Benefit-Cost Analysis
Benefit-Cost Analysis
Transportation Projects
1 PURPOSE
Travel-Time Savings
Travel-time savings typically generate the greatest amount of benefit.
These savings are calculated based on the difference in travel time
between the Base Case and an Alternative. Travel time is often expressed
as vehicle-hours traveled (VHT) and can be estimated using computer
models, spreadsheets, and/or travel time runs, depending on the level of
analysis needed and data availability.
The estimation of travel time savings should include both the driver and
passengers in the vehicle (i.e., vehicle occupancy rates). In many cases,
vehicle occupancy rates vary between peak and off-peak hours as well as
between alternatives. Several vehicle occupancy rates may be used to
represent different conditions.
Safety Benefits
Safety benefits are one of the principal benefits that can result from
transportation improvements. Benefits occur when the number of crashes
is reduced and/or the severity of the crashes is reduced on a facility or set
of facilities because of the transportation improvement. Standard
engineering methods can be used to evaluate both the potential crash
reductions and/or changes in severity.
Capital Costs
Capital costs make up the total investment required to prepare a highway
improvement for service, from engineering through landscaping. When
possible, capital costs should be grouped into similar life-cycle categories.
These include: engineering, right of way, major structures, grading and
drainage, sub-base and base, surfacing, and miscellaneous items. These
life-cycle groupings make it easier to calculate remaining capital value.
Estimates of capital cost, ranging from detailed engineer’s estimates to
planning-level cost estimates, should be as refined as appropriate for the
project’s stage in the project development process.
4.3 DISCOUNTING
For most transportation investments, costs are incurred in the initial years,
while the benefits from the investment accrue over many years into the
future. When assessing the costs and benefits of a project, it is necessary
to take into account the time value of money by converting the costs and
benefits that take place in different years into a common year. This process
is known as discounting. Discounting converts future costs and benefits
that occur in different years into a value for a common year (present value).
PV = present value
In an economic analysis all costs and benefits are given in constant dollars
(no inflation) and are discounted to the year of analysis. The year of
analysis is usually the current year.
Example
A new section of highway is estimated to cost $5,000,000. Construction will
occur in 2010. The year of analysis is 2005. If the discount rate is 3.6
percent for the year 2005, what is the present value of the construction
cost?
PV = ?
AC = $5,000,000
r = 0.036
n = 2010 – 2005 = 5
PV = 5,000,000/(1 + 0.036)5
PV = $4,189,587.13
PV = $4,200,000 (Rounded)
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5 CONDUCTING A BENEFIT-COST ANALYSIS
This section presents a stages-based methodology for conducting a benefit
cost analysis. These stages apply directly to highway improvement
projects, and can be used, with some modification, for other types of
transportation investments. Guidance for conducting benefit-cost analyses
for other types of transportation improvements is referenced in Technical
Memorandum No. 04-05-1M-01 Implementation of Minnesota Statewide
Transportation Plan Cost-Effectiveness Policy.
Figure 3 shows the analysis stages, the basic inputs, and the results.
Two other factors also help define the appropriate level of detail: available
data and analysis budget. Available data varies by project and influences
the level of detail appropriate for the benefit-cost analysis. Data sources
range from traditional engineering methods to sophisticated regional travel
demand models. The availability of this data varies with each project.
Benefit-cost analysis planning should establish what data is available, and
then verify that the available data suits the analysis purpose and provides
the appropriate level of detail for the benefit-cost analysis. The analysis
budget influences the appropriate level of detail as well. The level of detail
should be consistent throughout the analysis (the same for the Base Case
and Alternatives) and commensurate with the available budget.
Figure 4 below shows the relationship between level of data and level of
analysis. In the event that the available data lacks the desired level of detail
for a scrutinized project, a sensitivity analysis should be considered.
Many times, uncertain data such as travel time or operating costs are given
as a range. Sensitivity analyses can be used to test the robustness of
benefit-cost results by analyzing the effect that the range of uncertain data
has on the final benefit-cost ratio. Analysis planning should include time
and resources for sensitivity analyses. A well-planned analysis will produce
credible results consistent with the purpose of the analysis and available
data issues and budget.
Benefits of a project are derived from comparing the Base Case highway
user data (travel time, operating costs, and safety) that occur within the
study area to those of the Alternative scenario(s).
Analysis timeframe
Years of construction
First year of benefits
Final year of analysis/year of remaining capital value (RCV)
Number of days in a year
Figure 5 depicts the different years used. The following text defines the
relevant elements and gives typical values where applicable.
