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RETURNIQQ LIQRARY MATERIALS: Place in book run at to name chum from simulation records W goo A278 MfiY24m I _ 148 I "‘I8lg‘p§ I 3 “0"19’543205 AN ECONOMIC ANALYSIS OF THE FEASIBILITY OF THE RETORT POUCH FOR PACKAGING FRUIT AND VEGETABLE COMMODITIES IN AN ENVIRONMENT OF RISING ENERGY PRICES By Jeffery Robert Williams A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1980 ABSTRACT AN ECONOMIC ANALYSIS OF THE FEASIBILITY OF THE RETORT POUCH FOR PACKAGING FRUIT AND VEGETABLE COMMODITIES IN AN ENVIRONMENT OF RISING ENERGY PRICES By Jeffery Robert Williams The economic feasibility of the retort pouch for processing, pack- aging and distributing processed fruit and vegetable products in a period of rising real energy prices is examined. The study focuses on the feasibility of replacing existing fruit and vegetable can packaging systems with a retort pouch packaging system or with a new can packaging system. Food processing industries are relatively energy intensive in their operations and presently use a greater amount of energy per dollar of value added than any other sector of the food system. Development of technologies which are economic and reduce consumption of direct and indirect energy inputs is of importance to food processing and other food system sectors. Evaluation of new energy saving technologies, such as the retort pouch, requires the development of an approach for deter- mining if and when the new technology can replace existing technology. The approach used identifies the level of energy prices, container prices, freight costs and other production costs which make the retort pouch system the minimum cost packaging system among the alternatives Jeffery Robert Williams considered, given the required investments in the new durable processing and packaging equipment. Three systems models are used to estimate the costs associated with two existing canning systems and their possible replacements: a retort pouch or a can packaging system. A model is used to estimate the costs which are associated with acquiring and maintaining a new technolog- ically advanced set of durable equipment for processing retort pouches. Another is used to estimate these costs for a new canning equipment complement. The models also use the data in an economic replacement routine to determine the optimal economic life of the new durable equip- ment complements which could replace the existing canning equipment com- plement. The models are used for estimating the cash flows associated with other operating requirements of the new replacement packaging systems such as container, freight, labor and energy expenses. A third model is used to estimate the costs associated with the operation of the existing can packaging systems and the maintenance of their durable equipment complement. The total costs of each system are then compared to determine the minimum cost packaging system. Different operating scenarios which consist of various combinations of equipment components, energy requirements, container prices, energy prices and other input prices are used to generate a range of operating costs for comparing the systems costs under a range of feasible operating conditions. The retort pouch packaging system was the minimum cost packaging system among the alternatives considered. A retort pouch packaging system was cheaper than the new can packaging system and could currently replace the existing can packaging systems which were examined. Although the costs associated with acquiring and maintaining the durable machinery Jeffery Robert Williams complement for retort pouches is significantly greater than that of either a new canning equipment complement or the existing canning system, the other operating expenditures are considerably smaller. In the future as real energy prices rise and the costs of cans, cartons, retort pouches, labor and freight increase at their current rates, the operating’ cost advantage a retort pouch system has will increase. Lower freight costs, attributed to the lighter weight and smaller volume of pouches, and the comparatively lower purchase price of retort pouches than cans are the major contributors to the cost effectiveness of the retort pouch packaging system. Energy savings in processing the pouch versus the can is of little significance, but the comparatively lower amount of energy used in transportation and container manufacture has an important role in the cost effectiveness of the retort pouch. A sub- stantial reduction of energy used for processing the retort pouch versus the can did not influence the comparative cost analysis to any significant extent. ©Copyright by JEFFERY ROBERT WILLIAMS 1980 With love for my mother who instilled in me a desire to achieve and my wife for encouragement during times of little inspiration. ii ACKNOWLEDGMENTS I am indebted to a variety of people who have contributed to and made this research both a worthwhile project and an excellent learning experience. A special thanks goes to my major advisor and thesis di- rector, Dr. J. Roy Black. Dr. Black's particular brand of insight, criticism, guidance and humor throughout my research program was invalu- able. I would also like to thank Dr. Larry J. Connor and Dr. Lawrence Libby for presenting me with the opportunity to work with Dr. Black for a significant part of my graduate program. The remainder of my thesis committee also deserves recognition. To. Dr. James Steffe I would like to eXpress appreciation and acknowl- edge his assistance and friendship throughout the course of the re- search. Dr. Jack Allen's, Dr. Jack Gaicin's and Dr. Thomas Pierson's helpful suggestions and guidance during the formulation stages of the research contributed to the successful completion of this dissertation. Their assistance and constructive criticism is appreciated. I would also like to acknowledge the help of many people in the food processing and related industries and associations who contributed data to the research effort. Their cooperation and interest is greatly appreciated. A special thanks is also extended to Dr. Lester Manderscheid for providing advice during various stages of my graduate school experi— ence. His honesty is appreciated. Appreciation is also expressed to the Michigan Agricultural Experiment Station for providing the financial support for this re- search. I wish to express my appreciation to my colleagues at Michigan State University who contributed to the high standards of the learning environment. I would especially like to thank Mark Cochran for his friendship during our years in graduate school. His unique sense of humor and keen wit proved to be invaluable. Finally I wish to express my love and appreciation to my wife Lucy for her sacrifice and constant support and encouragement through- out the period of my graduate training. May she now have the oppor- tunity to work towards her goals. iv TABLE OF CONTENTS LIST OF TABLES ......................... LIST OF FIGURES ........................ INTRODUCTION ..................... Problem Statement ................. Overview of Research Objectives .......... Production of Package Material and Shipment . . . . Fruit and Vegetable Processing and Packaging . . . . Transportation of Product ............. Marketing and Preparation ............. Procedure ..................... Organization .................... THE RETORT POUCH ................... History of Retort Pouch DevelOpment ........ The U. 5. Experience ................ The Foreign Experience ............... Retort Pouch Vegetable Experience ......... The Pouch and Regulatory Agencies ......... Benefits of the Retort Pouch ............ Disadvantages of Retort Pouches .......... CONCEPTUAL ISSUES .................. The Firm ...................... Firm Adjustments to Rising Energy Prices ...... Technology Replacement ............... Replacement Theory Reviewed ............ Study Approach for Replacement Analysis ...... Discount Rate Selection .............. Uncertainty .................... Page viii 15 Chapter Page IV. MODEL DEVELOPMENT AND PROCEDURE FOR CONSTRUCTING COST ANALYSIS .................... 68 Systems Approach .................. 68 Selecting of Existing Processes for Modelling . . . . 71 The Packages .................... 75 Transport Considerations .............. 79 The Processing Lines ................ 83 Estimates of Values for Replacement Criteria Variables . . . 92 Capital Expenditures ............... 93 Salvage Value ................... 94 Maintenance .................... 95 Depreciation and Balancing Charge ......... 97 Investment Credit ................. 98 Energy Expenditures ................ 99 Labor Expenditures ................ 103 Interest ..................... 104 Insurance Costs .................. 104 Expenditures for Containers ............ 104 Transportation Costs ............... 105 Discount Rate ................... 106 Tax Rate ..................... 106 V. ANALYSIS ....................... 107 Procedure for Selection of Minimum Cost Packaging System . . . . 107 Firm A ....................... 109 Determination of Optimal Replacement Period . . . . 109 Energy Price Scenario Effect on Selection . . . . 113 Effect of Energy Requirements of Processing on Analysis Results . . . 116 Effects of Retort Pouch Cost on Analysis . . . . 119 Effect of Transport Distance .......... 121 Evaluation of Preformed Pouch Alternative . . . . 122 Effect of Production Rate ............ 123 Investment Credit Deductions Effect ....... 124 Effect of Interest Deduction .......... 125 Effect of Higher Discount Rate ......... 128 Firm B ....................... 128 Determination of Optimal Replacement Period . . . . 128 Energy Price Scenario Effect on Selection . . . . 132 Operating Costs .................. 136 Effects of Retort Pouch Cost on Analysis . . . . 138 Effect of Transport Distance .......... 141 Evaluation of the use of Preformed Pouches . . . 143 Effect of Production Rate ............ 143 Investment Credit Deduction Effect ....... 145 Effect of Interest Deduction .......... 146 Conclusions ............ . ........ 146 vi Chapter Page VI. SUMMARY ....................... 150 Procedure ..................... 151 Conclusion .................... 154 Issues of Concern for Managerial Implications . . . 157 Suggestions for Future Research .......... 161 APPENDICES A. PRIMARY DATA FOR ESTIMATES USED IN MODEL DEVELOPMENT .................... 164 B. COMPUTER PROGRAMS USED FOR ESTIMATING THE COSTS OF THE ALTERNATIVE PACKAGING SYSTEMS ......... 179 C. ESTIMATED COSTS OF ALTERNATIVE PACKAGING SYSTEMS. . 203 BIBLIOGRAPHY ......................... 244 vii Table 4-9 5-1 5-2 LIST OF TABLES Page Ratio of Food System Energy Intensity to Value Added . . 2 Energy Intensiveness of Food Containers ........ 29 Comparison of Weights and Volume for Empty Preformed Retort Pouches ..................... 77 Energy Used in Production of Retort Pouches and Cans . . 78 Empty Container Costs (1980) .............. 79 Energy Required for Transporting Containers ...... 81 Freight Costs of Empty Containers (1980) ........ 81 Freight Costs of Processed Products Packaged in Retort Pouches and Cans (l980) ................ 83 Equipment, Capital Expenditures, Labor and Energy Requirements for Processing Alternatives for Firm A at 300 Packages per Minute ................ 85 Equipment, Capital Expenditures, Labor and Energy Requirements for Processing Alternatives for Firm B at 360 Packages per Minute ..... 3 .......... 86 Base Period Energy Prices (1980) ............ 103 Sensitivity of Optimal Replacement Period, (Years), for Retort Pouch Equipment in Firm A ............ 111 Ranking of Packaging Systems for Firm A, by Lowest Cost Under Alternative Energy Price Scenarios ........ 114 Total Variable Operating Costs Accounted for by Cost Category-~Firm A .................... 118 Comparison of Total Amortized Costs Under Different Base Period Pouch Prices (1980 $) ........... 120 Comparison Total Amortized System Cost Under Alternative Transport Distances (1980 S) .............. 121 viii Table 5-7 5-8 5-9 5-10 5-11 A-lO Freight Costs of Alternative Packaging Systems per 1000 Units Shipped at Selected Transport Distances (1980 $) Total Amortized System Costs for Alternative Production Rates of Retort Pouch System (1980 S) ......... Comparison of Total Amortized System Costs Under Alternative Discount Rates .............. Sensitivity of Optimal Replacement Period, (Years) for Retort Pouch Equipment in Firm B ........... Ranking of Packaging Systems for Firm B by Lowest Cost Under Alternative Energy Price Scenarios ....... Total Variable Operating Costs Accounted for by Cost Category--Firm B ................... Comparison of Present Values of Total After Tax System Costs and 1980 Amortized Costs Under Various Pouch Prices ........................ Comparison of After Tax and Amortized System Costs Under Alternative Transport Distances ......... After Tax System Costs and Total Amortized System Costs for Alternative Production Rates of Retort Pouch Systems ........................ Freight Rate Estimate (l980) ............. Historical Energy Price Data ............. Historical Container Costs .............. Maintinance Costs for Existing Processing Equipment 1980 ........................ Interest Rates on Long Term Commercial and Industrial Loans ......................... Gross National Product Deflator Trend ......... Estimated Real Discount Rate Trend .......... Food Products Machinery Producers Price Index ..... Insurance Replacement Values (l980) .......... Selected Indexes and Conversions ........... ix Page 122 125 128 131 132 137 139 142 144 169 170 172 173 174 174 175 176 177 178 Figure 1-1 3-1 3-2 3-4 5-1 5-2 5-3 5-4 5-5 5-6 5-8 LIST OF FIGURES Page General Packagins System Outline ............ 4 The Retort Pouch .................... 16 Imperfect Substitute Input Combinations and Expansion Paths Under Different Relative Input Prices ...... 36 Perfect Substitute Input Combinations and Expansion Paths Under Different Relative Input Prices ...... 38 Perfect Complement Input Combinations and Expansion Paths Under Different Relative Input Prices ...... 40 Short Run Marginal Cost and Output Effect From an Increase in Real Energy Prices ............. 41 Amortized Present Value (1980 S) of Durable Equipment Costs for Firm A as a Function of the Age of Equipment 110 Total Comparative After Tax Costs of Alternative Packaging Systems for Firm A .............. 115 Total Comparative Variable Operating Costs not Associated with Equipment Age of Alternative Packaging Systems for Firm A ................... 117 Total Comparative After Tax Costs Without Interest Deduction of Alternative Packaging Systems for Firm A. . 127 Amortized Present Value (1980 S) of Durable Equipment Costs for Firm B as a Function of the Age of Equipment 130 Total Comparative Variable Operating Costs Not Associated with Equipment Age of Alternative Packaging Systems for Firm B ................... 134 Total After Tax Costs of Alternative Packaging Systems for Firm B ....................... 135 Total Comparative After Tax Costs Without Interest Deduction of Alternative Packaging Systems for Firm B. . 147 CHAPTER I INTRODUCTION Energy, both directly and indirectly, plays an important role in producing, processing and delivering food for consumption. Dwindling fossil fuel energy supplies and their rising real prices have lead to a re-examination of the role of energy in the food systems as well as other parts of the economy. It is expected that energy input prices will continue to increase relatively faster than prices of other in- puts. Managers in the respective sectors of the food system will try to substitute less expensive inputs for energy, reduce energy use and search out less energy intensive technologies for delivering food from farm to consumer. Investigations concerning potential adjustments to rising energy prices that take a system's perspective as opposed to an individual firm's perspective are needed in post farm gate sectors. This research is necessary because these sectors use a greater amount of energy per dollar value added than the agricultural production sector. In 1975, the food system accounted for 16.5 percent of total U. S. energy con- sumption, 82 percent of which was consumed in the post farm gate sec- tors. Farm production accounted for 2.9 percent, food processing 4.8 percent, marketing and distribution 1.7 percent, restaurants 2.8 percent and home preparation 4.3 percent of the aggregate energy con— sumption in the U. S. in 1975 (USDA, 1978). The ratio of the percent 2 of energy use in the food system to percent value added in the respec- tive sectors of the food system provides a measure of energy inten- siveness (Table l-l). The food processing sector uses more energy in total and per dollar value of product than any other sector of the food system. Table l-l--Ratio of Food System Energy Intensity to Value Added S ZLgngrgy Consumed of Total Food System ector a ue Added ofFTotal Food System Farm Production .56 Processing 1.46 Marketing and Distribution .30 Restaurants 1.13 Food processing industries are, collectively, a major energy user in the U. 5., currently ranking sixth among all major industrial groups in the total annual utilization of energy. Food processing Operations depend heavily on natural gas and oil. Processors also require energy intensive inputs such as metal cans and other containers. Development of technologies which are economical and could reduce these as well as other direct and indirect energy inputs are of importance to food processing and other post farm gate sectors. Adoption of such technology should improve the performance of the food system. The limited number of studies which have been conducted on energy related issues in the post farm gate sectors have primarily fo- cused on describing energy use. Little work has been undertaken delineating economic adjustments including evaluation of new energy efficient technologies. A review of the work which has been completed can be found in DPRA (1974), Henig and Schoen (1976), Olabode (1977), Rao (1977), Singh (1979), Unger (1975), and USDA (1979). The identification of new and emerging post farm gate technolo- gies expected to have significant impacts on the U. S. food system was the focus of a recent study by the Office of Technology Assessment (1978). The retortable pouch, a multi-layer plastic and aluminum package that will withstand heat processing at high temperatures and produce shelf stable products which need no refrigeration before use and are of equal or greater quality than cans was a prominent candi- date. Studies by Hoddinott (1975), and OTA (1978), indicate retort pouch packaging systems offer potential savings of energy in produc- tion, food processing, transportation and home preparation of food products. Additionally, the retort pouch is currently cheaper to pur- chase and transport than its comparable size counterpart, the metal food can. Although the retort pouch does have unique advantages as a sub- stitute package, the question of whether or not it can be economi- cally competitive with the can remains to be answered. This study addresses the economic feasibility of ad0ption of the retort pouch as a processed fruit and vegetable packaging system. The major components of a packaging system for processed fruits and vegetables, which will have an influence on the economic feasi- bility of retort pouches being adapted as an alternative package to replace the metal food can, are outlined in figure 1-1. This subsystem Lopcmu compznwcpmwo .n op “Loamcmcp mmguzoa mo newcoucmu mmguzoa mo acmxco macaw mcwmmxuma unpugoumm mcmpmmm SE: macaw mcwmmmuoca emu .m> gozoq “Lopez m=_mmmuoc¢ use mcwmmxuma .mcwppzo Empmxm m=_mmxuma chmcmw--~-F mczmwu TI 3:858 :8. 51111 m $232,. 33 commmuocm op mommxuma mo “coamcmch copcmo none; none; mFQMpcoumm emu Pocowpcm>=ou mo cowpuzuoga of the larger food system is selected because the issues related to package costs, transportation costs, processing equipment investment requirements and operating costs are the primary components of the larger food delivery system to consider in an initial economic feasi- bility analysis of the retort pouch. Marketing and home preparation issues and costs are not considered in this subsystem. Although it is recognized that the cost of the pouch is influenced by retailing and home preparation considerations, the initial focus centers around the issue of whether pouch packaging costs are at least closely competi— tive with the can in the commodity processor's realm of operations. Key non-energy costs which must be focused on in the search for a minimum cost packaging system for processed fruits and vegetables include: 1. The cost of purchasing cans, retort pouches and retort pouch cartons. 2. Transportation costs associated with moving containers and processed packages within the system. 3. Labor costs. 4. Costs associated with purchasing and maintaining proc- essing and packaging machinery for canning and retort pouch packaging. These costs are used to determine the minimum total cost packag- ing system for processed fruit and vegetable products. Although there are direct energy savings with the use of retort pouches as substi— tutes for cans, investment in the retort pouch technology cannot be justified strictly on reduced energy costs and flows alone. An evalu- ation must be conducted to determine if the new retort pouch packaging system is actually less expensive when the total costs of investment and operation are considered. The non-energy costs are different in a retort pouch system than in a can packaging system because of dif- ferential variable input and capital investment requirements. This study does address these cost issues and the question of the economic feasibility of a retort pouch system by determining which sys- tem, cans or retort pouches, is the minimum cost system for processing fruit and vegetable products. Additional analysis in this study con- siders the costs associated with replacing an existing canning system with a new canning system and a new retort pouch packaging system. Although many costs are considered, the underlying motivation and focus of the study is the potential energy savings the retort pouch offers as a substitute for the cans in fruit and vegetable commodity packag- ing systems in an environment of rising real energy prices. Problem Statement The emphasis on energy aspects of this study is necessary for reasons previously discussed. Real energy prices, particularly for liquids, will continue to rise faster than the prices of other com- ponents of production costs and will reinforce economic incentives to search for techniques to conserve and use energy in a less costly and more efficient manner. As technologies are being developed they may be adopted as economical as energy prices increase. A basic problem underlying this situation involves the need for the development of a new approach to evaluate possible investment in new energy savings technologies in a period of uncertainty concerning energy prices. Specifically, for this analysis, the problem centers around the need to develop an approach that can be used to identify the environment of resource prices, production costs, transport costs and investment requirements which must exist for retort pouch proc- essing to be selected as the minimum cost packaging system for replace- ment of existing can packaging systems. Overview of Research Objectives The objective of this research is to evaluate the economic feasi- bility of retort pouches for processing, packaging and distribution of processed fruit and vegetable products. Specific objectives include the identification of alternative packaging system boundaries for a canning system and retort pouch system and the estimation of the costs associated with the durable equipment and other operating requirements for each system. The major objectives of the study are to compare the costs asso- ciated with: 1. Purchasing processed food packaging containers, specifi- cally cans and flexible retort pouches of retail size for packaging fruit and vegetable commodities. 2. Transportation of these containers from the package producer to the food processor. 3. Processing and packaging of fruits and vegetable products in these alternative packages. 4. Transportation of product to wholesale distribution cen- ters from the processing location. Additional objectives include: 5. Identification of the amount of energy used in the various stages of the alternative packaging systems which include construction of the containers, trans- portation of empty containers and processed products, and processing and packaging of the product. 6. Estimation of the economic life of can and retort pouch processing equipment and the costs associated with their acquisition and operation over that period. A description of the advantages and disadvantages of using retort pouches and cans in the food system for fruit and vegetable products. Identification of the conditions under which retort pouches are a viable and economically feasible package for packaging processed fruit and vegetable commodities. Production of Package Materials and Shipment The objectives of the study that pertain to the packaging con- tainers and shipment of them include: 1. The identification of the amount of energy used in con- struction of cans, retort pouches and protective boxes. Determination of the current purchase price of cans, retort pouches and retort pouch cartons and the possible future price. Selection of the size pouch which would substitute for the 16 oz., 303 x 406, fruit and vegetable can. Calculation of the weights and volumes of the can and retort pouch in transport. Identification of the method of tranSporting the packages between producer and processor. Estimation of the current and future per unit transport cost of cans, retort pouches and retort pouch cartons. Fruit and Vegetable Processing and Packaging In the food processing component of the study, the objectives are to evaluate the advantages, disadvantages and economic feasibility of retort pouches versus cans for fruit and vegetable processing. Cans are extensively used for packaging fruits and vegetables for market. Processed fruits and vegetables in cans are an important com- modity in the Michigan agricultural economy as well. Therefore retort pouches have potentially large influences on the processed fruit and vegetable packaging system. Additionally, the packaging systems for fruit and vegetable products are considered because essential data con- cerning energy use in food processing plants is available for fruit and vegetable processing lines. Although high value items such as gourmet foods and meat based products appear to currently be economi- cally feasible for market in retort pouches, the major potential im- pact lies in the canned fruit and vegetable market. An additional objective of this part of the study is the estima- tion of the economic life of can and retort pouch processing equipment and the costs associated with their acquisition and operation over that period under conditions of rising energy prices. Further objectives of this section of the study include: 1. Identification of the operations within a canning plant which will have the greatest influence on resource use and production costs when comparing canning Operations and retort pouch operations. 2. Identifying the type of machinery and associated resource use and operating costs used in retort pouch and canning operations. 3. Determination of the amount of product which is processed in the retail size pouch. 4. Identifying the amount of energy used in processing the can versus the pouch. 5. Comparing processing costs for a given design which in- cludes the essential machine Operations for retort pouch , and canning Operations.1.1 6. Comparing the packaging costs and determining the economic feasibility of investing in retort pouch processing under a variety of resource prices. 1’IThis comparative analysis is conducted with a computer model that allows for the inclusion of costs associated with can and pouch packaging in the other sectors of the packaging system outlined in figure l-l. 10 Transportation of Product Specific objectives concerning transportation of the product to distribution centers include: 1. Selection of a method of transporting the packages between processor and distribution center. 2. Determination of the weights and volumes of the pouched and canned product in transport. 3. Identification of the amount of energy used in trans- porting the cans and pouches. 4. Estimation of the per unit transport cost of the finished pouched and canned product. Marketing and Preparation Although specific marketing problems, additional distribution costs, and energy use are not examined in detail at the retail or individual household level in this study, there is a general dis- cussion of these issues and an outline of problems in these areas is presented for consideration in future research. Procedure A variety of information sources are used to construct the Operating and capital costs associated with three alternative packag- ing systems. These systems are an existing canning system, a new can- ning system, and a retort pouch packaging system. The results of two energy accounting studies, which document the energy used in fruit and vegetable processing plants, are used to estimate the amount of energy required in the processing stage of the alternative packaging systems. Further, the essential components of the processed fruit and vegetable packaging system that could effect the adaption of the 11 retort pouch are identified and the capital and operating requirements for each system considered are established. This information is then used to construct a generalized model of the packaging system alterna- tives for processed fruit and vegetables to estimate and evaluate the equipment and operating costs associated with each alternative system under a variety of input price scenarios and Operating conditions. Selection of the fruit and vegetable processing plants from which the processing and packaging component of the model is constructed was conducted in conjunction with the National Food Processors Association, Berkeley, California and the Department of Agricultural Engineering, University of California, located in Davis. For the research to be of general use it is necessary that the model be based on typical fruit and vegetable processing plants and Operating conditions. Al- though the fruit and vegetable processing and packaging industry is very diverse in its Operating procedures, the processing plants from which the operating data was collected are not atypical."2 Further, it is believed that the firms selected are of the approximate size of firm that may consider the use of retortable pouches as a packaging alternative sometime in the future. The energy accounting studies which were used in the study had previously been conducted in the plants which were selected. After the typical fruit and vegetable processing operations were selected the next step was to collect information concerning the rate of production, type of equipment and associated labor, energy and 1'2Persona1 communication, National Food Processors Association. 12 maintenance costs for the plants selected. This additional information for the existing plants was collected by surveying the respective plant production managers. Information concerning the retort pouch and new can packaging system alternatives was collected from a variety of equipment manufacturers and distributors. Data concerning construc- tion and the estimation of the cost of retort pouches and cans was collected from package manufacturers and convertors. Current trans- portation costs were obtained from commodity transport companies and motor freight firms. Energy price scenarios are developed from a number of sources including responses to an open ended survey soliciting Opinions on energy price scenarios. The respondents were generally agricultural engineers and agricultural economists who have been conducting energy related research in the North Central States. Other input price sce- narios are developed in conjunction with the analysis and are mainly used to indicate the sensitivity of the results to certain increases in prices. As the required data was being collected, a computer model was formulated in accordance with the conceptual system outlined in figure 1-1. The model is used to estimate the costs which are asso- ciated with acquiring and maintaining a new technologically advanced set of durable equipment for processing retort pouches. These costs are also estimated for a new canning equipment complement. The model then uses this cost data in an economic replacement routine to deter- mine the Optimal economic life of the new durable equipment complements which could potentially replace the existing canning equipment. 13 The model is also used for estimating the cash cost flows for each of the new alternative packaging systems over the optimal economic life of the durable equipment complements which are required for opera- ting the system. Cash flows are also estimated for the costs asso- ciated with the operation of the existing packaging system and the maintenance of the existing durable equipment complement. The investment and operating costs used in this study are not total system costs but partial costs in the sense of partial budgeting costs because only those costs which are eXpected to be significantly different across the alternative packaging systems were estimated. In the analysis procedure, the investment and Operating costs of each new alternative packaging system are compared with the cost of continuing to operate the existing can packaging system to determine: 1. If a new packaging system which required either new canning equipment or retort pouch equipment should replace the existing canning system. 2. If a replacement system is needed, to determine which system it should be; a retort pouch system or a new canning system. This procedure of analysis is conducted on two sets of data for two different processing plants. In summary, the costs of each alter- native replacement packaging system are estimated and compared with the costs associated for each existing Operation under conditions of rising energy prices and a variety of other price and cost variables to determine if a retort pouch system could compete on a cost basis with the other alternative packaging systems. 14 Organization This study is organized to describe the essential operations and comparative cost differences in using retort pouches and food cans in packaging food systems. Chapter 2 discusses the current retort pouch technology, practical application to date and the potential benefits and disadvantages of using retort pouches. Chapter 3 outlines the conceptual energy price adjustment issues and reviews the current theory concerning asset replacement analysis. Chapter 4 presents the model, assumptions and basic data used in the study. Chapter 5 presents the analysis concerning the economic feasibility of a retort pouch packaging system. A summary of the results and discussion and needs for future research are presented in chapter 6. CHAPTER II THE RETORT POUCH The retort pouch is a flexible package made from a laminate of three materials; polyester, aluminum foil and polypropylene. This con- tainer can withstand thermal processing temperatures that are required in food canning Operations (figure 2.1). Combining the advantages of the can and the plastic boil-in-bag, retortable pouches substitute for the metal food can. Taste tests indicate that the quality of foods processed in the retort pouch is superior to that of foods processed in cans and approaches the quality of frozen foods (OTA, 1978). Ad- ditionally, the pouch product has a shelf life similar to canned prod- ucts and requires no refrigeration before opening. The inner layer of the pouch, polypropylene, acts as a food con- tact material. It also forms the pouch seal under the application of heat. Aluminum foil is used in the middle of the laminate to serve as a moisture, light and gas barrier while the outer layer, polyester, adds strength to the package. This construction can withstand steri- lizing temperatures of 240-270° F which are considerably higher than the temperature exposure of the boil-in-bag associated with frozen food products. History_of Retort Pouch DevelOpment Chughatta (1979), reports that the initial development of the retort pouch in the United States dates back to the 1950's when 15 16 .02; "musaom .guaoa pcoumm ask--3-~ «czar; \ C s. &\\v& LINN. f _\\. . x .11 .2. c c .. .... . \.