phd., p.e. rmt, - infohouseinfohouse.p2ric.org/ref/28/27079.pdf · selecting an acceptable payback...

.* The Pollution Prevention Cotuse

ANALYZING THE RESULTS: WHAT ARE THE ECONOMIC CONSIDERATIONS AND 'REAL C O S T BENEFITS?

James E. Clemmer, PhD., P.E. RMT, lnc.

Greenville, South Carolina

1. INTRODUCTION

One measurement of the success of a waste minim'kation project is the economic effect that it has on the facilii where it is installed. In comparing waste minimization aIternatives, the cost of installing the project must be compared against several factors including:

0 lmprwed efficiency and profiiabnity 0 Xme value of money 0 Availabilii of disposal facilities 0 Unpredictable escalation of disposal costs

The cost of constructing moditications to a process can be reasonably estimated. The time value of money is less predictable. However, the least predictable of the costs for implementing a waste minimization project is the availability and cost of future waste disposal. Therefore, the ultimate cost or cost savings for a waste minimization project is rarely predictable from historical cost information at the outset of a project A regulatory change such as the RCRA landban can change disposal costs drastically.

Selecting an acceptable payback period, rate of return on the investment, or present value is cfiicuk Setting an economic seledion criterion involves judgement as to the value of other selection criteria, such as community reaction or reduced future liability. What is it worth to reduce the quantity of emissions published in the local newspaper from your SARA report? In the 60s what was the rate of retum for burying those drums of waste on site rather than doing something else to dispose of them?

Often one assumes an acceptable selection criterion and computes the future waste disposal costs for several cases The facility must then decide whether the assumed future waste disposal costs are reasonable in comparison to historical trends and other, sometimes intangible, indicators of trends in waste disposal costs.

XIV-1

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Tier I1 tailpipe standards would be set at 0.2 for NOx and 0.125 for HC in the year 2003, if EPA fin& tha t tougher emissions limib are needed.

Over three years, and the vehicle must meet t he limit for For CO, the law seta a 10 g/mi standard in 1994, phased in *

-

"Congress did anticipate to some extent that EPA might drop the ball and drafted "hammers" into the law that shift rule- making authority to the states if EPA misses deadlines, "

50,OOO miles or five years. The Phase I1 CO limit will be 9.5 ppm should EPA in 1996 find that second-phase controb axe necessary.

The agency also must study the feasibility of on-board charcoal canisters for capturing evaporative emissions, and issue a determination within one year. Sbould EPA decide to issue rules requiring the canisters, and the Department of Transportation finds them to be safe, they will be phased in over a three-year period.

Cities with serious or worse ozone nonattainment would be required to set rules mandating clean-fuel vehicles in privately owned fleeta of 10 or more. The standards take effect in 1998 and apply to 70 percent of the vehicles. The law also manda ta a clean vehicle pilot program in Califor- nia.

By 1995, reformulated gasolines will be required in the nine cities with the worst smog problems. The fuels will have to contain no more than 1 percent benzene, 25 percent aro- matics and 15 percent less air toxiat and VOCs. A t the turn of the century, stricter standards are to take effect. In the 40 cities with CO problems, the act requires oxygenated fuels to be sold.

Even though Rep. John Dingell (D-Mich.) managed to use his influential position as chairman of the House Energy and Commerce Committee to cushion the impact t he mobile sources provisions will have on hie home state automakers, some researchers have criticized the stricter tailpipe controls. They maintain tha t the tougher controls will have minimal effect on air quality, since research has shown that most mobile source pollution comes from older, more polluting vehicles not addressed by the new law. More stringent controls add to the cost of new cars, prw-ding an incentive for keeping the older. more polluting vehicles on the road longer, these scientists argue.

Tltle Ill-Alr Toxlcr

The original Clean Air Act failed to address toxic air emb- sions in any meaningful way. Of the scorea of toxica the law was intended to address, EPA managed to promulgate rules for only a handful.

The amendments take a two-phased approach to regulat- ing 189 air toxiat. Within a year, EPA must publish a list of source categories emitting IO tons annually of any one toxic or 25 tons annually of a combination of toxic pollutants. The agency must then issue Maximum Achievable Control Technology (") standards based on the best demonstrated control ~ C ~ O l o g y or practices of the regulated industry.