Timeframe
The analysis timeframe is the period of time for which project benefits and
related costs are compared and evaluated. The general principles for
selecting an analysis period are:
The timeframe should be long enough to capture the majority of
benefits, but not so long as to exceed capabilities to develop good traffic
information.
The analysis timeframe should be consistent with that used for other
analyses being under-taken for the project, such as transportation
demand fore-casts or life-cycle cost models.
The timeframe should be consistent for all alternatives.
All benefits and costs occurring or accruing over this timeframe should
be included in the analysis.
An analysis period of 20 years is typical for transportation improvement
projects, because traffic and demographic information is generally available
for this timeframe.
Years of Construction
Construction costs in a benefit-cost analysis are assigned to the year or
years in which they are anticipated to occur. If the timing of incurred costs
is not known, the construction cost should be divided evenly over the years
of construction. For example, if construction is scheduled to last three
years, 2001 to 2003, the cost of construction should be divided evenly
between the years 2001, 2002, and 2003. Construction costs are then
discounted to the year of analysis (defined in Economic Terms and
Principles: Discounting).
The final year of analysis is defined as the final year of the benefit-cost
analysis.
The year of remaining capital value is defined as the year in which the
remaining capital value (salvage value) of a transportation investment is
assessed. Methods for calculating the remaining capital value are
discussed under “Calculations” (item 6 in Section 5.3).
Number of Days in a Year
The number of days in a year over which benefits accrue depends on the
traffic characteristics and the proposed improvement. A typical capacity
improvement done in an area with a high-level of commuter traffic (trips
between home and work) should use 260 days, the number of weekdays
(Monday through Friday) in a year. Weekday effects for this example are
chosen because traffic volumes are consistently highest at these times
throughout the year. However, if this same example were used with the
improvement being a new roadway that reduced trip length for all users by
two-miles, benefits would accrue over the 365 days in the year. Also,
substantial benefits may occur on weekends for projects in some areas
(especially where recreational trip patterns exist). In these cases, weekend
benefits can be assessed separately and added to the weekday analysis.
In areas with lower commuter volumes, 365 days should be used. The
number of days assumed in a year should always be noted in the analysis
documentation.
Benefit-related data
o Average annual daily traffic volumes (AADT)
o Daily vehicle-hours traveled (VHT)
o Daily vehicle-miles traveled (VMT)
o Other operational changes such as daily number of stops of
speed-cycle changes
o Annual number of crashes and severity for the Base Case
and predicted change(s) to number of crashes and severity
based on improvement Alternative(s)
Cost-related data
o Capital costs
o Annual maintenance and rehabilitation costs
A. Benefit-Related Engineering Analysis
Decisions about appropriate level of detail made while planning the benefit-
cost analysis become important when generating benefit-related data. The
appropriate level of detail helps define the tools and methods that should
be used. Regardless of the tools and methods used to generate data, the
analysis should maintain a consistent base (e.g., model base, travel-time
base route, etc.) and level of detail for all alternatives.
Several tools and methods can generate traffic volumes (AADT), travel-
time (VHT), and vehicle-mile (VMT) data for benefit-cost analyses. Tools
and methods include regional travel demand models, local operations
models, and engineering judgment and other methods. The appropriate
tools and methodologies depend on the study area and Base Case defined
during analysis planning. Figure 6 shows project traits and typical
tools/methods. In cases where the most typically-used tool is not available,
a combination of tools can be used. For example, a regional travel demand
model may be used for VMT/VHT information, but a local traffic operations
model may be used to estimate the number of speed-cycle changes.
When generating travel-time and vehicle operating data, it is important to
account for VHT or VMT changes both on the highway being studied and in
the highway system affected by it. For example, one alternative may add a
lane to the study highway, which results in an increase in vehicle-miles
traveled on the highway facility itself (i.e., attracts trips into the study
corridor). However, the new lane may lead to a decrease in the number of
vehicle-miles traveled on other facilities in the area. Regional travel
demand models are useful for estimating traffic diversion effects. If a
regional travel demand model is not available, and significant traffic
diversion is likely, traffic shifts should be estimated using other methods
such as route diversion curves and travel time estimates.
Travel-Time Data
Travel-time data (vehicle-hours traveled—VHT) is often generated using
travel demand models (e.g., TRANPLAN or TP+) or traffic operations
models (e.g., Synchro/SimTraffic, CORSIM), by making measurements of
existing (Base Case) travel times and adjusting them for the Alternative(s),
or using general engineering approaches and judgment. Travel demand
models are the primary source for producing VHT data for large projects.
They are best suited for analyzing system-wide impacts of various
alternatives. Traffic operations models can produce peak hour VHT data for
smaller, localized improvement projects. It is important to convert VHT
information from peak hour into daily VHT information when using a traffic
operations model. For a very simplistic approach, AADT can be converted
to VHT by multiplying the AADT by the estimated time needed to travel the
corridor in the Base Case and the Alternative(s).
