario buttons appear at the top of the screen.
Printing Scenarios
To print the Incremental Profitability Analysis sheet, click on the Print button at the top of the screen to access the general Print Selection Menu. From this menu, select the Incremental Profitability Analysis sheet and then click Okay. If you are working in the Incremental Profitability Analysis sheet, it will already be selected for you. You can print other sheets by selecting them instead of or in addition to the Incremental Profitability Analysis sheet.
Accessing Help
To access the on-line help screen for the Incremental Profitability Analysis sheet, click on the Help button at the top of the screen. This help screen defines each of the financial indicators reported on the Incremental Profitability Analysis sheet. To exit the help screen, click on the Return to Top 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.
Calculating
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4. Case Studies
An Example of a Basic Analysis

This case study illustrates how P2/FINANCE can be used for a relatively basic project analysis. This example is based on a factual case study that has been modified to better illustrate some of P2/FINANCEs features.
Conceptualize the Analysis

In this example, 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. The shop hopes that the waste oil burner can reduce both off-site waste disposal costs and facility heating costs. 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 processoff-site waste disposal.
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, as shown in Table 4. To help develop this inventory, the shop manager refers to the Total Cost Assessment Cost Inventory provided in Appendix A of this Guide. Table 4. Cost/Savings Inventory for Waste Oil Burner Analysis Initial Investment Costs Burner Equipment (incl. delivery, 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, 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. Through discussions with the equipment vendor, the manager learns that any engineering services required for the waste oil burner are included in its purchase price, thereby eliminating the need for any in-house engineering labor. Similarly, the manager initially foresaw a need to do some electrical work to install the burner, but later realizes that he can relocate the 4 - 49
Case Studies
burner to a different corner of the shop that already has suitable electrical connections, eliminating the need for this expenditure. The shop manager also narrows down its list of relevant Annual Operating Costs and marks those he plans to quantify with an . Through discussions with other shops that have installed waste oil burners, the manager learns that the labor required to operate the unit under normal conditions is negligible, leading the shop manager to decide against quantifying this cost. Storage space (i.e., floor space for the burner) was a relevant Annual Operating Cost that the shop owner felt was difficult to quantify. To simplify the analysis, the manager chooses to include the loss of shop floor space only as a qualitative consideration in the analysis.
Collect Cost Data