\&Ammu // \ ..~. . /7/...w \&\\\ ‘ ..mx L “aw w»/.\\ . S...\\.__ n \,/// \\.\ \\\\\.\\\ ..N /..1 55950.. c‘ z .uw,.s . . 3. Rm“ \. . _ gx . .. ._ \smxx \ .. \ \a. /II 4.0". 552.5544 . e m2w4>m0ma>40m 17 laboratory work was first initiated on thermal processable films. Its first practical application occurred in the Apollo Space Program in 1968. The U. 5. Army Natick Laboratory first proposed the use of the pouch as an alternative package to the conventional rigid can, in order to alleviate the difficulties encountered by the combat soldier with C-rations which were served in a metal can. The Army desired a pouch which would be light, could be carried by a soldier without in- terfering with normal movement, could fit into combat uniform pockets conveniently and would not injure the soldier if he fell on it. Ad- ditionally, it should be durable yet easy to open and dispose of. The contents of the pouch would be heated before being consumed by boiling for a few minutes. Further the quality should be at least equal to canned foods. During the course of the pouch develOpment Natick evaluated the durability and storage stability of the pouch, its resistance to bac- teria, and thermal processing temperatures and procedures. Addition- ally, the possible migration of pouch material extractives to the food was examined (Chughatta, 1979). Natick determined whether overwrapping Of the pouch by paperboard envelope or carton would be necessary or recommended. Results of a field test in 1965-66 using 50,000 filled pouches indicated that if the pouch was constructed well, it would perform well (Mermelstein, 1978). Natick conducted a reliability project beginning in 1968 to de- termine what type of pouch manufacturing and processing methods were suitable. Swift, Pillsbury, Continental Can, Rexham Corporation and FMC joined the effort. A pilot pouch processing line was installed 18 in Swifts research and develOpment center in Oak Brook, Illinois in 1970 and received USDA approval for army usage and testing. The reliability and a subsequent project culminated in the run- ning of the pilot plant for eight months in 1972, producing more than 400,000 five ounce pouches. A variety of twenty-two different food items were tested. These pouches were tested for seal integrity, sterility, and overall defects. The results showed performance equal to or better than the metal can (Mermelstein, 1976). Natick Laboratories examined the comparative resistance to damage from rough handling abuse of flexible packages and metal cans. The overall failure rate of the flexible package was slightly lower than that of metal cans (Burke and Schulz, 1972). After completion of the reliability project, several of the co- Operating firms pursued work on the retort pouch and its related proc- essing equipment. Rexham and FMC proceeded in designing and improving the packaging and processing equipment. Continental Can actively pur- sued commercialization of the retort pouch and purchased the pilot plant from Natick Laboratories (Mermelstein, 1976). Mermelstein (1978), reports that in 1974, the U. S. Department of Agriculture gave its approval for a number of manufacturers to mar- ket meat and poultry products in the retort pouch, provided that the pouch materials met Food and Drug Administration regulations. At that time, there was no data indicating any problem concerning the materials used in construction of the pouch. However, in early 1975, studies indicated that components of the adhesive used to hold the three layers of the pouch material together would migrate through the inner food contact layer at the high sterilization temperatures. As a 19 result, the FDA asked USDA to withdraw its approval and asked the ma- terial suppliers to submit data identifying and measuring the compo- nents of the adhesives and pouch materials. In 1976, the FDA reviewed additional safety testing data on the adhesive components. However, the major suppliers of the pouch ma- terials, Continental Flexible Packaging and Reynolds' Metals Flexible Packaging, modified the components of the pouch by using different thermal adhesives and bonding agents, that complied with existing FDA regulations. The following year the modified pouches were approved by the FDA. The USDA subsequently approved the pouches for use with meat and poultry products. The U. S. Experience Since 1977, several companies have shown interest in packaging commercially marketable food products in retort pouches. In September, 1977 the Continental Kitchens Division of ITT Continental Baking Company introduced a retort pouch product in the market. The prod- uct, Flavor Seal, was introduced in a limited test market of three cities: Fresno, California; Fort Wayne, Indiana; and Syracuse, New York. Seven meat based items were available in 8 oz. retail pouches. The items were Beef Bourguignon, Veal ScalOppini, Chicken Cacciatore, Chinese Pepper Steak, Beef Stroganoff, Chicken 5 1a King and Beef Stew. Each item was marketed in an individual carton which displayed graph- ics illustrating the product. The items were simply prepared by heat- ing the pouch in boiling water for five minutes. Because market de— mands in each test city consistently out-stripped supply, Continental halted its test and moved to develOp an expanded production facility 20 (Food Production Management, 1979). The Flavor Seal product was dis- played near canned meat items and above freezers where the frozen dinners were located. Accordingly the pouch was advertised as a sub- stitute to the frozen product as well as canned meat products. In summer 1979 ITT Continental retort pouch line re-entered the retail test markets. The new markets for distribution were Columbus, Ohio and Atlanta, Georgia. Bannar (1979) reports that according to a spokesman for ITT Continental Baking the pouched dinner market test had been successful. However, supermarkets in the Columbus area reported that the products were moving slowly, selling approxi- mately a case of each variety per store per week with some stores selling more and some selling less. Each case of product contained twelve individually cartoned pouches. A majority of retail market managers consider sales of a product at a rate of a case per store per week to be the minimum acceptable rate. Two issues which appeared to effect sales were the price of the product and the positioning of the product in the store. Prices ranged from $1.59 to $2.49 with an aver- age price of $1.89 to $1.99 for an 8 oz. package (Bannar, 1979). It is yet to be determined which location in the supermarket may Optimize the sale of the product. The location has varied from canned meats, frozen food, dried soups and boxed dinners sections. At least one store reported that sales appeared to be best when placed in the boxed dinner section. Although the success of ITT's product in the retail market appears to be mixed, the company has applied for seven patents concerning the processing of the product . George A. Hormel Company also initiated pouch production in the fall Of 1977 on a line at its Austin, Minnesota plant. The company's 21 marketing thrust aimed at Specialized markets where the retort pouch could command a premium price. The main market which the Hormel pouch is aimed at is the camping market (Food Product Development, 1979). The Hormel product line had twelve items which included meatballs in sauce, chicken 5 la king, frankfurters, ham patties, beef stew, ham slices, chicken loaf, beef and onions and beef patties. The serving sizes ranged from three to five ounces. Apparently, the pouches are attractive in the camping market because of their ease of handling and preparation. Further, their quality is superior to freeze dried foods. The Hormel products are also compatible with some of the currently available freeze dried foods. This enhances Hormel's concept of a total camping food line. Hormel also supplies retort pouch foods to Sky Lab Foods of Elmsford, N. Y. Bannar (1979) reported that this firm serves retort pouch foods to government institutions, public and private agencies, camping and recreational markets and expects to expand distribution into disaster relief programs. An additional market for the pouches through Sky Lab Foods is the Meals on Wheels program (Food Products Development, 1979). Prices for individual four ounce pouches are ap- proximately $1.10. Specialty Seafoods, Inc., Anacortes, Washington is using the retort pouch for its top-of—the-line Gold Seal brand of oysters and smoked salmon products. The pre-formed pouches measure 7-1/4 by 18 inches and are decorated with a gold seal label. After processing, the retort pouch product is packaged in a gift box for sale in gourmet food shops in the Pacific Northwest. 22 By far the greatest extent of development of retort pouch prod- ucts in the near future will be for the military. The last year in which the Army plans to rely on the three-piece can C-ration is 1980. The Department of Defense has contracted with three suppliers for pro- viding 24 million meals in retort pouches. The order involves produc- tion of 40 million pouches of meat entrees, fruit and baked products. The U. S. Army is calling its new rations MRE: (Meal, Ready to Eat). Each contractor will take responsibility for the production, assembly and delivery of complete rations. This is different than in the past where the government contracted separately for the manufacture of vari- ous food packets that comprise the ration, and then contracted to have them assembled. The first company awarded a contract was American Pouch Food Company. This firm was founded specifically to apply retort pouch technology to food processing. American Pouch Foods will produce the MRE ration at two Chicago plants. The pouch food processing plant will include four form/fill/seal lines utilizing 4-3/4" x 7-1/4" x 3/4" pouches formed from roll stock. The pouches will contain 4 to 5 oz. of food (Morris, 1979). The complete MRE program consists of twelve menus incorporating the following foods packaged in retort pouches: l. 12 meat entrees 1 vegetable 2 fruits 6 cake items 01-wa 6 freeze-dried items (2 meat, 4 fruit) 23 6. Miscellaneous items such as cookies, brownies, cheese Spread, peanut butter, jelly, crackers and cocoa powder. The other two contractors which are currently gearing up for retort pouch food production are Southern Packaging CO. Inc. of Baltimore. Maryland and Right Away Foods Co. of Edinburg, Texas. Kraft Foods announced in March 1980 that they would begin test— ing five entrees in retort pouches in five test market areas in May, under the name 5 la carte. The items will include beef stew, creamed chicken, sweet and sour pork, beef stroganoff and beef burgundy. Each pouch will be of the 8 02. single serving size. Reynolds Metals and Continental Can will be supplying the pouches for Kraft's product line. The primary marketing objectives in the test markets are to determine sales potential. Kraft's primary competition in marketing its new line will be Stouffer's frozen entrees and a line of retort packaged products marketed by ITT Continental. Market studies will be conducted to determine if there is a significant preference for one brand over another. Retail prices of the items are expected to be approximately equal per ounce of product to Stouffer's frozen entree prices. During the developmental stages of the 5 la carte program an independent marketing firm surveyed fifteen major national grocery chains and wholesalers purchasing staffs regarding the potential of Kraft's retort pouch product. According to the study 80% indicated they would purchase the pouch entree line (Supermarket News, March 24, 1980). To date retort pouch products in the U. S. are viewed as con- venience foods and are produced by firms which aim at marketing a 24 distinctly different and readily identifiable food product. These firms generally are able to spend a good deal on product research and development, advertising and promotion of the product. Competition among these firms is related significantly to advertising and promo- tion. Few commodity processing firms, which tend to compete on effi- ciency of Operation and distribution instead of brand name and differen- tial product characteristics, have attempted to enter the market with retort pouches. This is primarily due to the amount of uncertainty regarding the economic and technical processing and distribution as- pects of such products. The Foreign Experience In Europe retort pouches are being sold at a rate of about 40-50 million pouches per year, a relatively small market (Ebben, 1979). Lustucru, a: French food company appears to be the leader to date. Retort pouch food production started in the fall of 1978. A new fac- tory was built in northern France near a modern canning cooperative which had agreed to supply a variety of vegetables to be packaged. The plant uses pre-form pouches which measure 7-1/2" by 9-1/2" to fill 14 oz. of product. The products consist of a variety of retort pouched vegetables which include potatoes, carrots, brussels sprouts and mushrooms. The line currently Operates at fifty-five pouches per minute but is capable of 140 pouches per minute (Package Engineer, May, 1979). ’ Japan has the most experience with the retort pouch. In 1978, the total sales figure for retort pouched foods amounted to $259 million. This figure compares to $1,764 million for total canned food 25 sales in Japan (Food Engineering, September, 1979). Approximately thirty-three manufacturers are involved in retort pouch packaging. Many of the Japanese pouches are convenience type products which are of high quality and call for relatively higher market price than canned goods . Canada has also had some experience with retort pouch use. Magic Pantry Foods of Hamilton, Ontario have been making stuffed cabbage rolls in retort pouches since 1978. The cabbage rolls are stuffed with meat and rice, then hand-placed into pre-formed pouches. Before sealing and retorting, a tomato sauce is added. The pouch is approxi- mately 14 oz. and sells for $1.89 to $2.09 (Food Engineering, April, 1979). Retort Pouched Vegetable Experience Although there are no current marketings of retail size retort pouch vegetable products in the United States, there does appear to be market potential. Tung, Garland and Maurer (1976) reported that re- tort pouch vegetable products studied were "highly" acceptable and normal in storage stability. Flexible packaging techniques for shelf stable foods appeared to permit production of very high quality vege— table products. Even after twenty-five weeks of storage at room tem- perature products received sensory scores of 77 percent for overall acceptability, compared to 50 percent for commercial frozen samples (Food Production Management, June, 1978). Southwick and Winship (1971) also report that selected vegetables processed in foil pouches have been shown by actual consumer tests to be preferable in quality to similar vegetables processed in cans. 26 Approximately 75 percent of the respondents indicated that the pouch is a better way to package vegetables. Further, 50 percent of the reSpond- ents in the study indicated that vegetables in pouches could cost as much or more than equivalent quantities of frozen vegetables. Approxi- mately 80 percent believe the price should be above the price of canned vegetables. The products tested were peas, whole-kernel corn, cut green beans and mixed vegetables. Even though vegetables in pouches were found to be more acceptable than the canned product, they were not as acceptable as the frozen prod- uct. According to the authors even though the taste Of pouched vege- tables was recognized to be better than frozen vegetables, the overall acceptability was less due to the fact the frozen products had superior color. Although the market tests appeared to support the claims of higher quality products and desirability when compared to the can, the issue of acceptability is still open to some question. Initially, retort pouches will be viewed as a unique product rather than as a direct competitor against either canned or frozen goods. It is ex- pected that the pouch product may be sold at a premium price above com- parable canned items that will reflect the superior sensory quality of _the product. However, if production and distribution cost advantages are significant for the retort pouches, their market price may be quite competitive with canned products. The Pouch and Regulatory Agencies Two agencies, the Food and Drug Administration (FDA) and U. S. Department of Agriculture (USDA) have been involved in regulating 27 pouch use. The basic requirements for pouch use have been reported by Chughatta (1979). These include: . 1. Identification of all materials used in the pouch. 2. Materials must meet the FDA regulation regarding migration of substances into the food product. 3. The pouch must be able to withstand exposure to 250°F water. 4. The sealed package must be resistant to bacterial penetra- tion. 5. Additionally the pouch must preserve the food product for at least six months at 100°F and two years at 70°F. All products currently being marketed meet and surpass these re- quirements. For distribution of retail size pouches the USDA has dictated that an overwrap must protect the pouch. The pouch is generally mar- keted in a small carton which guarantees pouch integrity during ship- ment from processor to supermarket. Some industry people feel this may not be necessary. For example, an official representing American Can Company feels that if the transportation packing is adequate, overwrap cartons are not needed. From the standpoint of package de- sign and display, an overwrap is unnecessary, since the pouch can have multi-color printing and can be displayed without overwrap from racks or even on shelves (Pinto, 1978). Currently there are no overwrap regulations for institutional size containers moving to institutional markets. Benefits of the Retort Pouch The retort pouch has many advantages when compared to canned and frozen products throughout the various stages necessary to deliver processed foods to the consumer. 28 Production and distribution of containers: 1. Currently a retail size pouch which measures 6" x 8" and its protective carton costs less than a comparable size retail can, (303 x 406). The pouch, including carton, would be approximately 10.5¢ while the comparable can would be 12¢. The difference in cost between larger pouches and cans is even greater. An institutional pouch with the capacity of .8 gallons would cost 12¢ while a number 10 can with the same capacity would cost 42¢ (Beverly, 1980). 2. A comparison of the energy requirements for comparable 8 oz. containers shows that retort pouches require less energy to produce, (Table 2.1). 3. Retort pouches require less energy and cost less to trans— port than cans because they generally weigh less than cans. For example, 1,000 pouches with dimensions of 5-1/2“ x 7" weigh 12.5 lbs. and 1,000, 211 x 304 cans of the same capacity, 8 oz., weigh 109 lbs. (Hoddinott, 1975). Additionally, 1,000 6" x 8" pouches would weigh 15.6 lbs. while 1,000, 303 x 406 cans of comparable capac- ity would weigh 168 pounds. ' The cost to transport pouches would be less because empty pouches take up considerably less space than empty cans. The area required for shipping 1000 empty 303 x 406 cans is approximately 25.72 cu. ft. while lOOO empty 6" x 8" x 0.1" pouches need only approximately .28 cu. ft., (appendix A.2). A shipment of one million pouches Of this size requires only one 45 foot long trailer truck. However, a shipment of one million cans requires approximately 10 trailer trucks. This dis- parity is even greater for number 10 cans and institutional size pouches. Approximately 36 truckloads of number 10 cans are equivalent to one truckload of institutional size pouches (Silverman, 1979). Con- sequently, the amount of storage space for empty containers is much less for the pouch than the can. 29 Table 2-l--Energy Intensiveness of Food Containers (8 oz. Capacity) Container Weight BTU/LB. BTU/Container Pouch Mylar .0005" 1.86 lb./1000 21,850 41 Thermoplastic adhesive .36 lb./lOOO 21,850 8 -—-Foi1 00035" 2.42 1b./lOOO 124,800 302 Thermoplastic adhesive .36 lb./lOOO 21,850 8 F’M°d‘f5§§np°1’pr°py‘e”e 7.45 1b./1000 21,850 163 Inks' .11 1b./lOOO 21,850 __j; (Single Pouch) 12.56 lb.7|000 Sub Total 524 Carton 84.26 1b./lOOO 16,700 1,410 TOTAL ’l,934 Frozen Food Dishes Aluminum 14.78 lb./1000 124,480 1,840 Organic Coatings 1 lb./1000 20,927 21 Plug lid: 11 lb./1000 Foil .825 lb./lOOO 124,800 103 Paper 10.175 lb./lOOO 16,700 170 Carton 41 lb./lOOO 16,700 685 TOTAL 2,819 Glass Jars - Wide Mouth Jar 4-5/8 02. 10,440 3,020 Lid (Steel) 10 gms. (est) 32,100 71 Seal Compound 1 gm. (est) 20,927 46 Label & Glue 1 gm. 16,700 37 TOTAL 3,174 Three-Piece Steel (Tinplate Cans - 211 x 303) Stee1 (1) 109 1b./1000 32,100 3,500 Tin 605 gm./1000 Organic Coatings 0.5 gm./can 20,927 23 Label & Glue l gm./can 16,700 37 TOTAL 3,560 Source: Hoddinott, 1975. 30 Processing and packaging: 1. Because the pouch has a thinner profile than cans or jars it takes about 30-50 percent less time to reach sterili- zing temperatures at the center of the food in the pouch than in cans or jars. In addition, the product near the surface of the container is not overcooked, as it may be with cans and jars. Most products' quality is generally maintained--the product is truer in color, firmer in tex- ture, fresher in flavor, and there is likely less nutrient loss (Mermelstein, 1978). It is expected that certain products will be more suitable for processing in pouches than others. Some products such as vegetables and fruits can be proc- essed with less brine or syrup than is required with cans. This advantage becomes more significant as the package size becomes larger. Because of the previously mentioned items,ithe pouch product should require less energy to process than the canned product. Distribution, marketing and preparation: 1. The pouched product prepared for distribution weighs less and takes up less room than the comparable canned product. A case of twenty-four 303 x 406 cans weighs approximately 31 lbs. while a case of 24 retort pouch products weighs approximately 23 lbs. (Appendix A.l). As a result, distribution costs for the pouch should be - less. The pouch product after processing is commercially sterile, and shelf stable. Refrigeration or freezing are not re— quired. Retail size pouched foods can be heated quickly by placing the pouch in boiling water for 3-5 minutes, substantially less preparation time than for frozen foods. Therefore, less energy is used in the home when compared to frozen foods. There is little need for pots and pans and cleanup is rela- tively simple. Pouches take up less disposal space than cans and should contribute to less costly refuse removal and incineration. Additionally, the pouch can be Opened easily by tearing across the top of the pouch before or after preparation. There are no sharp edges for injuries and a can Opener is not necessary. 31 Retort pouches could also be used for portion control for people on strict diets and could also be advantageous for elderly persons. Single-serving portions individu- ally packaged could be of use to many groups such as single persons or hospitals. The potential for packaging larger quantities of product with less brine than is necessary in cans is particu- larly advantageous for institutional markets. Mermelstein (1978) reports that from harvesting to con- sumption the total energy required is about 60% less for vegetables packaged in retort pouches when compared to frozen vegetables. When compared to canned vegetables the result is approximately 15 percent lower. For retail sizes the label display area on pouches is greater than that of cans. Disadvantages of Retort Pouches 1. Currently, the biggest difficulty and the main impediment to retort pouch sales growth is the lack of high speed pouch filling and sealing equipment. Most equipment cur- rently available is only capable of handling up to sixty pouches per minute while canning equipment is many times faster. Retort pouches are not as standardized in sizes as cans, mainly because the technical processing relationship of certain size pouches with various products are still some- what uncertain. The most appropriate way to ship the pouch has still not been determined. It is not totally clear whether cartons are actually beneficial or detrimental to pouch protection. Further recommendations concerning appropriate shipping containers for institutional size pouches are virtually non-existent. At this time retail prices for pouched products are con- siderably higher than both canned and frozen foods. This is likely due to initial large food product develOpment costs associated with the pouch products. General technical sophistication, knowledge and experience with the pouch is less than alternative packages. Considerable experimentation and testing is usually needed to bring a retort pouch product on-line. Expenses re- lated to product development will be significant. 32 Consumers will need to be educated about the retort pouch concept and its use. Costs associated with marketing the new retort pouch may initially be substantial. Retort pouches, as they are currently constructed, are not suitable for microwave preparation because of the aluminum layer. Some research is being conducted to develop pouch materials which could be substituted for the aluminum foil and allow for microwave cooking. The tradeoff which is made when aluminum foil is removed from the pouch is one of reduced shelf life. However, the amount of energy needed for home preparation may be further reduced. CHAPTER III CONCEPTUAL ISSUES The methods and techniques applied in the analysis of the problem are based on theoretical considerations. Several theoretical and con- ceptual issues are involved in outlining and conducting an economic feasibility study of a new technology. This chapter reviews the nec- essary conceptual issues which include several aspects of the theory of the firm. A firm's possible responses or adjustments to rising input prices such as energy prices will also be reviewed. The neces- sary issues concerning capital investment and replacement theory will be dealt with in detail and a technique for applied replacement analy- sis will be suggested. The specific assumptions and technique for model construction and analysis will be discussed in chapter 4. The Firm In this study the major concern with the firm, a food processing firm, involves its possible adjustments as a response to rising input costs. Specifically, this concern involves the issue of how a firm should evaluate the question of technological adjustment in an environ- ment of rising real energy prices which would make its operating sys- tem less energy intensive and less costly than would exist under the current set of technology. A modification where technological change is considered may involve the disinvestment of existing durable equip- ment and investment in technologically advanced durable equipment. 33 34 A procedure is needed to evaluate the question Of whether or not the firm should invest in new durable equipment and a more energy efficient operating system. The procedure should be able to determine when and under what conditions durable asset replacement should be made. Secondly it should be able to select which durable assets should be used as replacements from the possible replacement alternatives. Be- fore examining such a procedure and other possible adjustments, a re- view of some production economics theory is necessary. A firm is defined as a "going concern" which produces one or several economic goods. A firm must decide on what goods to produce and how much of these goods to produce. To accomplish this, it is nec- essary for the firm to select the best possible way to technically com- bine various inputs such as labor, machinery, energy and other raw materials in combination to derive a saleable product. Firms involved in making such technical decisions are constrained by the existing productive technology. Any productive process and its relationship of rate of input use to rate of output of product can be represented by a production function. In a simple single output pro- ductive process the production function can be represented by equation (3.1) where q represents the output per unit of time, while x1...xn (3.1) q = f(x], x2, x3...xn xn+]...xm) represent variable inputs per unit of time in the production process. The xn+]...xm represent inputs which are not variable but have been fixed at some predetermined level. The production function represents the maximum output obtainable from the possible input combinations and is determined by existing technology at a given point in time. 35 Technology is defined as the available productive processes technically feasible for producing an output. In the long run technological change can occur. Therefore the production function of the firm may be alter- ed by adjustments to its technological base. To determine the best input combination for production of a parti- cular output level, input price information needs to be included in the analysis. Consider, for example, a two variable input production func- tion, equation (3.2), in which all other inputs are held constant. (3.2) q = f(x], x2 xn+]...xm) The problem for the firm is to choose x1 and x2 levels so as to mini- mize costs for each level of output. In order to minimize the cost of producing a given level of output a firm should choose that point on the isoquant or iSOproduct curve for which the rate of technical sub- stitution of inputs x1 to x2 is equal to the ratio of prices x1 and x2, (figure 3.1). The isoquant or iSOproduct is defined as a curve that illustrates all the possible combinations of inputs, (processes), that can produce an equivalent level of output. The slope of the isocost curve, the ratio of input prices, should be tangent to the isoproduct curve in the production function. The isocost or total cost line illustrates the combination of x1 and x2 which have equal' cost. By equating equation (3.3) at every level of output that level of output is obtained at minimum cost given the existing technology which is in use in the production process. This occurs where the rate of technical substitution of x1 and x2 is equal to the ratio of the input prices and their marginal products. (3.3) Ax1 = Msza 32. sz MPx1 Px1 36 ISOproduct Isocost X2 Figure 3-l--Imperfect substitute input combinations and expan- sion paths under different relative input prices. The locus of the tangencies is called the firm's expansion path. It traces how input combinations change as output expands given con- stant input prices. However as prices of inputs change the slope of the isocost line changes and the combination of the inputs used in production is altered if the production function has attributes of substitutability. The technology currently in use restricts the available combina- tions in which the inputs can be combined to produce a given level of output because it influences the positioning of the isoquants. As a new technology becomes available additional combinations of inputs to produce the previous level of output are a possibility. Therefore the 37 expansion path can be effected by the technology changing the shape of the isoquant as well as by the changing ratio of input prices. Ferguson (1972), Lancaster (1974) and Herfindahl and Kneese (1974) should provide a further detailed review of the theory of production economics. Firm Adjustments to Rising Energy Prices The possible adjustments to rising energy prices a food proces- sing firm can undertake are influenced by the production function or the technical relationships dictated by existing technology. The relationships can range from perfect substitutability to perfect com- plementarity. The economic structure of the food processing industry also has some influence on the possible adjustments. In the short run when some inputs are fixed and the technology is given, adjustments are limited. As the period of analysis becomes longer the opportunities for other types of adjustment increase. In the short run it may be possible in some circumstances to substitute one energy input for another energy input. As the price of one of the inputs of energy increases it may be cost effective to substitute the cheaper energy input. For example, a BTU of natural gas may be substitutable for a BTU of fuel oil in the process of producing steam for use in food processing Operations. What determines this substi- tutability relationship is the technology in place. Figure 3-2 illus- trates the possible adjustments under changing relative energy input prices for a production function which exhibits the characteristics of perfect substitutability. Natural gas is x1 and fuel oil is x2. 