Safety Data
The safety analysis results in the number of crashes expected for each
severity type (fatal, type A injury, type B injury, type C injury, and property
damage only). These estimates are made for the Base Case and the
Alternative(s) for the first year of benefits and the final year of analysis. The
numbers are estimated based on existing and anticipated future crash rate,
severity rate, and AADT or VMT.
The crash rates and severity used in the safety analysis should reflect the
level of detail appropriate for the benefit-cost analysis. Crash rates and
severity are given for different facility types (freeway, expressway), for
specific corridors, and for specific sites (roadway segments or
intersections). The analyst must determine if the safety analysis should be
system-level, corridor-specific, or site-specific based on the Alternative(s)
proposed. System-level analyses are appropriate for projects that cause
traffic to shift between facility types. Corridor-specific analyses are
appropriate when improvements cover a larger area but traffic patterns are
anticipated to remain the same. Site-specific analyses are fitting when
improvements are site-specific and do not change traffic patterns. The level
of detail used in the safety analysis should be consistent for the Base Case
and Alternative(s).
Existing crash rates and severity are used for all Base Cases, and for the
Alternative(s) in system-level safety analyses and corridor-level analyses
where the facility-type changes. System-level safety analyses typically use
existing crash rates and severity (historical averages) available from
MnDOT District Traffic Engineering office (for roadways under MnDOT
jurisdiction) for different facility types. In this case, the forecast AADT or
VMT data should be given for each facility type (e.g., freeway or non-
freeway). Safety impacts will be evident by the change in AADT or VMT per
facility-type throughout the system. Some corridor-level analyses include a
facility-type change between the Base Case and the Alternative(s). Safety
impacts will be evident if the corridor’s facility-type, and therefore the crash
rate and severity rate, changes.
For corridor-level analyses where the facility-type does not change, and in
site-specific analyses, Hazard Elimination Safety (HES) tools can be used
to estimate reduction in crashes and/or severity. A worksheet aiding in the
calculations is available from MnDOT
at: http://www.dot.state.mn.us/trafficeng/safety/
It is important to remember that all numbers (VHT, VMT, number of
crashes, etc.) are needed for each year in the study timeframe. VHT, VMT,
and crash data are often generated only for one or two years (e.g., base
year and final year of analysis) of the study timeframe and these results are
then interpolated/extrapolated for other years in the analysis timeframe.
Roadway rehabilitation costs for the Base Case should consider the type
and extent of pavement distress and the rate of deterioration due to the
level of traffic volumes using the facility. The rehabilitation schedule used in
the benefit-cost analysis for the Base Case should be based on MnDOT’s
Pavement Management System recommendations or on recommendations
from the District Maintenance Engineer. Rehabilitation costs for other
roadway components, such as bridges, should be evaluated separately
and approved by the District Maintenance Engineer.
The Alternative(s) usually involve new construction and include only routine
maintenance. A 20 year benefit-cost analysis typically assumes no
rehabilitation costs under new-construction Alternative(s). If the benefit-cost
analysis timeframe is longer than 20 years, refer to the rehabilitation
schedules listed in the MnDOT Pavement Selection Process (Technical
Memorandum No. 04-19-MAT-02).
Removing a traffic signal (mainline free- Depends on percentage of mainline green time (30 to
flow) 50 percent of daily traffic)
Changing the speed limit All traffic traveling at the speed limit
1. Assemble highway user data (VMT, VHT, other operating costs, and
safety information) for the first year of benefits and the final year of analysis
at a minimum. If detailed annual estimates are not available, interpolate
between these two data points to compute information for each year in the
analysis timeframe (the spreadsheet aids in this calculation). Data
generation and interpolation must be done for the Base Case and the
Alternative(s). Table 2 shows a calculation table with VHT data in columns
A and B. A calculation table like this should also be prepared for vehicle
operating costs, one for vehicle-miles traveled and one for speed-cycle
changes, and safety.
2. Compute the difference in travel time, vehicle operating costs, and safety
between the Base Case and the Alternative for each year in the analysis.
Table 2 shows an example of the difference for VHT in column C. Figure 8
also depicts this difference and shows the difference is the benefit of the
Alternative as compared to the Base Case.