With this inventory in hand, the shop manager begins the data collection process, using billing records to determine current expenditures and talking to the vendor and other shops about the expected costs of the waste oil burner. Base Scenario: Current Oil Handling Process The Base Scenario reflects the shops usual off-site waste disposal arrangement. The scenario includes only Annual Operating Costs because no Initial Investment Costs are required for business-as-usual continuation of oil pick-up by an external waste vendor.
Annual Operating Costs
The proposed investment in a waste oil burner impacts current costs related to waste disposal and heating. The Base Scenario therefore includes the business-as-usual estimates for these cost items.
Waste Oil Handling - Vendor Fees
For business-as-usual, 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. According to the shops billing records, the shop generally pays its waste disposal vendor $1000 annually to pick up waste oil on an as-needed basis. This fee includes the cost of disposal and applicable manifesting (paperwork) fees.
Waste Oil Handling - In-house Labor
The shop manager estimates the in-house labor associated with business-as-usual waste oil pick-ups to equal approximately 0.5 hours of management labor per scheduled pick-up. Assuming a fully burdened labor cost (i.e., a cost that includes employee benefits) of $30/hour, the ten waste oil pickups per year require five labor hours for an annual cost of $150.
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Building Heating System
Case Studies
Currently, the shop uses one gas-fired boiler with a maximum heat input rating of 1.82 million BTUs/hour for heating the facility in the winter months. Based on its billing records, the shop used approximately 2,613 million BTUs (equivalent to 24,722 hundred cubic feet of natural gas) to heat the facility during the previous year, at a total cost of $17,808. Alternative Scenario 1: Waste Oil Burner In this scenario, the purchase of a waste oil burner replaces the shops current off-site waste disposal arrangement. 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.
Initial Investment Costs
Alternative Scenario 1 requires the purchase of a waste oil burner (including delivery charges), installation of the burner, start-up training labor time, and a heating permit from the city.
Waste Oil Burner and Other Equipment
The equipment vendor quoted a cost of $4,331 for purchase of the necessary equipmenta ceiling-hung UL listed burner, a stand, a 500 gallon storage tank, and a support package of the necessary hardware and brackets. 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. There is a $73 delivery charge for each item, resulting in a total delivery charge of $292. According to the vendor, the equipment has a lifetime of 10 years and no salvage value. The shop depreciates equipment using DDB over 5 years.
Installation Fees
The vendor will install the equipment for a fee of $ 970. The installation cost is also depreciated over 5 years using DDB.
Start-up Training Labor
With the purchase of the waste oil burner equipment, the vendor offers a one-hour training session for at least two people in the shop. The shop manager decides that one technician in addition to himself should attend the training session, at a total internal labor cost (including labor burden) of $55. The shop is not required to depreciate this cost, but instead can expense it, using the Depreciation Method, EXP.
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. Such a permit costs $15.50 per every $1000 spent on capital, labor, and materials. The total cost of the waste oil burner (excluding delivery charges)
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Case Studies
is $5,592, which corresponds to a one-time permit fee of $ 89. The permit fee is directly expensed, using the Depreciation Method, EXP.
Alternative Scenario 1 impacts the shops operating costs related to waste disposal and heating for the facility. In addition, the waste oil burner generates an additional Annual Operating Cost burner maintenance.
Waste Oil Handling - Vendor Fees
The purchase of a waste oil burner would eliminate all costs associated with disposal of waste oil, including manifesting and disposal fees.
Waste Oil Handling - 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.
Heating Costs
The shop manager uses the shops waste shipment manifests to estimate that the shop generates about 3,300 gallons of waste per year. Based on a heat value table provided by the vendor, the manager knows that this quantity of waste oil will generate a maximum of 462 million BTUs of heat. This quantity of heat corresponds to 17.7% of the annual heating requirement for the facility, and will lower the facility heating bill to about $14,660 per year.
Maintenance Costs
The purchase of a burner will require some burner maintenance effort each year. To minimize the in-house labor required, the manager would purchase a maintenance contract from the vendor for $220 each year.
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. On the Project Title sheet, he enters Waste Oil Burner Analysis as the Project Title. 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, such as the increased space needs of the waste oil burner.
Default Parameters sheet
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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. For the Global Parameters, he chooses to not explicitly consider inflation and escalation in the cash flow analysis and therefore sets the Inflation Rate to 0%. To accompany these uninflated cash flows, the manager also needs to choose a (real) Discount Rate that does not include the effect of inflation. After consulting with staff from the state Small Business Development Center, the shop manager enters a Discount Rate of 15%. The manager also assumes that the cash flow changes resulting from the investment will not alter the shops current Income Tax Rates: 2% for Local, 6% for State, and 23.4% for Federal, giving an Aggregate Income Tax Rate of 29.5%. On the advice of the shops accountant, the manager defines double declining balance (DDB) as the default Depreciation Method and 5 years as the default Depreciation Period. For the Scenario Parameters, the manager defines the Name, default Investment Year, and default Lifetime for each scenario. The Alternative Scenario 1, Waste Oil Burner, has a default Investment Year of 0 and a default Lifetime of 10, based on vendor assurances that the waste oil burner will function problem-free for at least 10 years. The Base Scenario, Current Oil Handling Process, therefore also has a default Investment Year of 0 and a default Lifetime of 10. After entering all of the relevant data on the Default Parameters sheet, 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.
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. In the Initial Investment Costs sheet, the manager moves to the Alternative Scenario 1 section of this sheet by clicking on the Alt1 button at the top of the screen. In this scenario, the manager modifies the cost category titles to reflect the cost data for the analysis. He defines the following four Initial Investment Cost categories: Waste Oil Burner and Other Equipment , Installation Fees, Start-Up Training Labor, and Heating Permits. He then deletes all of the remaining default cost category titles on the sheet. Because the names of the Initial Investment Cost categories must remain consistent through the scenarios within a project, P2/FINANCE automatically copies these cost category titles to the other scenarios. Starting in Alternative Scenario 1, the manager inputs a brief description of the cost items within each Initial Investment Cost category. For example, under Waste Oil Burner and Other Equipment, he defines the following three cost items: 1) Burner, stand, and storage tank; 2) AC hookup and air compressor; and 3) Delivery charge. For each cost item, he inputs the cost developed through his earlier data collection efforts. Where necessary, he modifies the 4 - 53
Case Studies
parameters for that cost category. For example, under the cost category Start-up Training Labor, he types an entry for One-hour session for two people and enters a cost of $55. Because the shop can directly expense the training costs associated with the investment, the shop manager changes the default Depreciation Method to EXP and deletes the Depreciation Period. After finishing data input related to the Alternative Scenario 1, the manager moves to the Base Scenario by clicking on the Base button at the top of the screen. The Base Scenario does not require an Initial Investment Cost because it reflects the shops current off-site waste disposal arrangement. To make this clear, 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, for the Waste Oil Burner and Other Equipment cost category, the manager types No burner or other equipment and inputs $0 as the cost.
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. Once in the sheet, he moves to the section for Alternative Scenario 1 by clicking on the Alt1 button at the top of the screen. In this scenario, the manager modifies the cost category titles to reflect the cost data for the analysis. He defines the following four Annual Operating Cost categories: Waste Oil Handling - Vendor Fees, Waste Oil Handling - In-house Labor, Heating, and Maintenance. He then deletes all of the remaining default cost category titles on the sheet. Because the names of the Annual Operating Cost categories must remain consistent through the scenarios within a project, P2/FINANCE automatically copies these cost category titles to the other scenarios. Starting in Alternative Scenario 1, the manager inputs a brief description of the cost items within each Annual Operating Cost category. For example, under Maintenance, he defines the cost item, Vendor contract for burner maintenance. For each cost item, he inputs the cost developed through his earlier data collection efforts. For example, under the cost category Heating, he types an entry for Reduced gas boiler costs and enters a cost of $14,660. After finishing data input related to the Alternative Scenario 1, the manager moves to the Base Scenario by clicking on the Base button at the top of the screen. In the Base Scenario, the manager inputs a description of the cost items within each Annual Operating Cost category and for each cost item, inputs the dollar value of the cost. For example, under the cost category Waste Oil Handling - Vendor Fees, he defines a cost item, Vendor payments (10 pickups/year) and inputs a cost of $1,000.
Generate Reports
Having completed all of the necessary data entry, the shop manager reviews the four reports available with P2/FINANCE.
Scenario Summary sheet
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The manager opens the Scenario Summary sheet by clicking on the Scenario Summary tab button at the bottom of the screen. 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. To make any changes to the data for this scenario, he 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. P2/FINANCE automatically moves you to the same scenario in which you were working in the Scenario Summary sheet. For example, if you are in the Alternative Scenario 1 section of the Scenario Summary sheet and you choose to open the Initial Investment Costs sheet, P2/FINANCE automatically moves you to the Alternative Scenario 1 section of the Initial Investment Costs sheet. After reviewing the contents of Alternative Scenario 1, the shop manager moves to the Base Scenario by clicking on the Base button at the top of the screen. Here, he checks the accuracy and completeness of the Base Scenario.
Tax Deduction Schedule sheet

