Cost Effectiveness Values and Calculations

Cost effectiveness is measured in terms of control costs (dollars) per air emissions reduced (tons).  If the cost per ton of emissions reduced is less than the maximum required cost effectiveness (Table 5, Part C of BACT Guidelines), then the control method is considered to be cost effective.  Chapter 1, Part C of the BACT Guidelines discusses the costs which can be included in the cost effectiveness evaluation.

There are two types of cost effectiveness: average and incremental. Average cost effectiveness considers the difference in cost and emissions between a proposed MSBACT and an uncontrolled case.  The incremental cost effectiveness looks at the difference in cost and emissions between the proposed MSBACT and alternative control options.

The latest Maximum Cost Effectiveness Values are available here.

Discounted Cash Flow Method
The discounted cash flow method (DCF) is used in the MSBACT Guidelines. This is also the method used in South Coast AQMD's Air Quality Management Plan.  The DCF method calculates the present value of the control costs over the life of the equipment by adding the capital cost to the present value of all annual costs and other periodic costs over the life of the equipment.  A real interest rate of four percent, and a 10-year equipment life is used.  The cost effectiveness is determined by dividing the total present value of the control costs by the total emission reductions in tons over the same 10-year equipment life.  The 10 year and 4% are default values that are used but for case-specific situations other values may be considered.


                   Equipment Life (n)                    10 years
                   Rate of Interest (r)                      4 %   
                   Emissions reduced                     0.5 tons/day for NOx
                    (annual average)

                   Capital Cost (C)                         $1,750,000
                   Annual Operating Costs (A)       $175,000 

Using present value formula,

PVF = ( 1 - 1/(1 + r)n) / r  = 8.11

Note:  This is a formula based on an approximate inflation adjustment.  The actual Present Value Formula is ( 1 - 1/(1 + r)n) / r(1 + f) where r = (i - f)/(1 + f) , i = nominal interest rate and f = inflation rate.

Present value
                 = C + A x PVF
                 = $1,750,000 + $175,000 x 8.11
                 = $3,169,250

Cost Effectiveness = Present Value / Emission Reduced Over Equipment Life
                         = $3,169,000 / (0.5 tons/day x 365 days/year x 10 years)
                         = $1,737/ton reduced

Per Table 5 in Part C of the BACT Guidelines, the Maximum Average Cost Effectiveness for
NOx = $27,359/ton (based on 1st Quarter 2017 Marshall & Swift equipment index), therefore it is cost effective.

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