38 Isocost Figure 3-2--Perfect substitute input combinatiOns and expansion paths under different relative input prices. The diagram on the left in figure 3-2 illustrates the case where a BTU of fuel oil is cheaper than a BTU of natural gas. Thus the tangency of the isocost and isoproduct line occurs on the x2 axis. The expan- sion path is the x2 axis. If fuel oil were to increase in price to be more expensive per BTU than natural gas then the expansion path and isocost curves would be different. The diagram on the right of figure 3-2 shows the result. Natural gas is relatively less expensive than fuel oil and the expansion path is the x] axis. Because the ratio of input prices is used in determining the Optimal input combination and not the absolute price of the input alone, the expansion path would remain as it was originally if both energy input prices increased equivalently so that the ratio was uneffected. A production function exhibiting the case of imperfect substi- tutes is illustrated in figure 3-1. For this case there would be some 39 substitution of inputs occurring as the ratio of the input prices change. This substitution would not be a one to one or all or none switch. In this case let x2 be energy input and x1 be labor. As the price of the energy input x2 increases the slope of the isocost line changes and the point of tangency of the isocost and isoproduct line change. More labor and less energy is being used to produce every level of output than before. There are likely some adjustment alternatives of this type which can be used in a food processing plant. Some labor or a combination of inputs may substitute for a small amount of energy in the food processing operation. Possibly the most interesting case in light of the study objec- tives is the case where energy and other inputs are perfect complements) in production. Figure 3-3 illustrates that for all ratios of input prices the cost minimizing input combination for a particular level of output is always the same. There is no adjustment which takes place in terms of the input combination to produce a given level of output under changing input prices in the short run. A good deal of the energy use in the food processing industry ex- hibits technical relationships like the latter. Energy needs to be combined with other inputs such as machine hours and raw product at very specific levels to arrive at a product given the existing technol- ogy in use. In the short run there is little chance of reducing energy use or making input substitutions for energy. Over a longer time period the technology and, therefore, the production function may be changed so that different and more cost effective input combinations can be considered. If this is true, the economic evaluation of invest- ments in technology which reduce energy use in the Operating system 40 ///;E7—— Isocost \ \ \ _‘x // / Isoproduct Figure 3-3--Perfect complement input combinations and expansion path under different relative input prices. is important. When the price of energy inputs in production increase the level of output can also be affected. The increased input price will affect the marginal cost of production and therefore the level of output that the firm chooses to maximize profits. This is illustrated in figure 3-4. As the price of energy rises the ratio of the input prices be- comes larger and the lepe of the isocost line becomes steeper. Less units of energy input can be purchased for the same amount of money as previously. Therefore, with the same dollar outlay for inputs, less can be purchased and less output produced. The total cost to produce the previous level of output has been increased. In the short run a firmwhich exists in a perfectly competitive market with price given would reduce output as the costs associated in production rise. However, the level of output is a function of the price the product 41 X P 1 MC mc2 mc1 :Isoproduct /: I f u : I Figure 3-4--Short run marginal cost and output effect from an increase in real energy prices. receives in the market over the long run, as well as the influence of input prices and marginal costs. As the market determined price of the product changes the level of output can change. The optimizing point is where marginal costs are equated with price or marginal revenue. Of course the firm could always attempt to pass higher input costs on to consumers in the form of higher product prices. The suc- cess of such an adjustment depends upon the structure of the industry that the firm exists in. If there are a large number of firms in the industry and there are many close substitutes and demand for the spe- cific product or brand is elastic it is possible that a higher price for the product would influence consumers to switch to substitutes or other manufacturers' products which are cheaper. However, if all firms in the industry have the same cost structure and are effected 42 by rising energy prices similarly then the aggregate result may be a rise in price along with some reduction in output. The actual level of price in the market will be the result of aggregate supply and de- mand adjustments. In general the more atomistic the industry and homo- geneous the products, the less the individual firm can influence the market price and the more important the level of costs are in influ- encing the level of output. Alternatively, if the number of firms in the industry are small, close substitutes are nonexistent and demand for the product is in- elastic, then the individual producer may have more influence on the market price and therefore is somewhat more successful in passing in- creased production costs along to consumers. However, even in this case output would not remain at its original level. The food processing industry is characterized by a large number of firms of various size Operating under different conditions of cost. Greig, (1976) reports that firms involved in commodity processing par- ticipate in an industry which is nearly atomistic. Further, this type of processing results in production of fairly standard homogeneous commodities. A substantial part of the canning and freezing industry produce standard commodities. Although brands may exist, in most cases there are few distinguishing characteristics among commodities manu- factured by different companies. Typically the cost of entry into this industry is not high. These firms tend to compete on efficiency of Operations and efficiency of distribution of relatively low margin products (Greig, 1976). Under such circumstances the possibility to pass increases in energy costs of production on to consumers are limited. 43 Most producers would control a nonsufficient share of the industry to influence price. As energy prices increase firms with different cost structures will hold somewhat different competitive positions. Some firms will fare better than others. If a firm has little ability to influence the price it receives for its product then other types of adjustments are particularly important. Reducing the amount of energy used in the production process is another alternative which firms have. The possibilities for doing such are related to the shape of the production function as previously illus- trated by super-imposing different combinations of relative input prices on the isoquant surface. Before the firm can attempt to reduce energy inputs it is essential to examine the forms and amounts of energy used in the production process. Singh, (1979) has outlined a procedure for accounting for energy inputs and flows in food processing firms which appears to be receiving wide acceptance. It is also important to identify how the inputs are combined in the process and the poten— tial for substitution in the short run versus the long run. In the short run the technology is fixed and therefore technology, which generally exhibits input complementarity, has little potential for input substitution. This appears to be the general case for many food processing Operations. Initially a food processing firm may be able to substitute some cheaper fuel for a more expensive fuel and make slight improvements in the efficiency of machinery which requires energy in the plant. By improving in-plant housekeeping, energy use can also be reduced. These possible adjustments include: 44 1. Improve boiler and other processing machinery efficiency with improved maintenance. 2. Eliminate excessive lighting. 3. Minimize idle time of equipment when product is not being processed. 4. Repair leaks in steam lines. 5. Insulate steam lines, boilers, retorting equipment and other process equipment. 6. Consider around the clock operation a few days per week instead of one or two shifts per day to eliminate start up time and further reduce Operation of equipment when actual processing is not being conducted. The firm may also consider shifting to processing other products that require less energy but can still utilize the existing technology of the plant. More specifically, a shift to processing products which are valued higher in relation to their cost of production may be con- sidered in the short run if existing plant equipment can be used. In the longer run a variety of energy saving technologies asso- ciated with similar or different products than were processed previously may be considered. These technologies would change the production func- tion, input combinations and the expansion path of the plant. The con- ceptual issues and a procedure for evaluating these possibilities will be examined in detail in a subsequent section of this chapter. Food processing firms also have a few other adjustment alterna- tives even though they may not be particularly pleasing. One possibil- ity is to absorb the higher operating costs associated with the in- creased cost of energy inputs without reducing output and live with a reduced profit margin. Another alternative is for the firm to try to get control of its input costs by lobbying regulating agencies for some 45 type of price break or associated tax breaks. This would generally be done as a member of a larger association of firms within the in- dustry. Therefore, except for firms at the margin, the relative com- petitive advantage of any particular firm may not be substantially changed by this type of activity. Finally, as a last resort, the firm could cease production and salvage its assets. In summary, there are several options a firm has for adjusting to rising energy input costs. The potential of these options is limited by the type of production function or technical relationship dictated by existing technology and the structure of the industry. The adjustment options are: 1. Substitute a cheaper energy input for a more expensive one where possible. 2. Reduce the amount of energy inputs used by substituting other inputs where possible. 3. Reduce amount of energy inputs by shifting to products which are less energy intensive. 4. Shift to products which have a higher value to energy cost ratio. 5. Reduce energy use and produce at a lower level of output. 6. Continue to produce at the same level of output and ab- sorb increased Operating costs and accept a lower profit margin. 7. Conserve energy and reduce waste by establishing improved housekeeping and maintenance practices. 8. Lobby or try to influence regulatory agencies. 9. Discontinue production and salvage assets. 10. Invest in new energy saving technologies which will change the production function and therefore the optimal input combinations. 46 Technology Replacement As mentioned previously, investment in a new energy saving tech- nology is one possible adjustment which may be chosen in the long run. Retortable pouches and the associated equipment for processing each individual pouch is a different technology than currently exists in traditional food processing plants. Therefore the issue of the econom- ic feasibility of the retort pouch involves the question of replace- ment: that of a new technology for an existing technology. Processors who are going to use retortable pouches in the future are required to invest in new durable assets and disinvest existing durable assets. In this case, durable assets are processing machinery such as fillers, sealers, cartoners and retorts. Different amounts and types of variable inputs will also be associated with the new technology for use with the durable assets services. The new technology will have a different production function and cost structure than the previously existing technology. Although an energy saving technology will have lower costs associated with variable energy inputs, the costs of the other variable inputs in production and the investment required for the purchase of the durable assets may be substantial and needs to be considered. The evaluation of the question to invest in a new technology or not is difficult because it involves evaluating the costs and benefits attributed to the new technology, not only in the current time period, but in the future as well. Baquet (1980), reports that decisions con- cerning the acquisition and/or disposal of durable assets are inher- ently different from decisions regarding the acquisition of nondurable 47 assets. Durable assets which are typically available in large fixed units are capable of being used in a number of production periods. Thus decisions regarding the acquisition and disposal of durable assets require information about future production periods. Nondurable assets are used up in the current production period and decisions regarding their purchase do not require information about future periods. Durable assets effect the firm's ability to respond to changing economic con- ditions and the decision maker could have to bear the responsibility for his decision for a considerable period of time because the capital expenditure may involve relatively permanent commitments that can in- fluence the profitability of the firm in the long run. Replacement Theory Reviewed Asset replacement criteria under the assumptions that the firm is motivated to maximize profits and also exists in an environment of certainty has received considerable attention in economic theory litera- ture in recent years. Vernon Smith, (1961) reports that this body of theory had its origin in two papers by J. S. Taylor, (1923) and Harold Hotelling, (1925). Taylor conceptually identified the costs associated with using a durable asset in production over a period of years. He also determined that the optimal time period to hold the durable asset in production would be where the average unit cost of the output of the durable over time would be minimized. The average unit coSt of output was related to the acquisition price of the durable asset, its salvage value at the end of its service life and the costs associated with maintaining the durable asset during each production period. Smith also reveals that Hotelling reworked Taylor's theory to add profit 48 consideration to the analysis. Hotelling proposed that the owner of the durable asset wished to maximize the present value Of its output minus its Operating costs. The optimal time period to hold the durable asset was the period that maximized present value of net returns to the durable. Preinreich, (1940) reports that neither of the previous authors defined what the limitation of their methods were. However, he deter- mines that they are only valid under static conditions where the exist- ing durable would be replaced by another of identical type and operated‘ under the same economic conditions. Preinreich goes on to point out that the Taylor method is also invalid when the existing durable is not to be replaced. The value of the product must be considered as well as the cost of producing the output when determining how long to keep the durable in production. The author also reveals in his dis- cussion of the previous works limitations that the economic life of a single durable cannot be determined without consideration of the economic life of all durables in the chain or replacement over the firms planning horizon. Therefore the criteria becomes one of maxi- mizing the present value of net returns to all durables in the re- placement chain. Terbough, (1949) contributes to the develOpment of replacement theory by emphasizing the effect of dynamic external technological change on the decision process as well as internal deterioration of the durable. Terbough states: The majority of durable goods require during their ser- vice life a flow of maintenance expenditures, which as a rule rises irregularly with age and use. Most of them suffer a deterioration in the quality of their service as time goes on. Moreover, in a dynamic technology such 49 as ours, they are subject to the competition of improved substitutes, so that the quality of their service may decline relative to available alternatives even when it does not deteriorate absolutely. In other words, the existing durable should be evaluated against the performance of the latest technologically advanced durable. The cri- teria for evaluation should include these technologically advanced durables in the replacement chain. Faris, (1960) was one of the initial works to appear which dealt with replacements of assets pertaining to agricultural systems. Faris identified the Optimal replacement strategy to use when replacing an asset where the only revenue derived is by the sale of the asset. The principal of Optimum replacement for a firm with a long production period and returns being realized by the sale of the asset is that replacement should take place when the marginal net revenue from the present enterprise is equal to the highest amortized present value of anticipated net revenues from the enterprise immediately following. This criteria can also be used where revenue is received from the en- terprise throughout the economic life of the asset. Smith, (1961) in addition to reviewing the development of the theory in its early stages, questions the need for developing the theory in terms of profit maximization. He reveals that if neither output or price of the output is influenced by the replacement deci- sion then the decision can only be influenced by the associated costs Of using the durables under evaluation. In other words, if a durable is replaced with a durable of equal capacity, there would be no effect on the price of the output and therefore on profit that could be at- tributed to output price alone. Profit could be affected however by 50 a different cost structure attributed to the replacement but this could be handled under a purely cost minimization criteria. He de- velops a criteria using cost minimization where obsolescence and deterioration affect only Operating cost per unit of output and not the level of output. Smith's criteria is not entirely correct. In the long run, be- cause a different cost structure attributed to the replacement would effect the profit maximizing criteria and the level of output and therefore market price of the output. However, the criteria should serve for a single firm in an atomistic industry where internal pro- duction decisions will not effect market price. Smith also gives an excellent review of the intertemporal con- siderations for replacement. If the firm's planning horizon extends beyond the life of a single replacement, a sequence of replacements must be examined. Postponing Of replacement will permit the adoption of more technologically advanced equipment at a later date but also burdens the firm with rising operation costs of the existing equip- ment. Additionally there are three Opportunity costs which are at- tributed to delaying replacement. As a result of holding a durable asset for an additional production period, it suffers a decline in salvage value and the return foregone from the salvage proceeds. Further delaying replacement will likely lead to installation of du- rable assets with lower operating costs when technological change is occurring. However, the initial purchase price of the new durable may increase from one period to another. 51 A summary of the functional relationship between operation costs of the replacement durable and several factors which appear to be based on the previous work of Terbough is also given. The operating costs of a replacement durable are a function of the utilization rate of the durable, its age and the time, a proxy for the state of advancement of the durable, at which it is acquired. Operation costs are assumed to increase with the utilization rate of the durable and its age. The state of advancement of the durable asset is assumed to influence the Operation costs negatively, in that the more advanced the durable is, the lower the underlying Operating cost structure. Smith's criteria for replacement of the existing durable without accounting for revenue consideration directly is based on cost mini- mization taking account of the previously mentioned costs. When the cost of holding the existing durable asset for another production period is equal to the uniform equivalent of all future durable ex- penses the existing durable asset should be replaced. Perrin, (1972) presents a general model of asset replacement which accounts for Opportunity costs. He suggests that to determine the optimal replacement age of durable that will be replaced by an improved durable, one must first determine the present value stream of the earnings associated with the "challenger" or durable asset to be acquired to replace the "defender," the durable asset currently in use. Using Perrin's notation the stream of earnings associated with the first challenger in the string of replacement assets is 52 (3.4) C(b, s, l) = f5 R(t) e") (W) dt + M(s) e'P (S'b) - M(b) b and the present value of the entire stream of replacements would be 1 (305) C(O, 5: 0°) = ‘l_e'ps C(O, $9 1) where C(b, s, m) = the present value of the stream of residual earnings from a challenger to be purchased at age b and re— placed at age 5 by a series of m identical chal- lengers. R(t) = current revenues less costs from the process when the durable asset is age t. M(s) = salvage of the durable at age 5. M(b) = acquisition cost of the durable at age b. p = the interest rate. Equation (3.5) is an expression for the present value of a perpetual annuity of amount C(o, s, 1) received every 5 years. In other words the present value of all the replacement assets in the stream are based on being identical to the first asset in the stream. Taking the deri— vative with respect to s and setting it equal to zero to determine the replacement age which maximizes the present value of the returns from the chain of replacement durable assets yields (3.6) R(s) + M'(s) = P[M(s) + C(o, 5, 0°)] where the value maximizing replacement age 5 is the age at which mar- ginal revenue (residual earnings plus changes in the asset value for the first asset in the chain) equals the marginal opportunity costs (defined as the interest which could be earned by salvaging the asset in existence and the interest which could be earned on the returns from the replacement chain of assets which is postponed each period 53 the asset is not replaced). Perrin states that the greater these fu- ture earnings are, the sooner the firm will replace the current asset. In the case where there is a durable asset in existence, a defender, the criteria of optimal replacement is essentially the same. The defender should be held until the net earnings of the defender plus the changes in the defenders salvage value equal the opportunity costs of postponing the replacement. The opportunity cost is the interest which could be earned from the salvage value of the defender plus the interest on the present value of returns from future replacements. The replacement criteria is (3.7) R(c) + M'(c) = P[M(c) + C(o, s, 00)1 where c is the period in which the defender is salvaged. In most real world replacement evaluations, net revenues and mar- ket values are observed as discrete annual levels rather than as con- tinuous functions of time. Additionally, income tax regulations and investment credits can affect decisions of replacement of durable assets. Tax credits received for the investment in a durable asset can significantly reduce the price of the durable for evaluation. Tax considerations and discrete observations need to be accommodated in an approach for evaluation of real world replacement issues. Chisholm (1974) and Kay and Rister (1975) present discrete time replacement models with tax considerations and apply them to optimal replacement decisions for farm machinery. Chisholm states that be- cause of the severe problems of measurement of returns attributed to a particular durable, the model is formulated in a cost minimization fashion. The model developed as presented by Kay and Rister is presented in equation (3.8). (3 where: .8) The 54 l -n n -k W = ————— [(C0 - CIn (1+r) )+ (1-T) ( 2 Rk(l+r) ) ” l-(1+r)'n - T(A (1+r)‘])- T( ’2 D (l+r)'k) - I (l+r)']] n k=1 k n k=1 the present value of costs of a perpetual replacement policy of N years after tax discount rate acquisition cost of the challenging durable value of challenging durable at the end of the nth year in constant dollars the marginal income tax rate kth repair cost in year in constant dollars additional first year depreciation which can be taken with a replacement policy of N years regular depreciation in kth year investment credit which can be taken with a replacement policy of N years model assumes that the resale value is equivalent to the depreciated book value when replacement occurs. If resale value did exceed the depreciated book value, then the difference would need to be added to taxable income in the year replacement occurred. Operationally the authors suggest that the optimal time period be selected by evaluating the present value from t=l...N until the amortized cost is minimized. This cost is then compared to the cost of Operating the defending durable for an additional production period. If it exceeds the amortized cost of the challenger's stream, then re- placement should occur. 55 This particular formulation allows for consideration of income taxes. The after-tax present value of the sum of Operation costs which are a function of machine age are included as well as the present value of tax savings from depreciation and investment credit. Income and expenses after tax considerations are equal to (l-T) multiplied by the before tax level of income and expenses, where T is equal to the tax rate. Depreciation and interest credit advantages after taxes are equal to (T) multiplied by the before tax level of depreciation and interest. Further, by reformulating the amortization factor to allow for the discount rate in the numerator, the formulation allows the replace- ment criterion to reflect the opportunity cost of postponing the re- turns which would be realized from the next durable in the stream. This is consistent with Perrin's suggestion. Robison (l980), identifies five costs associated with durable asset use in a production process which may be considered in replace- ment analysis. Three of these costs are related to the passage of time and are: control costs, time depreciation costs, and replacement op- portunity costs. The fourth and fifth costs are user costs which are a function of both the amount of services extracted from the durable as well as time. A direct user cost is defined as the value of the durable's capacity or services used up in the production process in a particular period. The user cost depends upon the rate of utilization of the durable. The utilization rate of the durable effects its lifetime capacity and therefore the period of time the durable would be held 56 in service. The greater the utilization rate, the greater the loss in the durable's value in the current period because of its use. There is also a user cost associated with the passage of time which is de- fined as indirect user cost. This is the value of future durable ser- vices foregone because of current use (Robison, 1980). The control cost is defined as the Opportunity cost associated with money used to purchase the durable and maintain it in production over several periods. It is the amount which could be earned from that money in the next best investment alternative. Interest costs associ- ated with financing the purchase of the durable could be used as a proxy for this Opportunity cost. The second cost associated with the passage of time is the time depreciation costs. The value of a durable changesover time because of physical deterioration, inferior perform— ance compared to technologically improved durables and imperfect mar- kets for buying and selling durables of various ages. Because of some combination of these factors the durable asset's value depreciates over time. Robison refers to the third cost which is a function of time as the replacement Opportunity cost. The opportunity cost is that which is associated with the delay of receiving benefits from a replacement durable. This cost is only relevant when services from a replacement are considered as an alternative to the durable or equip- ment complement in use. Although it is recognized that the determination of the Optimal rate of extraction of services from the durable and maintenance levels in each production period are important they will not be dealt with in this study because of the extremely difficult and uncertain process of determining them. A constant rate of services from the durable over 57 some fixed production period is assumed. From an Operational point of view, food processing equipment can Operate over a range of utiliza- tion rates. However, in practice this range may be sufficiently small enough to ignore its relevance. Further the amount of operation or service extraction durables may be subject to in a production period may be determined by factors exogenous to the firm. The size of a particular fruit or vegetable crop and the frequency of delivery to the plant can not be totally controlled by the processors. It is likely that the firm's fixed capacity in some years may not be totally used simply because the size of the crop for processing may be small. Although the processor may desire to Operate at a higher level, the raw product is unavailable. Other resource supplies may have the same effect if not controlled entirely by the plant manager. The assumption concerning fixed extraction rates would appear to be suitable for making preliminary comparisons concerning the economic feasibility of different technologies. Where specific Operating levels for particular durables in service, under actual operating con- ditions are trying to be determined for Optimizing returns, variable rates of service extraction and particular maintenance levels would become more important to consider but nonetheless difficult. Study Approach for Replacement Analysis The approach used in this study is similar to the discrete time replacement models presented by Chisholm (1974) and Kay and Rister (1975). A present value replacement criteria will be calculated using equation (3.9). The computer program for Operationalizing the cri- teria is presented in appendix B. 58 ____lL____ - n - (3.9) APVFDN = 1-(l+r)'N [ co - cN (1+r) N + (l-T) kg] Rk (1+r) k) n - T( 2 Dk (1+r)'k)- 1N (i+r)" + T(BCk (1+r)'k)] k=1 where: APVFDN the amortized present value of costs which are a function of the age of the durable with a perpetual replacement policy of N years r = after tax discount rate Co = acquisition cost of the challenging durable CN = value of challenging durable at the end of the Nth year in constant dollars T = the marginal income tax rate Rk = maintenance cost in the kth year in constant dollars Dk = depreciation in kth years IN = investment credit which can be taken in first year with a replacement policy of N years BCk = balancing charge which adjusts for the possible dif- ference between resale value and depreciated book value The optimal time period for holding the durable will be selected by evaluating the present value from t = 1...N until the amortized cost is minimized. Once the optimal t is found the additional costs asso- ciated with operating the durable which are not a function of the age of the durable must be calculated. In this study the costs which are not a direct function of the age of the durable considered are described by equation (3.10). 59 r n -k n -k (3.10) APVNDN =-——————:N-[(l-T) ( Z Ek (1+r) + Z Lk (1+r) l-(l+r) k=1 . k=1 n -k n -k n -k + Z INTk (1+r) + 2 INk (1+r) + .2 0k(l+r) )] k=1 k=1 k=1 where: . APVNDN = the amortized value of costs associated with operat- ing the durable which are not a function of the age of the durable. Ek = costs associated with energy use in kth year in con- stant dollars Lk = costs associated with labor use in kth year in con- stant dollars INTk = interest charges in kth year on a loan associated with acquisition of the durable INk = insurance cost in kth year in constant dollars 0k = all other costs in year k associated with operating the durable which are not a function of its age (in this study such costs as containers and transporta- tion charges are included here). These costs which are not a function of the age of the durable are amortized over the economic life of the durable which was deter- mined by the previously described process using equation (3.9). The two amortized cost figures are then summed to find the total amortized costs associated with using the durable over its optimal life (equation 3.11). This cost is then compared to the total costs which are asso- ciated with purchase and operation of other new alternative processing techniques. If more than one alternative is being considered the amortized values of all the alternatives can be compared. The alter- native which has the lowest amortized value should be selected. (3.11) TPVN = APVFDN + APVND N 60 If the objectives include evaluation of the question of whether or not the currently Operating processing technique, the defender, should be replaced with a new technique, a challenger, the evaluation criteria for selection of the least cost alternative is somewhat dif- ferent. Evaluation of the replacement question initially follows the previously described approach. Equation (3.9) would be evaluated for the minimum amortized cost associated with the age of the durable equipment. The optimal economic life of the durable is found where the amortized costs are a minimum. Again, once the optimal time period is estimated and the minimum amortized costs found the additional costs associated with operating the durable and the production process which are not a function of the age of the equipment must be calculated. For evaluation of the replacement issues these costs are estimated using equation (3.12). (3.12) PVNDk = (1-T) [Ek (1+r)'k + Lk (1+r)'k + INTk (1+r‘)-k + INk (l+r)'k + 0k (l+r)'k] where: PVNDk = the present value of costs associated with Operating the durable which are not a function of the age of the durable in the kth year Ek = costs associated with energy use in the kth year in constant dollars Lk = costs associated with labor use in kth year in con- stant dollars INTk = interest charges in kth year on a loan associated with acquisition of the durable INk = insurance cost in kth year in constant dollars 61 Ok = all other costs in year k associated with operating the durable which are not a function of its age (in this study such costs as containers and transporta- tion charges are included here). These costs which are not a function of the age of the durable are estimated on an annual basis over the economic life of the durable which was determined by evaluation of equation (3.9). The minimum amortized cost is then summed with present value of costs associated with Operation of the production process which are not a function of the age of the durable in the current production period (equation 3.13). (3.13) TPV = APVFD k N + PVNDk This cost is then compared to the total costs which are associated with operating the defending durable for an additional production period. If the total costs associated with the challenger are less than that of the defender then replacement with the challenger should be con- sidered. If the total cost for the challenger is less than the total kth years from 1...N where N is the opti- costs for the defender in all mal life of the challenger, the replacement should be made. However, if the total costs associated with the challenging process are less than that of the total costs of the defending process only in a few production periods and not all of them, an alternative evaluation pro- cedure needs to be considered. If the total cost associated with the challenger in all periods is greater than the total cost associated with the defender in all periods, replacement should not be considered for the current production period. The analysis can then be repeated for each of the following production periods. 62 Discount Rate Selection The approach suggested here involves discounting all flows over the economic life to a present cost and annualizing this cost by amor- tizing the present costs over the expected economic life. Discounting is necessary because a dollar's value at some future date is worth less than a dollar in the present. This is true because of the oppor- tunity of investing money in the present to yield some return in the future. Therefore returns or costs associated with various future periods are not comparable unless converted to a value at a specific point in time. In this case, the present. The present costs associ- ated with a stream of costs through future periods is that stream of costs discounted to the present period. To discount costs an appro- priate discount rate must be determined. Several rates may be selected. These rates are based on the cost of borrowed capital, a weighted cost of borrowed capital and equity capital, and a firm's expected or mini- mum rate of return for investments undertaken. In this study the cost Of borrowed capital will be used for the discount rate. This rate was selected because it has been suggested that most fruit and vegetable firms would obtain commercial loan money for purchasing equipment for the type of investment under evaluation in this study.3'] To correctly account for inflation, real cost flows should be discounted by a real discount rate and cost flows which are not in con- stant dollars should be discounted with a nominal rate. Watts and 3'IPersonal comnunication with Comptroller, Michigan Fruit Canners Division of Curtice-Burns Inc. 63 Helmers (1979) report that for annual compounding the relationship of the real discount rate rr, the rate of inflation ri and the nominal discount rate mr, are as presented in equation (3.14). In this study the costs are in terms of real dollars, therefore, a real discount rate will be used. This rate will be estimated using equation (3.14). (3.14) rr = I€$—?