To open the Tax Deduction Schedule sheet, the shop manager clicks on the Tax Deduction tab button at the bottom of the screen. Once inside the sheet, he moves to the Alternative Scenario 1 section by clicking on the Alt1 button at the top of the screen. Here, he reviews the depreciation calculations related to the waste oil burner investment. Because the Base Scenario does not require an investment, he does not review the Base Scenario section of this sheet.
Incremental Cash Flow Analysis sheet

To open the Incremental Cash Flow Analysis sheet, the shop manager clicks on the Cash Flow tab button at the bottom of the screen. Once inside the sheet, 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. Here he reviews the impact the investment would have on the shops cash flows. He focuses on the Tax Calculation and the Cash Flow Calculation at the bottom of the sheet.
Incremental Profitability Analysis sheet

To open the Incremental Profitability Analysis sheet, the shop manager clicks on the Profitability Analysis tab button at the bottom of the screen. In this sheet, he inputs an optional time horizon of 3 years over which he can evaluate the profitability of the investment. He then uses all three profitability indicators to determine whether the shop should invest in the Waste Oil Burner Project.
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Summary of Results
The shop manager focuses most of his attention on the investments Net Present Value (NPV) because he knows that it has the least limitations and gives the most accurate picture of the investments profitability. The Discounted Payback measure indicates that the NPV becomes positive between Years 2 and 3. Given the managers conservative assumptions about the cost of the investment and its expected savings, 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.
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An Example of a Complex Analysis

This case study illustrates the use of P2/FINANCE to assess the profitability of a more complex, multi-year investment. This example, again, is based on a real case study that has been modified to better illustrate P2/FINANCEs features.
Conceptualize the Analysis

In this example, a large multinational chemicals manufacturer evaluates a hard-piped, 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. Here, the firm compares the purchase of the batch still with its business-as-usual waste handling practicesoff-site waste disposal and treatment.
Develop a Cost Inventory

The firms 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, as shown in Table 5. To help develop this inventory, she refers to the Total Cost Assessment Cost Inventory provided in Appendix A of this Guide. Table 5. 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, the environmental engineer then decides to identify those costs she will quantify for the analysis (marked by a ). Most of the cost data are readily available via facility records or simple labor time estimates made by facility personnel. Although some of the cost items she chooses to quantify are much less significant than others, she decides to include them all in the analysis to illustrate that she has considered them in thinking through the project. The one relevant cost item the environmental engineer chooses not to quantify is liability. She is in general agreement with Purchasing staff and upper management that the less hazardous waste
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generated, the better, and the less shipped off-site, the better, but is not sure how best to quantify the potential dollar value of the liability avoided via the purchase of a hard-piped, on-site solvent recovery system. She decides to postpone quantifying liability until after she sees the results of the rest of the analysis.
Collect Cost Data

