# Economic Analysis: Applications to Work Zones

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2 Δεκ 2013 (πριν από 4 χρόνια και 5 μήνες)

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Economic Analysis:
Applications to Work Zones

March 25, 2004

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

Why? Performance

What? Greatest net benefit

When? Optimal timing

Where? Best alignment

How? Best implementation
strategy

Economic Analysis

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

Economic Analysis

Typical 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

Benefits

Costs

Cost

Economic Analysis

t
t
A
r
PV

)
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
power)

Discount rate is 3%

Economic Analysis

Example of Discounting

Plug values into discounting
formula:

Do calculations:

\$412

0.41199
x
000
,
1
\$

PV
Economic Analysis

Example (continued)

30

30
000
,
1
\$
)
03
.
1
(
1
year
PV

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

EA Methods

Benefit
-
Cost Analysis

Life
-
Cycle Cost Analysis

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

EA Methods

BCA Formula

BCA is done using the basic multi
-
year discounting formula:

)
(
)
1
(
1
0
t
t
N
t
t
Cost
Benefit
r
PV

EA Methods

Applications of BCA

Project
-
level analysis

Selecting ITS or operations
technologies

Highway program
-
level analysis

Regulatory analysis

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

EA Methods

LCCA Formula

LCCA is done using the basic
multi
-
year discounting formula:

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

t
N
t
t
Cost
r
PV

0
)
1
(
1
EA Methods

Applications of LCCA

Evaluation of pavement
preservation strategies

Project planning and
implementation, especially the
use and timing of work zones

Value Engineering

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

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

EA Methods

Valuation of User Time

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 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

Other tools increase the
usefulness of BCA and LCCA

Traffic Forecasting

Risk Analysis

Economic Impact Analysis

Traffic Forecasting

Queuing models

Included in RealCost LCCA
Software

Traffic simulation models

Corsim

QuickZone

Travel demand models

Risk Analysis

Uncertainty can be measured and
mitigated

Sensitivity and probabilistic
methods

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

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

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 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?

LCCA Applied To Work Zones

Comparing Strategies

Each construction/WZ strategy
-
offs

Agency vs. user costs

Initial vs. long
-
term costs

LCCA approach permits
-
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)

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 Zones

Example 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 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

For Further Information

Economic Analysis Primer

FHWA IF
-
03
-
032, August 2003

Contents:

Economic Fundamentals

Life
-
Cycle Cost Analysis

Benefit
-
Cost Analysis

Forecasting Traffic

Risk Analysis

Economic Impact Analysis

For Further Information

Life
-
Cycle Cost Analysis Materials

Life
-
Cycle

Cost Analysis

Primer

RealCost
Software
and
workshops

call your
Division
Office

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