§-- l The nominal rate is determined by the interest rate on long term commercial and industrial loans. The inflation rate is determined from the average annual increase in the gross national product deflator over the last several years. Because the cost streams are calculated as after tax flows in this analysis the discount rate must be adjusted to an after tax basis. The before tax discount rate must be multiplied by (1-1) to determine the after tax discount rate. T is the marginal income tax rate. Uncertainty Decision making concerning investment and disinvestment in du- rables involves evaluation of uncertain conditions. Estimates of the capital requirements and the cash flows over time which are necessary for evaluating equations (3.9)--(3.12) have some degree of uncertainty associated with them. Each alternative investment and the values assigned to the parameters of a model to estimate cash inflows and out- flows are subject to different amounts of uncertainty. It is not gen- erally appropriate to assume that for each future period the cash flows have single value estimates. Hopkins et al, (1973) states that it may be more realistic to describe an investment in terms of a range of possible outcomes and 64 introduce the dimension of risk by examining the characteristics Of that range. These risk characteristics are based on probability theory and statistical techniques. Methods are available for including vari- ance, skewness, and expected values of a distribution of cash flows in an investment analysis. One of these techniques is referred to as Monte Carlo simulation. Monte Carlo simulation involves specification of probability distributions for the parameters that most influence investment feasibility. A series of randomvalues are then generated for these parameters based on the previously specified probability density functions. These values are then used to calculate the cash flows and present value of the investment. With a large number of repe- titions of this procedure a probability density function of present values for the investment can be determined. This additional informa- tion is useful for the manager to evaluate the risk associated with different alternative investments. A range of present values is avail- able with an associated probability at each specified level within the range. The manager can then evaluate the alternatives with reference to his particular preferences concerning risk and uncertainty. Hopkins et al, (1973) reviews two other alternatives for incor- porating uncertainty into the investment analysis procedure. These two procedures are basically adjustments of the single valued estimates of a present value estimate and are known as the Discount Rate Adjust- ment and Certainty-Equivalent method. According to the discount rate adjustment method the discount rate being used in the present value analysis can be adjusted upward to reflect investment alternatives which are uncertain or known to have comparatively more risk associated within them. Everything else being constant, a higher discount rate 65 would deliver a lower net present value of an investment than a lower discount rate. Different discount rates will reveal different values for the net return from the investment, however it is difficult to con- sistently choose an appropriate discount rate which reflects the risk associated with the investment. When the present value analysis is being conducted on cost streams alone, the discount rate would be adjusted downward to reflect the uncertainty associated with the in- vestment. A lower discount rate would deliver a higher present value of costs than a relatively higher discount rate with all other things constant. Certainty-Equivalent techniques have the discount rate reflect only the time preference of money and not variations in risk. The risk adjustment should occur in the cash flow or the numerator of the present value equation. The adjustment coefficient ACM in equation (3.15) takes on a value between 1.0 and 0.0 depending upon the degree of risk associated with the investment. n ACm(Ym ' Cm) (3.15) PV = mEO (1+r)m where: PV = present value of the investment Ym = income in year m from the investment Cm = costs in year m associated with the investment r = discount rate n = economic life of the investment ACm = risk adjustment factor in year m Hopkins et a1, (1973) reveal that the adjustment coefficient ACm can be 66 interpreted as the adjustment factor which would lead the manager to regard the projected cash flows from an investment as equal to a cer- tain cash flow as Opposed to an uncertain cash flow. The coefficient ACm is equal to 1.0 when the cash flow is certain and something less than 1.0 when it is uncertain. A risk adjustment factor which ap- proaches 0.0 would indicate a very high risk. When working only with cost streams an adjustment coefficient range which varied between 1.0 and 2.0 could be used to compare alternative investments. In this case the more risky the investment the greater the value of the adjust- ment coefficient. In other words, if the gross returns are assumed to be equivalent for the possible investment alternative but there is uncertainty associated with their costs streams the allowance for risk would be operationalized by increasing the level of the costs and thereby decreasing what the net return would actually be if it were calculated. Both the certainty-equivalent and risk adjusted discount rate approach have the same weaknesses. The present values associated with certainty and varying degrees of risk can be compared, but they rep- resent single-valued estimates of the expected return from alternative investments adjusted for risk using a quantitative measure based on limited subjective judgment. Another approach exists for attempting to deal with uncertainty in the estimation of cash flows which are essential for evaluating equations (3.9)-- (3.12). This approach, the one which will be used in this study, recognizes that many investments have more than one possible outcome and will utilize a range of possible cash flows. 67 Different cash flows will be generated by using a range of values for the important variables in the analysis. This will allow for a range of values to be evaluated using the investment or replacement criteria previously outlined in this chapter. This alternative allows for ex- amination of the evaluation under a wide range of conditions and in- dicates how sensitive the results are to changes in individual values used in the estimation of the cash flows. CHAPTER IV MODEL DEVELOPMENT AND PROCEDURE FOR CONSTRUCTING COST ANALYSIS Systems Approach According to Manetsch and Park (1979), a "systems approach" is a problem solving methodology which begins with an identified set of needs and has as its result an operating system for satisfying the set of needs which is acceptable in light of the trade-Offs among the needs and resource limitations that are accepted as constraints. The sys- tems approach seeks to include those factors which are important in arriving at a solution to the problem and makes use of quantitative models and often computer simulation of those models in a decision making framework. This study uses the systems approach for the eco- nomic evaluation of retort pouches as a new replacement packaging technology. The economic evaluation of a new technology requires the examina- tion of the larger process of which it is a component. Further, it requires the identification of the interrelationship of the technology components inputs, outputs of the process, their values, and how they change over time. The relationship between process components and the inputs and outputs to and from the components constitute a system. More generally, a system is a set of interconnected elements organized toward a goal or set of goals (Manetsch and Park, 1979). A system can be defined to be large, such as the food system, or small, such as a 68 69 food processing plant. Subsystems, such as a processing plant, con- tribute to the structure of a larger system--the food system. A system can be modeled for use in a problem solving or decision making process. A model is an abstract representation of a real world system which represents those aspects of real world behavior which are important in the problem solving or decision making process. This study incorporates the use of a mathematical model of a subsystem of the larger food delivery system. The subsystem under study is outlined in figure l-l. Once the general objective is decided upon and the problem de- fined the next step is selection of the system boundaries. The system boundaries that are selected are a function of the objective of the research and the experience of the researcher in identifying the im- portant components of the system and the system inputs and outputs. The boundaries for this study contain the components outlined in figure 1-1. These boundaries are selected because the issues related to package costs, transportation costs, processing equipment investment requirements and operating costs are the primary components of the larger food delivery system to consider in an initial economic feasi- bility analysis of the retort pouch. Although it is recognized that the cost of the pouch is influenced by retailing and home preparation considerations, the initial concern centers around the issue of whether pouch packaging costs are at least closely competitive with the can in the commodity processors' realm of Operations. Alternatively, a study of the processing plant alone would not be comprehensive enough be- cause the processor does have to deal with package, transportation and 70 distribution cost issues. This is not to say that marketing issues are not important but that the costs associated with using retort pouches for packaging commodities in the parts of the system outlined in figure 1-1 are of significant concern at the present time. Com- modity products are generally homogeneous in nature and are processed by a large number of firms that compete on production and distribution efficiency in terms of minimizing cost and not on expensive and far reaching marketing programs. If the major costs associated with using retort pouches in the components of the system in this study, (figure 1-1) are not somewhat competitive with the traditional canning method, then the issues associated with marketing pouches as opposed to cans would appear to currently need little consideration. However, if a retort pouch packaging system described by figure l—l appears to be cost competitive with a canning system, the marketing and home prepara- tion issues should definitely receive further consideration. This study uses the structural approach to systems model build- ing in that it attempts to represent a detailed system structure. The approach divides a system into its component parts and builds a mathematical model that simulates the costs associated with each com- ponent and its relationship to other components within the system. The first task after the system boundaries were selected and the tech- nology components identified was the identification of design para- meters. The design parameters are such things as capacities and pro- duction rates, which are associated with the flow of resources and products through the system. Controllable inputs and their substi- tutes in the system which are important to the analysis were 71 identified in conjunction with the design parameters. The relationship between the flows of inputs to the system, within the system and out- puts from the system are quantified per unit of time. The controllable inputs values such as cost and price are established on a per unit basis over the time period the analysis is to take place. Finally, alternative technology components which could potentially be compo- nents of the packaging system were identified. Their design parameters, input and output flows and their values, were also determined in order to evaluate changes in system design. In this particular study operating costs are of primary concern. Three system models are used to simulate or generate the costs asso- ciated with alternative packaging systems as a function of time. These models were developed specifically for simulating the costs of proces- sing, packaging and transporting fruits and vegetables in accordance with a currently existing canning system, a new canning system and a new retort pouch system. By examining different alternatives or sce- narios which include changes in the technology components, design parameters, internal resource flows, controllable inputs and values of these inputs, a range of Operating costs are determined for evalua- tion of the systems costs under different Operating situations. Selection of Existing Processes for Modellipg. For this type of research to be of general application it is necessary that the processing component of the models constructed for use in the economic evaluation of retort pouches versus cans be based on typical fruit and vegetable processing plants. Initially, Michigan Fruit Canners in Benton Harbor a division of Curtice-Burns Inc. was 72 consulted in an effort to pursue selection of typical plants. It was their Opinion that the National Food Processors Association (NFPA) would be most helpful in this regard. Of major concern was that energy consumption and flow information would be available for the processing Operations selected. This data was necessary to determine if retort pouch adoption is particularly sensitive to rising energy prices. The National Food Processors Association in Berkeley, California was con- sulted concerning this matter. They revealed that the Departments of Agricultural Engineering, Food Science and Technology and NFPA had COOperated in several energy accounting studies concerning fruit and vegetable processing plants. The information collected in these studies is presented in Chhinnan'and Singh (1978), Carroad and Singh (1980) and Singh and Carroad (1979). These three studies contain an energy ac- counting for the processing of spinach, peaches and tomato products. The peach and spinach processing plants were selected from the three studies available for use in constructing the processing compo- nent of the models. They were selected because of their different characteristics in relation to type of process, labor intensiveness and rate of production. The spinach processing plant is a relatively labor intensive plant that has non-continuous batch retorting process. It also has a lower output per hour and shorter processing season than the peach plant. The peach plant processing line Operates for an average of 40 days a year while the spinach line Operates approxi- mately 20 days a year. A continuous rotary retorting Operation is used in the peach processing line. Further details concerning the existing processing lines are presented in the following sections of 73 this chapter. The two processing plants selected for use in con- structing the processing component of the packaging system models should be suitable and present sufficient contrasts for comparison in this initial study of the economic feasibility of the retort pouch. Fruit and vegetable commodity items are useful in setting the more restrictive or demanding case for evaluation of the retort pouch packaging system in terms of cost effectiveness. It is felt that fruit and vegetable pouched products would have to receive a price very close to the currently existing canned product price to be market competitive. Fruits and vegetable products are comparatively low valued to other types of items which have received attention for re- tort pouch packaging. Fruits and vegetables would generally not be expected to derive a significantly higher value in the market place because of the change in processing and packaging technology. Im- proved product quality and a lighter more convenient package may con- tribute to the product being valued higher, but a significant change in value for commodity items is unexpected. Therefore, the chance of an increased return from fruit and vegetable pouch products does not complicate the analysis. Meat entrees, gourmet sauces and other spe- cialty items would not present a restrictive case or a good comparison because they may be viewed as new products with little or few competi- tors. Further, these types of items are likely to receive a higher price than canned items and also compete in markets where more slack exists in terms of cost competitiveness. The competition in these areas would be centered mainly around advertising, promotion and prod- uct differentiation, not cost effectiveness. 74 Data for formulating a retort pouch processing line and a new canning line and the associated costs of packages and transportation were collected from a wide variety of sources which are referenced in the following text. Any reference to a company or product name does not imply approval or recommendation of the product to the exclusion of others that may be suitable and appropriate. Only those components of the packaging system which were considered to be significantly dif- ferent in terms of costs across alternative systems were considered in the data collection process. The necessary assumption or condition which makes this allowable is that output from the existing canning line and either of the proposed alternatives would be equivalent. This eliminates the need to be concerned with revenue because under the same levels Of output there would be no output effect on revenue for the comparative evaluation. Additionally, if output is considered to be equivalent for all of the alternatives, then rates of flow of energy and other resources and amount of equipment needed in some parts of the packaging system can be considered to be equivalent for either of the alternatives and their cost ignored. The models and results are not necessarily specific for spinach or peach processing. The intent has been to keep the model and the results general enough to make some basic conclusions about the eco- nomic feasibility of the retort pouch and is not intended for any specific commodity. In fact, if the results were to be used for de- signing spinach and peach processing Operations they would be inade- quate because a greater level of detail in some aspects of the proc- essing design would be needed for actual application. This is not to 75 say that the models or the results would be less useful for considera- tion in a detailed study concerning possible investment in new retort pouch or can processing lines. The Packages The containers under consideration for packaging in this study are the retail size metal can and retort pouch. The metal can measures 3-3/16" in diameter and 4-6/16" in depth and is commonly referred to as the 303 can by the food processing industry. Number 303 cans have a capacity of 16.85 fluid ounces and are commonly used to package fruit and vegetable products. A brief examination of the U. 5. pack statis- tics in Section VIII of The Almanac of the Canning, Freezing and Pre- serving Industries (1979) reveals that 303 cans are the most widely used for canning vegetables and are used in significant numbers for processing fruit products. Further, this size container was selected because it is widely used in the existing processing Operations upon which this study bases its model of fruit and vegetable processing. A retort pouch which will allow for packaging the same amount of drained weight of edible product as the comparable size metal 303 can was determined to be 6" wide and 8" long with seal widths on each side of the pouch being 3/8".4" The calculation of the size of the pouch includes the assumption that the extra fluid in the typical canned fruit and vegetable product would be reduced for the retort pouch. 4'1Pouch size is based on a personal communication with the Pro- ject Director of the Flex-Can Program, Flexible Packaging Division, Reynolds Metals Company. Although an American Can Company official estimated the size to be 5" x 7“, it was felt that given the lack of a standardized procedure for establishing retort pouch sizes, the larger estimate would present the more restrictive case. 76 Less fluid is needed in the retort pouch because when air is extracted from the pouch after filling, the pouch conforms to the geometry of the food. This does not happen with cans resulting in a greater amount of fluid needed to fill the can. Air is extracted from the containers in a standard procedure to reduce the chance of bacteria growth and spoilage. It was assumed that the pouch net weight would be 12 oz. although the drained weight would be equivalent to that of the product contained in the 303 can. Berry (1979) reports that 6" x 8" pouches accommodated 12 oz. of corn in brine for determining critical processing parameters in tests which he conducted. I The 6" x 8" retort pouches are approximately .01" thick and re- 4'2 Weight quire less Space in shipping than the 303 x 406 food can. is also significantly different when retort pouches are compared to cans. Less weight and a smaller volume will contribute to comparatively smaller freight costs for transporting empty retort pouches versus cans. Table 4-1 contains a comparison of weight and volumes of the alter- native containers. For distribution of retail size pouches the USDA has stated that an overwrap must protect the pouch to guarantee integrity during ship- ment from processor to consumer. Protective cartons for a 6" x 8" pouch would measure 5-3/4" wide 8" long and 3/4" in depth with each 4.3 wall of the carton measuring .016" in thickness. The weight of each carton would be approximately .79 02.4'4 A group of 1000 cartons 4'21nformation supplied by Reynolds Metals. 4'3Personal communication American Container Corporation. 4"4Based on Kelsey, (1976). See appendix A.1 for further details. 77 gablfi 4-l--Comparison of Weights and Volume for Empty Preformed Retort ouc es Retort Pouches Metal Cans 6" x 8“ x .01" 3-3/15" x 4-6/16" Weight] 15.58 lbs./1000 157.95 lbs./1000 w/carton52 65.19 1bs./1000 Volume] .2778 cu. ft./lOOO 25.72 cu. ft./1000 w/cartons 1.42 cu. ft./1000 1 Based on information SUpplied by Reynolds Metals. See appendix A.1 for details. 2Based on Kelsey, (1976). See appendix A.1 for further details. would weigh 49.61 lbs. This makes the total weight of cartons and pouches, 65.19 lbs./1000, significantly less than that of cans, (table 4-1). The volume a flat carton would require is approximately 1.976 cu. in. or 1.14 cu. ft./1000 cartons. Pouch material instead of preformed pouches can also be purchased for use on retort pouch form/fill/seal machines. These machines form the pouch just before filling occurs. Generally a form/fill/seal machine would be more expensive than a fill/seal machine. However, it would require less labor because pouches would not have to be loaded into the machine as preformed pouches generally are. Each roll of material could contain enough material for approximately 15,000 pouches of the 6“ x 8" size.4'5 The roll stock would be 16" wide and be 4'5Personal communication, Retort Pouch Market Development ' Manager, American Can Company. 78 shipped on a 6" fiber core. The entire roll would be approximately 18" diameter. The weight of 1000 pouches on roll stock would be slight- ly heavier allowing for added weight of the fiber core. Less energy is also used in the production of retort pouches and their protective cartons in total than is used in the production of cans, (table 2-1). Table 4-2 illustrates the difference in energy use for producing the size of containers considered in this study. Table 4-2--Energy Used in Production of Retort Pouches and Cans Energy Embodied Container Per 1000 Container51 Pouches 6" x 8" 3,646,499 BTU Cartons 5-3/4" X 8" x 3/4'l 828,487 BTU Cans 303 X 406 ‘ ‘8,905,884 BTU 1Based on Hoddinott, (1975). As mentioned previously, the costs or value associated with the inputs needs to be established. Retort pouches currently cost less than the metal food can. Estimates of the cost of the 6" x 8" pouch ranged from $50-$100/1000 units. Reynolds Metals Company estimated the cost of the preformed 6" x 8" pouch at $50-$70/1000.4°6 Alterna- tively, American Can Company estimated the costs based on square inches of pouch material. Pouch material would cost approximately 85¢-90¢/ 1000 sq." with an approximate charge of l¢ to 1.5¢ additional for 4‘6Personal communication, Project Director of Flex-Can, Program Flexible Packaging Division, Reynolds Metals. 79 preformed pouches.4'7 Under these circumstances a 6" x 8" preformed pouch could cost as much as 10¢ or $100/1000. Cartons costs range from $20-$30/1000 depending upon the quantity ordered.4'8 A 5 million order or larger would be approximately $20/1000. Prices for empty 303 x 405 cans ranged from $118.16/1000 to $120.55/1ooo."°9 Table 4—3 presents a summary of these costs. Table 4-3--Empty Container Costs (1980) Container Cost $/1000 units Pouch 6" x 8" $ 50—$100/1000 Carton 5-3/4" x 8" x 3/4" $ 20-$30/1000 Can 303 x 406 $118-$120/1000 Transportation Considerations Retort pouches require less energy in transportation and cost less to ship than cans. This is by virtue of the fact that retort pouches weigh less than cans and also require significantly less space in shipment, (table 4-1). Assuming that trucks are used to deliver retort pouches, cartons, and cans to the fruit and vegetable processors, it is possible to estimate the freight costs associated with the con- tainers. A standard 45 ft. trailer truck has approximately 2669 cu. ft. 4'7Personal comnunicati on, Retort Pouch Market Development Manager, American Can Company. 4'8Personal communication, American Container Corporation. 4'9Personal communication, National Can Company. 80 of Space.4'10 The weight limitation for this size truck ranges from 40,000-43,000 lbs.4'I] That is, approximately 20 tons can be loaded if enough useable volume is available. A 45 ft. truck with a 40,000 lb. weight limitation could load approximately 2,500,000 retort pouches or 103,770 metal cans.4'10 One truck could handle 806,289 cartons.4'10 To deliver 2,500,000 units of containers, one truck would be needed for pouches, four trucks for cartons and 25 trucks for metal cans. This represents a significant difference in the cost of transporting empty pouches and their required cartons when compared to the metal food can. Less energy in the form of diesel fuel would be required for shipping empty cartons and pouches than cans. Accord- ing to USDA (1980) a truck with a 22.1 ton weight limitation required 2,550 BTU's/ton-mile. Therefore, retort pouches and cartons, because of their comparably smaller weight, require less energy in transport than cans. Table 4-4 illustrates the amount of energy needed for transportation of the alternative containers. The actual current freight costs to ship the alternative containers is illustrated in table 4-5 for various shipping mileages. . Up to this point the discussion has focused on identifying the characteristics and current values and costs associated with empty containers. The transport costs associated with the filled, processed package are also an integral part of this evaluation. Again retort pouches which contain fruit and vegetable products appear to have an advantage related to the weight of the finished package. Reduced 4’IOSee appendix A.2 for details. 4'nPersonal communication, Yellow Freight Line. 81 1 Table 4-4--Energy Required for Transporting Containers Container _ BTU's/lOOO Units/Mile Retort Pouches 6" x 8" 19.481 Cartons 5-3/4" x 8" x 3/4" 52.011 Cans 303 x 406 189.032 1Based on weights of containers in appendix A.1 and 2,500 BTU's/ton-mile. 2Based on weights of containers in appendix A.1 and 2,251 BTU's/ton-mile. Table 4-5--Freight Costs of Empty Containers (l980) Container Miles Shipped Freight Cost/1000 Units Retort Pouch] 250 s .31 500 $ .42 750 $ .54. 1000 $ .88 Cartons2 250 $ .78 500 $ 1.16 750 $ 1.69 1000 $ 2.77 Metal Cans3 250 s 4.83 500 $ 7.14 750 $ 8.14~ 1000 $11.06 1 Based on one truck of 2,500,000 pouches. 2Based on one truck of 806,289 cartons. 3Based on one truck of 103,770 cans. See appendix A.5 for Raw Freight Rate Data Information. 82 weight will result in comparatively lower freight costs for retort pouch packaged products versus canned products. The Almanac (1979) con- tains tables which list the approximate case shipping weights for vari- ous products in a variety of can sizes. According to these tables the average weight of a case containing 24 303 x 406 cans of fruit and vegetable products weighs 30.7 lbs. Alternatively, a case of 24 com- parable 6“ x 8" x 3/4" pouches of fruit and vegetable products is esti- mated to weigh 22.23 its.4°‘2 This is a 8.47 lbs. difference. Less energy is also required to ship a case of pouched products than a case of canned products. A 22.23 lb. case of pouched products would require 27.79 BTU's/Mile while 30.70 1b. case of canned products would consume 38.40 BTU's/Mile.4'13 The actual current freight costs to ship the processed products packaged in different containers is illustrated in table 4-6. Goldfarb (1971) writes that retort pouched vegetables have been approved for freight rates equivalent to canned vegetables. It is assumed that this rate holds for fruits as well because fruits are currently charged equivalently to canned vegetable products. The initial value used for tranSport mileage in the analysis is 750 miles. This assumes that empty containers are shipped 750 miles from manufacturers to processor and finished products are shipped 750 miles from processor to wholesale distribution centers or warehouses. Barton (1980), reports that the average mileage manufactured food prod- ucts are shipped to the warehouse is 765 miles. Therefore it was 4'IZSee appendix A.3 for details for this estimate. 4'I3See appendix A.3 for details Of this estimate. 83 Table 4-6--Freight Costs of Processed Products Packaged in Retort Pouches and Cans (l980) Container Miles Shipped Freight Cost/1000 Units Retort Pouch1 250 $ 9.63 500 $ 14.45 750 $ 20.52 1000 $ 31.20 Metal Can2 250 $ 13.31 500 $ 19.96 750 $ 28.35 1000 $ 43.10 1 Based on 1799 cases in a trailer truck, 40,000 lb. limit. 2Based on 1302 cases in a trailer truck, 40,000 lb. limit. See appendix A.5 for further details concerning estimates. assumed that 750 miles would be suitable for use as the distance fruit and vegetable products are shipped from processor to warehouse. Due to the lack of information concerning the distance that empty con- tainers are shipped it was initially assumed to be 750 miles. The effect of different transport distances is further analyzed in chapter 5. The Processing Lines This section presents the data which was collected from the two existing processing lines. The data for constructing the models of the necessary components for a new retort pouch and can processing line that are replacement alternatives is also presented. Tables 4—7 and 4-8 present the information needed cOncerning equipment, 84 capital expenditures, labor and energy flows required for modeling of the alternative packaging processes. As mentioned previously, this information is for those components which are considered significantly different from one alternative process to another and have different costs associated with acquisition and Operation. Firm A is based on the existing spinach processing plant and Firm B is based on data col- lected from the existing peach processing plant. The energy requirements listed in tables 4-7 and 4—8 are based on the information in Chhinnan and Singh (1978) and Carroad and Singh (1980). In these studies energy data was collected for several pro- cessing lines which were packing several size cans. This presented a problem because the energy consumption data for processing only 303 cans was what was necessary for this analysis. The procedure under- taken to determine the energy use in processing only 303 cans in each plant is as follows. The plant managers of the spinach and peach processing plants were contacted to determine the average production rate of the processing lines which were packaging 303 cans. Produc- tion rates were determined to be 300 cans per minute for spinach pro- cessing and 360 cans per minute for peach canning. Once this step was completed the tons of product being processed per 8 hour shift was estimated. This calculation was based upon the average rates of production and the drained weights of each product being processed. Drained weights of processed product used in this estimate were 10.6 oz. for spinach and 10.3 oz. for peaches. The result was that 47.73 tons of raw spinach and 55.62 tons of peaches were processed in 303 cans on the respective canning lines per 8 hour shift. The required 235 Table 4-7--Equipment. Capital Expenditures, Labor and Energy Requirements for Processing Alternatives For Firm A at 300 Packages per Minute Electrical Thermal Energy Capital Labor Total Labor Energy Use Use BTU's Number of Expenditure Required Per Kwh's Per Per Operation Units 1980 3 Per Unit 8 Hr. Shift 8 Hr. Shift 8 Hr. Shift Existing Eguipfint Fillers 5 N. A. 15 11.8 Hand Filling- Check Height 20 Exhaust Box 2 N. A. 0 4.5 61747350 Seamer 2 N. A. 2 19.8 Retorts 3 N. A. 1 .24 19633950 Total 38 36.34 81381300 New Canning Eguiggnt Filler l 8 40,000 0 6.0 Can Closer (Steam Closure) l 3 60,000 1 60.0 4457950 Retorts 3 N. A. 1 .24 19533950 Total 3 100.000 2 66.24 24091900 New Retort Pouch Equipment Form/Fill/Seal 5 $1,500,000 5 800 4457950 Retort 3 N. A. l .1 4932200 Dryer 5 3 30.000 0 223.5 Cartoner 2 S 300,000 0 53.7 Additional Inspection 2 Total $1,830,000 8 1077.3 9390150 With Fill/Seal 5 S 700,000 10 132.0 4457950 Total $1,030,000 13 409.3 9390150 86 Table 4-8--Equipment, Capital Expenditures, Labor and Energy Requirements for Processing Alternatives for Firm 8 at 360 Packages per Minute Electrical Thermal Energy Capital Labor Total Labor Energy Use Use BTU's Nunber of Expenditure Required Per KWH's Per Per Operation Units 1980 8 Per Unit 8 Hr. Shift 8 Hr. Shift 8 Hr. Shift Existing Eguipmgnt Fillers 2 N. A. l 2 > 16.17 Seamer-Syruper 2 N. A. l 2 Continuous Retorts 2 N. A. 2 26.95 81286450 Total 6 43.12 81286450 New Canning __§Qfliflflfifl£ Filler l 3 40,000 0 6.0 Syruper 2 S 130,000 0 Can Closer (Steam Closure) l 5 60,000 1 1 60.0 4457950 Continuous Retorts 2 460.000 1 .2 26.95 81286450 Total S 690,000 3 92.95 85744400 New Retort Pouch Equipment Form/Fill/Seal 6 $1,800,000 1 6 960.0 5349540 Retorts 4 S 420,000 1 _ 81286450 Dryer 6 3 36,000 0 268.2 Cartoner 2 S 300,000 0 53.7 Additional InSpection 2 Total $2,556,000 9 1281.9 86635990 With Fill/Seal 6 3 840,000 2 ' 12 158.4 5349540 Total $1,596,000 15 480.3 86635990 87 energy used per ton of product being processed in the respective pro- cessing Operation was multiplied by the estimated tonage to arrive at a value of energy consumption for canning 303 cans in an 8 hour shift. The energy used per ton of product being processed in the respective processing Operations was derived from the energy accounting data re- ported in the previously mentioned studies. Electrical and thermal energy use per shift is reported in tables 4-7 and 4-8. Additional information was also collected from the production managers of the two processing plants from which the energy informa- tion was originally collected. This information included the number of units of each type of equipment in the processing line and the amount of labor required to operate it on an 8 hour shift. This in- formation is reported in tables 4-7 and 4-8. Firm A is a relatively labor intensive plant which requires a significant number of persons in the filling stages of the processing Operation. Exhaust boxes are also used to obtain a vacuum in the con- tainer just ahead of the sealing machine. This Operation consumes a considerable amount of energy. Batch type retorts are used in this thermal-processing system. Firm 8 is comparatively much less labor intensive. Vacuum for closing the can is produced mechanically in the sealing machine and does not require an exhaust box. Further, this process uses continuous rotary retorts for processing the canned prod- uct. Firm 8 uses approximately 15% less thermal energy per ton of product processed than Firm A. Part of this can be attributed to the fact that peaches processed in Firm 8 can be processed at a lower tem- perature than spinach which was processed in Firm A. 88 Once the information concerning the existing canning plants was collected it was necessary to establish what the requirements for equipment, capital expenditures, labor and energy would be if the existing processing lines were to be replaced with new retort pouch equipment or new canning equipment. The information in tables 4-7 and 4-8 concerning the equipment required and the associated labor re- quired is based upon personal communications with package manufac- turers and machinery suppliers. The dollar figures are estimates based on average requirements and should not be considered exact costs because the requirements would vary depending upon the brand of equip- ment and the product being processed. Further, only those pieces of equipment which would be significantly different in each processing line alternative were considered. The Operations concerning raw prod- uct cleaning, washing, blanching and sorting were excluded. Therefore a relative comparison or partial budgeting technique is presented in terms of cost and not total costs. An important assumption in this regard is that the equipment to move cans and pouches from one stage to the other in the process would be essentially alike and cost the same to purchase or modify and to operate. What is assumed for re- placement considerations is that the equipment to move cans in the existing Operation would be suitable or easily modified to move pouches. Additionally, the amount of pouch filling and sealing equip- ment required is based upon the assumption that each machine can oper- ate at a rate of 60 packages per minute. This rate of production is the machine's top production Speed. Alternatively, the canning equip- ments production rate which is required to produce the indicated 89 output is well within its tOp production Speed. These conditions pre- sent the best possible case for Operating a retort pouch processing line. Obviously if a retort pouch processing line for fruits and vegetables does not appear to be economically feasible under these conditions, then the state of retort pouch processing technology would have to be considerably improved. In Firm A the retort pouch processing replacement equipment con- sists of form/fill/seal or fill/seal machines and retort pouch dryers and cartoners. The new replacement canning equipment consists of fillers and can closers or seamers. Retorts are not considered for replacement in Firm A because the batch retorts are suitable for either cans or pouches. Of course the retort carts for holding the containers for processing would have to be replaced or modified for pouches, but this cost is considered to be negligible fOr the purposes of this anal- ysis. Firm B's retort pouch processing replacement equipment also con- sists of form/fill/seal or fill/seal machines, pouch dryers and car- toners. However, because Firm B's existing retort system uses con- tinuous rotary retorts which are unsuitable for pouch prOcessing, new batch retorts would need to be installed for a retort pouch packaging system. In this case four batch retorts would be required to handle the same production rate that the continuous retorts accommodate. The new replacement canning equipment complement for Firm 8 consists of fillers, syrupers, can closers or seamers and new continuous rotary retorts. The energy use in the new continuous retorts was assumed to be equivalent to that of the existing continuous retorts in Firm 8. 