Econ Section IV: Project Evaluation

What impacts must transportation agencies consider?

Economic, environmental, and equity impacts

What does traveler welfare depend on?

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

Who benefits when travel times or costs fall?

Existing and new travelers

What can be used to estimate the change in traveler welfare?

Rule of Half

How much benefit does the first additional user receive?

Almost as much as the last existing user

How does the final new user feel about the transportation service?

They are indifferent to using the service or not

Why does the purchasing power of money decrease?

Inflation and uncertainty

How does a discount rate express the value of money?

It expresses expected future monetary quantities in terms of their worth today

What benefit does discounting have for planners?

It allows them to compare costs and benefits that occur at different times over the course of a project

What is a net present value calculation used for?

Stating a project's worth for its entire life cycle at a specific point in time

What variables are included in the NPV calculation?

Initial project cost, project's design life, discount rate, cash flow, and year

What is the internal rate of return?

The discount rate that sets the NPV to 0

What is another definition of IRR?

It is the interest rate used to measure the value of an investment

When can IRR be used?

When the project will generate income

What is the minimum accepted rate of return?

The lowest interest rate investors would accept

How are alternatives evaluated using IRR?

The alternatives' IRRs should be greater than the MARR

When will a profit-maximizing firm expand service?

When marginal revenue is greater than marginal cost

What are changes in revenue a good indicator of?

The value that users place on services

Why is it hard to determine the full social value/cost of transportation?

Some parts of the system are public goods, some externalities are not reflected in prices, and some fares are set below the cost of providing service

What is benefit-cost analysis?

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

What can BCA be used to do?

Determine whether and when a project should be undertaken and rank projects

What does BCS compare?

Total social benefits and total social costs

What is the first step of the BCA process?

Identifying the project's needs and constraints

What is the second step in the BCA process?

Designing a range of alternatives

What costs and benefits are estimated in BCA?

Construction, operation, maintenance, travel time savings, safety improvements, environmental effects, etc.

Why are costs and benefits discounted in BCA?

To present value to account for the time value of money

What metrics are used to compare project alternatives?

Benefit-cost ratio, NPV, and IRR

How is the B/C ratio calculated?

Dividing total discounted benefits by total discounted costs

What rules of thumb should projects follow to be economically worthwhile?

A B/C ratio greater than 1, an NPV greater than 0, and an IRR greater than the discount rate

What does economic impact analysis reveal?

How transportation facilities and systems affect businesses, governments, and households

What counts as an economic impact?

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

What economics indicators are used in economic impact studies?

Spending by households and businesses, employment, income, business sales, exports/imports, capital investment expenditures, and value added

How is EIA different from BCA?

BCA calculates economic value while EIA measures the broader impacts of a project

What impacts are excluded in EIA?

Impacts that cannot be measured as pure economic transactions

What is not included in BCA?

Attraction of business activity into the area and income generated by off-highway businesses

What is the ultimate goal of transportation projects?

Use limited resources to produce the greatest net benefit for society