Within two y e m , EPA is required to issue MACT standards for 40 source categories. The remainder of sources will . . . .

on MACT compliance will be granted to c o m h i e e h t voluntarily reduce emissions according to p r e s c n i condi- tions. In a major concession to the steel industry, coke ovena were granted a 30-year extension on MACT, providing they significantly cut emissions of five toxiar.

Eight yeam after the f m t - p b MAC" standards, the second-phase health risk-based standards ate slated to take effect if a facility's emissions present a cancer risk of more than one in 1 million. However, EPA's Mohin said during the November 28 videoconference that the agency doea not ex- pect there to be residual risk after the MAC" standards are in place. The health-based standards are "more of a back- stop," he Mid.

The air toxics provisions wil l regulate commercial, i ndu- trial and municipal incineratore, but language requiring utilities to cut mercury emissions wan dropped in favor of provisions requiring EPA to study the problem before developing rules. The agency also is required to study Mu'ca depositioo in the Great Lakea. All sources of air toxica wil l be required to obtain an operating permit under Title V of the act.

Mle N-AcM DeposHlon

The new law's acid rain provisions marked tbe end of a nearly ten-year congressional debate of such legislation. Tbe law wil l require sulfur dioxide emissions to be cut 10 million tons below the 17 million tons EPA estimates utilities emit- ted in 1980. To accomplish this, the agency will h u e emh- sion allowances in two phases.

The f m t phase takes effect January 1,1995, and affects the 111 dirtiest power planta. A t that time, plants emitting more than 2.5 Ibs of SO2 per million Btu will be required to cut back to tbe 2.5 Ib level. Plants eliminating 90 percent or more of SO2 emissions will receive a two-year deadline extension.

During Phase 1, E P A will issue federal allowances permitting one ton of SO1 emissions. FaciIitiea that cut back further than the 2 5 lb rate will receive additional allowances, which may be sold or applied to other facilities that fail to meet the limit. In a concession to Midwest legislatore, a special alloca- tion of 100,ooO allowances per year for each of the five years of Phase I will be allocated to p l ~ t s in Illinois, Indiana and Ohio.

Phase Jl taka effect January 1,2000, and will set an emissions limit for utilities of 1.2 lbs of SO2 per million Btu. Bonus allowances will be distributed to states where utilities emit less than 0.8 lbs SO2 per million Btu.

Midwest plants that meet Phase I limita will receive another 50,OOO allowances during Phase 11. Any plant that reduces SO2 by 90 percent will receive allowances on a two- for -one bask

During both phases, sources will be required to install equipment to continuously monitor emissions. track pro- gress, and assure compliance. Sources must have sufficient allowances to cover annual emissions, OK become subject to a $2,000 per ton excess emissions fee and a requirement to offset future emissions equal to the amount of the excess emissions. Plants that emit lese than 1.2 lbs per million Btu will be

allowed to increase emissions 20 percent by the time Phase II takes effect. Within 18 months, E P A will be required to issue emission standards for nitrogen oxides that cut NOx emissions 2 million tons by January 1,2OOO.

-

Title V-Permb

EPA has 12 m o n t h to issue a final rule on air pollution permits, creating a program similar to the National Pollut- an t Discharge Eli_mination System established under the

The Pollution Prevention Course

'

The major costs for i-ling any process modi- are d i i in - _ various SOU- The

e Purchased equipment costs

- - - -following summarizes the major direct and indirect costs (1). I

- Land - Major equipment - InsWmentation and Control - Piping - Electrical equipment and merials - Buildings and services, e.@, process buildqs, aWniary buildings for

Service faciiies, e.g., steam, air, power, Wer, W etc.