90 Retort pouch processing characteristics and performance under actual processing conditions are as yet not as well known as for cans and therefore will receive more quality control attention. An addi- tional two units of labor above that amount used for cans has been allowed for inspection and quality control. When fill/seal machines are used with preformed pouches instead of form/fill/seal machines with roll stock the labor requirements increase. The energy consumption values listed in tables 4—7 and 4-8 for the replacement retort pouch and canning equipment are estimates. The estimates for the filling, sealing, cartoning and drying Operations are based on equipment specifications supplied by the various equip- ment manufacturers. The energy estimates for the retorting Operations are based on the energy use in the existing retorts and processing characteristics of retort pouches. In Firm A the same retorts are used for pouch processing as for the existing can processing operation. The thermal energy use for processing pouches was estimated to be 25 percent of that used for processing cans. A 75 percent reduction in the amount of energy used in the retort was considered to be the maxi- mum energy advantage which could possibly be obtained in the retorting operation. It is generally presumed that the thermal energy require- ments for retorting pouches is significantly less than that required for comparable cans. This is due to the fact that the pouch has a geometry which is more favorable to heat transfer than the can. The Shortest distance from the heating medium to the slowest heating point in a 303 x 406 can is approximately 1.59". This distance is less than .39" for a 6" x 8" pouch. However, there are many other factors which 91 may affect processing time: amount of fill, heating characteristics of the food, heating media, circulation of heating media, container agita- tion and residual air in the container. Manufacturers vary greatly in their estimates regarding process time reduction for food contained in pouches as opposed to cans, these values may range from 30 percent to 70 percent when an equal mass of food is being cooked. To account for the reduced sensible heat requirements (due to brine reduction) and the potential reduction in process time, it was assumed that a 75 percent reduction in thermal energy could be achieved by cooking food in pouches instead of comparable size cans. The thermal energy requirements for pouch retorting were initially estimated for preliminary analysis by multiplying the values used for the existing can process by .25. Be- cause there is a great deal of uncertainty surrounding the use of this estimate a more restrictive energy consumption estimate for pouch retorting was used for all of the analysis which is reported in this study. The thermal energy consumed in pouch retorting is assumed to be equivalent to that amount used in processing cans. Electrical energy use (for compressed air) was assumed to be equal for retorting in either system. In Firm 8 there was considered to be no significant energy saving advantage in the retorting process because the replace- ment involved switching from two continuous rotary retorts to four batch type retorts for processing the same number of containers per minute. Supposedly can agitation in the rotary retorts reduces the process time for retorting cans. Therefore there appears to be little, if any, comparative energy saving advantage when switching from an agitating can retort to a batch retort for processing pouches. Because 92 of this factor and the lack of any documentable data for comparative energy use in continuous versus batch retorts which would be suitable for this study, it was assumed the total thermal energy use in retort- ing pouches and cans would be the same in alternative systems based on Firm 8. Electrical use in the new replacement batch retorts has been ignored because electricity is not needed to turn a rotary retort reel in the batch retorts used for processing pouches. Further detailed research in measuring comparative processing times and energy use for pouches and cans is needed if credible research is to proceed in this area . Estimates of Values For Replacement Criteria.Variables Evaluation of the replacement criteria discussed in chapter 3 requires estimation of the values of the variables found in equations (3.9) through (3.12). These values are a function of time and many of them represent actual cash expenditures. However, some of these such as depreciation, investment credits and balancing charges are non-cash expenditures. These items must be considered in the analysis for ad- justing actual cash expenditures for tax purposes. The cash expendi- tures which are a function of time are referred to as cash flows. In this study those cash flows associated with costs are only considered because the assumption is that the cash flows associated with gross revenue for each packaging system are equivalent. Therefore, the ob- jective is to select the packaging system which has the lowest after tax costs associated with it. This section will discuss the estimation of these cash and non- cash flows which are required for the evaluation of the replacement 93 criteria. Reasonable forecasts of the values of the variables which account for the cash and non-cash flows are crucial as well as difficult to determine. Because uncertainties concerning the future make cash flow projection imprecise it is necessary to proceed with good judgment and credible assumptions. The techniques for forecasting these values are based on past trends and subjective judgments about the future. Although there are many possible techniques and estimates which could be used, the ones described here are deemed apprOpriate and reasonable for the study and Objective at hand. The techniques and estimates for calculating the present value of equation (3.9) will be discussed first and will be followed by a dis- cussion concerning the estimate of equation (3.10). The procedure used for estimating the discount rate and determining the tax rate concludes this section of the study. Capital Expenditures. The cost of purchasing new equipment in 1980 was based on primary data collected from a variety of equipment manufacturers. The expenditures required in 1980 are indicated in tables 4-7 and 4-8. To evaluate the possibility of replacement of old canning equipment with new canning equipment or retort pouch processing equipment in future years the capital expenditures need to be projected for those years. The cost of this equipment in future years is based on the trend in these costs since 1975. Code #1161 of the Producer Price Index is an index for the costs of Food Products Machinery. This index reveals that the average cost for food processing machinery has been increasing at an average rate of approximately one percent per year, in real dollars, since 1975. Therefore, the costs associated 94 with purchasing the equipment will be increased at a real rate of one percent per year to allow for the evaluation of possible replacement of the 01d canning processes with new canning processes or retort pouch processes in years beyond 1980. Salvage Value. Just as there is a cost associated with the pur- chase of durable equipment, there is also a value which may be received for the used durable in the market. The amount of money which can be received in the market for the used durable in any particular produc- tion period is known as the salvage value. A positive salvage value associated with the used durable can be viewed as increasing the posi- tive cash flow or decreasing the negative cash flow for the year in which it is received. The salvage value of the used equipment in this study is assumed to decline with the passing of each production period. Coen (1975) has suggested that the pattern of economic depreciation of equipment used in the Food and Kindred Products Industry, (SIC 20) most closely follows a sum-of-the-yearS-digits pattern. This pattern implies a more rapid depreciation in the earlier years of the durables life than in the later years. This would appear to be intuitively true because of the specialized nature of food processing equipment and the imperfect market conditions for the used equipment. In prac- tice, the salvage value may decline more rapidly than the sum-of-the- years-digits function given in equation (4.1). The effect of a more rapidly declining function on the replacement decision with all other things constant would result in an extended economic life of the durable which is being evaluated. 95 n (4.1) PPV. = (n+1 - i)/ Z i 1 _ i-l where: PPVi = percent of original purchase value which is lost in year i i = year 3 ll number of years in which the salvage value is greater than 0.0. Equation (4.1) is used to determine the salvage value of the new canning and retort pouch processing equipment when n is set at fourteen years. This length of time was estimated by Coen (1975) for the Food and Kindred Products Industry. It was determined to describe the economic depreciation function by the sum-of—the-year-digits pat— tern the best. If the equipment was held in the processing operation for greater than fourteen years the salvage value is assumed to be zero. The salvage value of the existing equipment in the old canning lines is assumed to be zero because in most cases it is substantially older than fourteen years. Maintenance. Another cost which is assumed to change with the use and the age of the equipment is maintenance cost. Presumably, if the equipment is used at a constant rate in each production period the maintenance costs will rise with the age of the equipment. In prac- tice the amount of maintenance costs allowed for a particular piece of equipment which is being considered for purchase is based on 4.14 2-3 percent of the original purchase price. In other words, an 4'14Personal communication, Consultant to the Food Industry. 96 average annual real maintenance cost could be figured by multiplying the original purchase price by .02-.03. Because maintenance costs are assumed to increase with the age and use of the equipment, it was de- cided to use a function which allowed for increasing maintenance costs as a function of the age of the equipment. The function illustrated in equation (4.2) allows for .5 percent of the original purchase cost in the first year of operation. Maintenance charges in the following years increase by .1786 percent per year of the original purchase price of the equipment. Even though the annual maintenance charges are increasing as a function of age of the equipment the maintenance charges still fall within the suggested range of an average of 2-3 percent. Over a twenty-nine year period the average annual maintenance charge is approximately 3 percent. (4 2) not = opp1 x (.003214 + (.001786 x t)) where: MCt maintenance cost in year t OPP1 = original purchase price of equipment in the first year of operation t = time or Specifically year of operation This technique for estimating the maintenance cost was only used for the new canning equipment and the retort pouch line processing equipment. Maintenance cost estimates in 1980 and future production periods for the existing canning processes wére determined in a some- what different fashion. The plant managers who were in charge of Operating the existing processing lines were asked to estimate an an- nual maintenance cost for the specific pieces of the equipment in the processing lines. These estimates are reported in appendix A.9. The 97 maintenance costs for 1980 are assumed to be equivalent to these esti- mates. Further, the maintenance costs for the years following 1980 are estimated by multiplying each previous year's maintenance cost by the equivalent percentage increase for that year found by equation (4.2). It is assumed that any existing processing equipment is twenty- five years old and that the maintenance cost will increase at the same percentage rate described by equation (4.2) for equipment that is twenty-five years old in 1980. Therefore the 1980 estimated mainten- ance costs would be multiplied by the percentage change in maintenance costs, (PMC), where t is equal to twenty-six to estimate the 1981 main- tenance cost associated with the previously existing processing equip— ment. The value of PMC is estimated in equation (4.3). (4.3) PMC = .003214 + (.001786 x t)/.003214 + (.001786 x (t-l)) Additional years maintenance costs are calculated in a repetitive man- ner. Additional details concerning these calculations can be found in the maintenance cost routine in the computer programs presented in appendix B. I Depreciation and Balancing Charge, A straight line depreciation technique is used for calculating the non-cash depreciation expense. The book salvage value is assumed to be zero at the end of the depre- ciation period of ten years. This period is the shortest complete year period which is allowed by tax regulations for the industries in asset guideline class 20.4 (U. S. Master Tax Guide, 1980). This classifica- tion is for industries involved in manufacturing of food and kindred products. Although the book salvage value at the end of the depreci- ation period is assumed to be zero, the actual market salvage value 98 may not be. Therefore if the durable asset is sold in a period where the depreciated book value and the salvage value are not equivalent, a balancing charge adjusts the cash flow estimates for that period. If the salvage value exceeds the depreciated book value the difference between the two is added to the costs for that period. If the salvage is less than the book value the difference between the two values is subtracted from costs for that period. If the depreciated book value which is calculated for tax reasons is always equivalent to the salvage value then no balancing charge is needed. However, it is comnon prac- tice to depreciate the book value of the asset sooner than what the actual salvage value may be for that asset. The balancing charge ad- justment allows for flexibility in that the two functions, that of salvage value and depreciated value, can be different. This also pre- cludes the necessity of assuming the depreciable life and economic life of the durable assets are equivalent and guesstimating the eco- nomic life as opposed to empirically solving for it. Investment Credit. According to Section 1178 of the Master Tax Guide (1980), a credit for investment in depreciable personal property against federal income tax is allowed. This amount may be as much as 10 percent of the purchase price of the asset. The limitations involv- ing this credit require that a firm cannot drive its tax liability to zero by using the credit. If a firm does not have enough tax liability to write off all of the credit in the year when the asset is purchased the remaining amount can be carried over until the 10 percent is used. However, no more than 10 percent can be used and it can only be used once for reducing the firm's tax liability. In addition, if a 10 99 percent tax credit is taken the asset must be held in production for a minimum of seven years. If it is held for a shorter period than seven years then less than the l0 percent investment tax credit is allowed. If the asset or durable equipment in this circumstance is held for five- six years only 6.6 percent is allowed. A three-four year period allows 3.3 percent and any period less than three years has no allowable in- vestment tax credit. This study assumes that the firms who would be considering this type of investment would be able to take the entire 10 percent in the year in which the durable assets were acquired if 4'15 However, the ana- they hold the equipment seven years or longer. lytical procedure used in estimating the Optimal economic life of the replacement durable assets does allow for the alternative amounts of tax credit to be used when the durable asset has been held in the production system for less than seven years. Energy Expenditures. Energy consumption for the processing alternatives has been previously identified in tables 4-7 and 4-8. Electrical consumption is indicated by KNH's per 8 hour shift. Alter— natively, the thermal energy consumption is indicated by BTU's per 8 hour shift. Singh (1979) reveals that 78.5 percent of the fossil fuel based energy used in the canned fruits and vegetable industry is natural gas. This energy is used to generate thermal energy. Addi- tionally, l7.8 percent of the thermal energy used is generated by a variety of petroleum products and 3.4 percent by coal. Therefore the thermal energy used in processing is priced as a BTU of natural gas. 4'15This assumption is based on a personal communication with the Comptroller, Michigan Fruit Canners, Division of Curtice-Burns. 100 Electricity is valued on a KNH basis. Because the amount of energy used in processing is based upon the amount of energy being used by individ- ual pieces of equipment during the processing operation it must be assumed that the efficiency of delivery of energy to each of these pieces in the process for all alternatives is equivalent. This is necessary to allow for a fair comparison of the energy expenditures of the major components of the alternative processing lines considered in the packaging systems. To calculate the total energy expenditure for the processing alternatives the price of the energy per BTU or KNH is multiplied by the amount of energy used. Electricity is generally priced on a KWH basis but natural gas is priced on a cubic foot basis. The necessary conversion factor used to convert $/cu. ft. of natural gas to S/BTU of natural gas is 1000 BTU/cu. ft. ‘ To calculate the cash expenditures for energy in processing for future years of operation it is necessary to project the price of elec- tricity and natural gas. This experience proved to be an extremely dif- ficult and frustrating process. Initially, the USDA was contacted for information concerning energy price forecasts. At that time USDA had been relying on information generated by the Project Independence Evaluation System model, (PIES) of which the Department of Energy (DOE) was the caretaker. The PIES model is now known as the Midrange Energy Forecasting System (MREFS). In discussions with USDA officials it was determined that the MREFS had proved unreliable for forecasting energy prices in the past. Following such discussions the officials adminis- tering MREFS in DOE were contacted for their Opinions. DOE was lOl unwilling to commit themselves to making available any forecasts at that time. One DOE official stated that he felt any long term fore- casts they might possibly generate from MREFS would be unreliable for the purposes of this study. The next strategy undertaken to obtain a handle on future energy prices involved surveying a group of agricultural economists and agri- cultural engineers who were working on energy related research in agri- culture throughout the midwest. Each person was asked to outline a low, medium and high energy price scenario for several types of energy sources over a fifteen year period. The majority of those who responded stated that they were quite skeptical about any scenarios they outlined. A summary of the results would show a very wide divergence of opinion concerning how energy prices may rise although all respondents did agree that prices would rise at a rate faster than the general rate of inflation. As a result of the lack of concensus among experts and the in- ability of any particular model to forecast energy prices, three increas- ing price scenarios were selected for use in estimating energy input expenditures over the period of analysis. The lower bound scenario uses a 5 percent real increase in energy prices per year. The upper bound uses a l5 percent real increase per annum. A medium energy price scenario is calculated by using a lO percent annual increase in real energy prices. The majority of the analysis is conducted with energy prices based on the lower bound scenario. The lower limit of 5 percent real price increase per annum ap- pears intuitively correct if the own price elasticity of aggregate 102 energy demand is considered in relation to the necessary reductions in energy use over the period of l980—l990. According to Sawhill (l979) some studies such as Pindyck (1979) have estimated the own price elas- ticity of aggregate energy demand in the residential sector to be as great as -l.O. Therefore, a one percent increase in the real price of energy would result in a one percent decline in consumption. Inversely, a one percent decline in the supply available for consumption would re- sult in a one percent increase in the real energy price. A recent study by Exxon (l980) reports that domestic production of oil will decline from about l0.0 million barrels per day in l980 to 6.0 million barrels per day by l990. Imports are also expected to decline. The current administration strategy calls for imports to fall from the current level of approximately 8.0 million barrels per day to 4.5 million barrels per day by l990. These figures point to a 40 percent reduction in the liquid energy supply over the period from 1980-1990. Therefore an aver- age annual 4 percent reduction of supply from 1980-l990 may cause the real energy price of liquid fuel to rise approximately 4 percent per year. The elasticity estimate reported above is considered to be the upper bound for the own price elasticity of aggregate energy demand. Therefore if the elasticity of demand is actually smaller the actual real rate of adjustment would be greater. Increasing levels of income may also force a greater increase in real price in order to reduce de- mand to meet the available supply. In light of these considerations a 5 percent annual real rate of increase for energy prices appears to be appropriate for the majority of the analyses conducted in this study. 103 The energy prices used in the analysis are national annual aver- ages. Annual average prices estimated for 1980, the base year, are illustrated in table 4-9. Diesel fuel price is included because it is used in calculating the transportation costs which were discussed pre- viously . Table 4-9--Base Period Energy Prices (l980) Energy Type Price/Unit] $/Unit Electricity $3.87¢/KNH $0.0387/KNH Natural Gas $2.60/l000 cu ft. $0.0026/lOOO BTU2 Diesel Fuel $l.20/gallon s .OO857/l00 BTU3 1See Energy Price Estimates appendix A.7. 2Based upon 1,000 BTU/cu. ft. 3Based upon l40,000 BTU/gallon Labor Expenditures. Labor costs are simply multiplying the labor charge per hour by the amount of hours of labor employed on the food processing line. The 1980 annual average labor charge for the food and kindred products industry is estimated to be $7.02/hr. This re- flects a 12 percent increase over the l979 annual average of $6.27/ hr.4'16 Costs associated with labor use in years beyond l980 are ex- pected to remain at the l980 level in real dollars. There is no 4'16l979 labor rate obtained from the Monthly Labor Review, March l980. The l2 percent increase in labor rates is based on outlook information in Agricultural Outlook, April l980. 104 assumed increase or decrease in real labor costs for the calculation of cash flows. Interest. Interest charges on a commercial loan for acquiring new retort pouch processing and canning equipment are included as cash flows. An interest rate for calculating the interest charges is based on long-term commercial and industrial loan rates. In this study the 4'17 The loan 4.18 interest rate is assumed to be 13 percent per year. period allowed for payback is assumed to be five years. Insurance Costs.. Cash outlays for casualty insurance based on replacement value for processing equipment are included in the analysis. These annual cash outlays are calculated as one percent of the actual acquisition costs of the processing equipment in each subsequent year. Acquisition costs for new equipment have been previously discussed. Estimation of insurance charges for previously existing equipment are somewhat different. These costs are based on one percent of the acqui- sition cost of new processing equipment which would serve as replace- ments. Details concerning the replacement equipment acquisition costs used for calculating the insurance charges for new canning and retort pouch processing equipment as well as new and previously existing equipment are presented in appendix A.lZ. Expenditures for Containers. Prices.for the containers which are under study in this evaluation have been previously listed in table 4.3 for l980. However it is also necessary to project their costs for several years into the future because they are an important component 4'17 Thirteen percent is the 1979 average, Federal Reserve Bulle- tin, 1979 issues. 4'laBased on Personal communication, Commercial Loan Officer. 01d Kent Bank, Grand Rapids, Michigan. 105 of the cash flows in the packaging systems under evaluation. Histori- cal trend data collected since 1973 is used to project the annual real 4'19 Metal rate of increase in the cost of the respective containers. can prices have been increasing at an average annual real rate of 3.28 percent. Retort pouch materials are estimated to increase at an aver- age annual real rate of 0.94 percent. Carton costs on the other hand have been declining at an average annual real rate of l.6 percent. For purposes of this analysis the real cost of the cartons were not allowed to decline over time. Carton costs were assumed to remain con- stant in real terms to present a restrictive case for comparison. Transportation Costs. Tables 4-5 and 4-6 contain the data on freight rates for shipping lOOO units of empty containers and finished products for various distances in l980. These figures are re-estimated for each of the years that the cash flows are needed for the analysis. The assumption for estimating transportation costs is one that seems reasonable but yet somewhat rather simplified. It is assumed that all other costs except for the energy cost component of the freight charges will remain constant in real dollars. Therefore the only factor which will cause a real cost increase in transportation rates is the price of diesel fuel. Future years transportation rates are estimated by increasing the 1980 dollar value of transportation costs associated with energy consumption by the forecasted annual real increase in diesel fuel prices. The raw freight rate data and the costs associated with energy consumption in transportation are located in appendix A. 4'lgDetails concerning these calculations are presented in appendix A.8. 106 Discount Rate. An after tax discount rate is determined by mul- tiplying (l-T) by the result of equation (3.l4) where T is the marginal tax rate. The nominal rate in equation (3.l4) is determined by the interest rate on long term commercial and industrial loans and the in- flation rate deflator is determined from the fourth quarter to fourth quarter increase in the gross national product deflator. The after tax discount rate used in this study is 1.07%.4'20 Tax Rate. The marginal income tax rate which was considered to be appropriate for this analysis is 46 percent. This tax rate is based on corporations that have a taxable income which exceeds $lO0,000 per year.4'2] 4‘205ee appendix A.lO for details concerning the calculation of this estimate. 4'21l980 United States Master Tax Guide. CHAPTER V ANALYSIS The conceptual and analytical approach used to evaluate the eco- nomic feasibility of the retort pouch for processing fruits and vege- tables is described in detail in chapters 3 and 4. This chapter pre- sents an economic comparison of fruit and vegetable processing using a new retort pouch processing system, a new canning system and an old existing canning system. A variety of energy scenarios and production parameters are examined in an effort to present a range of economically viable processing conditions. Each scenario presents a different set of purchase and operating conditions under which the issue of economic replacement is evaluated. The minimum cost alternative is selected for each set of conditions. Further, sensitivity analysis is conducted on: l) the cost estimates which are used to determine the optimal eco- nomic life of the durable equipment complements of the new packaging systems; and 2) the overall cost of operating either of the three packaging system alternatives under consideration. Procedure for Selection of Minimum Cost Packaging System The initial step in the analysis involves the determination of the optimal economic life of the durable assets which are required in the new packaging system alternative. The optimal economic life is determined by solving for the period of time which minimizes the annual 107 108 amortized costs of holding the durable assets in production, (equation (3.9)). Once the Optimal time period for holding the new retort pouch and new canning durable assets in production is found it is necessary to estimate the Operating costs, which are not a direct function of the age and utilization of the durables, for the alternative systems. Equ- ation (3.l2) is used for estimating these costs. The minimum amortized cost, which is the present value Of the average annual cost of holding the durable assets in production over their economic life, is summed with the present value of the operation costs of the packaging system for each subsequent production period. This aggregate cost estimate for a new packaging system, which is calculated by using equation (3.l3), is then compared to the total cost of Operating the existing or defending packing system for an additional production period. If the total costs associated with the challenging systems, new canning and retort pouch systems, are less than that of the defending packaging system, in this case, the existing canning system, replacement with the challenging system is considered. If the total cost of the challenging system is less than the total cost for the defending system in all kth years from l...N where N is the Optimal life of the challenger, re- placement with the challenger is selected, If this is not true the defender is held for continued production in the next period. If re- placement does not occur in the first period the analysis is then re- peated for the next production period to determine if the defender will be replaced by a challenging system. If it is determined that both of the challenger systems are less costly than the defending system then the issue becomes one Of 109 selecting the minimum cost challenger. This is done by comparing the result of equation (3.ll) for each alternative challenging system. The results of the analysis conducted on the packaging system alternatives for Firm A are presented first with the results of the evaluation of the minimum cost packaging system for Firm 8 following. Firm A Determination of the Optimal Replacement Period The Optimal economic life of the new durable equipment complements for a retort pouch packaging system and a new canning system were de- termined for Firm A. The Optimal period to hold the durable equipment in production in a retort pouch system was determined to be thirty- four years. The optimal period for operating the durable equipment associated with a new canning system was estimated to be thirty-three years. Figure 5-l illustrates the amortized present value Of costs for holding the respective durable equipment complements in production as a function of time.