With this inventory in hand, the environmental engineer begins the data collection process by using billing records, talking to the vendor, and requesting labor time estimates from production staff at the facility. Base Scenario: Off-site Waste Disposal and Treatment The Base Scenario reflects the business-as-usual costs of the firms off-site waste disposal and treatment arrangement for waste from the three product lines. 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.
Currently, the firm manufactures two products (Product A and Product B) at the facility. The facility also plans to bring a new product on-line in Year 2, Product X, the waste from which could also be handled by the batch still solvent recovery system. Annual Operating Costs expected to change with the investment in a batch still include the annual cost of virgin raw materials, vendor disposal fees, waste manifesting labor, and the internal labor required to maintain vendor relationships (e.g., contract negotiations, site visits).
Year 1 Annual Operating Costs
The following Year 1 costs reflect the Annual Operating Costs for the facilitys two current product lines .
Virgin Raw Materials - 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. Purchasing records indicate that virgin raw materials for the manufacture of Product A cost $234,000 annually in the business-asusual Base Scenario. The annual purchase cost for Product B virgin raw materials is $ 157,000. These costs apply to Years 1-15.
Vendor Disposal - Start Year 1
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The purchase of a batch still recovery system would impact the off-site waste disposal and treatment costs for each of the product lines. From the facilitys waste manifest records, the environmental engineer calculates that, under the business-as-usual Base Scenario, Product A requires an annual off-site disposal cost of $104,000 and Product B requires an annual off-site disposal cost of $283,000. Because the vendor disposal costs for both products are expected to rise at a rate higher than inflation, the environmental engineer adds an Escalation Rate of 2.0% to costs within this category. These costs apply to Years 1-15.
Manifesting Labor - Start Year 1
The preparation of hazardous waste shipment manifests for these two product lines requires inhouse labor. The environmental staff member responsible for this task estimates that manifesting for Product A requires approximately 22 hours per year of his time, while manifesting for Product B requires 50 hours per year. Assuming a fully burdened labor cost (i.e., including employee benefits) of $44 per hour, manifesting costs $ 968 annually for Product A and $2,200 annually for Product B. These costs apply to Years 1-15.
Maintenance of Vendor Relationships - Start Year 1
Under the business-as-usual Base Scenario, the head of the facilitys Purchasing Office spends approximately 10 days per year maintaining the firms relationships with multiple waste disposal and treatment vendors through contract negotiations and site visits. Assuming a labor cost of $55 per hour, the sum of these activities translates into an annual cost of $ 4,400. These activities also require $2,000 in travel costs for site visits. These costs apply to Years 1-15.
Year 2 Annual Operating Costs
These include the additional Annual Operating Costs associated with the introduction of a new product line at the facilityProduct X. 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, i.e., the revenues will be the same for Alternative Scenario 1 as for the Base Scenario.
Beginning in Year 2, the facility expects to bring a new product on-line, Product X. The manufacturing supervisor estimates that virgin raw materials for this product will cost about $414,000 annually. She defines the Start Year for this new Annual Operating Cost as Year 2 and the End Year as 15.
In the business-as-usual Base Scenario, waste disposal costs associated with Product X also have a Start Year of 2 and an End Year of 15. The head of the Purchasing Office estimates the annual off-site shipment and disposal cost for Product X waste to equal approximately $ 862,000. Again, because the vendor disposal cost for this product is expected to rise at a rate higher than
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inflation, the environmental engineer adds an Escalation Rate of 2.0% to the costs within this cost category.
When the high volume Product X comes on line, preparation of hazardous waste shipment manifests will require approximately $3,500 annually of internal labor.
When the firm brings the third product line on-site, the cost of maintaining vendor relationships will increase by approximately $4,000 annually. Alternative Scenario 1: Batch Still Recovery System Alternative Scenario 1 reflects the cost to the firm of bringing a batch still recovery system onsite to allow recovery and reuse of solvents in its manufacturing processes. The scenario includes the Initial Investment Costs associated with the batch still as well as its Annual Operating Costs.
Initial Investment Costs
With the assistance of the facility manager, an equipment vendor, and the manufacturing supervisor, the environmental engineer obtains reasonable estimates for the Initial Investment Costs and the timing of the batch still project. The initial investment for the solvent recovery system would occur over a period of approximately 1.5 years. During the latter part of Year 0, the firm would focus on the construction of a building to house state-of-the-art batch still equipment. During Year 1, the firm would complete the construction of the building, purchase and install the distillation equipment, hard-pipe the new system to the manufacturing lines, train personnel in the operation of the still, and perform start-up runs and quality control tests.
Year 0 Investments
The first step in the project is the construction of the building to house the batch still. It is assumed that, at the end of Year 0, the firm completes 75% of the necessary construction.
Construction Costs - Inv. Year 0
At the end of Year 0, the firm completes approximately 75% of the new building and supporting facilities to house the batch still at a cost of $1,057,500. The firm depreciates this cost over 31.5 years using the Straight Line ( SL) Depreciation Method. The firm defines the Lifetime of the building as 50 years.
Engineering and Planning Costs - Inv. Year 0
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The facility hires an outside engineering firm to take responsibility for the primary construction of the building. These engineering services at the end of Year 0 total $ 399,000, and also are depreciated over 31.5 years using the Straight Line (SL) Depreciation Method. Because these engineering services are required for construction of the building, they have the same Lifetime of 50 years.
Year 1 Investments
