Text from 'Economic Analysis: Applications to Work Zones' PowerPoint Presentation
Slide 1
Economic Analysis: Applications to Work Zones
Graphic: U.S. Department of Transporation logo
Federal Highway Adminstration
Slide 2
Economic Analysis
What Is It?
- Benefits and/or costs of competing investment options are compared in common unit of the dollar
- Makes non-like performance measures comparable
Slide 3
Economic Analysis
Addresses Key Project Questions
- Why? Performance
- What? Greatest net benefit
- When? Optimal timing
- Where? Best alignment
- How? Best implementation strategy
Slide 4
Economic Analysis
Issues and Concepts
- Costs and benefits can be valued in dollars
- Project life cycle is basis for comparison
- To be compared, dollars in different years must be "discounted" to their present value amounts
Slide 5
Economic Analysis
Bar Graph: Typical Life Cycle Profile
Speaker Notes:
The above graph is a fairly typical profile of the monetized cost and benefit flows of a transportation project. The initial cost spike represents the capital cost of the project. Subsequent costs are attributable to maintenance (smaller bars) and periodic rehabilitations (medium height bars). Benefits build over time as traffic grows, due in large part to the effect of the project in reducing future congestion and delay.
Slide 6
Economic Analysis
Adjusting for Present Value
Graphic: Mathematical equation which reads
The present value represents one divided by the sum of 1 plus r raised to the power of t multiplied by A at time t
where
PV = present value at time zero (base year)
r = discount rate
t = time (number of year)
A = amount of benefit or cost in year t
Speaker Notes:
The formula above is the most basic calculation of present value. The term which incorporates the discount rate "r" is called the discount factor. Multiplying a future sum by the appropriate discount factor for that future year will yield the present value of that sum at time zero.
Slide 7
Economic Analysis
Example of Discounting
- What if we want to determine how much a $1,000 benefit in 30 years is worth to us today?
- $1000 is in "real" dollars (i.e., in dollars with today's purchasing power)
- Discount rate is 3%
Speaker Notes:
Application of the discounting formula is easy to demonstrate. In this example, we want to learn what a $1,000 in resources to be realized 30 years from now would be worth to us today at a 3% discount rate. The substitution of these values into the discounting formula is shown on the next slide.
Slide 8
Economic Analysis Example (continued)
Plug values into discounting formula:
Graphic: Mathematical equation reads
The present value represents one divided by the sum of 1 plus .03 raised to the 30 power multiplied by $1,000 (at 30 years)
Do calculations:
Graphic: Mathematical equation reads
PV equals $1,000 multiplied by 0.41199
This equals $412.
Speaker Notes:
The bracketed term in the above equation is often referred to as the discount factor. In our example is equal to 1/(1.03)^30 or 0.41199. When $1,000 is multiplied by this amount, the present value of $1,000 in 30 years is revealed to be $412 in today's dollars.
Slide 9
Economic Analysis
Discount Rate Is Important
- Higher the discount rate, the lower the present value of a future dollar
- At 3%, $1,000 30 years from now is worth only $412 today
- Worth $231 at 5% and $57 at 10%
- Discount rate can influence project selection or design
Slide 10
EA Methods
- Benefit-Cost Analysis
- Life-Cycle Cost Analysis
Slide 11
EA Methods
Benefit Cost Analysis (BCA)
- BCA compares discounted value of project's benefits to discounted
value of its costs
- The blue and red bars on the life cycle profile
- BCA is different from financial analysis, which focuses on how to fund a project
Slide 12
EA Methods
BCA Formula
- BCA is done using the basic multi-year discounting formula where
PV = present value
t=time
N=number of interest periods
r=interest rate per period
Graphic: Mathematical equation reads
The present value represents the sum of all values of the reciprocal of 1 plus r raised to the power of t, multiplied by the difference between the benefit and cost at time t, for all times t between zero and N inclusive.
Speaker Notes:
The above formula shows the BCA formula, which is a direct expansion of the multi-year discounting formula discussed in the module on economic fundamentals. The formula is applied to each design alternative or project being evaluated for identical analysis periods.
Slide 13
EA Methods
Applications of BCA
- Project-level analysis
- Selecting ITS or operations technologies
- Highway program-level analysis
- Regulatory analysis
Slide 14
EA Methods
Life-Cycle Cost Analysis (LCCA)
- Subset of BCA
- The "blue bars" on the life cycle profile
- LCCA reveals lowest life-cycle cost alternative for a project
- Used only when all design alternatives yield same benefits
Slide 15
EA Methods
LCCA Formula where "Cost" equals the cost for design alternative in year t
Graphic: Mathematical equation reads
The present value represents the sum of all values of the reciprocal of 1 plus r raised to the power of t, multiplied by the cost at time t, for all times t between zero and N inclusive.