‘ Actual estimates of these costs are presented in appendix C.3 and 0.4. Each of the cost curves have similar shapes and are quite flat after the twenty-second year of operation. The minimum point on these cost functions indicates the Optimal economic life of the durable equipment complement. The shape of the functions indicates that an extremely accurate decision concerning selection of the replacement period for the durable machinery complement, under the conditions Of constant technology, is not particularly critical. The Optimal period for replacement would only minimize costs by a few dollars as compared to any particular period a few years either side 110 .ucmanaam we one any we covuuczm m am < Esp; Lee mpmou ucwanzcm mpnmczu mo Aw ommpv wspm> “cmmmga cm~wugosv mew; eesoeoow Feseuao NWT mm cm on mm mm mp e— op o N p P. - p L P _ L P p u\ M “ n.cm F- 111 _ - 1| _ om . up 1.05 low lo: \ acmngaam gozoa vacuum .1om_ romp (cacti) (s 0861) snsoo PazllJOWV 111 of the Optimal. Sensitivity analysis which consisted of varying the after tax discount rate, maintenance function, depreciation period, salvage func- tion, tax rate and investment credit allowance was performed on the replacement analysis concerned with using retort pouch processing in Firm A. In this case, the machinery complement contained form/fill] seal units for using roll stock pouch material, as Opposed to preformed pouches for the operation. The Objective was to determine how alterna- tive scenarios would effect the Optimal period of time the replacement retort pouch equipment would be held in production before being re- placed with a similar equipment complement. After tax discount rates and the rate at which maintenance costs increased over time influenced length of the Optimal replacement period. The direction in which com- binations of discount rates and maintenance cOst functions influence the number of years the durable equipment should be held in service is reported in table 5-l. A discussion of how the base rate maintenance function and discount rate were selected is presented in chapter 4. Table 5-l--Sensitivity of Optimal Replacement Period, (Years), for Retort Pouch Equipment in Firm A Maintenance Function After Tax . Discount Rate l/2 Base Rate Base Rate Double Base Rate .0007 44 31 ' 22 .OlO7 (Base Rate) 50 34 24 .0207 56 37 25 112 An increase in the after tax discount rate increased the optimal length of time the durable equipment would be held in service. A one percent increase in the after tax discount rate resulted in an increase in the optimal replacement period of one to six years. However the greatest effect was for the situation where the increase in the main- tenance cost function was one-half the base rate, (equation (4.2)). Alternatively an increase in the rate at which the maintenance costs increased over time caused a decrease in the period of time the durable equipment should be held in service. Therefore the combination of lowering the discount rate and increasing the rate at which maintenance costs increased over time results in a shorter replacement period. Changes in other variable values had little effect on the Optimal replacement period. A change in the number of years for which depre- ciation and salvage values were calculated over did not effect the re- placement age. Depreciation calculated over depreciation periods of five, ten and fifteen years and salvage values based on functions de- clining to 0.0 by the tenth, fourteenth and twentieth years of opera- tion had no effect on the optimal period. All salvage functions did however follow a function equivalent to a sum-Of-the-years-digits scheme. This result is specific to the conditions under which the re- placement analysis was conducted and should not be interpreted as a general result for all types Of durable equipment. The optimal time period for holding the durables in service for the base case scenario was thirty-four years which is significantly outside of the range of production periods in which the depreciation and salvage values were varied for sentitivity analysis. 113 A change in the corporate income tax rate to 30 percent and 40 percent had no effect on the Optimal replacement period net of the effect on the discount rate. Of course, as the tax rate changes the discount rate changes and results in a different optimal replacement period. As the tax rate declines, the after tax discount rate increases and the optimal replacement period increases. Just the opposite would be true as the corporate tax rate increases. The Optimal replacement age was also evaluated with and without the allowance for the lO% investment credit. The investment credit allowance resulted in an Op- timal replacement period which was one year shorter than it was when it was excluded from the calculation. Energy Price Scenario Effect on Selection. Initially, the analy- sis was conducted under conditions of constant energy prices and three scenarios where energy prices increased at an annual real rate of 5 percent, lO percent and 15 percent. The initial values of the other relevant parameters and variables used in the analysis are described in detail in chapter 4. The results of the analysis, where only the percentage annual increase in real energy prices were varied, is illus- trated in table 5-2. Retort pouches appear to be the most cost effec- tive packaging system available for Firm A under the Operating condi- tions outlined in chapter 4. Retort pouch packaging could replace the existing canning system under any of the energy scenarios selected in- cluding constant energy prices. Because retort pouch processing and packaging systems are less energy intensive than either a new canning or existing canning system, the cost advantage of retort pouch packag- ing is increased under scenarios where energy prices increase. 114 Table 5-2-—Ranking of Packaging Systems for Firm A by Lowest Cost Under Alternative Energy Price Scenarios Annual Percent Real Energy Price Increase Rank 0.0% 5.0% 10.0% 15.0% 1. RP RP RP RP 2. NC NC NC NC 3. 0C 00 00 DC (1980) (1980) (1980) (1980) RP - Retort pouch process NC - New can process OC - Old can process Number in parenthesis is the first year in which replacement of Old canning process could be made. Additional analysis concerning other selected variables was con- ducted under the energy price scenario which increased at an annual real rate of 5 percent. This rate of price increase is appropriate because it is thought to be the lower bound on the rate energy prices may increase in future years. Additionally, it presents a more re- strictive case for a cost comparison of the retort pouch packaging system with the other packaging alternatives than do scenarios which have a lO percent or 15 percent annual increase in real energy prices. The results of the analysis under a 5% annual real increase in energy prices are presented in detail in appendix C. The costs associated with the existing canning system, new canning system and new retort pouch packaging system are presented in C.2, C.3 and C.4 respectively. Figure 5-2 presents the total costs associated with the alternative 115 .< sewn com msmpmzm mcwmmxuma m>wumccou~m mo mumou xmu cmpwm m>wpmcmasou Panchuumum mczmwm me> «Pom opom moou Noom wmmp vamp comp owm— «mop . u p p . p _ P _ Ill swuwm cuzoa ucmumm swamam emu 3mz / 539$ :mu mcpumvxm )1 I‘1 omp omm omm ome omm Omm own (0001” ($ 086L) 5:500 X91 JalJV 19101 116 processes in graphical form. The values for the new canning process and retort pouch processing system are estimated by equation (3.13). Estimates of the total cost for the existing canning system include maintenance costs, which are the only relevant costs associated with the age of the existing canning equipment, plus all other costs asso- ciated with the existing can packaging system which are not a function of the age of the equipment. Clearly retort pouches have an advantage over the other packaging systems for Firm A. The actual variable Operating costs for the three alternative packaging systems which are not a function Of equipment complements age are displayed in figure 5-3. The actual estimates are also presented in appendix C.2, C.3 and C.4. Table 5'3 illustrates the different percentages of total operating costs that the individual cost catego- ries account for in each alternative packaging system in l980 and 1985. Package costs are the largest component of the costs for Operat- ing either of the packaging system alternatives which are described in table 593. Freight costs associated with transportation of the proc- essed commodities accounts for the second largest expenditure. Energy used in the processing line actually accounts for a very small per- centage of the Operating costs of each packaging system. Effect of Energy Requirements of Processing on Analysis Results Initially, the value used for the actual BTU's Of natural gas consumed in the retorting operation for retort pouch processing was estimated to be 25 percent of that used in the existing canning line Operation. Manufacturers vary greatly in their estimates regarding 117 .< scam Lee mamamxm mammmxumn m>wumccmupm we mam acmsawzcm cue: umpmmuommm no: mpmou mcwpmcmao mpgmwcm> m>wumcmaeou peachunmum «gamma cum> epow opow ooou Noam mamp «map camp camp Nam. _ r P p p _ . . . “ ' J \ smumam nuaoa vacuum \1. 82 Seaman emu zmz .I cow— fia ace. .0 coop fin oom— / Emumzw :8 @533 . .. 88 (00013) $1503 alqetaen [9101 118 e_neecpaa< “oz - .< .z m. emm._ F. .e.4 mm _. .e.4 mm Amwa_v N. om~.. _. .e.4 as P...e.4 Ne Aomva suau.eeua_m e. wmm.m m. mam.~ o.p _o_.m Amwm_v m. mum._ m. acm.. a. Nem.a Roma—v mew _eeauaz amcmcu mcwmmmuoca c.0P mme.~m o.~_ om~.emp m.m. om~.emF Ammm_v o.m_ moo.mm o.mp mpm.~N_ m.op mpm.~NF Aowmpv ocemmaeoea seee< ~._ aom.o_ a.e moo.om m.e mom.om Ammm_v a._ oeo.m N.m ¢o_.mm ~.e amp.mm Acma_v mecmmauoea «Locum . egmaeea o.mp ooo.mo_ Ammo—v o.mp ooo.mo_ .< .z .< .z Aomm_v acoeeeu w.oe FmP.~om Ammm_v w.oa coo.mem .< .z .< .z Aomm_v mageaoa e.- _mm.mom m.PN pmm.moo Amwm_v .< .z o.o~ mmm.m_m m.mo mmm.m_m Aomapv menu mwmmxoma e.~ mae.m_ e. mom.m m.~ «No.40 Amwapv e.~ wee.mF a m. acm.m a o.m Nwo.eo a Aswapv gone; ucmugma szuu< «smegma Pmauu< ucmucma pmauu< gmm> Emumxm Ewumzm swpmzm xgomwgmu umou guzoa ucoumm mcwccmu 3mz mcwccmu acmumpxm < Ecpmu-»commumu umou an com umpczouu< mumou mcpumcmqo m—amwca> Papohiumum mpnm» 119 process time reductions for food contained in pouches as opposed to cans. These values may range from 30 to 70 percent when an equal mass of food is being cooked. To account for the reduced sensible heat re- quirements (due to brine reduction) and the potential reduction in proc- ess time, it was initially assumed that a 75 percent reduction in ther- mal energy could be achieved by cooking food in pouches instead of the comparable cans. The preliminary results of the analysis, however, were quite in- sensitive to the level of energy used in the retorting Operations. Thus, because of the uncertainty in estimating the thermal energy re- quirement of pouch retorting, a more restrictive case was used for all of the analysis which is reported in this study. The thermal energy used for pouch retorting was assumed to be equivalent to that amount used in processing cans. The estimates in table 5-3 reflect this assumption. Further analysis, under the assumption that the pouch uses 25 percent more thermal energy in the retorting Operation indicated that the pouch processing system would remain the minimum cost proces- sing system. Under this assumption natural gas costs for the addi- tional thermal energy accounted for an additional $469 and $600 in 1980 and 1985 respectively. This alternative only added $251 in 1980 and $304 in 1985 to the after tax present value of the total costs used in comparison of the alternative processing systems. Effects of Retort Pouch Cost on Analysis. Table 5-3 indicates that the cost associated with purchasing the empty packages is a sig- nificant part of the variable Operating costs of the alternative sys- tems. The effect of a higher price for purchasing empty retort pouches was evaluated. When the price of retort pouches was raised to $90/1000 120 from the $80/1000 used in the base case the cost of the retort pouch processing system increased significantly. However, the retort pouch processing system was still selected as the minimum cost packaging sys- tem. Additionally, the retort pouch packaging system was the minimum cost system under conditions where pouches were $100/1000 and cartons were $30/1000. These prices are currently what could be considered the upper bound for costs of purchase of the containers. However, if conditions were such that the pouches were $100/1000 units and cartons were $25/1000 units and the cost of the pouches was expected to in- crease at the same rate as cans the new canning system would be the minimum cost system for replacement in 1980. Table 5-4 summarizes the results Of the variable pouch price analysis. The amortized costs re- ported were calculated using equation (3.11). Table 5-4--Comparison of Total Amortized Costs Under Different Base Period Pouch Prices (1980 $) Pouch Price $/1000 Retort Pouch System New Can System 80.00 w/$25/1000 cartons $433,721 $614,593 90.00 w/$25/1000 cartons 460,916 614,593 100.00 w/$25/1000 cartons 488,111 614,593 100.00 w/$30/1000 cartons 499,775 614,593 80.001 w/$25/1000 cartons 545,054 '514,593 90.001 w/$25/1000 cartons 586,166 614,593 100.001 w/$25/1000 cartons 627,277 514,593 100.001 w/$30/1000 cartons 638,941 614,593 1 Pouch prices increasing at same annual real rate as can prices. 121 Effect of Transport Distance. Although the analysis to this point has been based upon transport mileage of 750 miles each, for before and after processing, it is important to consider the effects of alterna- tive transport distances upon the selection of a replacement packaging system. Distances of 250,500, and 1000 miles have been evaluated in addition to the 750 mile distance which is used in the base case analy- sis. Please refer to chapter 4 for details concerning the selection of the 750 mile distance. At all distances the new canning system and retort pouch system are less costly than the existing canning system at the equivalent transportation distances. Further, the retort pouch system is the minimum cost system at each level of transport distance considered. Table 5-5 summarizes the results of this evaluation. The costs displayed in table 5-5 were calculated using equation (3.11). Table 5-5--Comparison Total Amortized System Costs Under Alternative Transport Distances (1980 $) Retort Pouch New Canning System System Before After Processing Processing 250 250 $387,641 $547,032 500 500 409,013 580,301 750 750 433,721 614,593 1000 1000 470,957 668,153 According to the results presented in table 5-5 a retort pouch system for Firm A that had transportation distances of 1000 miles would prove 122 to be less costly than a new canning system with transport distances of only 250 miles. Table 5-6 presents the actual 1980 freight costs per 1000 units shipped for each packaging system. Retort pouches hold a distinct advantage over cans in the transportation components of the system considered in this study. Table 5—6--Freight Costs of Alternative Packaging Systems per 1000 Units Shipped at Selected Transport Distances (1980 $) Distance Shipped - Miles 250 500 750 1000 Empty Containers Retort Pouch & Cartons $ 1.09 $ 1.58 $ 2.23 $ 3.65 Cans 4.83 7.14 8.14 11.06 Advantage of Retort Pouch System (3.74) (5.56) (5.91) (7.41) Processed Products Retort Pouch Product 9.63 14.45 20.52 31.20 Canned Product 13.31 19.96 28.35 43.10 Advantage Of Retort Pouch System (3.68) (5.51) (7.83) (11.90) Evaluation of the Preformed Pouch Alternative. Retort pouches can also be purchased preformed with the sides and bottom already sealed. This is an alternative to purchasing retort pouch material on rolls for forming into pouches. Retort pouch system evaluation in the analysis preceding this section has been based on purchasing pouch ma- terial and forming the pouch just previous to the filling and sealing 123 stages in the processing operation in the food plant. The equipment complement included form/fill/seal machines for accomplishing this task. However, when preformed pouches are used a different equipment comple- ment is needed which requires a lower amount of electrical energy and a greater amount of labor. Table 4-7 presents the alternative require- ments of the fill/seal machines for Firm A. Fill/seal machines are cheaper to purchase than form/fill/seal machines but require preformed pouches which are generally $10-$15 more expensive per 1000 units than roll stock material. As a result of the comparatively lower acquisi- tion cost for fill/seal machines the insurance cost is lower than that of form/fill/seal machines. Transportation costs for preformed pouches and roll stock are considered to be equivalent. Comparison Of the retort pouch system using preformed pouches and fill/seal machines with the retort pouch system using roll stock ma- terial revealed that the retort pouch system which uses form/fill/seal machines and roll stock material is less costly. However, the pre— formed pouch system remains less costly than the new canning system alternative. The costs associated with this alternative are presented in appendix C.5. Although the costs associated with machinery purchase are less when preformed pouches are used the labor requirements and pouch costs are substantially greater. Preformed retort pouch costs for this comparison were considered to be $95/1000. The after tax amortized total costs of the preformed pouch system were $449,534. This compares to $433,721 for the roll stock system. Effect of Production Rate. Under conditions in which the form/ fill/seal and fill/seal machines are not operated at their rated 124 capacity of sixty packages per minute it is necessary to repeat the evaluation of the retort pouch packaging system with the other alter- natives. In this study a lower production rate for each filling ma- chine was evaluated. The alternative rate considered in the analysis was forty packages per minute or 66 percent of the rated production limit. Therefore, if a required 300 packages per minute are to be produced, additional pieces of equipment and units of labor and energy are needed in the production process. Both preformed pouch processing equipment and form/fill/seal machines for roll stock material were con- sidered under these production conditions. Although the evaluation showed that the costs of the retort pouch systems with lower filling machine production rates were greater than the systems with the higher sixty package per minute production rates, they were less costly than the new canning system alternative and the existing canning system. Table 5-7 presents a summary of the results Of this comparative analy- sis. The costs reported are obtained from equation (3.11). Actual cost estimates for these Operating conditions can be found in appendix C.6 and 0.7. Investment Credit Deduction Effect. The analysis in this study allows for an investment credit of 10% which can be deducted from the firm's tax liability. Further details concerning the investment credit allowance are located in chapter 4. (The investment tax credit ef- fectively lowers the costs associated with purchasing the new durable equipment complement required for fruit and vegetable processing and packaging. Because there is no investment credit allowed in the cal- culation of the previously existing canning equipment complement costs, 125 Table 5-7--Total Amortized System Costs for Alternative Production Rates of Retort Pouch Systems (1980 $) System Amortized Costs (1980) New Canning System $615,539 Retort Pouch System Roll Stock 60 ppm 433,721 40 ppm 458,943 Preformed Pouches 60 ppm 449,534 40 ppm 470,130 1the investment credit allowance presents a particular cost advantage for the alternative processing systems.' Replacement equipment asso- ciated with the retort pouch system requires the largest investment. Therefore, the largest investment credit write-off is associated with the retort pouch processing alternative. When the base case, as described in chapter 4, was analyzed with- out an allowance for investment tax credit in the new can and retort pouch packaging systems, the ordering of replacement alternatives re- mained the same. Although the cost advantage of each replacement sys- tem was reduced, they remained less costly than the alternative of continuing to process under the existing canning system. Retort pouch packaging remained the lowest cost system. The actual estimates for this evaluation are reported in appendix C.8 and C.9. Effect of Interest Deduction. The irregular shape of the cost function of the retort pouch processing system, presented in figure 5-2 in the first five years of operation is due to the deduction of 126 interest payments from the cost stream. There is also an interest de- duction effect on the cost function of the new canning system, however, it is not nearly as significant because the outlay required for acqui- sition of the new canning equipment complement is significantly less than that which is required for retort pouch processing equipment. Therefore the commercial loan balance and interest payments would be substantially less for the canning equipment complement. Because of the large amount of deductions which can be taken for interest payments associated with the retort pouch packaging system in the first several years the effect of not including these deductions was evaluated. Figure 5-4 illustrates the effect on the total cost function of not including the allowable interest deductions. Both alternative replace- ment systems are less costly than the existing can packaging system. If the amortized total costs of the new canning and retort pouch pack- aging system, (equation (3.ll)), are compared, the retort pouch system proves to be less costly. However, the absence of the interest deduc- tion in the first five years of operation Of the retort pouches system influences the cost substantially. Estimates for this analysis are presented in appendix 0.10 and 0.11. The assumption allowing interest deductions and investment tax credit allowances are both included in the basic analysis. This appears to be a reasonable assumption, particularly if there are different divisions of a food processing firm that have enough tax liability in total to allow for these deductions from an individual division to be used. Initially it is believed that any firms involved in considering such Operations would be large and profitable enough to be able to take 127 .< scam com msmpmam mcwmmxuma m>wpmccmupm mo cowuuztmu ummcmpcv paosuwz mumou xmu Lmumm m>wumcmasou quopuneum Ocamwm cum» epom opom meow meow mmmp camp camp mmmp p _ . b _ _ — _ Emamzm cuaoa acouwm Emumxm :ao 3mz mumam coo mcwpmwxm www— _ \ j 1 omm omm omc omm omo omn (0001s.) ($ 0861) uogaonpag asaaaqul inoullM 51500 X21 JG1JV [9101 128 advantage of these credits and deductions. Effect of Higher Discount Rate. A real, as compared to nominal, after tax discount rate was used in the preceding analysis. The effect of using a higher discount rate was evaluated. Under a 3.07 percent discount rate the ranking of the processing alternatives in terms of cost effectiveness was unchanged from the base case. Retort pouch pack- aging was the minimum cost alternative. The Optimal economic life of the retort pouch equipment complement increased to forty-one years whereas the Optimal economic replacement period for the new canning line changed to thirty-nine years. The difference between the respec- tive total amortized system costs, (equation (3.11)), for retort pouches and the new canning alternative were essentially the same. Table 5-8 demonstrates this result. Table 5-8--Comparison of Total Amortized System Costs Under Alternative Discount Rates .0107 .0307 Retort Pouch System $ 433,721‘ $ 447,310 New Can System 614,593 627,909 Difference ' (180,872) (180,599) 6.88.8. Determination of the Optimal Replacement Period The optimal economic life of the new durable equipment comple- ments for a retort pouch packaging system and a new canning system 129 were also determined for Firm B. The optimal period to hold the du- rable equipment in production in a retort pouch system and a new can packaging system was estimated at thirty-fOur years. Figure 5-5 illustrates the amortized present value of costs associated with the age of the durable equipment which is used in the challenging packaging systems. Estimates of these costs are presented in appendix C.13 and C.14. The minimum location of the cost curve indicates the Optimal economic life of the durable equipment complements. Both cost func- tions have similar shapes and are quite flat after the twenty-fourth year of Operation. This would appear to indicate, as did the results from the analysis concerning Firm A, that an extremely accurate de- cision concerning selection of the replacement period for the durable machinery complement, under the conditions of constant technology, is not particularly critical. Sensitivity analysis, which consisted of varying the after tax discount rate, maintenance function and the investment credit allowance, was performed on the replacement analysis concerned with evaluating retort pouch processing for Firm B. As with Firm A, the analysis was based on a system which used form/fill/seal units for using roll stock pouch material for forming the pouch in the packaging operation. Table 5-9 illustrates the results of varying the after tax discount rate and the maintenance cost function in the analysis. The base rate at which maintenance costs increase as a function Of time is described in chapter 4. The results of the sensitivity analysis are very similar to the results Obtained for Firm A. In fact, the results should be similar 130 .pcmsawacm mo mom asp mo cowpucam a mm m sew; com mpmou acmEnwacm mpnmczu mo Am ommpv m:_m> acmmmca uONPpLOE<11m1m wcammm Amgmm>v wee; uwsocoum Peerage me an em on mm mm mp wp op c N . 1b . _ . . _ _ p P. e . " mw _ . 11. . . .1 cm _ . . .I . c e . ucmsavzom _ emu zmz 1. ooF .1 cap 1y: 1. owp ucmsawzcu use co m s a u p m 1. omm a (0001i) (s 0861) 51500 PBZIIJOWV 131 Table 5-9--Sensitivity of Optimal Replacement Period, (Years) for Retort Pouch Equipment in Firm 8 Maintenance Function After Tax Discount Rate 1/2 Base Rate Base Rate Double Base Rate .0007 45 31 22 .0107 50 34 23 (Base Rate) .0207 56 37 25 because all of the equipment costs which are a function of the durable equipments' age were calculated in the same manner for each firm. The actual levels of costs are different but the pattern of the changes in costs over time is equivalent. An increase in the after tax discount rate increased the optimal length of time the durable equipment would be held in service. A one percent increase in the after tax discount rate resulted in an increase in the optimal replacement period of one to six years. An increase in the rate at which the maintenance costs increased over time caused a decrease in the period of time the durable equipment should be held in service. Therefore the combination of lowering the discount rate and increasing the rate at which maintenance costs increased over time resulted in a shorter replacement period. The Optimal replacement age was also evaluated under conditions where the 10 percent investment credit was not allowed. Under these circumstances the Optimal replacement period was two years longer than it was in the situation where the base case allowed the deduction. The base case is that set Of conditions which are described in 132 chapter 4. .EnergyAPrice Scenario Effect on Selection. Evaluation Of the alternative processing and packaging systems for Firm 8 was initially conducted under four energy price projection scenarios. The analysis was conducted under the situation where energy prices remained constant at the 1980 level and under three scenarios where the annual real rate of energy prices increased at 5 percent, 10 percent and 15 percent respectively. The results of the analysis where only the percent annual increase in real energy prices was varied is reported in table 5-10. Retort pouch processing could replace the existing canning Table 5-10--Ranking of Packaging Systems for Finm B by Lowest Cost Under Alternative Energy Price Scenarios Annual Percent Real Energy Price Increase Rank 0.0% 5.0% 10.0% 15.0% 1. RP RP RP RP 2. 00 0C DC DC 3. NC NC NC NC (1980) (1980) (1980) (1980) RP - Retort pouch process NC - New can process 0C - 01d can process Number in parenthesis is the first year in which replacement of Old canning process could be made. system under any of the scenarios selected including the scenario of constant energy prices. The second best alternative system for Firm B 133 was not a new canning system. A new canning system for Firm B did not present enough of a reduction in operating costs to offset the increased expense of obtaining and maintaining a new durable equipment complement. This held true for the analysis when the replacement years considered varied from 1980 - 1985. Although the costs associated with obtaining and maintaining the equipment complement for retort pouch processing are substantially higher than that of the new canning system (figure 5-5) the operating costs associated with the retort pouch system are much lower than the other alternative packaging systems (figure 5-6). Therefore the total costs associated with the retort pouch system are less than the other canning alternatives (figure 5-7). There are two major factors which contribute to increasing the advantage of retort pouch packaging over time. Each category of Oper- ating costs, which is not a function of the age of equipment, increases at a slower rate than the rate at which these costs increase for the canning system alternatives. Chapter 4 contains further details con- cerning the estimation Of these costs. Secondly, retort pouch proc- essing and packaging systems are less energy intensive than either a new can packaging or an existing can packaging system. Therefore, as energy prices increase, the difference between the total costs asso- ciated with the can processing and packaging systems and the retort pouch packaging systems gets larger. Further, the advantage of retort pouch processing becomes greater the faster energy prices increase. As with the previous analysis, conducted for Firm A, evaluation of changes in other selected variables was conducted under the energy price scenario where prices increased at an annual real rate of 5 percent. The results of the analysis under a 5 percent annual real 134 cmm> 38 Bow meow Noon momp _ _ _ b 1111.. Emumam :mu mappmwxm 32 0mg _ 32. «we _ .m Ecru so; memumzm mcwmmxomn w>wumccou~m mo mam pcmanzam saw: uwmeOOmmm yo: mumou mcwumcwao mpnawcm> m>wpmcaneou Papop1io1m mesa?“ _ 1 comp com F 1 oo_.N 1 comm 1 comm .1 comm 1 comm 1 co; 1 come (0001s) S1503 aiqeiaeA [2101 135 .m sewn cow mamumam mcwmmxuma m>wpmccwupm wo mumou xmp cmuwm pmuow1iw1m wcsmwu cmm> epom opom ooom moom wmmp comp omop comp Nomp . . w . . n _ _ . Empmzm goaoa pcoumm swam»m coo mcwpmwxm 182 1 82. (0001s) (8 0861) $1500 X91 Jazav 12101 136 increase in energy prices are presented in detail in appendix C. The costs associated with the existing canning system, new canning system and new retort pouch packaging system are present in appendix C.12, C.13 and C.14 reSpectively. Figure 5-7 presents the total costs as- ‘sociated with the alternative processes in graphical form. The values of the new canning process and retort pouch processing system were estimated using equation (3.13). Estimates of the total cost for the existing canning system include maintenance costs, which are the only relevant costs associated with the age of the existing canning equip- ment, plus all other costs associated with the existing can packaging system which are not a function of the age of the equipment. Clearly retort pouches have an advantage over the other packaging systems considered for Firm 8 given the conditions presented in this study. The actual variable production costs for the three alternative processing systems which are not a function of equipment age are dis- played in figure 5-6. Table 5-11 illustrates the different percentages of total operating costs that the individual cost categories account for in each alternative processing system in 1980 and 1985. 0perating,Costs Table 5-11 indicates that package cOsts are the largest component of the costs for operating the packaging systems. Although pouches and cartons account for a larger percentage Of the total variable costs of the retort pouch packaging system than cans account for in the canning system alternatives, the actual expense for the containers is signifi- cantly less. Freight costs associated with transportation of the processed commodities accounted for the second largest amount in all 137 a.neewpaa< eoz - .< .z m. was.» P. .e.4 mam .w.4 amp Ammmpo N. mam.~ P. .w.4 mpm .w.4 cop Aommpo xewuweeua_m ~._ me~.NF a. _eo.w_ a. ¢m_.ep mmmwv o.F mpm.m_ m. eem.mp w. owa.~_ owmpo mam _eeauez . xmcmcu mcwmmmuoca o.e_ mmm.mm~ o.~_ Npm.m~m o.ap ~_m.mmm Amwmpo o.a_ Nem.~.~ o.m_ mmo.em~ m.~_ omo.¢a~ Aowm_o mewmmmeoea empw< w.~ ~e~.¢u m.e pow.am 8.6 Pom.~m Ammm_o h._ ¢N~.m~ P.m mam.em F.m mam.em Aommpo mewmmeuosa aeowem . . Seaweza o.mF oo~.mm~ mmm_o a.wp oo~.mm~ .< .z .< .z owmpo acceeeu e.oe mop.mom Mammp m.oo oe¢.m~w .< .z .< .z oma_ maeezoa m.o~ emm.eme._ m.m~ om~.eme._ Mama_ .4 .z m.ms eNm.NmN._ o.m~ eNm.NmN.F omm_ menu mmmmxuma _.~ cum.om m. mop.op F.F a.~.o~ Ammmpv ~.~ mmm.om w o. wo_.op ~.P “_N.om a Aomm_o cone; ucmucma Pmsuu< ucmucma _mauu< pcoucma szuu< cmm> smumzm swam»m smpmxm accompao umou guaoa ucoumm mcwccmo 3oz mcwccmo mcwpmwxu m scwm11acommumo umoo an cow cupcaouu< mumou mcwpmcmao mpnmwcm> _muowiupwim mwaaw 138 of the systems. Again, the freight costs of the retort pouch system were significantly less. Energy used in processing accounted for a very small amount of the total variable costs, therefore, the results of the comparative analysis are quite insensitive to the level Of energy used in the processing Of the retortable pouches. Further, the thermal energy used for pouch retorting was assumed to be equivalent to that amount used in processing cans even though manufacturers of processing equipment estimate that process time for an equal mass of food contained in pouches may range from 30 to 70 percent of the time required for processing of cans. Because of the uncertainty which sur- rounds the estimating Of the thermal energy requirement for pouch re- torting this more restrictive case Of assuming the requirements were equivalent was used in the analysis. The estimates in table 5-11 in- clude this assumption. Effects of Retort Pouch Cost on Analysis. Table 5-11 illustrates that the cost associated with purchasing the empty packages is a sig- nificant part of the variable Operating costs of the alternative sys- tems. Therefore, the effect that a range Of purchase prices for re- tort have on the analysis was evaluated for Finm B. The effect of a higher price for purchasing empty retort pouches and cartons is sum- marized in table 5-12. When the total after tax system costs for the retort pouch packaging system under various pouch and carton prices are compared with the other alternative packaging systems it is revealed that the retort pouch system is the minimum cost system. A retort pouch processing system was the minimum cost system under conditions where pouches were $100/1000 and cartons were $30/1000. These are the 139 ) .mucaso.aaou ucusu.:ao mc.ccuu an: ecu gusoa accuse «cu wo ow.— O.Ec=ouo —~2.uno on» o» uco.o>.=oo a. cc.uo~wucoea wo vowgoa ugh .zuaum mwgu :. ucoso.asou ucusawaaw u:.=:ou v.0 ogu we can on» we cowuucaw a on o» vosov.mcou ouc gu.gx mumou mpco mg» use sows: mumou aucocou=.as vo~.ucosu use ma—n .o..mv co.un:au wo 9.3mm; Ogu co woman on: mumou eo~.ucoa<~ .mouwga coo mo ago. .oos ..acca mica a. u=.m~ocucw “no.5: guaoa — ~a...m¢ 8.8.8.9 nma.emo.. ..co. 3.. mm. . E... 3... .3. 8... 8... «3 m8. z... . '3. .8 .8... . assuage ooc.\on.\s .oo.oo. ~an..¢m u.o.o.o -..o.°.. Mama. «a..n~m.. c.a.amm .cm.o~m.. na¢.nom .o..o¢¢.. .om.nm. oma. acousou coo..m~.\: .oo.co. ~on..ma o.o.g.m ooo.m.o Mama. .o..n~m.. o.o.omm ..o.°~m.. «ma.mmm cmo.m¢n.. ~...m~. oaa. aeoueau coo.\m~.\z .co.oa ~mm..¢m o.o.m.a a.~..mm mam. , ca..m~m.. c.m.amm ..m.o~m.. ”mo.nam .om.ae~.. o...~.o owe. neoueau coo.\m~.\x .oo.oo an. .8 as. 2. 8...... M32 em..m~m.. o.m.amm ..o.o~m.. nmc.nao ome.o¢... ¢o~...o oma. neoueeu coo.\on.\: oo.oo. ~m...aa o.o.o.a oao.nca mma. co..m~m.. o.m.omo ..¢.o~m.. nao.noa no..~.... .om.mm. one. “8:8 8232... 8.8. ~an..ma o.o.o.a omo.mma Mama. em..n~m.. o.m.amm ..m.c~m.. ”mo.nom mm....o.. ~...m~. one. meoueau coo.\m~.\z oo.oa ~mn..ma 0.8.... o~o.nnm Mama.w em..n~m... o.m.mmm . ..m.o~m... mac.nam . mo..~ma . m...~.o . cue. «gout-o coo.\m~.\s oo.oo momoo mumoo xow mmumou numoo xaw mumoo mumou xow swuw< gnaw coo—w» ou—ss guaom ua~...oe< sauce as... ee~..eoa< sa..< as... us...cee< on... oceans. no.6.m ea. :62 assume. oma. an»... ego e.o .eemoea cam. emu... cam. sou... auuwam coo 3a: soumxm coo v.o zuaoa agave: guaoa acouoz moo—ca gusoa mao.co> cone: mumou vo~wucoa< oom— uca uumou soamxm xaw couw< .ouow wo mo=.~> acumoca wo com.c¢a-ou-1~.