PPT

Economic Analysis: Applications to Work Zones

March 25, 2004

Economic AnalysisWhat Is It? Benefits and/or costs of

competing investment options are compared in common unit of the dollar

Makes non-like performance measures comparable

Why? Performance What? Greatest net benefit When? Optimal timing Where? Best alignment How? Best implementation

strategy

Economic AnalysisAddresses Key Project Questions

Economic AnalysisIssues 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

Economic AnalysisTypical Life Cycle Profile

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Year

Initial Capital

Dollars

BenefitsCosts

Cost

Economic AnalysisAdjusting for Present Value

tt ArPV

)1(

1

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

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%

Economic AnalysisExample of Discounting

Plug values into discounting formula:

Do calculations:$412 0.41199x 000,1$ PV

Economic AnalysisExample (continued)

30 30 000,1$)03.1(

1yearPV

Economic AnalysisDiscount 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

EA Methods

Benefit-Cost Analysis Life-Cycle Cost Analysis

EA MethodsBenefit 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

EA MethodsBCA Formula BCA is done using the basic multi-

year discounting formula:

)()1(

10

tt

N

tt CostBenefit

rPV

EA MethodsApplications of BCA Project-level analysis Selecting ITS or operations

technologies Highway program-level analysis Regulatory analysis

EA MethodsLife-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

EA MethodsLCCA Formula LCCA is done using the basic

multi-year discounting formula:

where “Cost” equals the cost for design alternative in year t

t

N

tt Costr

PV

0 )1(

1

EA MethodsApplications of LCCA Evaluation of pavement

preservation strategies Project planning and

implementation, especially the use and timing of work zones

Value Engineering

EA MethodsHow 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

EA MethodsCost Items Used in LCCAAgency Costs

Design and engineeringLand acquisitionConstructionReconstruction/RehabilitationPreservation/Routine Maintenance

User Costs At Work ZonesDelayCrashesVehicle Operating

EA MethodsValuation 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

EA MethodsInclusion 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

Linking EA to Other Tools

Other tools increase the usefulness of BCA and LCCA Traffic Forecasting Risk Analysis Economic Impact Analysis

Linking EA to Other ToolsTraffic Forecasting Queuing models

Included in RealCost LCCA Software

Traffic simulation models Corsim QuickZone

Travel demand models

Linking EA to Other ToolsRisk Analysis

Uncertainty can be measured and mitigated

Sensitivity and probabilistic methods

Risk can be mitigated using alternative engineering, contractual methods, etc.

Linking EA to Other ToolsEconomic 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

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

LCCA Applied To Work ZonesMitigation 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?

LCCA Applied To Work ZonesComparing 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

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

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

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

LCCA Applied To Work ZonesExample Results

Agency User Agency User

Present Value $2,605 $4,969 $2,865 $1,226

Present Value $2,721 $3,715 $2,987 $1,055

Costs Over 35 Years in $1000

SP - 24 Hr WZ SP - Night Only

SMA - 24 Hr WZ SMA - Night Only

LCCA Applied To Work ZonesExample 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

For Further InformationEconomic Analysis PrimerFHWA IF-03-032, August 2003

Contents:

• Economic Fundamentals

• Life-Cycle Cost Analysis

• Benefit-Cost Analysis

• Forecasting Traffic

• Risk Analysis

• Economic Impact Analysis

For Further InformationLife-Cycle Cost Analysis Materials

Life-CycleCost AnalysisPrimer

RealCost Software and workshops– call your Division Office

For Further InformationOther Economic Materials FHWA’s Office of Asset

Management, Evaluation and Economic Investment Team:www.fhwa.dot.gov/infrastructure/asstmgmt/invest.htm