Compute the total benefit for travel time, vehicle operating costs, and
safety accrued during the analysis timeframe. Total benefit is calculated as
follows:
Find the annual savings for each year in the analysis period. Annual
savings are found by multiplying the difference in travel time, vehicle
operating costs, and safety by the number of days in the analysis year
(may not be applicable for safety), and then multiplying by the
appropriate unit cost (e.g., dollars per person-hour traveled, dollars per
vehicle-mile traveled, dollars per speed-cycle change, or dollars per
crash) for each year in the analysis period. This should be done for each
year in the analysis timeframe. Travel-time unit costs should reflect the
percent autos and trucks, auto occupancy in peak and off-peak periods,
and value of time per person for autos and trucks. The analyst should
use vehicle occupancy data collected for the project area or corridor, for
example through origin-destination studies. If none is available, Table 3
lists auto occupancy data for different areas of Minnesota. Vehicle
operating unit costs should include percent autos and trucks and
variable operating costs for autos and trucks. Crash costs should
account for crash severity. Use the values of time, variable operating
costs, and costs for each crash severity provided by MnDOT OIM (Table
A.1 in Appendix A). Annual benefit is shown in column D in Table 2
Discount the annual benefits back to the year of analysis. This should
be done for travel time, vehicle operation costs, and safety for each year
in the analysis timeframe. The present value of annual benefits is shown
in column E in Table 2.
Find the overall savings for travel time, vehicle operating costs, and
safety by summing the present value of the annual benefit for each year
in the analysis timeframe. Table 2 shows the overall travel time savings
in the bottom row, column E.
Table 3: Vehicle Occupancy Rates
. Peak/Off-Peak/Overall
.
Truck Occupancy Rate (b) Overall
(a) Source: 2010 Metropolitan Council Travel Behavior Inventory (TBI) Home Interview Survey
(b) Source: 2009 National Household Travel Survey (NHTS), Minnesota data
3. Find the total user benefit of the Alternative(s) as compared to the Base
Case by summing the overall savings for travel time, vehicle operating
costs and safety. Table 4 shows an example spreadsheet tallying total
highway user benefit. This is the final step in calculating the total highway
user benefit.
B. Cost Calculation
There are five steps in calculating agency cost:
When calculating remaining capital value, first estimate the useful life of the
investment elements (see Table 5). The capital cost should be broken into
elements such as preliminary engineering, right-of-way, major structures,
roadway grading and drainage, roadway sub-base and base, and roadway
surface. Right-of-way costs can include the cost of land and buildings. The
useful life of the land and buildings should be considered separately. Table
5 shows that the useful life of land is 100 years; however, the useful life of
an acquired building is dependent on if it will be demolished as part of the
highway improvement, or if it will be resold. Buildings that will be
demolished have a useful life of zero years. The useful life of a building that
will not be demolished is the same as the useful life of land (100 years).
After determining the useful life, calculate the percent of useful life
remaining at the final year of analysis (see Table A.2 in Appendix A).
Multiply that percent by the initial construction cost and discount that
amount back to the year of analysis. If the Base Case involves capital
expenditures, the remaining capital value should be calculated for the Base
Case as well.
1. Find the total present cost for the Base Case and Alternative(s). Table 6
shows the total present cost as the sum of the discounted annual costs
found for each year in the analysis timeframe. Annual costs are calculated
by adding the construction and ongoing maintenance costs, and
subtracting the discounted remaining capital value for each year in the
analysis.
PV(CostALT) –
PV(Costs) =
PV(CostBASE)
PV(x) = Present Value of x
Benefit-Cost Ratio
After the future streams of costs and benefits are discounted, the sum of
the discounted benefits is divided by the sum of the discounted cost. This
can be represented by the following formula:
B/C = PV(Benefits)
PV(Costs) = Present Value of x
IB/C =
PV(Benefits)
PV(Costs)
Incremental benefit-
IB/C =
cost ratio
The change in net benefits between these two alternatives is divided by the
difference in net costs. If the result is greater than or equal to 1.0, the
increase in benefit of the “challenging” Alternative is equal to or greater
than its increase in costs and the “challenger” then becomes the “defender”
and is compared to the next Alternative. If the result is less than 1.0, the
current “defender” is retained and the new “challenger” becomes the next
Alternative on the list. Comparisons of the challenger to defender are made
until all Alternatives have been considered. The surviving defender is the
most economically efficient.
If the sum of the discounted benefits is greater than the sum of the
discounted costs, the net present value is positive and the infrastructure
improvement is deemed to be economically justified.
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6 QUESTIONS
If you have any questions concerning the processes discussed in this
guidance or encounter a situation not specifically covered herein, please
call John Wilson at 651-366-3732 or send email
to [email protected].
Footnotes
1. A speed-cycle change is the process of going from the posted or cruising
speed to a stop and then back to the initial speed. In this process,
additional operating costs for braking and accelerating are incurred. back