In Year 1, the facility completes the construction of the building and purchases the batch still solvent recovery equipment. The new system is hard piped to the existing manufacturing processes and trial runs are performed.
Construction Costs - Inv. Year 1
The firm finishes the remaining construction of the new building and supporting facilities to house the batch still for $352,500. The firm depreciates this cost over 31.5 years using the Straight Line (SL) Depreciation Method. Again, the Lifetime of the building is 50 years.
Engineering and Planning Costs - Inv. Year 1
The firm completes remaining engineering and planning tasks with in-house labor for a cost of $157,500 at the end of Year 1. These engineering and planning labor costs are depreciated over 31.5 years using the Straight Line (SL) Depreciation Method. Because these engineering services are required for construction of the building, they have the same Lifetime of 50 years.
Purchased Equipment Costs - Inv. Year 1
Operation of the solvent recovery system requires several different types of major equipmentdistillation vessels, odor abatement equipment, a molecular sieve unit, and storage tanks, heat exchangers. The firm also must purchase piping materials, valves (e.g., relief valves), instruments (e.g., flow meters, pressure gauges), and other special items (e.g., flame arrestors). These items cost a total of $853,500 and are depreciated using the Depreciation Method and Depreciation Period of DDB over 5 years. This equipment has an estimated Lifetime of 15 years and a Salvage Value at the end of that Lifetime of $50,000.
Equipment Installation Costs - Inv. Year 1
Equipment installation requires $770,250 of contractor labor and is depreciated using the Depreciation Method and Depreciation Period of DDB over 5 years.
Training Costs - Inv. Year 1
The firm sends three operators to a free one-week, on-site training session offered by the equipment manufacturer. The cost of their time equals $5,250. This Initial Investment Cost is also expensed using the EXP Depreciation Method.
Engineering Costs - Equipment-Inv. Year 1
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The final testing of the equipment requires both in-house and contract engineering expertise towards the end of Year 1. In-house engineering costs $247,500. Contractor engineering costs $232,500. Both are depreciated using DDB over 5 years.
The batch still begins operations at the very end of Year 1. Therefore, the firm assumes the business-as-usual Annual Operating Costs for Year 1, and includes the Annual Operating Costs associated with the batch still for Years 2 - 12. In addition, the firm must take into account the fact that Product X will be manufactured at the facility beginning in Year 2. The batch still system lowers the annual costs of virgin raw materials, vendor disposal, maintenance of vendor relationships, and waste manifesting at the facility. Concurrently, the system increases the cost of utilities, direct operating labor, permit fees, and miscellaneous supplies.
Start Year 1 Annual Operating Costs
These costs mirror the business-as-usual costs defined in the Base Scenario, because the batch still system is still under construction during 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. Purchasing records indicate that virgin raw materials for the manufacture of Product A cost $234,000 annually in the business-asusual Base Scenario. The annual purchase cost for Product B virgin raw materials is $ 157,000. These costs apply only to 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. The environmental engineer goes to the facilitys waste manifest records to determine that, under the business-as-usual Base Scenario, Product A has an annual off-site disposal cost of $ 104,000. Product B has an annual off-site disposal cost of $283,000. 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 2.0%. These costs apply only to Year 1.
The preparation of hazardous waste shipment manifests for the waste from the two product lines requires in-house labor. The environmental staff member responsible for this task estimates that manifesting for Product A requires approximately 22 hours per year of his time, while manifesting for Product B requires about 50 hours per year. For a fully burdened (i.e. benefits
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included) labor costs of $44 per hour, this corresponds to an annual cost of $ 968 for Product A and $2,200 for Product B. These costs apply only to Year 1.
Under the business-as-usual Base Scenario, the head of the facilitys Purchasing Office spends about 10 days per year maintaining the firms relationships with multiple waste disposal and treatment vendors through contract negotiations and site visits. At a labor cost of $55 per hour (including benefits), this translates into a total annual cost of $ 4,400. This activity also requires $2,000 in travel costs for the site visits. These costs apply only to Year 1.
These costs relate to Products A, B, and X being on-line, with the batch still in place and operational.
With the batch still, 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. Reduced annual virgin raw material costs for Product A are estimated to be $ 35,100. For Product B the estimate is $23,500. When Product X is first manufactured in Year 2, the first-year virgin raw material cost will be $414,000 as it would be in the absence of a solvent recovery still. These costs apply only to Year 2.
With the batch still, the facility will reduce its waste disposal vendor costs to $ 15,600 for Product A, $42,450 for Product B, and $129,300 for Product X. Again, 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 2.0%. These costs apply to Years 2-15.
With the batch still, the facility also will reduce its annual internal labor costs associated with waste manifesting to $145 for Product A, $330 for Product B, and $660 for Product X. These costs apply to Years 2-15.
Utilities - Start Year 2
The batch still requires steam, electricity and nitrogen gas at an additional cost of $ 15,000 per year. This cost applies to Years 2-15.
Direct Labor - Start Year 2
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One and a half operators are needed to run the batch still at an annual direct operating labor cost of $95,000. This cost applies to Years 2-15.
Recycling Permit Renewal - Start Year 2
The batch still will require the annual renewal of a recycling permit, a task of two days per year at a fully burdened cost of $880 per year. This cost applies to Years 2-15.
Maintenance of Vendor Relationship - Start Year 2
Because the batch still will reduce reliance on external waste disposal vendors, its purchase would reduce the total cost for inspections and contract negotiations to about $ 2,000 per year. This cost applies to Years 2-15.
The reduced annual virgin raw material costs for Product A will continue to be $ 35,100. For Product B they will continue to be $23,500. For Product X, they will fall to only $ 62,100. These costs apply to Years 3-15.
Enter the Financial Parameters