, storage, maintenance, process contrd, etc. , P -

1

0 Purchased equipment installation - Sic preparation ' - Installation of equipment

e indirect costs - Engineering fees - Construction supervision - Contractor's fees - Construction expenses, e.g., construction, operation and maintenance of temporary facilities, o f f i , roads, parking lots, electrical service, etc.

security - Storage of purchased equipment -

0 Manufacturing costs Raw materials Operating labor and supervision Power and utilities, ag., steam, electricity, fuel, water, refrigeration, etc Maintenance and repairs Operating supplies Dsposal costs Laboratoly charges

Interest Depreciation TaxeS InSUranCe Rent

- Training . Support labor, e.g.* accounting, purchasing, payroll, shipping, - rece'bing, etc. Process laboratory -

XIV-2


0 General Expenses - Admin’lstrative costs

- Legal - - Distribution and marketing expensss - Research and Development

- Engineering costs -

I

F i i benefits that one may gah from l”ng a waste minimization project lndude the foilowing:

8 Reduced manufacturing costs - Savings on raw materials by recyding or beneficial reuse Lower power and utitities costs; e.g., steam, electricity, fuel, water, rdrigerafton,

Lower disposal costs due to reducing the volume or toxicity of the waste

Reduced interest rates may be possible if lender‘s m e m s over

Insurance costs may decrease if waste generation is decreased

- etc., due to increased efficiency or generation of energy from by-products I -

0 Fiied costs - environmental issues are addressed. -

0 Purchased equipment costs - Land requirements may be lowered if on-site disposal is used. Some equipment costs may be reduced if the quantity of waste dassiied as - hazardous in RCRA is reduced.

The displacement of purchased raw materials alone is often not a significant economic incentive. There are three potential benefns that stand out in certain situations.

1. For industries that generate wastes with fuel value, e.g., the petroleum industry, the petrochemical industry, etc., the potential for energy savings from recovering the fuel value of the waste has been recognized since the 1970s. Would fewer Superfund sites exist if the relative cost of energy in the 1960s and 1970s had been as high as it is now?

2 For industries, such as paper mills and foundries, which generate large volumes of solid waste for on-site disposal, available land for construction, at an affordable cost, is often a significant concern.

3. Of the potential benefts of waste minimization, saving disposal costs by reducing the volume or toxicity of a waste has, by far, the most important cost beneft W h the NIMBY reaction of communities, new waste disposal capacity is more and more difficutt to construct. Some consider the cost of waste disposal to be high now. However, as siting, permitting, and constructing new waste disposal facilities becomes more difficult, many industries believe that the disposal costs will continue to rise at a rate higher than the rate of inflation.

:

XIV-3

The Pollution Prevention Course-- -

We cannot include some economic benefits of waste minim'kath in a dassical engineering economic analysis.

- _.--- 1. - One dffrcuft-toquantify benefit is the image and goodwii in the communi?; that is buitt, by reducing waste quantity and toxicity. Many companies are concerned about their image when the local newspaper publishes the waste quantities from SARA 313 reports.

2 The reduction in long term G a b i t i i is also difficub to quantify, but would a company today send its waste to a ChemDyne? If the manager of 25 years ago knew the potential economic I i i i l i i , would he make the decision to bury drums of waste on site? WouM a manager of today decide to build a hndfill that is not lined? t

I

1 1

3. ECONOMIC COMPARISON OF ALTERNATIVES

Waste minimization decisions almost always involve choosing between alternatives, e.g., continuing with the operation as it exists 01 installing a modification. A number of methods are available for comparing aftematives (1).

The simplest and most commonly published method is pavout wriod, which is the amount of time theoretically necesary to recover the original capital investment.

( R d 1) depmci~able fmd-mpital Investment avemge p f l t ~ average dep&atbn

Pajvut period In years - wysar P r Y m

or

(Ret 2) depredabh f~ed--capltal investment Payout ped& In years - average profft - average operating and

mahtenance aest per year per Yew

The time value of money is generally neglected.

4 simple comparison of alternatives with different costs and liies is the method CaDitaTned- cost. In this method, the amount of capital that must initially be available to purchase equipment and generate funds to replace the equipment at the end of its life is compared for various alternatives. The following example from Peters and rtmmehus (1) illustrates this method


Example:

Assume:

A steel reactor costs $5.OOO and lasts 3 years A stafnless steel reactorcosts $15,000 and lasts 8 years. No inflation; money coss 10?6 per year; no sahrage value.

which Is less expensive?

,

K - C , + c, (1 + I ) ” - l

- $3sm $1 5,OOo (1 + 0.08)* - 1

STANESS S7EL $15.000 +

The Discounted Cash Flow method takes into account the time value of money. The procedure allows one to establish (or calculate) a rate of retum which can be applied to the annual cash flow of the company so that the original investment is reduced to zero over the life of the project

The rate of retum is the maximum interest rate at which money can be borrowed to pay ail principal and interest accumulated over the life of the project. However, the rate of retum used alone does show the magnitude of a project.