Slide 16
EA Methods
Applications of LCCA
- Evaluation of pavement preservation strategies
- Project planning and implementation, especially the use and timing of work zones
- Value Engineering
Slide 17
EA Methods
How to Get Best LCCA Results
- Evaluate all reasonable design alternatives for the project
- Analyze alternatives over identical analysis periods
- Evaluate all relevant costs that vary among the alternatives
Slide 18
EA Methods
Cost Items Used in LCCA
Agency Costs
- Design and engineering
- Land acquisition
- Construction
- Reconstruction/Rehabilitation
- Preservation/Routine Maintenance
User Costs At Work Zones
- Delay
- Crashes
- Vehicle Operating
Slide 19
EA Methods
Valuation of User Time
- Business travel valued at wage plus benefits
- Personal travel valued at what travelers are willing to pay to reduce
travel time
- Usually a percentage of wage
- People do value their time
Slide 20
EA Methods
Inclusion of User Costs in EA
- Some agencies resist valuation of user delay caused by construction
- However, agencies seeking to reduce work zone impacts without user cost data may overspend or underspend
Slide 21
Linking EA to Other Tools
- Other tools increase the usefulness of BCA and LCCA
- Traffic Forecasting
- Risk Analysis
- Economic Impact Analysis
Slide 22
Linking EA to Other Tools
Traffic Forecasting
- Queuing models
- Included in RealCost LCCA Software
- Traffic simulation models
- Corsim
- QuickZone
- Travel demand models
Slide 23
Linking EA to Other Tools
Risk Analysis
- Uncertainty can be measured and mitigated
- Sensitivity and probabilistic methods
- Risk can be mitigated using alternative engineering, contractual methods, etc.
Slide 24
Linking EA to Other Tools Economic Impact Analysis
- EA focuses on direct benefits and costs of highway projects
- Time savings, safety, externalities
- EIA "translates" EA results into indirect economic effects
- Delays affect business and jobs
- Not additive to value of direct benefits and costs
Slide 25
LCCA Applied to Work Zones
- LCCA can be used to compare construction/work zone mitigation strategies
- FHWA's RealCost LCCA software can measure agency costs (construction, rehabilitation, maintenance) and user costs over multi-year periods
Slide 26
LCCA Applied To Work Zones
Mitigation Strategies
- There are many ways to mitigate construction impacts
- TMP and work zone strategies
- Innovative contracting
- Design features and materials
- Does value of mitigation justify costs?
Slide 27
LCCA Applied To Work Zones
Comparing Strategies
- Each construction/WZ strategy involves trade-offs
- Agency vs. user costs
- Initial vs. long-term costs
- LCCA approach permits comparison of cost trade-offs
Slide 28
Application to Work Zones Example
- Consider Stone Matrix Asphalt (SMA) vs. Superpave (SP), each with 24 hour vs. nighttime work zones
- 5 mile, 4 lane road mill & fill
- 25,000 vehicles Average Daily Traffic, rising to 60,000 ADT in 35 years
- One lane closed each way
Slide 29
Application to Work Zones
Example (Continued)
- ADT is allocated by RealCost model to peak/off-peak times
- RealCost model calculates user delay caused by work zones
- 35 year analysis period
- 4 percent real discount rate
Slide 30
Application to Work Zones Example (Continued)
- SMA costs 20 percent more than SP per overlay but lasts longer 20 percent longer between rehabilitations
- Nighttime work zones increase agency cost by 10 percent
Slide 31
LCCA Applied To Work Zones
Example Results
| WZ Strategies | Agency Present Value | User Present Value |
|---|---|---|
| SP - 24 Hr WZ | $2,605 | $4,969 |
| SMA - 24 Hr WZ | $2,721 | $3,715 |
| SP - Night Only | $2,865 | $1,226 |
| SMA - Night Only | $2,987 | $1,055 |
Slide 32
LCCA Applied To Work Zones
Example Results (Continued)
- Least cost option for the agency (SP/24 hours) is highest cost for travelers
- Using SMA reduces traveler cost due to fewer rehabs
- Nighttime work zones eliminate most of delay for SP and SMA at little additional cost to the agency
Slide 33
For Further Information
Economic Analysis Primer
FHWA IF-03-032, August 2003
Graphic: Cover of Economic Analysis Primer book
Contents:
- Economic Fundamentals
- Life-Cycle Cost Analysis
- Benefit-Cost Analysis
- Forecasting Traffic
- Risk Analysis
- Economic Impact Analysis
Slide 34
For Further Information
Life-Cycle Cost Analysis Materials
RealCost Software and workshops-call your Division Office
Graphics: Covers of Life-Cycle Cost Analysis Materials
Slide 35
For Further Information
Other Economic Materials
FHWA's Office of Asset Management, Evaluation and Economic Investment
Team:
www.fhwa.dot.gov/infrastructure/asstmgmt/invest.htm