Having collected all of the relevant cost data for the analysis, the environmental engineer enters the data into P2/FINANCE. On the Project Title sheet, she enters Batch Still Solvent Recovery as the Project Title and other general information about the analysis.
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. To define the Global Parameters for the analysis, the environmental engineer goes to the facility controller for advice on Inflation Rate, Discount Rate, default Depreciation Method, and default Depreciation Period. The controller recommends an analysis Inflation Rate of 3%. To correspond with this Inflation Rate, he recommends a Discount Rate of 18% in the analysis. The controller assumes that the investment would not alter the facilitys current Income Tax Rates, which equal 32.5% for Federal, 8% for State, and 0% for Local, giving an Aggregate Income Tax Rate of 37.9%. Although the Depreciation Method and Depreciation Period used for Initial Investment Costs will vary by category for this complex analysis, the controller selects DDB as the default Depreciation Method and 5 as the default Depreciation Period. As Scenario Parameters, the environmental engineer defines the Name, Initial Investment Year, and Lifetime for each scenario. Alternative Scenario 1, Batch Still Recovery System, has a 4 - 32
default Investment Year of 0 and a default Lifetime of 15. Base Scenario, Off-Site Waste Disposal and Treatment, has a default Investment Year of 0 and a default Lifetime of 15. The Lifetime of 15 years is the project Lifetime customarily chosen by this large firm for projects of this size, as recommended by the facility controller. After entering these data on the Default Parameters sheet, 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.
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. In the Initial Investment Costs sheet, the manager moves to the Alternative Scenario 1 section of the sheet by clicking on the Alt1 button at the top of the screen. In this scenario, she modifies the cost category titles to reflect the cost data for the analysis. She defines the following nine Initial Investment Cost categories: Construction (Inv. Year 0), Engineering and Planning (Inv. Year 0) , Construction (Inv. Year 1), Engineering and Planning (Inv. Year 1) , Purchased Equipment (Inv. Year 1) , Equipment Installation (Inv. Year 1) , Training (Inv. Year 1), and Engineering Costs Equipment (Inv. Year 1) . She then deletes all of the remaining default cost category titles on the sheet. Because the names of the Initial Investment Cost categories must remain consistent through the scenarios within a project, P2/FINANCE automatically copies these cost category titles to the other scenarios. Starting in Alternative Scenario 1, the environmental engineer inputs a brief description of the cost items within each Initial Investment Cost category. For example, under Purchased Equipment (Inv. Year 1), she defines the cost item, Distillation vessels, odor abatement equipment, molecular sieve unit, storage tanks, heat exchangers, piping materials, valves, instruments, etc. For each cost item, she inputs the cost developed through her earlier data collection efforts. Where necessary, she modifies the parameters for that cost category. For example, under Construction (Inv. Year 0), she types an entry for Construction of building (75%) and enters a cost of $1,057,500. She changes the default Depreciation Method to SL and the default Depreciation Period to 31.5. She also changes the Lifetime of the investment to 50 years. After finishing data input related to the Alternative Scenario 1, the environmental engineer moves to the Base Scenario by clicking on the Base button at the top of the screen. The Base Scenario does not require any initial investment because it reflects the shops current off-site waste disposal arrangement. To make this clear, she types a brief note in each cost category indicating that there are no Initial Investment Costs and inputs a $ value of 0. For example, for the Equipment Installation (Inv. Year 1) cost category, she types No equipment installation and inputs $0 as the cost.
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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. Once in the sheet, she moves to the section for Alternative Scenario 1 by clicking on the Alt1 button at the top of the screen. In this scenario, the environmental engineer modifies the cost category titles to reflect the cost data for the analysis. She defines the following twelve Annual Operating Cost categories: Virgin Raw Materials (Start Year 1), Vendor Disposal (Start Year 1), Manifesting Labor (Start Year 1), Maintenance of Vendor Relationships (Start Year 1) , Virgin Raw Materials (Start Year 2), Vendor Disposal (Start Year 2), Manifesting Labor (Start Year 2), Utilities (Start Year 2), Direct Labor (Start Year 2), Recycling Permit Renewal (Start Year 2) , Maintenance of Vendor Relationship (Start Year 2), and Virgin Raw Materials (Start Year 3). She then deletes all of the remaining default cost category titles on the sheet. Because the names of the Annual Operating Cost categories must remain consistent through the scenarios within a project, P2/FINANCE automatically copies these cost category titles to the other scenarios. Starting in Alternative Scenario 1, the environmental engineer inputs a brief description of the cost items within each Annual Operating Cost category. For example, under Maintenance of Vendor Relationships (Start Year 1) , she defines the cost items, Internal labor costs and Travel costs. Where necessary, she modifies the parameters for the cost category. For each cost item, she inputs the cost developed through her earlier data collection efforts. For example, under Virgin Raw Materials (Start Year 1) , she types an entry for Product A raw materials with a cost of $234,000 and Product B raw materials with a cost of $157,000. After finishing data input related to the Alternative Scenario 1, the environmental engineer moves to the Base Scenario by clicking on the Base button at the top of the screen. In the Base Scenario, she inputs a description of the cost items within each Annual Operating Cost category and for each cost item, inputs the dollar value of the cost. For example, under Manifesting Labor (Start Year 1), she defines a cost item, Product A - internal labor with a cost of $968 and Product B - internal labor with a cost of $2,200.
Generate Reports
Having completed all of the necessary data entry, the environmental engineer reviews the four reports that P2/FINANCE develops.
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 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. To make any changes to the data for this scenario, 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. P2/FINANCE automatically moves you to the same scenario in which you were working in the Scenario Summary sheet. For example, if you are in the Alternative Scenario 1 section of the 4 - 34
Scenario Summary sheet and you choose to open the Initial Investment Costs sheet, P2/FINANCE automatically moves you to the Alternative Scenario 1 section of the Initial Investment Costs sheet. After reviewing the contents of Alternative Scenario 1, she moves to the Base Scenario by clicking on the Base button at the top of the screen. Here, she checks the accuracy and completeness of the Base Scenario.
Tax Deduction Schedule sheet