-m u.n~w 140 current prices which are considered the upper bound for the price of the containers. Some additional explanation of the calculations which pertain to the costs of the old canning system shown in table 5-12 are necessary. Previous analysis has shown that if retort pouch processing or a new canning equipment complement was acquired in 1980 they should be held in production for thirty-four years. The optimal replacement period of thirty-four years was found where the amortized costs of challengers were minimized (equation (3.9)). NO such analysis was performed on the existing canning equipment complement due to the impossibility of tracing its history. However, replacement theory states that it is not necessary to consider such cost history. Simply, if the marginal costs or the cost of operating the equipment one additional production period are greater than the average costs or amortized costs of the challenger the challenger should replace the existing equipment complement. This theory ignores the additional costs which are not a function of equip- ment age that become important when challengers are being compared that are technologically different. The procedure outlined in chapter 3 appears to be adequate at handling these comparisons although it is somewhat cumbersome when comparing many different alternatives. Fur- ther, the technique used in this study is only useful when the order- ing of the alternatives by their costs is consistent. In other words, where the total costs of operating one system remain consistently be- low that Of another system in each production period. This is where the problem enters the retort pouch price analysis. Under the condi- tions at which pouch prices are $100 in 1980 and increase over time 141 at a rate equivalent to that Of cans, the ordering of the alternatives does not remain consistent. Therefore another evaluation procedure for analysis must be considered. The total amortized system costs cal- culated over a period of thirty-four years for the existing canning systems were compared with the amortized costs of the other systems. If the existing canning plant could be Operated for thirty-four more years it would be more costly than the retort pouch packaging system. Effect of Transport Distance. As with the previous analysis concerning Firm A, the effect that the transport distance has on the analysis was evaluated for the alternative systems considered for Firm 8. Distances of 250, 500 and 1,000 miles have been evaluated in addi- tion to the 750 mile distance which is used in the base case. Table 5—13 summarizes the results of this evaluation. The costs presented in table 5-13 for the retort pouch system were calculated using equa- tion (3.11). The costs presented for the existing canning system were calculated using equation (3.10) plus the amortized maintenance costs which are the only costs which are considered to be a function of the age of the Old canning equipment complement in this study. The total amortized cost was calculated over a period of thirty-four years as it was in the previous section for the-existing canning system and retort pouch packaging systems. Costs for the new canning system were not included because they were higher than those associated with the existing canning system except in the first two years of Operation. The main point to consider in this evaluation is that the retort pouch system is the minimum cost system at each level of transport distance considered. Further, according to the results presented in .5888». :uzo: 8.0.8: 8:» sow 88.:8: 8:82888.88. .8swu88 8:» 88>: 8.888 88:8:8p:.8e 88....828 8:» 88.: .o..mv :owu8aam wo p.888. 8:» :8 88888 8.8 88888 88...:oe<~ .88888.8:ou 8.88» m:.3o..ow 8:» we ..8 :. .838. o8—8 8:8 88:. 88.. :. .828. 8:8 Emu... :8888 p.888. 8:» we 8.888 8:. w. .88. 38:. 8288.88 8888 8:» we :o.u8:.s8x8 .83888 8:.. 142 8.....8.. ....... ..8... .88.8.8.. 8...8.. ..m...... .88.... .88... 08.. 8.8.8.. 8.8...8 ..8... ..8...... .88.... 88...8. 8.....8 ..88... cm. ..8.... ..8.... . ..8... .88...... ..8..88 888.... ..8...8 .88... 88. .88..88 .....8. Mm8.. .......... .8...... ..m...8. 8...888. 88.. 8.. «88888 88~pucos< 88880 x8. cmuw< 888:8 88...:oe< .mpmoo x8. .muw< .88» a:.mmmuo.. . 58.8.8 8:.8> 8:88888 oom— smumxm 8:.8> u:m.m:. omm. .mpw< 8:8 meowmm :80 8:.umwxu. 58.8.8 :8o m:.u8.xm :uzoa ucopma smamam :uso. asoumm 88:888.: 8:888:8cw 888:8umwo 8:888:8Lw 8>.u8:cmu.< 888:: mumoo 58.8.8 88~wpgoe< 8:8 x8» Lapw< wo :08..8qeoo11m.1m 8.88. 143 table 5-13 a retort pouch system that had transportation distances of 750 miles would prove to be less costly than the existing canning system with transport distances of only 250 miles. Clearly retort pouch sys- tems have a distinct advantage over the alternative system considered in this study in terms of the transport costs. Evaluation of the Use of Preformed Pouches. As pointed out in the analysis for Firm A, retortable pouches can also be Obtained pre- formed. Retort pouch system evaluation in the analysis preceding this section has been based on purchasing pouch material and forming the poucr just previous to the filling and sealing stages on the processing line. Table 4-8 presents the requirements of the alternative system which uses preformed pouches and fill/seal machines in Firm B. A comparison of the retort pouch system using preformed pouches and fill/seal machines, with the retort pouch system using roll stock material, for Firm B revealed that the retort pouch system which uses form/fill/seal machines and roll stock material is less costly. The preformed pouch system, however, is less costly than the existing can- ning system alternative, (table 5-14). The estimated costs associated with this alternative are presented in appendix 0.15. Although the costs associated with machinery purchase are less when preformed pouches are used, the labor requirements and pouch costs are substan- tially greater. Retort pouch costs used in this comparison were $95/1000. Effect of Production Rate. Under conditions in which the form/ fill/seal and fill/seal machines are not Operated at their rated pro- duction rate of sixty packages per minute it is necessary to 144 Table 5-14--After Tax System Costs and Total Amortized System Costs for Alternative Production Rates of Retort Pouch Systems Total After Amortized System Year Tax Costs Costs (1980 $) New Canning System (1980 $859,870 $1,523,184 1985 987,392 Existing Canning System (1980) 893,083 1,520,841 (1985) 976,616 Retort Pouch System Roll Stock Pouches 60 ppm (1980) 672,778 982,168 1985) 833,820 40 ppm (1980) 657,906 1,021,240 (1985) 876,944 Preformed Pouches 60 ppm (1980) 788,175 1,054,832 1985) 885,937 40 ppm (1980) 789,455 1,081,285 (1985) 913,841 re-evaluate the retort pouch packaging system with the other alterna- tives. In this study a lower production rate for each filling machine of forty packages per minute or 66 percent of the rated production limit was considered. If the total plant production rate of 360 pouches per minute is to be maintained additional pieces of equipment and units of labor and energy are required. Both preformed pouch processing equipment and form/fill/seal machines for roll stock ma- terial were considered under these production conditions. Although the evaluation showed that the costs of the retort pouch systems with 145 lower filling machine production rates were greater than the systems with the higher, sixty package per minute, production rates, they were less costly than the new canning system alternative and the existing canning system. Table 5-14 presents a summary of the results of this comparative analysis. Actual cost estimates for these operating condi- tions can be found in appendix 0.16 and 0.17. Investment Credit Deduction Effect. The analysis in this study allows for an investment credit Of 10 percent which can be deducted from the firm's tax liability. Further details concerning the invest- ment credit allowance are discussed in chapter 4. The investment tax credit effectively lowers the costs associated with purchasing the new durable equipment complement required for the packaging systems. Be- cause there is no investment credit allowed in the calculation of the previously existing canning equipment complement costs, the investment credit allowance presents a particular cost advantage for the alterna- tive processing systems. Replacement equipment associated with the retort pouch system requires the largest investment. The largest in- vestment credit write-off, therefore, is associated with the retort pouch processing alternative. When the base case for Firm 8 was analyzed without an allowance for investment tax credit in the new can and retort pouch packaging systems, the ordering of replacement alternatives remained the same. The retort pouch packaging system remained the lowest cost packaging system. The actual estimates are reported in appendix C.18 and C.19. 146 Effect Of Interest Deduction. The irregular shape of the cost function of the retort pouch processing system, presented in figure 5-7, in the first five years of operation is due to the deduction of interest payments from the cost stream. There is also an interest deduction effect on the cost function of the new canning system, how- ever, it is not nearly as significant because the outlay required for acquisition of the new canning equipment complement is significantly less than that required for retort pouch processing equipment. The effect Of not including interest deductions in the evaluation was tested. Figure 5-8 illustrates the effect on the total cost function of not including the allowable interest deductions. Although the cost advantage of the retort pouch processing system was reduced, the pouch system did remain consistently less costly than the existing canning system and the new canning system alternative. Further, under these conditions the new canning system alternative would be the highest cost system in all production periods. The actual estimates are re- ported in appendix 0.20 and C.21. Conclusions The retort pouch packaging system is the minimum cost system among the alternatives considered under the assumptions and conditions described in chapter 4. Although the costs associated with acquiring and maintaining the durable machinery complement for retort pouches is greater than that of either a new canning equipment complement or the existing canning equipment, the other Operating expenditures for the system are less. If the projections used in this study for the costs of cans, cartons, retort pouches, labor, freight and energy are 147 .m a... cow 85888.8 m:.m8xo8o o>.88:cou.8 wo :owuooooo pmocop:. p:o:u.3 mumoo x8. couw8 o>..8c882oo .8uowiio1m 8:8... :88> v—ow opow ooow .woow woo. com. com. coop woo. F _ b P h n _ _ . \‘ 58.8. 8.8... Emumam :8o m:.um.xu 5888.8 :8o :82 I ooo oom ooop oowp ooo. com. com. (0001i) ($‘086l) uolnonpag asauaaul JOOHIIM $1503 xel Jaqjv [9101 148 approximately correct, the difference between the Operating costs of the retort pouch system and the alternative canning system will increase over the next several years. Package costs influence the analysis to the greatest extent. A savings advantage of $15/1000 units for retort pouches and cartons versus cans in the base year (1980) is significant. This factor will become even more significant over a period of years if the cost of cans continues to increase faster than the cost of the empty retort pouch. It is expected that this difference in the trend in the prices of cans and pouches will continue because cans are significantly more energy intensive to construct than retort pouches. Retort pouches also have a particular advantage in the transporta- tion component of the system, particularly in the delivery of empty containers from manufacturer to processor. Because the processed re- tort pouch product is lighter than the canned product it also has a freight cost advantage in distribution from processor to wholesale market. Lighter weight, smaller volumes, low freight costs and a purchase price that is significantly less than that of the empty can are the major contributors to the cost effectiveness of the retort pouch pack- aging system. The level of energy used in processing the pouch versus the can appears to be Of much less significance and has little effect on the selection of the minimum cost system in this study. Labor use is generally more intensive in the retort pouch packaging system. However, labor use contributes only a small percentage to the operating costs which were considered in this study. Labor costs do not influence 149 the results to a great extent. Comparisons of the differences in the after tax amortized costs for the proposed retort pouch system and new canning system reveal the cost advantage of the retort pouch system. For conditions presented for Firm A the cost advantage to the retort pouch system is $41/1000 units produced. The cost advantage under the circumstances described for Firm B is $52/1000 units. A further summary, conclusions and issues for further research are presented in chapter 6. CHAPTER VI SUMMARY This research evaluated the economic feasibility of the retort pouch for processing, packaging, and distributing processed fruit and vegetable products. Specifically, the study identified alternative packaging systems which are currently technically feasible and compared the costs associated with the durable equipment and operating requirements for each of the systems. The packaging systems studied were an existing canning system, a new canning system, and a new retort pouch packaging system. Further, the economic feasibility of replacing an existing canning system with a new canning system or a new retort pouch packaging system was examined. The major objectives of the study were to compare the costs asso- ciated with: 1. Purchasing processed food packaging containers, specifically cans and flexible retort pouches Of retail size for packag- ing fruit and vegetable commodities. 2. Transportation of these containers from the package producer to the food processor. 3. Processing and packaging of fruit and vegetable products in these alternative packages. 4. Transportation of products to wholesale distribution centers from the processing location. Additional objectives included: 5. Identification of the amount of energy used in the various stages of the alternative packaging systems which include 150 151 construction of the containers, transportation of empty containers and processed products, and processing and packaging of the product. 6. Estimation of the economic life of can and retort pouch processing equipment and the costs associated with their acquisition and operation over that period. 7. Identification of the conditions under which retort pouches are a viable and economically feasible package for fruit and vegetable commodities. 8. A description Of the advantages and disadvantages of using retort pouches and cans for fruit and vegetable products in the food system. Procedure A variety of information sources has been used to construct the operating and capital costs associated with three alternative packaging systems. The systems studied were an existing canning system, a new canning system, and a retort pouch packaging system. The results of two energy accounting studies, which document the energy used in fruit and vegetable processing plants, were used to estimate the amount of energy required in the processing stage of the alternative packaging systems. Further, the essential components of the processed fruit and vegetable packaging system that could effect the adoption of the retort pouch were identified and the capital and operating requirements for each system considered were established. This information was then used to construct a generalized model of the packaging system alternatives for processed fruits and vegetables to estimate and evaluate the equipment and operating costs associated with each alternative system under a variety of input price scenarios and operating conditions. Selection of the fruit and vegetable processing plants from which the processing and packaging component of the model was constructed was 152 conducted in conjunction with the National Food Processors Association, Berkeley, California and the Department of Agricultural Engineering, University Of California, located at Davis. For the research to be of general use, it was necessary that the model be based on typical fruit and vegetable processing plants and operating conditions. Although the fruit and vegetable processing and packaging industry is very diverse in its operating procedures, the processing plants from which the operating data was collected are not atypica1.6’] Further, the firms selected are of the approximate size of firms that may consider the use of retort pouches as a packaging alternative sometime in the future. The energy accounting studies which were used in the study had previously been con- ducted in the plants which were selected. After the typical fruit and vegetable processing operations were selected, information concerning the rate of production, type of equip- ment and associated labor, energy, and maintenance costs for the plants selected was collected. Data from the existing plants was collected by surveying the plant production managers. Information concerning the re- tort pouch and new can packaging system alternatives was collected from a variety of equipment manufacturers and distributors. Data concerning the construction of cans and pouches and the estimation of their market price was collected from package manufacturers and convertors. Current transportation costs were obtained from commodity transport companies and motor freight firms. 1 Energy price scenarios were developed from a number of sources including responses to an open ended survey soliciting opinions on energy 6'1Personal communication, National Food Processors Association. 153 price scenarios. The respondents were generally agricultural engineers and agricultural economists who have been conducting energy related re- search in the North Central States. Other input price scenarios were developed in conjunction with the analysis and were mainly used to indi- cate the sensitivity of the results to alternative rates of price in- creases Of selected inputs. As the required data was being collected, a computer model was formulated in accordance with the conceptual system outlined in figure 1-1. The model was used to estimate the costs which are associated with acquiring and maintaining a new technologically advanced set of durable equipment for processing retort pouches. These costs were also estimated for a new canning equipment complement. The model used this cost data in an economic replacement routine to determine the optimal economic life of the new durable equipment complements which could potentially replace the existing canning equipment. The model was also used for estimating the cash flows for each Of the new alternative packaging systems over the optimal economic life of the durable equipment complements which are required for operating each system. Cash flows were also estimated for the costs associated with the operation of the existing packaging system and the maintenance of the existing durable equipment complement. - In the analysis procedure, the investment and operating costs of each new alternative packaging system were compared with the cost of con- tinuing to operate the existing can packaging system to determine if: 1. A new packaging system which required either new canning equipment or retort pouch equipment should replace the existing canning system. 154 2. A replacement system is needed, which system it should be; a retort pouch system or a new canning system. This procedure of analysis is conducted on two sets of data for two different processing plants. In summary, the costs of each alternative replacement packaging system were estimated and compared with the costs associated for each existing operation under conditions of rising energy prices and a variety of other price and cost variables to determine if a retort pouch system could compete on a cost basis with other alternative packaging systems. Conclusion The retort pouch packaging system is the minimum cost system among the alternatives considered given the acquisition and operating require- ments described in this study. Although the costs associated with ac- quiring and maintaining the durable machinery complement for retort pouches is significantly greater than that Of either a new canning equip- ment complement or the existing canning system alternative, the other operating expenditures considered in the packaging system alternatives are considerably smaller for the retort pouch system. ‘As energy prices con- tinue to rise at a positive real rate and if the costs of cans, cartons, retort pouches, labor and fWeight increase at similar rates of those used in this study to simulate future production period costs, the dif- ference between the operating costs of the retort pouch system and the alternative canning systems will become larger over the next several years. The expenditure category which influences the analysis to the largest extent, and will be the major factor in explaining the difference in costs between retort pouch packaging systems and canning systems, is the cost 155 of empty containers. If carton manufacturers and film and foil convertors are continually able to hold price increases of their products to a rela- tively lower rate than those Of can manufacturers, the retort pouch system will have substantial cost advantages in this segment of the packaging system. The total cost of retort pouches and cartons used in this analy- sis is $15 less per 1000 units than the cost of 1000 retail size cans. This is a significant factor in the base year (1980) and should prove to be even more significant over a period of years as real energy prices increase. Because the construction of the can is more energy intensive than that of the retort pouch and carton, rising energy prices will have a greater effect on the cost of production of cans than of retort pouches and cartons. Although energy requirements will not be the only item to effect the purchase price of the respective containers, it will have an important effect. Further consideration of the supply-demand character- istics of retort pouch markets is necessary. Retort pouches also have a particular advantage in the transporta- tion sectors of the packaging system. In 1980, freight costs attributed to transporting empty retort pouches and cartons of retail size are 66 percent to 77 percent less than the freight costs associated with trans- portation of empty 303 cans for an equivalent distance. Freight costs associated with shipment of the processed product in the retort pouch system are approximately 27 percent less than those costs attributed to transporting the processed product in cans. This freight savings is attributed to the lighter weight of processed pouch products which is a result of the reduced brine requirements considered in this study. As freight costs and energy prices increase, the cost advantage which retort pouches hold in this area should increase because a smaller number of 156 shipments and less energy are required for shipping the equivalent amount of product. Lower freight costs, attributed to lighter weight, and smaller volumes and the fact that the purchase price of retort pouches are sig- nificantly less than that of empty cans are the major contributors to the cost effectiveness of the retort pouch packaging system. Although the amount of energy used in transportation and container manufacture may play an important role in the cost effectiveness of the retort pouch, the amount of energy used directly in processing the pouch versus the can appears to be of much less significance. The amount of energy used in processing and the potential energy savings attributed to processing re- tort pouches does not influence the results of the comparative cost analysis to a great extent. A comparison of the difference in the after tax amortized costs for the proposed retort pouch system and new canning system over their Optimum economic lives indicates there is cost advantage for the retort pouch system. Given the base case conditions presented for Firm A, the cost advantage to the retort pouch system is $4l/1000 units. The cost ad- vantage of the retail pouch system estimated for Firm B is $52/1000 units. The retort pouch system evaluated in this study was also found to hold a cost advantage over the new canning system when lower production rates of 40 packages per minute were considered for each individual filling and sealing machine. The advantage of a retort pouch system fOr Firm A and Firm 8 under these set of conditions is $38 and $48 per 1000 units, respectively. Consideration of using preformed pouches under these lower production rates lowers the coSt advantage Of the pouch systems to $35 and $42 per 1000 units produced. 157 Issues of Concern for Managerial Implications Although the results reveal that the retort pouch has particular cost advantages in the subsectors of the food system considered ir1 this study (figure 1-1), they must be interpreted carefully. As with any general system simulation study, assumptions were made which simplify the real world conditions so they could be handled in an evaluation. There are many technical, locational, financial, managerial and institu- tional considerations which need to be addressed when evaluating the re- tort pouch packaging system for individual processing plants. The follow- ing discussion presents the issues which could effect the results of the analysis. A manager should consider these issues and the implications they may have on any evaluation that is conducted which concerns alter- native packaging systems. The results presented do not include comparative costs associated with cans and pouches for other subsectors of the food system such as marketing at the retail level and home preparation and storage. Pouches would appear to have particular advantages in storage because Of their lighter weight and cubic design. There may, however, be unforseen handl- ing problems and additional marketing costs attributed to product promo- tion and consumer education which may need to be considered. Costs associated with development of the food prOduct and technical processing characteristics may reduce the comparative cost advantage of the pouch. Initial research and development for pouch use and production start up costs would also contribute to increased costs associated with pouch processing systems. This would certainly be true if the pouch processing system was being considered as a replacement alternative to an existing canning system. Alternatively, this difference in costs may be 158 insignificant if the decision has already been made to replace an old canning line with a new processing and packaging system. Initial planning and start up costs may be similar for a new canning system and a retort pouch packaging system, therefore, the advantage of the retort pouch system may be maintained in such a comparison. This study has considered replacement of an existing process in an existing food processing plant. It has not considered the alternative of constructing an entirely new fruit and vegetable processing plant with either a new canning equipment complement or a retort pouch packaging equipment complement. Consideration Of the price of the product is an additional issue which is important. If retort pouch packaged fruit and vegetable products are of considerably higher quality than their canned counterparts and approach the quality of frozen fruits and vegetables, they may draw a relatively higher price in the market. A higher price than the can pro- duct price would increase the attractiveness Of the retort pouch packag- ing system for the processor, wholesaler and retailer. A major issue which effects the results of the study is related to the replacement equipment complements that were considered. It was assumed that if retort pouch processing equipment were to replace exist- ing canning equipment, the machinery which moved the canned product from operation to operation in the processing line could also move retort pouches with a minimum of modification. The possibility of this assump- tion being correct would vary a great deal and is a function of which processing plants are considered. This assumption was used because there is a substantial amount of uncertainty surrounding the particular design and types of equipment available for use in these Operations in any 159 particular processing line. If this assumption is not valid, the cost advantage attributed to the retort pouch system would be smaller. A somewhat more valid assumption is that the cost of acquiring and Operating equipment which moves pouches or cans from one processing stage to another in a new processing line would be essentially equivalent although the actual equipment design may be quite different. If this is true, there is a greater level of confidence that the retort pouch processing system holds a cost advantage over a new canning system. Quality control problems with canning and retort pouch packaging systems have been assumed to be equivalent in terms of costs. The lack of technical experience in processing pouches on a day to day basis may make this assumption somewhat questionable, although, it is hoped that these problems have been previously considered in the design of processing equipment. A majority of the price projections are based on 19705 price series data and the results are dependent upon the historical relationships hold- ing true for the forseeable future. Importantly, the historical price series may be suitable for projections because they are from a period when real energy prices were rising. However, a different rate of increase in real energy prices would also have an effect on the other prices and costs considered in the alternative packaging systems. Unless there are sub- stantial changes in the pattern of price increases, the retort pouch system will become more attractive. The results of the study are only valid for fruit and vegetable products which are currently packaged with brine. A reduction in the amount of brine needed in the package was used in estimating the size of the pouch for the retort pouch packaging system. Less brine reduces 160 process times and energy consumption costs in the retorting operation and weight of the processed product for consideration in the calculation of freight costs. Energy use in processing was estimated from two energy accounting studies. A problem with these estimates is related to the potential improvement which may exist in new canning and pouch processing equipment. New processing equipment would be more energy efficient than similar older processing equipment. Even without reduced process times, a retort- ing system would likely use less energy than an older system because of the fact that newer retorts would be more efficient. This change in efficiency was not considered. The investment and operating costs estimated in this study are not total system costs, but partial costs in the sense of partial budgeting costs because only those components of the packaging system that were not considered to be common and equivalent in terms of costs were considered. The results, therefore, should not be interpreted as a comparison of actual total Operating costs, but only a comparison of those costs asso- ciated with those parts of the packaging systems which were considered to be different. The calculations which are used to estimate the optimal economic life of the replacement equipment are based on the aggregate costs of the equipment complement. This assumes that all pieces of the equipment com- plement are used at equivalent rates in each production period and are effected by the salvage function and maintenance function in a similar fashion. Their patterns of depreciation and maintenance and useful physical lives are equivalent for equipment within alternatives and across alternatives. However, under actual operating conditions, one piece of 161 machinery in the equipment complement may wear out before the other pieces. This could effect the results of the study to some degree. The comparative costs of the alternative systems may be effected by the total amount of fruits and vegetables being processed. The costs may vary with the level of output. This study assumes fixed levels Of output in each production season and for each alternative process and does not consider the effects Of a variable length processing season and the total tonage processed. In summation, it is the position of this study that retort pouch packaging is not the only viable processing and packaging alternative for fruit and vegetable products. In fact, a retort pouch system may not be the minimum cost system under some production conditions. The study, however, does suggest that retort pouches clearly have some specific economic advantages in certain components of the packaging system under study and that they should be considered in any evaluation of replacement of an existing processing system or investment in a new processing plant for fruit and vegetable products. Importantly, the results of this study should be considered with reference to the conditions under which the study was conducted. Managerial groups should consider any implications the preceeding issues have on the evaluation of a retort pouch packaging system. Suggestions for Future Research Further questions surrounding the use of retort pouches for packag- ing fruits and vegetables need to be investigated. Other types of research which are required as an input into further analysis of these questions is also needed. Several are pointed out below. 8. 162 Additional research concerning the economics of the retort pouch is needed in the retail and home preparation sectors of the food system. Questions concerning marketing issues, retailing costs and benefits and costs for home use should receive further attention. Disposal problems and the poten- tial for recycling may also need to be studied. Although the retort pouch appears to have a great deal of potential for institutional markets, further research is needed on the problems of processing and handling large pouches in the distribution stages. Even less is known about the economic feasibility of the institutional size pouch as a replacement for large institutional size cans. Other cartoning and shipping container alternatives and their costs may prove feasible and provide additional cost advantages for the retort pouch packaging alternative. Further research in this area could prove beneficial. Improved data on processing times and energy consumption Of the equipment complements for the alternative processing systems would prove valuable. Establishment of a relation- ship between the size Of the package and the required amount of energy needed for processing would prove useful. A better understanding of the relationship of total pro- duction costs and retort pouch product package size is also Of interest. From an engineering and food processing perspective, the processing characteristics of a wider variety Of products need to be developed and standardized as they have been to a large extent with cans. Improvements are necessary in the techniques for determin- ing or estimating freight costs for a variety of transporta- tion modes at various transport distances. This research would be of benefit to a wide variety of studies in which transport costs need to be considered, particularly under the conditions of rising real fuel prices. Projections of energy prices under selected scenario con- ditions would be extremely useful for use in the evaluation of new energy saving technologies related to energy policy. Improvements in Operationalizing economic replacement theory under conditions of technological change and rising costs should be made. This is particularly important as energy prices continue to increase at a significant rate and efforts are reinforced to evaluate technologically improved ways of handling energy and using it productively throughout the food system. 163 In addition to the more technical research needs and narrowly de- fined research needs identified, further identification is needed on how fundamental institutional and market characteristics will effect retort pouch adoption. The impact that retort pouches will have on market structure and performance and institutions is an important area for future research. APPENDIX A PRIMARY DATA FOR ESTIMATES USED IN MODEL DEVELOPMENT APPENDIX A PRIMARY DATA FOR ESTIMATES USED IN MODEL DEVELOPMENT A.l--Pouch Can and Carton Weights 1000 5-1/2" x 7" pouches weigh 12-1/2 lbs. 1000 211 x 304 cans weigh 109 lbs. Source: Hodinott (1975). 