A similar method Is Present Worth or Present Value, which substitutes an interest rate or cost of capital for the discounted cash flow rate of return. The present worth is the value above the principal and cost of capital. This results from this method depend on base year for calculatiolls.

Another discounted cash flow method, the Uniform Annual Equivalent COG allows comparison of altematives with different lives. The present worth in base year dollars for each case is converted to a series of equal annual payments over the l ie of the project.

9 course, inflation significantly affects investments and cash flow on environmental projects According to Peters and Timmerhaus (1)‘ the Marshall and Swift All-Industry Installed- Equipment Cost Index, which is published in Chemical Enaineerinq, doubled between 1968 and 1978 and increased by another 60 percent between 1978 and 1988. The Chemical Engineering Plant Index, which b also pubrished by Chemical Enaineering, is specafc to the chemical process industry. This indicator of rising project construction costs has increased by almost 350 percent since 1959, but the inwease has only been about 8 percent since 1983.

XIV-5


TABLE 1: EXAMPLE OF PRESENT WORTH AND DISCOUNTED CASH FLOW

Example: Initial Fiied-Capital Investment - $1 00,OOO Working-Capital Investment I SI 0,000 Project Life - 5 years Safvage Value - $10,OOO

Discwnted Cash Flow 20.7% Rate of

Retum

Discount Factor

- worth

0.207

1 Present

(1 +i)"

0.829 $24,900

0.687 $21,200

0.570 $20,500

Present Worth at 15% j[ Discount- Fador.

1 - (1 +i)" 0.1 5

Estimated Cash Flow to

Project

Present Worth

($1 10,Ooo)

$3O,OOO 0.870 $26,100

$23,400 $31 ,OOo 0.756

0.658 $23,300

$4O.o00 0.572 0.472 $1 8,800

0.497 $31,300

$1 0,OOo Working Capital

Salvage $1 0,OOo 1

I $11O,OOo $127,000

The effect of inflation on discounted cash flow and present value can be estimated as follows (3):

1 (1 + Inflation Rate)

Annual Cash Row Annual Present Vdue - (1 + Infla~on Rate) (1 + Cost ob Caphi)

4. CASE STUDY: SIMPLE MODlFlCATlON WITH SHORT PAYBACK (4)

A'common success story is that of the facilii that discovers a very simple modification that can be made to a process, with economic benef& which rapidly offset the cost of installing the modification

XIV-6


I

A radiator manufacturer was accumulating copper sulfate pentahydrate crystals in a hydrogen peroxide/sutfuric add bright dip bath due to d m u t i o n of copper from the tubes &I the sukric acid. TIE crystals were removed and sent to a hazardous waste M I 1 (reactive 6nd Corrosive).

The company installed ion exchange system and recirculated the hydrogen peroxide/sutfuric acid solution to remove the copper. When the *on exchange column is regenerated, the plant plates the copper from the regeneration sdution and sells it to their copper supplier as high quality copper scrap.

I

e Installed capital cost of the ion exchange system and plating eo00 (1984).

0 Disposal cost savings and income from the sale of the recovered copper paid for the system in 14 months. i

e With increased landfill costs and landban treatment considerations, the retum on investment in 1990 is much greater than when the equipment was originally installed.

5. CASE STUDY: LARGE PLAM MODIFICATION (5)

A manufacturer of uranium hexafluoride and sulfur hexafluoride treats wastewater with lime to precipitate the soluble fluoride. Wastewater treatment sludge, which was a hazardous waste, had the following composition:

7580% 10-1 5%

Other 1 0%

c*2 Ca(OW2

The plant had a stream of dilute hydrofluoric acid available, which was used to neutWiz8 the residual lime in the sludge. Neutralization of the excess lime with HF raises the percentage of CaF2 about 95% and another of the company's facilities was able to use the neutralized sludge as a raw material for manufacturing HF.

e Capital cost $4.3 Million e e e

increased operating costs S500,OOO per year Value of Raw Material $5O,OOO per year Payout period (no inflation or interest)

depreciable fIxed-capital fnvestment average p" per year + average d8pci8tbn per year

Payout ped& In years - M , ~ , o 0 0

$85O,OOO + $215,000 Payout period In pars =

Payouf period in years - 4 years

or

XIV-7


Realistically, inflation and the time value of money affect the payout on a project such as this and should be considered. Wnh the following assumptions, Table 2 shows that considering the time d u e of money and inflation adds suQ3antialty to the payout period for this p r o j w l

0

0

0 Inflation rate 5% 0

Assume 10 year project Tie; straight line depreciation, zero sahrage Assume an annual interest rate of 10% @rime rate on 10/15/90)

All investment in fim year

The general inflation rate is expected to be 5% and the cost of capital is 10%.

