Project Evaluation

What must transportation agencies consider about their projects?

How potential projects and policies will impact a much larger community’s well-being

What impacts may a project have?

Economic, environmental, equity, and other impacts

What does traveler wellfare depend on?

Direct user costs, travel times, and the base attractiveness of various choices

What are direct consumer costs?

Fuel, tolls, fares, and vehicle mantinenance

What are travel times?

An opportunity cost

What are the base attractiveness of various choices?

Time of day, destination, and mode

When travel times or costs fall who does it benefit?

Existing travelers and new travelers choosing to use the service due to the improvement

How can the change in traveler welfare be estimated?

The Rule of Half

What does the benefit to existing users equal?

Area 2

What does the benefit to new users equal?

Area 1

What assumption is made in the Rule of Half?

It assumes a linear demand function between before and after demand points

The first additional user recieves nearly how much of a benefit compared to the last existing user?

Nearly as much

Which user is practically indifferent to using the service or not?

The final new user

What is represented on the Y-axis of the Rule of Half?

Travel Cost

What is represented on the X-axis of the Rule of Half?

Travel Demand

When travel costs fall what happens to demand?

It rises

How are changes in consumer surplus showed?

Shaded in regions Area 1 and Area 2

What happens to the purchasing power of money over time?

It decreases

Why does the purchasing power of money decrease over time?

Due to inflation and uncertainty

What does a discount rate do?

It adjusts the value of money for time

What does the discount rate express?

Future monetary quantities in terms of their worth today

In transportation project evaluation what does discounting enable planners to do?

Compare costs and benefits that occur in different points in a projects life cycle on a consistent present-value basis

What is the net present value (NPV)

A calculation used to state a projects worth or cost for its entire life cycle in todays dollars or at a point in time

What is the equation for NPV?

NPV = -C₀+Ʃ^t_i=1(C_i/(1+r)ⁱ)

What is -C₀?

The initial project cost

What is T?

The projects design life

What is r?

Discount rate

What is c_i

Cash flow of year i

What is year i?

Benefits minus costs for that year

What is the internal rate of return (IRR)

The discount rate that sets the NPV of all cash flows from investment equal to zero.

What is the equation for IRR?

-C₀+Ʃ^t_i=1(C_i/(1+IRR)ⁱ) = 0

What is IRR?

The effective equivalent interest rate used to measure the value of an investment

When can IRR only be used?

When the project will generate income

What must be true when evaluating alternatives using the IRR?

The alternatives IRR should be greater than the minimum accepted rate of return (MARR)

What is the minimum accepted rate of return (MARR)?

The lowest interest rate investors would accept given the risk of the investment and opportunity cost of other projects

A profit maximizing firm will expand service or capacity so long as what?

Marginal revenue earned from the next unit is greater than the marginal cost of providing it

Which modes of transit make decision in a profit-maximizing way?

Airlines, trucking companies, freight railroads, and private port operators

For profit maximizing firms what is a good indicator of the value that users place on services?

Changes in revenue

Why are changes in revenue a good indicator the value places on services by users?

People and firms are willing to pay for what benefits them

How do economists often treat revenue?

As a lower bound on gross user benefits

True or False, private profit-based decision making does not capture the full social value or cost of transportation?

True

Why is private profit based decision making not a good way to capture the full social value or cost of transportation?

Some aspects of the system or public goods which are difficult to charge for directly but are essential for travel, externalities that are not reflected in market prices, in public transit sectors fares are set below full cost of providing the service

What are examples of public goods in travel systems?

Streets, air traffic control, and maritime navigation aids

What are examples of externalities in travel systems?

Noise, congestion, or air pollution

What is the effect of fares deliberately being set below full cost of providing the service?

Revenue understates the true benefits riders recieve

What is benefit cost analysis (BCA)

A method to measure and evaluate all relative direct economic impacts of public investment projects

What is BCA a useful tool for?

Decision making in planning and evaluation phases of projects

Other than measuring all direct economic impacts, how else can BCA be used?

Determining whether and when a project should be undertaken and rank and prioritize projects

By explicitly comparing total social benefits on a project to total social costs what does BCA provide a framework for?

Deciding whether transportation investments or policies improve overall welfare

How does the BCA process begin?

Identifying the project’s needs and constraints

What are examples of a projects needs and constraints?

Capacity shortages, safety concerns, or regulatory requirements

What happens after identifying a projects needs and constraints?

A range of alternatives is designed

What are examples of alternatives?

Different project scopes, technologies, or alignments, as well as the no action base case for comparison

What is estimated for each alternative?

Costs and benefits

What quantifiable impacts do costs and benefits estimate?

Construction, operation, maintenance, travel time savings, safety improvements, environmental effects, and other quantifiable impacts

What happens after costs and benefits are estimated?

Costs and benefits are discounted to present value to account for the time value of money

What is the last step in the BCA process?

Project alternatives are compared using decision metrics

What decision metrics are used to compare project alternatives?

benefit-cost ratio (B/C ratio), net present value NPV, and internal rate of return IRR

How is the B/C ratio calculated?

Dividing total discounted benefits by total discounted costs

To be considered economically worthwhile what should the B/C radio be greater than?

1

What should an NPV be greater than?

0

What should the IRR be greater than?

The discount rate

What is another way to evaluate a transportation project?

Economic impact analysis

What does the EIA unveil?

How transportation facilities and systems affect businesses governmetns and households

What is an economic impact?

Any change to the amount, flow, or distribution of money due to changes in production, distrubution, and consumption of goods and services

What economic indicators do economic impact studies use?

• Spending by households and businesses

• employment by the number of jobs

• income

• business sales

• exports and imports

• capital investment expenditures

• value added

True or False, a transportation projects economic impact is not the same as its economic value?

True

What question does economic value estimation involve answering?

Do the projects intended benefits outweigh its costs?

What does economic impact analysis seek to estimate?

A projects impacts on economic indicators

What is BCA used for?

Calculating economic value

What does EIA focus on?

Measuring the broader consequences that a project will have rather than return on investment

What does EIA exclude?

Any impacts that cannot be measured as pure economic transactions

What does BCA ensure?

Benefits outweight costs from a value for money standpoint

What does EIA capture?

A broader ripple effect on jobs, income, and business activity

By combining approaches to evaluation what can decision makers prioritize?

Investments that generate lasting improvements in efficiency, safety, and community wellbeing

What is the ultimate goal?

Using limited resources in ways that produce the greatest net benefit for society, now and in the future