To open the Tax Deduction Schedule sheet, the environmental engineer clicks on the Tax Deduction tab button at the bottom of the screen. Once inside the sheet, she moves to the Alternative Scenario 1 section by clicking on the Alt1 button at the top of the screen. Here, she reviews the depreciation calculations related to the batch still investment. Because the Base Scenario does not require an investment, she does not review the Base Scenario section of this sheet.
Incremental Cash Flow Analysis sheet

To open the Incremental Cash Flow Analysis sheet, the environmental engineer clicks on the Cash Flow tab button at the bottom of the screen. Once inside the sheet, 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. Here she reviews the impact the investment would have on the firms cash flows. She focuses on the Tax Calculation and the Cash Flow Calculation at the bottom of the sheet.
Incremental Profitability Analysis sheet

To open the Incremental Profitability Analysis sheet, the environmental engineer clicks on the Profitability Analysis tab button at the bottom of the screen. In this sheet, 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.
Summary of Results
The environmental engineer reviews the profitability indicators associated with this investment. The investment does not meet the firms usual investment criteria because its IRR during the time horizon from Year 0 to Year 5 is less than the firms Discount Rate. However, 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
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improve the projects desirability to upper management. Therefore, she includes a thorough qualitative discussion of relevant liability issues in the quantitative report that she submits to the firms Vice President of Manufacturing. The Vice-President of Manufacturing, after review of the quantitative analysis and discussions with the environmental engineer, the firms legal and purchasing staff, and the production manager, approves the Batch Still Solvent Recovery project. The staff widely recognize that the potential avoided liability and the long-term inherent production flexibility (i.e., 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, sound business-decision.
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Appendices
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Appendix A: Copy of the Blank Spreadsheet
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 Planning In-house Engineering/Design Procurement Vendor/Contractor Fees Site Preparation (Labor, Materials) In-house Demolition & Clearing Old Equipment/Rubbish Disposal Grading/Landscaping Equipment Rental Vendor/Contractor Fees Construction/Installation (Labor, Materials) In-house Equipment Rental Vendor/Contractor Fees Start-up/Training (Labor, Materials) In-house
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
ANNUAL OPERATING COSTS Direct Materials (Purchase, Delivery, Storage) Raw Materials Solvents Catalysts Utilities Electricity Steam Water Fuel Plant Air Inert Gas Refrigeration Sewerage Direct Labor (Wage/Salary, Benefits) Operating Supervision Manufacturing Clerical Maintenance Waste Management (Labor, Materials) On-site Handling & Storage On-site Pre-treatment On-site Treatment Hauling Off-site Treatment Off-site Disposal Regulatory Compliance (Labor, Materials) Permitting Training Monitoring/Inspections Testing Generator Fees/Taxes Labeling Manifesting Recordkeeping Reporting Product Quality (Labor, Materials) QA/QC Product Rejects/Returns Revenues - Product Change in Product Throughput
Change in Market Share Revenues - 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 NPV = CF1 + CF2 + ..... CFn - I 1+k (1+k)2 n (1+k)
where: CF1 is cash flow in period 1 CF2 is cash flow in period 2, etc. I is initial outlay or investment cost k is cost of capital or discount rate
Appendix C: Glossary of Financial Terms