TABLE 2' PAYOUT P ERlOD FOR MAJOR CAPlTAL EXPENDITURE INCtUDlNG THE n M E VALUE OF MONEY

Hundreds of Thousands of Dollars

$806 0.3855 $31 1 $5.21 5

Table 3 illustrates the cast of the project in constant dollars for the base year with an estimated inflation rate of 5 percent.

,

x w - a


TABLE 3: EFFECT OF INFLATION COST ON MAJOR CAPITAL MPENDITURE

HundredsofThousandsofDdlars .- -. -

Annual Total Envimnmental Drsposal Income Total Discount Present Present savings cost Savings Factor' Value Value

$1 ,Ooo $325 $!jQ $875 0.8658 $758 $758

$1 ,OOo $341' $!j3 $869 0.7496 $651 $1,409

$1 ,OOo $358 $55 $862 0.6490 s560 $1,968

$1 ,Ooo $376 $58 $855 0.561 9 $481 SZ.449

$1 ,OOo $395 $61 $848 0.4865 $413 $2862

$1 ,OOo $41 5 $64 $a40 0.4212 $354 $321 6

$1 ,ooo $436 $6? $832 0.3647 s304 $331 9

$1 ,Ooo 9457 $70 $824 0.31 58 $260 $3,779

$1 ,ooo $480 $74 $81 5 0.2?34 $223 $4,002

$1 ,ooo $504 $78 $806 0.2367 $1 91 $4.1 93

1 + Inflation Rare)" (1 + Interest Rare)"

'Diimunt Factor - (

6. CASE STUDY: EFFECT OF DISPOSAL COST OF PROCESS SELECTION (6)

Often, the escalation of disposal costs is an -mportant and dficult-to-estimate variable in a decision of whether or not to proceed with a waste minimization project The following

,' hypothetical example was adapted from Higgins (6). i

A manufacturer operates a process (Process A) that generates hazardous waste. The maintenance and operating costs for Process A are expected to be W , O O O next year and the waste disposal costs are expected to be $1,2OO,Ooo per year.

An alternate process (Process 6) is available with the following parameters:

0 , . 0

A capital investment of $14,000,000 is required for this process. The maintenance and operating costs are $6,500 in the first year. The waste disposal costs would be $1,ooO,ooO next year.

XIV-9 0 1991 .Government Insti tutes. Inc 0


i

The rate of d a t i o n of the hazardous m e disposal cost was varied and the present worth esOmated for each process. Figures 1 shows the present worth of each process over a 10- year project lie, and Figure 2 shows the incremental present worth between the two processes. As the Figures indicate, Process A is more economical if disposal costs rise less

-than 20 percent per year, and process 8 is more economical if the disposal (=osts rise more than 20 percent p e r year.

- 1

No one can project the rate at which waste disposal costs wilt rise; therefore, the decision makers must deal with regulatory situations that are difficult or impossible to predict Among these concerns are the following:

0 Will future restrictions and disposal capacity drastically increase the cost Of hazardous waste dsposal? 1

The landban with a requirement for incineration as the Best Demonstrated Available Technology (BDAT) has caused a ten-fold increase in the cost of disposal of those wastes. The reluctance of states to build hazardous waste facilities suggests that capacity will not increase rapidly. Some states, such as Alabama and South Carolina, are becoming reluctant to accept hazardous wastes from some other states, and they are increasing the disposal taxes.

in municipal landfills

I 1 -

-

- Subtitle D will have a dramatic effect on the cost of disposing of solid wastes

0 Are benefns of community and employee attitudes toward reduced waste generation sufficient to justify installing a waste minimization project that is more costly than the existing waste disposal practice?