5-1/2" x 7" pouch .00032468 lbs./sq." .00281035 lbs./sq." 2-11/16" x 3-1/4" cans 2nR or 00 Circumference Circumference of 211 x 304 can = 8.44305" Height Of 211 x 304 can = 3.25" Area of Can Walls 27.439913 sq." nRz = 5.6726742 sq." Total Surface Area = 38.785261 sq." Area of Lids each Weight per Area = .00281035 lbs./sq." 6" x 8" pouch 48 sq." 303 x 406 can 59.770167 sq." Therefore: 1000 6" x 8" pouches weigh 15.58464 lbs. 100 303 x 406 cans weigh 167.95509 lbs. Weight of Cartons = .0065471 oz./sq." Source: Kelsey (1976). 164 165 For a 5-3/4" x 8" x 3/4" carton Sides = 3/4" x 8" x 2 = 12 sq." Faces = 5-3/4" x 8" x 2 = 92 sq.“ Ends = 1-1/2" x 5-3/4" x 2 =_lzgg§ sq." Total Surface Area =121.25 sq." 1000 5-3/4" x 8" x 3/4 cartons weigh 49.61 lbs. A.2--Transportation Calculation for Pouches, Cans and Cartons Truck dimensions 45' L x 90" W x 110" H With pallet dimensions of 5" x 44" x 56" The approximate useable space is: 42' L x 88" W x 104" H or 2669 cu. ft. Source: Based on information in Lopez (1975) pages 120-121. One truck potential for loading containers: 25.72 cu. ft. .2778 cu. ft. 1.14 cu. ft. 1000 303 x 406 cans 1000 6" x 8" x .01" pouch 1000 5-3/4" x 8" x 3/4" cartons Source: Calculations based on information supplied by Reynolds Metals and American Container Corporation. Cans: With 2669 cu. ft. useable truck space 103,770 cans-can be loaded with a weight of 17,429 lbs. Space is the restriction and not weight. 166 Pouches: With a 40,000 lb. weight limitation approximately 2,566,629 pouches can be loaded with a volume of 713 cu. ft. Weight is the restriction and not space. Cartons: With a 40,000 lb. weight limitation approximately 806,289 cartons could be loaded with a volume of 919 cu. ft. Weight is the restriction and not space. A.3--Estimated Weight of Retort Pouch Products The shipping weight of a case of 24 6" x 3/4" pouches containing fruits and vegetables is estimated as follows: Product 24 x 12.0 oz. net weight = 18.0 lbs. Pouch 24 x .01558464 1bs./pouch = .347 lbs. Carton 24 x .04961 lbs./carton = 1.19 lbs. Shipping Case _ = _2;§Z_ lbs. Total 22.23 lbs. The product weight is based upon the assumption that the liquid component of the product can be reduced when packaged in retort pouches. This is due to the pouches ability to reduce void air space when vacu- umized. Assuming that the comparable pouch will have the same drained weight of product but less fluid the figure of 12 oz. of net weight is used. A 6" x 8" x 3/4" pouch is deemed suitable for 12 oz. of fruit and vegetable product.1 1Size is based on personal communication with the Project Direc- tor of the Flex-Can Program, Flexible Packaging Division, Reynolds Metals Company. 167 The shipping case weight is estimated to be the same for pouches as it is for cans. In reality the weight of the shipping container would likely be less for retort pouches than cans because the case would be smaller. The possibility does exist that heavier materials or other packaging materials may make the case for shipping retort pouches heavier. Little information was available for making estimates concerning the weight and size Of the packing case. In this study it is estimated by subtracting the weight of 24 303 x 406 cans and the net weight of the packaged product from the total average case weight of 30.7 lbs.2 for a case of 24 303 cans. The net weight Of the product in cans as reported in Sacharow & Griffen (1970) was assumed to be 16 OZ. A.4--Transportation Calculations for Processed Pouched Products and Canned Products Dimensions: One case of 24 303 x 406 cans has the following dimensions: 12-3/4" L x 9-9/16" W x 8-3/4" H. Source: LOpez (1975), page 122. One case of 24 5-3/4" x 8" x 3/4" cartoned pouches are esti- mated to have the following dimensions: 11.5“ L x 8" W x 9" H. One case of pouches requires 828 cu." or .479 cu. ft. One case of cans requires 1066.8 cu." or .617 cu. ft. 2Source: The Almanac of The Canning, Freezing, Preserving_1n- dustries, l979. 168 Processed Cans: With a 40,000 lb. weight restriction for trucks approximately 1302 cases could be loaded with a volume of approximately 803.33 cu. ft. Weight is the restriction and not space. Processed Pouches: With a 40,000 lb. weight restriction for trucks approximately 1799 cases could be loaded with a volume of approximately 861.72 cu. ft. Weight is the restriction and not space. A.5--Freight Rate Information for 1980 The freight rate estimates are based on information collected from freight haulers and commodity transport companies. The rates are adjusted for the weight of the load assumed in the study and are reported in Table A-1. A.6--Transportation EnergyRequirements Energy Requirements for Capacity Loads: Loaded truck - 0.01089 gallons/ton-mile Unloaded truck - 0.00733 gallons/ton-mile Total - 0.01822 gallons/ton-mile Total assumed no backhaul--truck departs full and returns empty. Energy coefficients are based on a 22.1 ton unrefrigerated truck. Source: Barton (1980). 169 Table A-lu-Freight Rate Estimates (l980) All Other Energy Cost Costs Fuel Associated $/1000 Associated $/1000 Container Miles Ratelgwt Surcharge Total With Total Units With Total Units Food Cans Class 50 ITEM 52755 250 $2.22/cwt +13% $ 501.72 $ 42.03 .405 459.69 4.43 500 $3.28/cwt +13% $ 741.28 $ 84.07 .81 657.21 6.33 750 $3.74/cwt +13% $ 845.24 $126.10 1.21 719.14 6.93 1.000 $5.08/cwt +132 $1,148.08 $168.14 1.62 979.94 9.44 Information and Totals Based on a 20,000 Minimum Load Requirement Paper Board Cartons 250 $1.40/cwt +13% $ 632.80 $107.14 .13 525.66 .65 500 $2.07/cwt +13% $ 935.64 $214.28 .27 721.36 .89 750 $3.03/cwt +13% $1,369.56 $321.42 .40 1,048.14 1.30 1,000 $4.95/cwt +13% $2,237.40 $428.56 .53 1.808.84 2.24 Information Based on Loads Weighing 36,000-43,000 lbs. -- Totals Based on 40,000 lbs. Load Pouches Class 60 ITEM 20480 250 $1.77/cwt +13% $ 800.04 $107.13 .04 692.91 .27 500 $2.4l/cwt +13% $1 .089 .32 $214.28 .08 875.04 .34 750 $3.04/cwt +13% $1,374.08 $321.42 .13 1,052.66 .41 1,000 $4.97/cwt +13% $2,246.44 $428.56 .17 1,817.88 .71 Information Based on Loads Weighing 24.000-43,000 lbs. Totals Based on 40,000 lbs. Load Source: Personal Coumunications with Yellow Freight Lines Packed Fruit 3 Vegetable Commodities in Cans 250 $ .92/cwt +13% $ 415.84 $107.14 3.43 308.70 9.88 500 $1.38/cwt +13% $ 623.76 $214.28 6.86 409.48 13.10 750 $1.96/cwt +13% $ 885.92 $321.42 10.29 564.50 18.07 1,000 $2.98/cwt +13% $1,346.96 $428.56 13.71 918.40 29.39 Packed Fruit 3 Vegetable Commodities in Pouches 250 $ .92/cwt +13% $ 415.84 $107.14 2.48 308.70 7.15 500 $1.38/cwt +13% $ 623.76 $214.28 4.96 409.48 9.48 750 $1.96/cwt +13% $ 885.92 $321.42 7.44 564.50 13.07 1.000 $2.98/cwt +132 $1.346i96 $428.56 9.93 918.40 21.27 Information and Totals Based on 40,000 lbs. Loads Source: Personal Communication with Michigan-Nebraska Transit Company, Food Commodity Carriers A11 mileages are based on shipments from Lansing to Joliet, Illinois. St. Louis. Missouri, Memphis, Tennessee. Oklahoma City. Oklahoma respectively. Rates from different locations to different destinations of the same mileage would vary somewhat. 170 Energy Required for Less Than Capacity Loads: 40,000 lb. shipments of cartons, pouches and packaged products-- [2(.00733) + .9(.01089 - .00733)] x 140,000 BTU/gal. 2500 BTU/ton-mile 17,429 lb. shipments of empty cans-- [2(.00733) + .4(.01089 - .00733)] x 140,000 BTU/ga1. 2251 BTU/ton-mile Energy requirements are based on BTU's of diesel fuel. A.7--Energy Price Estimates for 1980 The energy prices listed in table 4-9 of the text are based on the historical trend in real energy prices. Historical data on energy prices in recent years is presented below in table A-2. Table A-2--Historical Energy Price-Data Industrial Industrial Diesel Year Electricity Natural Gas Fuel ¢/KWH $/100 cu. ft. $/Gallon 1 2 1 2 l 2 Actual Real Actual Real Actual Real 1979 3.03 1.39 ' 2.03 .94 .79 .36 1978 2.77 1.42 1.54 .79 .53 .27 1977 2.50 1.37 1.32 .73 .51 .28 1976 2.21 1.29 .97 .57 .45 .26 1975 2.07 1.28 .73 - .45 N.A. 1974 1.69 1.14 .53 .36 N.A. 1973 1.25 .94 N.A. N.A. 1Actual price data was collected from the DOE Monthly Energy, Review, various issues. 2 CPI. N.A.--Not Available. Real prices are estimated by deflating the actual price by the 171 The 1980 national average electricity price was estimated from the trend in prices from 1973-1979 using the following equation which ”describes the trend in real prices. The inflation rate in the CPI was assumed to be 15% above the 1979 average level. Real Electric Price = -4.l7447 + .0715672 * Year (-3.67) (4.79) R2 = .82 A 1980 national average industrial natural gas price was esti- mated from the trend in prices from 1974-1979 using the following equa- tion which describes the trend in real prices. The inflation rate in the CPI was again assumed to be 15%. Real Natural Gas Price = -8.20521 + .115611 * Year (-20.81) (22.44) R2 = .99 An annual average price of diesel fuel for 1980 was estimated from the 1978-1979 trend in prices again assuming a 15% rate of infla- tion in the CPI. It was felt that the 1979-1980 period would be very similar to the 1978-1979 period in terms of diesel fuel price increases. To date this appears to be the case. A.8--Projected Cost of Containers The cost projections for the various containers considered in the analysis are based on the historical trends Of price indexes which apply to metal cans, cartons and retort pouch materials. These in- dexes are listed in table A23. A real price index was calculated by deflating the actual price index by the aggregate PPI. 172 .mompmo mUou .~n_n_ .._. xmficw w..w:rmvcou w..w mmxon gamma m .82. .8 oo..oo=8 8.88 x88:.w ..o.o..mo. 8808 ..88 :. x88:. 8:88 8o8 x mom. 88..- n 8>< 88.. + n 8>< 88w.m+ m>< 8N8. 8w.. 888. 8.. mwo.. 88.. m... m..- w... 88.. 8.8 1 ~88. om. 88.m+ w8o.. o... 8.8. 8.81 mom. 88.. ... + wum. 88.. 8...+ 88... oo.w 8.8. 8.8- 888. 88.. 8.m.+ m88. 8w.. am..+ 88... w..w 8... ..8- 888. 88.. 8.. 1 888. mw.. a..w+ om... .m.w n... 8.8- 888. 8... 8.8 1 8.8. .w.. 88.8+ 88w.. m8.w 8... 8.8+ .88. .m.. .<.z 8w..- w8w.. w..w a... .88. 88o.> .88. .8opo< c88> 88o.> .888 .8auo< :88> 88o.> .888 .8opo< 18.... so... 8 18... so... 18... so... . 88:8:8 a 88:8:8 a 88:8:8 a 8:ooc88 88:83o8 peop8m 8:88 :88. mumoo 88:.8p:o8 .8o.coum.z1im1< 8.88. A.9--Maintenanc Equipment The maint collected by su Table A-4--Main 173 e Costs for Existing Processing in l980 enance costs for the existing processing equipment was rveying the existing plants' production managers. tenance Costs for Existing Processing Equipment (l980) . . Total Mainten- Operation Number of Units ance Estimate Plant A Fillers 5 $ 1,240 Exhaust Box 2 900 Seamer 2 6,000 Batch Retort 3 375 TOTAL $ 8,5l5 Plant B Fillers 2 $ l,400 Seamer-Syruper 2 9,800 Continuous Retorts 2 4 500 TOTAL $15,700 A.lO--Discount The real equation: where: rr Ill" ri Rate Estimation discount rate is calculated using the following real discount rate nominal discount rate--interest rate on long term comnercial and industrial loans = inflation rate—-percent annual increase in GNP deflator 174 Table A-5--Interest Rates on Long Term Commercial and Industrial Loans Year Q Q Q Q Annual 1 2 3 4 Average 1979 12.01 12.23 12.52 15.15 13.08 1978 9.19 9.67 10.20 11.38 10.11 1977 N.A. 8.24 8.09 8.71 8.34 1976 8.02 8.02 8.45 7.48 7.99 1975 10.26 8.22 8.89 8.88 9.06 1974 10.16 11.41 13.08 12.16 11.70 1973 7.11 7.66 9.82 10.68 8.82 Source: Federal Reserve Bulletin, various issues. Table A-6--Gross National Product Deflator Trend Year Q4 % Increase From Prev1ous Year 1979 170.74 8.97 1978 156.68 8.20 1977 144.82 6.21 1976 136.35 4.75 1975 130.17 7.53 1974 121.06 11.01 1973 109.05 7.50 1972 101.44 Source: Survey of Current Business, various issues. 175 Table A-7--Estimated Real Discount Rate Trend Year Rate 1979 3.77 1978 1.77 Average Real Rate 1973-1979 1977 2.01 1.99 1976 3.09 After Tax Real Rate 1.07 1975 1.42 1974 0.62 1973 1.22 A.11--Estimation of the Annual Increase in Real Costs of Processing Equipment The capital equipment cost projections for the years following 1980 are based on historical trends of the producer price index which applies to food processing equipment. This is code group 1161 and the index for years 1973-1979 appears below. A real index was calcu- lated by deflating the actual price index by the aggregate PPI. 176 Table A-8--Food Products Machinery Producers Price Index PPI Food Products Year Machinery 1:23:23: 52:: 1979 2.325 .988 -.018 1978 2.106 1.006 +.005 1977 1.943 1.001 +.018 1976 1.798 .983 +.036 1975 1.659 .949 +.036 1974 1.471 .919 -.055 1973 1.309 .972 AVE = +.004 A.12--Replacement Values of Equipment in 1980 for Insurance Calculations The replacement values of equipment in 1980 are the acquisition costs of the durable equipment used in the processing lines. Replace- ment values for the equipment in the existing processing plants is based upon the cost of new canning equipment which would replace the existing equipment. The values for the new canning equipment and the retort pouch equipment are their current acquisition costs. 177 Table A-9--Insurance Replacement Values (1980) Plant A Plant 8 Operation ExistingiEquipment Filling 40,000 40,000 Syruping N.A. 130,000 Closing 60,000 60,000 Retorting 315,000 460,000 TOTAL 415,000 690,000 New Canning Equipment Filling 40,000 40,000 Syruping N.A. 130,000 Closing 60,000 60,000 Retorting 315,000 460,000 TOTAL 415,000 690,000 New Retort Pouch Equipment Fonm/Fill Sealing 1,500,000 1,800,000 Retorting 315,000 420,000 Dryering 30,000 36,000 Cartoning 300,000 300,000 TOTAL 2,145,000 2,556,000 with Fill/Seal 700,000 840,000 TOTAL 1,596,000 1,345,000 A.13--Misce11aneous Information and Conversions The indexes and conversions listed in table A-10 are used in various calculations and are listed here for reference. Table A-lO--Se1ected Indexes and Conversions 178 m; Year PPI CIP GNP 1979 2.352 .174 1.655 1978 2.093 .954 1.520 1977 1.942 .815 1.417 1976 1.830 .705 1.337 1975 1.749 .612 1.271 1974 1.601 .477 1.160 1973 1.347 .331 1.058 1972 1.191 .253 1.000 Conversions Natural gas Diesel fuel Electricity GJ 1000 BTU/cu. ft. 140,000 BTU/gal. 3,413 BTU/KNH 9.485 x 105 BTU APPENDIX B COMPUTER PROGRAMS USED FOR ESTIMATING THE COSTS OF THE ALTERNATIVE PACKAGING SYSTEMS APPENDIX B COMPUTER PROGRAMS USED FOR ESTIMATING THE COSTS OF THE ALTERNATIVE PACKAGING SYSTEMS 000000000000000000000000000000000000005600000M05600n000005”5Wfi”5050”..0a50“"””5” 0.12345678901234567890123456789012345677789012 40456 890122 9 8901. 45 0 1.1111111112222229.2223333331833344044A.444A...455555555555566666666666777;7777888 ’ o \l t 8 0 r. I I 8 0 09 U U ( 0 t 91 08 I T L \a \o 8 8 EE 0( ( )0 E 0 )0 9 R TT 80 TI08 E 8 08 I I 1m 1 1“ noam w m mm 8 u D 0 R 8 1 I 10".. O C I, F O v 90:: T01 EC,’ 0 I 0 t 88 (0)9.) 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H U R 0 s s 0 m OES H 01 A1(8F8) v(00VP 9.18 TPN o o QT0R ..No P L C 0 0 S S 8 N ..l 6R5 9 OE H(L(U(0 )EBBPTIO 9 o. QEIT‘JUB 9 tEt I A N 0 I E E 9 I t EPE v. 4T ENACHRB 0C o 9 o 0080 ))P0008() 9H9 U V I 0 G I C C 1 S P C H EA PISRPF 0 8000))8(1 00 9888 900 ..Ec O R 1 X E N S O 0 S E AEO H TD ORPC 0P0 0T1100(Y( 88)(( 0T8 QT. E E H T I E T I R R N A TTR O A 9 )P 9 OIAI 0V((83F62 ((ORNUIA 0 0A! C I N S D U s 0 P D- I 5 CAP P 04 0 9))0 o( 1P1C((PNC NN8FAI(H0 9T. 5 N S E N I S 8 8.. TL 0 I 8)OOB)P)( oCORFBEE AAIERtTEl .8. N A C T I N E 9 E L L O UUH N 3E vOEBlOEDCTEVCPETV RRFTTVNP( o t I R 0 R S I C 1 R R E A .T S PCC 0 ET 8 05 9(680880VPEAVVP TTPOENI 0T .89 S U 8 E 0 T N O X 0 E U R m TLU L TA T 110PN(T OVBP OVEPP O’TPATBITIU OE! S S 9 P C s R N E F T X F. U .0 e UAO 0 AD N ((ITUC 0P(9)PVT IOOOEOOOPOT tLt E N I 0 R P I U E F E T e t CCP L D O E CB(RHF 91. 91,0 9P 9,080,?)0’ 98 9 .8. C I X H C E N B A D L A S S 0 o 02 H DBSEPE)(TC08) 0’08 000 0000) 0) 0A.. 0 N E C P S T I N E N U V. TOT S D 21 E P 00 o OAOVOAB 90308 008811888000 ..Ic R0T I D U H Y S S S I S 5 UTR T H EE T I.) O), .8018 9 90808(UI((0(((818 OR. PUN N o C D A 0 T E E I F P 0 N H TT A TUIOUI 9 9 9)01(8(FI(TV~8NRN '( I .Ato 0E E I P U E E D C s L L L E 0 m NHT E 0 AA T 0508800)001(P(RP(255(AEA0N0 0V. 0H0" T . U S N U I I E D a g IAE H I 00 S 118((81018(1TLCA3CRRFRNRITI t t oCOE A E T P U I F N C H N U E 81 n (RR E R 00 (((CF((8((CCREEECAEEPTET(A( tEtDUOC R T0R L 0 0 F F C 0.71 KG T L 11 N CTIPPLC(TCBOEEVVEVNNBETECHIT 92.. 005A A00 T S 0T N T T 00I 0 g COF A 9VE1 O ANSTBEOCIVDVVVPPVPEEEATBEEV9 aIa 0P4L R R oTQR E N ROR 0 H H L 6R r a ARO T HNTE I PIDREETATPTPPPTTPTTPPPPPTPR?) 9L. 0 1P20 0E90 S 0 E oA T G 65E E 0P P k PP S CIATNS 9.. 9A.. 3T2E03 R8ROT A 85C R I I0STC2 C P L oDATN NNNNNNNNNNNNNNNNNNNNNNNNNNN ol..Ia8R:R 0A 0 0E 0K R H2 0A E E oESI: : r. a L 9T 0 E 0000000000000000000000000001. ..Tg 10) TLOB: .. oROC 050 :OC R R11 oR)) e P H A RNR 9R" IIIIIIIIIIIIIIIIIIIIIIIIIIIG‘ t I t : T1. = .. .. UATDI 0A BIN .. 0 UFO-r 08911.]. t A E IIEOEI SSSSSSSSSSSSSSSSSSSSSSSSSSS(TtNtTE t))) oLII: :SP A )II:5 5 : ..(( R R 6160 NNNNNNNNNNNNNNNNNNNNNNNNNNNEA..I...IRIIIII ((II 8L :11: 7..T:::FFGG U 1n 6 LLEEE EEEEEEEEEEEEEEEEEEEEEEEEEEETH .. ..(..((((: ..CCCC: .. = .. = ((II: .. DDNN m W 0 AATTT NHHHHHNHHHHHMHHHNHHHHHHHMHHIMt o..ACCIIHWIIPPWWMNMPWCCNMHHHHHHWWWW AN IIIIIIIIIIIIIIIIIIIIIIIIIIIR t t AVVC RRTT 8 RR FF MW % M MMWDI DDDDDDDDDDDDDDDDDDDDODDDDDDUF c cPPRRLLLLRRRRPWLLNNCCCCBBAADDPPPP X t t . t t . o t o 9 t i B CCCCC CC 9CCC C C C C C C C C C C C C C C C C 179 180 0 0000 0000000 00000 00000 00000000000 01230 00000000000 00 00000 00000 00000 000 505 050 50 505050505012301 2305 6789012345678901230567890125 444. A.5 678 90123056789019.1814 56789 01234 567 2345678901234567899999000000000111111111122222222223333333333333444444¢444555555555566666666 888800889999999999999911111111111111111111111111.1111111 1111111111111111111 11111 11111 11111111. KKKK S H CCC E KKKK E E N HHH AAAA L CCCC S 5 I 0 PPPP I AAAA A R 0000 H PPPP H A D 5050 0000 C H E 2571 0000 0 0000 T S R C T T 0000 5 0000 R S E U E R I TTTT 1111 2 0000 E O X P C T A 0 AAAA IIII 1111 V C A N S T E 3333 T IIII 0 T R A R S R 5665 A SSSS 0 N E R E C NNNN 8 T o R T U T N 1111 S G SSSS 9 S I 0 F S N A X 8388 SSSE N EEEE 1 O T F A N I 0 A SSSS EEEL I LLLL U C S I L T EEEE LLLI S IIII T N I R A CCCC IIIH S HHHH B I N U E N R U N T 0000 HHH E 0 0 V 0 0 N E N RRRR 0 C 0000 N T I C 0 I F N H E PPPP 0000 0 5050 0 H N T A T A U H 5050 R 2570 I H E I N A D T EEE 2571 P 1 L K H T S Y 0 R E F t S RRRR T L I P N I R I E N 0 E 0000 T R A I S I E U E T P 0 0 R V FFFF A E H R U H 0 N A 0 L N A N EEEE T Y 1 U 0 P C I I L 0 N E I 8888 . Y F G I 0 0 E I A H C F A T A V1 G A R S 8 H U C E 0 A H C YYTV: R E 9 R C a E A R T L T N N 55an E v1 M... 0 1 R U N E T H P N S U I A RRRR N G E 8 E 0 I A E O 0 C R EEEE F. R 9 N P H T G L 6 0 I C L H E E E NNNN E 0 1 I X X S N U N T A T T G G EEEE 0 N T S R E E I I C I E A E C2 N A R R T .E N T A E D 0 X S L S T R S 1 0 E A A TTTT D I T G P N X N E S A S A E A R H R H H UUUU C T E I I E I E C E L D H 09 61C C 8888 E U T L C L D T C C U I C F R t T B U I I L I S N V1 S U o 0 C S R N E E 9T T LLLL U E 0 R A 0 A I T 0 R T R L N U SA 9. GXS S LLLL B L 1 T R 6 I C D: P A 0 P HO AIE E AAAA T. L R L C U L L C H C C TL N V(R R R A T E E T E L I I E D C E L N A LTE E TTTT T T U L A U A 0 R C L I S 0 R A ON 0 ANT T SSSS T. T A F E N F R T E N 0 H A T O N HI L SIN N v: 0000 A S R U L C T A U E F I TI I A CCCC 0 T F F U U U T E E A N F R S C FS N S D T C S 0 0 T T 0 A U L R E 0 S C R S I 0R 0 REL F TTTT S 0 B B H N F E 0T R N A R R A AOA 0 R HHHH 0 T C E E5 TON E A I E A 0 RE E E T 0 E 5565 3 C H CTCTN N R F F F. N oI G E V1 E ET T TNO N 00 S P 1111 2 6 7 T 0.18180 05E 0 050 U5A A v- 0 v- F B A OT 0 0 o N LEEE 01 T I5807H URSRAI 1291 0 07H QT F 0 HF R £11 I :0 S 0 SéRRRRD—ITSH E10 025 860 oP0P1L0L6 E EoE CS: E F0 0 F U0 OT: TJN): F N do R1FFFF9 .96 RooSoI 494 0 0 1L oLSH C CIC S..1 G 00X 0 T N T A) A 9 Oz, 0 9H 90 U o 1 01 753 F7911E o o 03 : : 0 0I01 0U5I51 I 110A 0E R N RZS R2! 21112 11 1: 0 = z = : 2E 1550 2R 2479 11 : : 0H : H4KOROR R 01(0R RID E R E LEIR E1 O 1:: QIEEH 2 +E..TE H .. : 2 : R a o .7: z z = = F 0 11113 3 0P 0P P7 (0 0E E N 8 E C ABIE BLXXLXZX 9UUUOUSU11U 12341234.? 011230 9 ((11: .. = 1:1 1 0LOT5V B 10H 8 1R THST HAIIAIIIRNNS OINNIIN : : CCCCCCCC .. .. z = : .. : : CCCCC : = : = = =. .. 00((HHHH .. : : : z .. :1ATA2A H: :IU H 0E00U1N4UI( I (III 0 S1 (I DDFFFFFFFF125412SRFFFFFIZSQIZ A. FFHHGBUOHHIIIIII0EAH : : UII NUU QPSTN oIINTTRT65T(TT : :8 : T9 NT 01910000 0000 CCCCCC CCOOOOOCCCCCCCC UUUUNNFFHHGGOOLL oRHEEElNCC: :5N : .. : : : : : : :INAI NVNNSS SN IN SSLLLLLLLLFFFFFFFFLLLLLFFFFFFFF HHKKUUUUUHNNFFEE::EPGG::AADD:: IINNNRRSSNIENOOINOONNONOOHO RRAAAAAAAAEEEEEEEEAAAAAEEEEEEEE PPPPHHHHHKPPPPPPRRP AAJUPPNNRN PPTTTIINNITV-IDDTICCSSDSCDRC HHBBBBBBBBBBBBHB BBAAAAAAAAAAAAA. CCCCCCCCCCCCCCC CCCCCCCCC C 9CCCCCCC CCCC C CCCC 181 00000000000000000001259509001230000000000000000000000000000000000000000000000000000000000000 39012345673901234566666677899990123456789012345678901230567890123056789012345678901233333333 66777777777788888888888888888889999999999000000000011111111112222222222333333333344404000444 11111111111111111111111111111111111111111222222222222222222222222222222222222222222222222222 iii. a t 95 t A 9N t I .1 t .8 t R «S t A tE t E 9C t T «O 9 NT 9R 9 N ON OF C I IE t t SH tH t T 1 RP 9 9C a S E1 c 9U 0 O VU t to t C it. NO t 9P t t t OE t t t TTt t C t tT t NS. t E 9 OR . E0! t TH t to t HCt t IT t CT t P t t 0 t 9E t IN. 0 EE t tR t UOtTt RH * t t 0111. C1 t tF t ETQDt T t to a ItEt T t o a GStRc NF 9 9T 9 NItCt HEO t is t IUt t 0H t to t SOON. LTT t .C t SAtAt LSH t t T! E QT. AEC t tNNt CE. 9 VN t ODE. CSQTQ 73 THE 0 11H! RAtNt 63 IIL i CTP! PEiEt 63 D i .11. Rth 65 ETF t OSUC HCtTt 63 C RSON! «IO: CNtSt 63 C CO 0* tUEt UItEt 63 V CHI. *0 t I O tVt 063 I X 0T9 oC t C POcNo 1000C ANIC: E 9A 9 A TtIt ooooA TOTU: T t t P T t t 00000 1CD! A tF t t RXtFt ::::1 TTNO... R to t I UEAOt CCCCA NIURQ t t 1 TD. 1 CCCCL ESFP: AN 0 . ENtNt vvvv0 HI t X to c A R1909 IIIIC TUANt A *1 i I '1. CCCCA SC It T tT t J0 ::tTtJNAAAAP EAS t tA t 9C I tAtIOIIII: V=Iot L tL i 2A A tLt1177531 NC Li A tU t :P I tUt::ooooX ICHEt N rC a A:E (ItCtAXETTTLEE:VCHt I tL t IIU CCthLLGLLLoUUVII t “ 9A 9 AN AAtAt coooANNNCHSt 6 QC t 011 PPOCQZIXXXXLIIIAUI! A“ t t 1(T t t11LLLL(TT t H0 t 1 CN 0 t ((((VNN t :: t t OAO t tOOFFFFNOO 1 TT t t DPC t CODIIIIICC t t t t I Q t t t A t t i i C O t t 0 t t t o t I t a 12 a C CCCCCCC CCCCCC 11CCCCC t Io CHARG FUNCT CHARGE YEAR OF OPERATION. R*((10IR)*OTN))I(((IOIRDOOTN)-1)T RETORT POUCH OEPRCIATION 1C): AND IC Ito CALCULATION or ANNUAL INTERST CHARGES ifiiitfii...t...i...AittttiitfififitttiQIOQQOOIOQOI CALCULATION OF DEPRECIATION Cttttttttttttttttt1.0.0...199.titiitttittilttttitttctttit PURCHA PDC(IE Ctitttitttittttttttit.fittttit.ttttttttttttttttttttttt Cttttt is I ’00,,IIK KKKKKKKI III-81.1110 00000009.! TTTTTTTN NNNNNNNI IIIIIII. #9909001 10110))9 23056780 IIOOOOOJ JJJJJJJI 11111110 0000000T TTTTTTTNI NNNNNNNIK IIIIIII TI )TTTTTTT:( K : : : : : : : )T 1,011,109“ 0230567801 TOOOOOOOJO NJJJJUJUI’ 1019111191 00 O0000000T1 ITTTTTTTNO INNNNNNNIJ OIIIIIIITI JTTTTTTT ( I 1T 0IIIIIIIIN TTIIIIIIBI N4680246OT 123467091: T O O O O O O O O, =EEEEEEEEU )LLLLLLLLI 1 O O O O O O O O . DKKKKKKKKJ JIIIIIIIII 1000000000 0.0000000T TDDDDDDDDN NNNNNNNNNI INIKJII 111111111 JJTJIIK(1246802O68 9191((182123067890 1010BA0E1 O O O O O O O .1 :C:CB:B:0TTTTTTTTO JAKA:TBIECSSGGCCGTEE0 IPIP’K31LooooooooGUUH =KIIOoKKKKKKKKoNNAJJEA::KTJSt 1010110KKKIIIIIIIIRII:IITTIIIKIAO t817J(NIII((0((0((ITTI (N0KK(I(H* t (OITI(((((((00(((NNJRCITIIN(TCt 103 (NRBBFFFFFFFFF OIA .:((I JR: QDBDAIPEBIIIIIIIIIVWC(EMWNBBRMUUQ AT ITBEPITP. t tttttttttfitItitttttttttttifiittttttt RTIZED MONTHLY PAYMENT FOR EOUIPMENT PURCHASED IN ION COST OF EQUIPMENT IN YEAR IJ N OF MAINTENANCE COSTS t t t t 00 00 * 78CCCCCCCCCCC CC 86t(IOAGE-1)) 1) *PIRC(I) =0PAC(IOI* (0003219*00001786*IE111 017 (I- 0032149(0001786*A6E) 5 Z NNNIJ 1ION *UUTIIIOSI0TI i03ATT0NN0CAT t HNNC: CHHN 30 5 0 182 00012500101250500000000000000000000000000000000 00 00000 0000 0012305 67800 00000 01000000 0000000 35555545566666678901234567890123456789012345 678 9012345678900000000001236.56789901254567890123 04400400040404444055555555556666666666777777777 78888888838999999999999999999990000000000.1111 2222222222322222229.22322222222222222222222222 22222222222222222222222222222223355353533553. N R E O A H I E T U T N G N R E N E H A : H G I H I E 6 P N T H Y. I E I I A R N C U S L H A N N E N 0 S U D I E I E H A E E C L 0 Y H U R C L O 8 R S U UOOO H O A 9 A N OOO SOOO F SO O E R C R 1 OOO E I O O EO O T L NO O N P 0 O O Y O O CO O N IO O R F N O O T O O OO O E R OEO N O O I O O MN N O O RO O H A RORO 0 L F T O O 11 E O O PO O P E OOUO 00 SI T O O H O O O O I Y POTO E IR 0. N O O RE 9. O O HO O U OIO C N 0 CI E OTO AU I O O CO O 0 N DODO N ORT H ONO EL U O O UO O E I EONO A AC ER P OEO VA 0 O O OO O HOEO N EEA CA I OHO V E O O PO O N E OOPO E CYF NE U OPO N O O O O 0 U LOXO 1 TON ATDO OIO 1 IE P O O N TO O NL LOEO R NIANNRN IE OUO 1 G O O O I RO O EOA AO O K I NIOAES OCO H EA O O OO O 01V OEO O ARE IETURG OEO I UV E O O R TO O RT OSO C HATESv-NOAN O O 0 LL U OEO A EO O AAE OAO L ENNR IIEI OPO I L AA L ORO E ROSO HRC TOHO 0 RVIIEOAVTS OOO I I VS A OUO V- OEO CEN SOCO 0 0 ALVTHE S O O 1 0 V OTO NOCO PA OORO T FNH N RNE OEO ( S LN OIO N IORO EOR COUO A I GORNPIC OUO I 0 AI E ODO I OAO C U OPO H E RNCAI 0 OLO S . N C ONO G ROHO NFS NO O E R001 E HTR OAO D 1 IE A OEO R N UOCO ACN UOHO P UEFSTYEOSP OVO O 10 GN V OPO U I HO O I R IRIOCO O TS SS SRO O O I .0 II L OXO 0 S AOEO C UR ATOUO I IAEECHAFCD OEO L H0 RL A OEO H S LOCO I A I SATEIOOO I C DHRCCOE L OCO I II: 0C S O O E ONO C P I NENVSOPO I a L NCUO RRTNO OAO 0 0H 9) EL LORO R C ROAO A O D. IVE IO O C I I ERTREFCNO OVO C SoILH FDILIOOO E OROORO P 1 O HEUOTO P ( B PUIPC NEIF OLO A NO0II O A OBO P TRAFOUO O 1 I L:EL°ORO T C L XPD NEIHTO OAO SD. 5:109 LRUROAO I APE OSO I 8 H AHC COUO R P ( E NEAG PI OSO N0 IISLL TAATAOLO R EX 0 YEONO 1 F I UIAEAOTO O T N NEHTNTISE O O S. )HDAI NUECEO O L Y GE Y S ROIO o L O N LH OEO 1 P0 R T :EPTNANUIS OFO ’1 HIOS0 ETYATOFO O H RD ARVRUO O 1 O G NDPTFORO 1 00 O A IHX IHEOUA O0O TL I()PL CC OOO I H ANEDEAETOPO . E I ANE OO O 8 0N0 T H EUENACCEO O O I .IL(A RAN:NO O 1 O HIN PDPIOOO D L ( ARN OFO P POI K E I IH R CE ONO .( 18135 E ITIONO . 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CALCULATION OF LABOR EXPENDITURE CtttttAtfitttittttttitttttttttttttttttiItttttttttttttttttttt C 9 PER HOUR IN YEAR IN 9 ( 0)*HHT H 1 N I R T D p LCH(IN-1’*LRT RS H0 =1 CH 8 R H H 0 L L R .Et 91...»...0 ’ULP TUTB NNODUONNA IILNSIIIL (T:=1(T(= NUT ENH1 OHHOLOCR CPNUPCLL 00 120 £N:20N LCH 120 130 CC 199 00 000012345 678900120000 000000000000000 00000 00000000000000000000000 00000 00000 0000000000 00000 23 456777777777789991234 567 890123456789 012349012305678901230 567890123856789012305678901234567 88888888888888 888880000 00000111111111122222398440400 AA. 55555 555556 66 66666 66777777777788888888. 22 2222 22 222 2222222 23333 33333333333333 33333 33333333333333 33333333 33333 33333 33333333333333 E 8 cat R N N t t 0 1 1 .09 t a P S U. A c a E S S It a t t 8 E E c t 6 t t C 55 Rt 3 N t t 0 EA At t 0 1 98* T R LK Eire. 1 T tNt G P 1C YtNt A or. N 91. R HA .1. R H t t 1 is: E E P N98. A 1 t t tSt N R 0 1.59 E T t t 8 9E: E 0 00 0E0 Y PS 0 t N 9C9 P 00 09C. LE t t A .0! T E 10 N90. 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C Rt1t R C 9R9 C 1 1 SSPAASE 95.0003 1 R( 8RAE A 0N9Nt 0R0. t UTA 900 P ( EE KKTP 0A10123 1T PC APG 0R NOtEc YRAPtPt 1 SNL 9P9 T C T CCSCCAX th333 1 2 P1 PP SH R 0 1 tPt APE *0. C NEPS: t R P S OOEAADE QC. 0 C C 3 A 0( 8E ECOA 5T E9X. 0 TE. 9 A 1HEE0N0 t T 0 RRGPP tAtOOOT P P C C QC 8 L OH H LRQEOPP Y S RtNt P ERGtAt 1 P0 R C PPA PL tPtTTT E E P P 1P .9 1T0CS:G EU. tDDP ARYRUQOQ c 1 LC RcCt 1 00 t X KL 0A 9 c 0 8 8 E E 1E T HH1 E21 UTtPtNND EDEAETQIo 1 P AAPAc t . 0N0 T NESSCAO T QPAOOOG o O 8 8 .8 TR C/TG E PItOtttN N PDPInTa 1 t ULOH.P¢ P Pt1 K ADEEATORO 909866 1 1 2 o 9 To KA TISHA R 0. .009 1R DtAt . 1 NP C901 1 SD] A CNGGPOOET t t 1 C C C 3 4 1C AP HE GKSP LNtNtPPD LESPSN-Lt 0 P NET 9 n ( RKK P 1AA T18 9Nt1110 P1P 2 P 3 C 4 C (P PT GRGTCE EEtOtSSP PROREcUt L L ARNEthNC HAANT : KK: H: 1090000 0C0 C20 C3P CAP NCO NTO 1PNEAL: SPtIaRRSN N U UPnCtN( N( ::ECtOtvP 09PP90 1TCC ::U1 *195050 LPL PCL PCO PCO vPL DOT E 1RP11 EXtTtHHR OSOROXtLtOI 91 11CN91¢2T oHTTlT PSAAD TN009T92571 AEA OPA OPL OPL 2EA 1T: R:SP HTTIEtActtH. RHEHE-AQZV 1V P0RAcTt:R 0P00= TOPPKKK 119Atoooo 888 LE8 LEA LEA :88 = 1 PCS 0 110 tLtHHt R0 8 tCtzR :R LLERtAtP: 6PTTO: (C AAA:( 9Lt0000 0A8 0A880A88 T:: U:U PE:00( :tUtGOH OONHN:¢ tD:EP:E((PUtLt11Eo: :11E C ::PPP PRtUtEEEEE:=:58::58::58::E111E111E :0CC05RR:P0C9NPH 8HAUA1¢ tL1UL1UC1:StUc PUHD:T 00 PNHHTTTPTAtCtooooU 113:1)3:113:11U TTU U(U HL0P12PA1PtLtUUU AzHNHOO t 0N PN1V1NtCt01NPKKK01N TAPPOOODREtLtHHHHNC11 C11 C11 C11N011N01NN PARE/:PEP8*A¢HHK LD 1. '5L16L1PRP1tLt 5‘1PAAA6‘1 RCPPTTTNETIA! FPPP1P((0P((UP‘ (0P‘TI6‘T17‘A1 88PB318TDEOC. : : .. :P:::(c t5(T5(T cAthTzPPPlPT tCtBBBBTOCRTOCRTOCRTOCRT3CRT3PRT a tGOH LSDPTE. t 1N CN 9C: PNHTTT TN 9 t((((NLPP LPP LPP LPPN PPN PTN t tNPN ORHDHLt tOVOOIO c tOTOPOOOORO c aPPPFOAEPOAEPOAEPOAEPOOEPOOBEO t tUUK LHPNHP. aDRCDPC t cDRCPTTTDEC t 91111C888688868886888C088C0E8C a tTTT t t g t t t a t t t a t t t t t t t t a 0 0 c t 0 0 0 0 0 0 t t c a t t 5 6 t t 0 1 0 3 5 6 T t t t t 5 6 g t 1 1 c t 3 3 2 3 3 3 3 t t CCCCCCCCC 5 SCCCCCCC CCCCCCCCCCCCCC 3 CCCCCCCCCCCCCC 200 00000000000000000000000000000000000000000000000000000000000000000000000000000000120000000000 890 12345678901234567890123456789012305678901230567890123A.56789012345673857809010558012356789 88999999999900000000001111111111222222222233333333334A44044440555555556666678999999000011111 333333333333000449040‘44AQQQAQAQAQAQAQQAAQAQAAQQAQAQ4040400444844440A44444440440404555555555 0 RRR J UUU 0 000U U G 0 R HHHT T it. R N 0 A B B t t E 1.1 E RRR t t T S I T EEEN N t t P S S PPPO 0 t t A E N T 1 1 t t C C 1 N T :::L L 1.6.. T 0 J StttttcS E N HH L L H 1N. G R 839 OS HL E GOHI 1 H 91* R P R NS: is "E H NPHH H K *5. E A 139 .3 ACR P 000/ I I .89 N R E 83: .8 EAAT 1 TTKS S 3 9E. E E T SS. .3 RLEO U QC! T ES. 93 1 TPTN R8 .0. T P N C3. t3 1 1 SE EE .Rt 0 A 1 05. .3 1T 1 RNS H A cPt 8 R3: .3 L. 1T E 1T TE J A a t T 8 PS. .3 (1 L. TT 5 0“ U J th L 8 N St is 0( (1 1ST0 T T R 9E. L R 1 Sc .3 Pt 0( NRNC L 8 A R 9T. A E 8 RS. 93 E) F: IIE LF U E A AP: N 8 ES. .3 01 E1 PPHG A0 NT T E 0A. 0 E E T3. .3 1L 61 N PN 08 T t 0 GT C P39 is L( 1L 1E11 PE 1 N A tTc N 0 0 AS. 93 (C L( HUT 06 LN 1 J N as. 10 T R St :3 5V (C LNTOA A LOH X 1Xt09 SE P T3. t3 NP CV A ERTT IIUSEN EgCt ST 0 HS. 93 E9 NP R R ENSE HLKA01 T0. 9 EU E R GS. 95 61 E9 ARODPEOH L 8N XTNtTt C8 T E 13. is 11 O1 EOPLOHCT 1 1LE110H0 01 U T 9.3. .3 LL 11 VIP 0 P 0HOL 10C 96. RR 8 P R39 E t3 (( LL L RIDH E EASONIYgIQ PTSI A P30 0 .5 PC (( NL GEUET S SRA 1RTtEt TER St L .3 P1 PC 1 RNH021 UDUUGL T1 9 R t RAGT NS 9 AA 9 3 BP P1 RA1TE1N E T ELCCtP. 11 E AT 031 V1 98 E9 8P NAETO T 11 SSTALUIEI. c 00 TEKA E X S: R c8 01 E9 0EYA ERO 60 AUTNAPOLRcEt 0 1 00 PGC T EESt TE .3 1L 91 1V RLHOE NP1 G 1 R ET3690008 P1 (( ARAE A 0R8. NT *3 1L( 11L S NELTHT PPL 11 LCPUPL C9A05670 0C RC APG R NUS. E1 18 1(T LL( RNIPA AA 99E 881 LIIOTOEPEthAQQ 1 J PP SH R 1T3. SR is LPA ((T E1 0 P 1 ))P 0J8 AOR A UOL¢Cc 0 C 2 3 A 9( PE ECOA T 18: RC .3 LTH OPA V N FOFC 11* ((J R TENEP EtAtOOOT P C C C C AA L OH H L031 P .3 IRE 0TH NNOPO 00L ..1 GO( ULCC C E tPtTTT E P P P 1F c TTOCSG ENS. T as aEP TRE 0010 E S AA1 NPH TEEIPIPCP. t 0 A E E E 1E tT HH1 E1 0E8: PN *3 1109 VEP CIS EGESR 00. 000 AULROROIOAPtOOOG 9 A A A .A K GITGE PPS. 0E 08 LR11 P99 SREUAUAA ((A HHK NPEP P R 90.888 1 2 O O O CO TA TISHAR XS: H .3 LOLL A11 EREUL L E 000 PPP E EPE: t 1 1 C C 2 3 4 4 JC KP HE GKP LES: NE 03 t1(( 1LL UEVLAEATT NP( can LLL:C:C CgNt1110 C1P P C 3 C C C (P AT GRGIC E 39 0C is 9(EP L(( LVNAVHVO NUUH NGOH AAA1111:19090000 PCO 02P C3P P4P NCO NPO TPNEA: 8:3: 1A 93 N 1(LP (EP ANOV T N0 QHHH ONPU TTTARAR1R31g5050 0PL LCO PCO 0C0 CPL OTT E IRP1SE1$t TL 03 N R.PA01LP VOC T T T 2PPK 1UUK 000JPJPAP0T¢2571 LEA APL 0PL LPL 2EA 10: R:SP CEIDSt AP OS 9 01(E0CPA C TNHNS :::P :TTT TTT( ( J cAtoooo AAA AEA LEA AEA :AA :T1 PCS 006005: LE *3 1 1((+TA(E T YNETETG A11: 8 :::G:0:(:tLt0000 A 0 AAOAAAOAAA C:: 0:0 PE:0(A (St UR 03 : (I(1::(¢ NYTESISSN JAA1EJ:::EGOHNIPIHIcUtEEEEE ::9E:::9A::9:::EJ11EJ1JE :0CC0RK:P$9 C 93 L (R9L11(1EETISEHE01 JJAU 111UNPUUGUOULtCtooooU:11QU 114:11QC11U CCU 0(U HL0P1PC1PSO L 980 ::0(LL:LUSIUER RCT 0((JN0fi88NUUKHNHPKEtLtHHHHNC11 NC11 C11 P11N0JJN0JNN PAREIPAPAS. A 13.50 110L((1(NEUNRP0P 050(11 JJITTTPPPPPPgAtPPFP1P((01P((0P((00((10((11(A1 AAPASAPDES. C 030.4LLLTEO3LL1RNNP:E:GM ANPHTQTTI‘T 0CtAAAATOCRTTOCRTOCRTLCRTSCRTsPRT St A 3 :N5 . 1“ :EOC‘ETPNA :1T1NE UUUN GOLN t t((((NLPP NLPP LPP APPN PPN PTN St OSO: :C109TOTEN:A: LAL1P OHHKOONPEO t tPPPPOAEPOOAEPOAEPOAEPOOEPOOAEO St OSOMOLVCO VV0901:11(1(T0 0PPPC0EEEC t .1111CAAAGCAAAGAAAG AACDAACDEAC 31 ACT DLPAT PPT CL1LL0C3A c A St .3 O O (LT‘OOCRN t 0 3t 13 C(1TT50EE 0 t c 0 0 0 0 St 93 VCCOVSVPH 0 1 t a 5 0 0 0 9 0 1 $1 93 0PAATPAP08 0 4 a c A 6 7 8 4 5 5 $0 98 A Q CCCCCCCCCCCC 4 4 A CCCCCCCCCCCCCCCCCC 5CCCCCCCCC 201 0000010000000000000000000000000000100000000000000000000000000000000000000000000000000000000 A.56788901235678.9012?5678901234567789012305678123456789012385 678901345989012367 01233 56789 22 22222333333333 44.404. 44.4045555555555566666666688 888888899999999990 00000000111111.2222 22222 5 555555555555 555 55555 55555555555555 5555 55 555 55 55555555 555555 5555666666666 6666666 66666 66666 AL TA 0T E T0 G T s A P T OF S E 0 0 33 N L T C 3 1 1 AL ST 3 1 H TA 05 LT 3 1 C 0.! C0 AH 3 It A T0 C T0 3 E H T T 01 3 L P HT TE 3 P H 0P 6H R 3 .v T 0 L5 10 PF 3 1 T. T ATS-L1 0 3 1 S U L ST TSTRE T33 1 E A 03 OUSPR SGT3 T R T T C0 TCO P TRS3 R U L 0 C CT SE03 C T T T T LLFT GT 0NC3 1 A 1 C HTAAOHTRG CE 3 1 P 1 D E P GHTT CHER L3 1 T 1 11 N R 0L IGOOSIGNE TGA3 l; 9 1 111111 E 1 AL E1TTTE1F.N HNT3 L 1 1 1111(1 P 0LTTA RE SRE E 8103 E 11 l‘ 1111R‘ X AGOT LPRPPOPRG $10T3 E 11 L11 (((TPL ESSDTRTO A PO0C PNGTEU 3 O (1 A11111 LLNLEA EEEOE TLTG T 1NSRLP3 11 NT T11111 AAAATT TRRTTNP A0NGSSLCTSIOPC03 11 AL101‘3111111TTRT00 GUUA EOPTT1NTT1RGSSC N 3 1T. RATLLTCCIIIOOTOTT RTT1F 00 SISSOERES T133N (A TT1’AALLL111TTETOI E11COGT TPSSOO NECETG T30 0P T0(1TTAAA(T(IIAI11 N000 NST 0E5CCLENOCHRSS31 PP OTL100TTTLLL11+111 ENNSSTOSP CE E EROGET03T EA 1IA1TT000AAA111111 EESTSCOOTOCSTUG PR1NSC3C 9E I1T(IITTTTTTIIII(( GPPASS C SROATFNG PEEO 3E 19 110T11I/IOOOTTITTG NXX OET TOPRGT. 1NE R CT3S 111(1T011111TTTNN(RGR IEETCCHESC P CLS1RRPL G3 111T(IR11111IIIAANPRE S 0 8680 E LIASSCE ATR3T (118T1E((111111RRAEEN STENRR1ACNRRARUESPTTTGE3U C‘TRAINNKTA‘IIITTRTNE EH6 OPER OOERTDCEEFCORN3P NPPEHEACPPF111EETOET CGASB RCNTPTUC1OCBARTEE3T NEPTNE‘TRATPP‘T‘BAETTT 01KTA PAAREPTESRU E N 3U 9:8REPE:TPR8A6L0::8::: RECSLT PCABAALEPRTTNTET30 11EET:L1TTEEENEP11:111 PRAO N C NER PNEEN N3 :1:..:1P1:::::EEE111111 PPC ETTT TT E EN ELE3 111111:111111: : :111111 L TCNNNTNNTTTRRCCLCAC3 11.111111111111111;111((EALLLNREEENEENNNOERRARTR3 T111(1T11111111NN(RGRUTAAAEECCCECCEEEPTEETEOE3 06313.1an(((l‘l‘IIIAARFRENOTTTCPRRRCRRCCCEFPPQOIPTP3 BRNKLATRNKPPP(((RRPEEN1T000R EEEREERRRBA 5EACAHEACTPPGL0TTET NET :TTTE :PPPEPPEEE : :T: : :3 NRATELNRARBANEPEETOETNT PT P PPP::NN:RGR3 OETPOPPETPEEEEEEBAOTTTOG : : : G: : : : : NNAARPRE3 0TTTTPPPPPPPPPPPPPTPTPCRNKL:PNKPzPP:::AARRFEER3 EACAEEACTCPPGLORRTTETNE3 NRATLNRARRBANEFTTEETOET3 ETPOPETPEEEEEEEEEBAOTTT3 OTTTTPPPPPPPPPPPBAPPTPTP3 5CC CCC CCCCCCCCCCCCCCCCCC CC 0 3 7 2 O O 3 1 1 0 5 0 0 1 2 1 1 P o o 3 o 3 P O 5 5 o 4 o 9 O P P 5 1 F 5 t 2 0 0 3 1 P A. O P = i t t 3 t 9 o t O 0 : : 1 3 S t 6 : t X 0 1 3 R 1 = 1 P t 1 = R 5 1 o A. 1 3 E 2 2 O 9 2 U 0 G 2 A o 2 3 T o o t X o 0 t N G o P 6 o 3 E A s A. = 1 5 A L H R 1 N 7 1 0 P 3 3 H P A P t 2 I P E U S 1 P 3 o O P 3 A 0 0 0 0 o t 9 U R 0 1 s s 9 o .. t 0 3 R t t X A L t P E H A. E s t 7 t : t 3 A = L = 0 P 1 = P O C E = P I. 1 1 t = 3 P t A t 1 O 0 t L R 6 0 C t 9 X 0 2 O t 3 9 R 9 O t 0 E S E P R 0 9 9 9 o o X 0 3 0 X U X t = L X s A P 0 P R X = O 3 4 5 X 3 N A T A T .- E A. E 8 O P 1 t a P P 1 6 3 1 1 A 1 T 0 U 1 1 L .. 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OO 1 2 3 4 5 600 0 1 2 3 4 50 5 6 7 8 9 0 00 0 1 2 3 4 5 00 0 0 0 0 0 012 3 3 3 3 3 34 4 O 4 O O 5 67 8 8 8 8 8 8 90 8 8 8 8 8 888 8 8 8 8 8 88 8 3 8 8 8 8 88 8 8 8 8 8 8 89 APPENDIX C ESTIMATED COSTS OF ALTERNATIVE PACKAGING SYSTEMS APPENDIX C ESTIMATED COSTS OF ALTERNATIVE PACKAGING SYSTEMS q C.l--A Guide to Interpreting Appendix C The following list indicates the equations which estimating the costs reported in this appendix. 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