Annual Cash Flow Break-Even-Point For an investment, the sum of cash inflows and outflows for a given year (see Cash Flow). The point at which cumulative incremental annual cash flows of an investment aggregate to 0. The Break-Even-Point designates the end of a project's investment Payback Period (see Incremental Cash Flow and Payback Period). A statement of the firm's planned investments, generally based upon estimates of future sales, costs, production and research and development (R&D) needs, 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. The internal procedure used to track and allocate production costs Payback = Investment and revenues to a product or process. Defines specific cost/profit Annual Net Income centers, overhead vs. allocated costs, degree of cost disaggregation. A process within an internal cost accounting system of assigning costs and revenues to cost and profit centers for purposes of product pricing, cost tracking, and performance evaluation. The discount rate (or Cost of Capital) is the required rate of return on a capital investment. In profitability analysis, the discount rate is used in Net Present Value (NPV) calculations to express the value of a future expenditure in the present year. The discount rate is expressed as a percentage. See Internal Rate of Return.
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. ROI = Annual Net Income Required by authoritative pronouncement, Investment regulatory rule or custom, including: corporate annual reports, prospectuses, annual reports filed with government agencies, descriptions of an enterprise's social or environmental impact.
C- 1
Financial Statements
The principal means through which financial information is communicated to those outside an enterprise. Statements include the Balance Sheet, Income Statement, and Statement of Cash Flows. A method of managerial accounting which accounts for both the direct and indirect costs of an item. Full cost accounting uses historical data to assign all costs to a process, product or product line, most often for purposes of pricing. The internally defined threshold, or minimum acceptable rate of return, required for project approval, e.g., 15% ROI, or 2 year payback. The cash flow of an alternative practice (e.g., after a pollution prevention investment has been implemented) relative to the current practice. Incremental cash flow is calculated by taking the difference between the cash flow for the current alternative practice. The discount rate at which the net savings (or NPV) on a project are equal to zero. The computed IRR of an investment is compared to a company's desired rate of return. The process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control all activities within an organization to ensure appropriate use, and accountability for its resources. Capital budgeting is one component of managerial accounting. 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", or "financial index", or "profitability index", or "capital budgeting technique". Includes: NPV, IRR, payback, ROI. The present value of the future cash flows of an investment less the investment's current cost. An investment is profitable if the NPV of the cash flow it generates in the future exceeds its cost, that is, if the NPV is positive.
Full Cost Accounting
Hurdle Rate
Incremental Cash Flow (of an investment) practice and the Internal Rate of Return (IRR) Managerial Accounting
Measure of Profitability
Net Present Value (NPV)
C- 2
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.
Project Financial Analysis Project Justification Process Project Justification
Costing (i.e., calculating the costs and savings) and calculating cash flow and/or profitability measures of a project. A generic term for a series of steps which are necessary to get approval for a project. A document prepared in the project justification process which comprising a written description of the project, a project financial analysis, and a discussion of benefits and risks which are not quantified in the financial analysis. A measurement of investment performance, calculated as the ratio of annual net income (less depreciation) over the initial investment amount.
Return on Investment (ROI)
Total Cost Assessment (TCA)
A comprehensive financial analysis of the costs and savings of a pollution prevention project. A TCA approach includes: a) internal allocation of environmental costs to product lines or processes through full cost accounting; b) inclusion in a project financial analysis of direct and indirect costs, short and long term costs; liability costs, and less tangible benefits of an investment; c) evaluation of project costs and savings over a long time horizon, e.g., 10-15 years; d) use of measures of profitability which capture the long-term profitability of the project, e.g., NPV and IRR.
C- 3

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Users Guide

Tellus Institute P2/FINANCE Version 3.0

P2/FINANCE Version 3.0

P2/FINANCE Version 3.0

P2/FINANCE Version 3.0

P2/FINANCE Version 3.0

Getting Started in P2/FINANCE

Elements of a Financial Analysis

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P2/FINANCE Administrative Commands

Each of these sheets is described in detail in Section 2 of this Users Guide.

Moving Between Sheets

Moving Between Scenarios

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Hardware and Software Specifications

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2. Step by Step Instructions:

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Step by Step Instructions: Entering Data

Project Title Sheet

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Default Parameters Sheet

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Time Value of Money

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N = R + I + (R * I) where: N = Nominal Discount Rate R = Real Discount Rate I = Inflation Rate

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Income Tax Rates

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Initial Investment Costs Sheet

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Tailoring the Financial Parameters

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