7. CASE STUDY: FOUNDRY SAND RECLAMATlON SYSTEM (7)

Foundries use 'green' sand to make molds for castings, which historically, has been discarded and sent to a landfill, typically, on site. Reclamation of this molding sand requires a combination thermal and dry scrubbing process. The following is a typical flow chart for a sand reclamation process:

used sand 1

&nV6YOf with hkp8liC &pNafbfl 1

Screen 1

Fumace 1

RuJdzed Bed and Mbrabng coders I

Secondary Processing (Two D I ~ scrubbers) I

Redalmed Sand

XIV-10 e 1991 Covc-cnt Instltutcs. Inc GI

I

I

x H

7 P P

W 6

E c

- .

(45,000)

9 0 (55,000)

% (60,000) 4 0

9 (65,000) c i .-..

6 (70,000) 0 v)

(75,000)

(80,000)

- FIGURE 1 : EFFECT OF DISPOSAL COST ON

DISCOUNTED CASH FLOW

_., \ .................................. .................................................... .......................... ................................................................................................................................

_ ............ ................................................... ........................................

............................................... ............................................... - ...................................

........................................................................................................................................... "\\.

.. (.._ ............................................................................................................................................. b I I I I I I I

0 5 10 15 20 25 RATE OF INCREASE OF DISPOSAL COSTS (%)

PROCESS A PROCESS .B - -

+ +

30

,

The -Polhtion Prevention Course

I

Table 4 shows the present worth of the sand r-on system for this foundry Over the assumed 1Gyear life of the project adjusted to 1982 doli=. mis assumes an inffation rate of 7.5% and an interest rate of 15%.

TABLE 4: PRESENT WORTH FOR SAND RECLAMATION SYSTEM I

Hundreds of Thousands of 1982 Ddlars

Capital Year and Depreciation Annual Annual D m n t Annual Total

Operating Savings Cash Factor' Present Present Cost fiow Worth worth

0 ($2500)

1 ($415) ($=I $1,656 $991 0.8089 $802 $802

2 ($446) ($=I $1,758 $1,062 0.6543 $695 $1,497

3 ($480) ($=I $1,860 $1,131 0.5293 $598 ' $2,095

4 ($516) ($250) $1,962 $1,197 0.4281 $512 $2,607

5 ($554) ($=I $2065 $1,260 0.3463 $436 $3,044

6 ($596) ($=I $2167 $1,321 0.2801 $370 $3,414

7 ($640) @=I $2269 $1,378 0.2266 $312 $3,726

8 ($689) ($250) $2,371 $1,433 0.1833 $263 $3,989

9 (940) (s2=) $2,473 $1,483 0.1483 $220 $4,209

10 ($796) ($=4 $2,575 $1,530 0.1199 $183 $4,392

1 + Inflation Rate)" (1 + Interest Rate)"

DisccuntFador - 1

XIV-14

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2

3.

4.

5.

6.

7.

The Pollution ~ e v k n t i o r i ~ e

REFERENCES

Peters, M. and K TmmemaUS, plant Desian and Economics for Chemical Enaineers, Fourth Edition, McGraw+lill, New York, 1991.

U.S. EPA, The EPA Manual for Waste Minimization Opportun itv Assessments, EPA 6 o o f 2 ~

Perry, R, 0. Green, and J. Maloney* Perrv's Chemical Enaineers' Handbook, Si Edion, McGraw-Hill, New Yo& 1984.

Hulsingh, D., L Martin, H. Hilger, and N. Seldman. Proven Profits from Pollution Prevention: Case Studies h Resource Conservation and Waste Reduction. Institute 1

for Local S e t f - R e f i 1986. pp. 171-174.

I

I

Hulsingh, D., L Martin, H. Hilger, and N. Seldman. Proven Profits from Polluh'on Prevention: Case Studies in Resource Conservation and Waste Reduction. InstitUte' for Local Setf-ReTmce. 1986. pp. 71-73. 8

Higgins, T.E, Hazardous Waste Minimization Handbook, Lewis PuMishers, 1989, p 6.

Stephens, W., and R Zayko, internal RMT Report, 1982

phd., p.e. rmt, - infohouseinfohouse.p2ric.org/ref/28/27079.pdf · selecting an acceptable payback...

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