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Economic Analysis: Applications to Work Zones March 25, 2004

Learn about economic analysis and its application to work zones. Discover the benefits, costs, and optimal timing of projects. Understand how to adjust for present value and make informed decisions.

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Economic Analysis: Applications to Work Zones March 25, 2004

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  1. Economic Analysis: Applications to Work ZonesMarch 25, 2004

  2. 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

  3. Economic AnalysisAddresses Key Project Questions • Why? Performance • What? Greatest net benefit • When? Optimal timing • Where? Best alignment • How? Best implementation strategy

  4. 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

  5. Benefits Costs Initial Capital Cost Dollars 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Economic AnalysisTypical Life Cycle Profile

  6. Economic AnalysisAdjusting for Present Value 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

  7. Economic AnalysisExample 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%

  8. Economic AnalysisExample (continued) • Plug values into discounting formula: • Do calculations:

  9. 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

  10. EA Methods • Benefit-Cost Analysis • Life-Cycle Cost Analysis

  11. 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

  12. EA MethodsBCA Formula • BCA is done using the basic multi-year discounting formula:

  13. EA MethodsApplications of BCA • Project-level analysis • Selecting ITS or operations technologies • Highway program-level analysis • Regulatory analysis

  14. 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

  15. EA MethodsLCCA Formula • LCCA is done using the basic multi-year discounting formula: • where “Cost” equals the cost for design alternative in year t

  16. EA MethodsApplications of LCCA • Evaluation of pavement preservation strategies • Project planning and implementation, especially the use and timing of work zones • Value Engineering

  17. 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

  18. Agency Costs Design and engineering Land acquisition Construction Reconstruction/Rehabilitation Preservation/Routine Maintenance User Costs At Work Zones Delay Crashes Vehicle Operating EA MethodsCost Items Used in LCCA

  19. 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

  20. 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

  21. Linking EA to Other Tools • Other tools increase the usefulness of BCA and LCCA • Traffic Forecasting • Risk Analysis • Economic Impact Analysis

  22. Linking EA to Other ToolsTraffic Forecasting • Queuing models • Included in RealCost LCCA Software • Traffic simulation models • Corsim • QuickZone • Travel demand models

  23. 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.

  24. 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

  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

  26. 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?

  27. 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

  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

  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

  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

  31. LCCA Applied To Work ZonesExample Results

  32. 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

  33. 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

  34. Life-Cycle Cost Analysis Primer For Further InformationLife-Cycle Cost Analysis Materials RealCost Software and workshops– call your Division Office

  35. For Further InformationOther Economic Materials • FHWA’s Office of Asset Management, Evaluation and Economic Investment Team: • www.fhwa.dot.gov/infrastructure/asstmgmt/invest.htm

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