p-S
ENGINEERING
TECHNICAL
INFORMATION
SYSTEM
FIELD
NOTESTECHNICAL
REPORTS
DATA RETRIEVALMANAGEMENT
PROFESSIONAL DEVELOPMENT
ppp
Notes
Field
A
SIGNS FABLE
IN
OF ECONOMIC ANALYSIS
PLAN SELECTION
WASHINGTON
OFFICE
FOREST SERVICE
NEWS
MAY
S
U.S.
DEPARTMENT OF AGRICULTURE
1979
UýS
ENGINEERING
Volume
contained
Information
in
Number
11
has
publication
this
FIELD NOTES
5
been developed
for
of employees
guidance
respon-sibility
of
the
United
Federal
cooperating
for
The
the
and State
of
use
product
that
The
in
text
or service
may be
the
must not
be
or policy
except
engineers
Such
The
by other than
of this information
names
use does not
in
this
publication
for
its
its
own
employees.
the information
and
an official endorsement or approval
constitute
by the United States Department of Agriculture
as
represents
the
recommended
exclusively
personal
opinions
or approved
to the exclusion
of the respective
procedures
of the type
read each
however
FOREST SERVICE
DEPARTMENT OF AGRICULTURE
Washington
D.C.
author and
mandatory instructions
of material in the publication
issue
for engineers.
U.S.
jlý
is
and
assumes no
Department of Agriculture
Because
by FSM references.
and engineering technicians
should
intended
contractors
its
suitable.
publication
construed
Service
Agriculture-Forest
agencies.
interpretation or
of the reader.
of others
not
Department
of trade firm or corporation
use
convenience
of any
States
20013
this
publication
all
is
A SIGNS
FABLE
Wes
OstheZZer
Forest
Mystic
Signs Coordinator
Flathead National
Forest
Once upon a time in a Forest far far away the Mystic Signs
Coordinator
hereinafter and forevermore to be called Mystic
was informed by the equally far far away Minor King
Leader that each Forest must follow all rules decrees
and edicts set forth in the scrolls of the Kingdom
those requiring ye olde sign programme.
Mystic sent
Minor
to
the
the
fastest
horse
available
King
by
a message
that
the
Forest
had
a
Rumor
truly
magnificient
sign plan.
Rumor traveled fast by sunset Mystic received a message
Ye have
bearing the seal of the Great Regional
Emperor
not a sign plan but--in fact--an inventory.
ALAS
OM
RO--in-cluding
Twas about this time it came to pass that the Forest was
blessed with a new Grand Ruler Supervisor who had a
strange habit of coming in late each night from his daily
rounds of the Forest land.
Everyone
thought How nice
he
loveth
the
Forest.
Truly
Mystic--dost
One
day Mystic
was summoned before the Grand Ruler.
on
his
Sitting
mighty throne he said
thou value thy head
said
Verily mighty Ruler
in
a
roar
to
be
heard
the
Then
throughout
land
Mystic.
the Grand Ruler spake If I get lost just one time more
on an unsigned road thy ox is boxed
Using a similar
phamiliar phrase.
bright
OH WOE
Mystic we have the finest sign inventory
Each
land truly all the royal roads are marked.
But sire
in
the
said
and every one dost have its wee tiny number.
As thou
canst see on this parchment
the royal maps do truly show
the royal roads even though they are somewhat old.
And
if
roads
thereon
shown
when
ever new maps are made
will also truly have a number.
Fine
said the Grand Ruler but numbers help me not
If thou desireth to live and prosper put up signs that
that tell in which of the
have some real words--words
Hades
I might
seven rings of
be
A
the Emperor word was sent
Sign Plan we do truly
When shall be the soonest we can meet
The Emperor
am so happy I could cry.
replied
Four hours hence the
Duke Regional Sign Coordinator and I shall be upon thy
To
need
I
lands.
it came to pass throughout
all the Forest the Grand
Rulers word was heard
A Sign Plan Cried the District
Knights Oh no
Oh please--not now.
But the Grand
Rulers final word was
Yea verily--a plan--now well
all be truly proud when tis done.
Then
Posthaste
all the Knights and Knaves assembled.
Each
District Knight on the Forest was truly involved.
Plans
were laid and all did meet and meet again--the Emperor
the Duke
the Knights the Knaves--and Mystic too.
The
meetings long did last and after many weeks had passed
there was
A SIGN PLAN
These last words the Emperor did say
Try Ojo
and signs at Condon ye are not to make.
And
were
in
due
time
it
royally signed
came to pass that
and well.
the
lo
Caliente....
royal roads
there-from
F
Now
Mystic of Flathead Forest tenders homage and paeans of
thanks to the Emperor and the Duke and Ojo Caliente for
all the help they rendered in ye olde sign programme.
And
the salubrious benefices to be derived
acknowledging
calls upon our brethren
and sistern Forests whose
names begin with
to perform in a like manner.
Manuscript
copies
sent
to
Feaverhead
Footenai
Fuster
Fez
Perce
Fallatin
Fouis
Clark
Flearwater
Felena
Fearlodge
Folo
Fan Handle
Fitterroot
ROLE
OF ECONOMIC
James
H.
ANALYSIS
Herendeen
IN
PLAN
Jr.
M.
SELECTION
ASCE
Transportation
Planning Engineer
Gannett Fleming Corddry and Carpenter
Harrisburg Pennsylvania
Inc.
INTRODUCTION
transpor-tation
plan-ning
The purpose of this paper is to describe the impact of changes in
the planning process on the role of economic
analysis to describe
the economic
tools that are available for application
to
planning and to analyze the use of these tools in the
An understanding
of the capabilities
and limitations
process.
of the economic
in the context of the overall
analysis techniques
planning process should assist in the selection of the appropriate
to satisfy specific planning
It should also
techniques
objectives.
be of value for insuring that the tools are applied in a manner
consistent with the function for which they were intended.
vari-ous
Concern is being expressed by many professionals about the use of
economic
Articles
analysis tools in the process of plan selection.
in technical
have covered
the application
of
journals
economic
to the evaluation
of proposed
analysis techniques
plans the setting of priorities or the analysis of alternative
There is a great deal of controversy
and disagreement
about
-plans.
the proper application
and significance
of economic
analysis in the
Several sessions and committee conferences
plan selection process.
at the 1977 Transportation
Research
Board meetings were dedicated
to these topics.
At one of these sessions it was suggested by
Robley Winfrey an accepted
authority and author of many articles
and books
on engineering economy that the profession was
of economic
actually regressing in its understanding
analysis and
its role in the decision-making
process.
123
78
The
controversies
and-misunderstandings regarding the role and
of economic
analysis techniques
proper application
appear to be an
of changes that have occurred
in the purpose and scope of
outgrowth
the planning process itself.
The need to address social and
issues as well as transportation
related concerns in the
envi-ronmental
Con-vention
Jan-uary
Presented
at the American Society of Civil Engineers Spring
and Exhibit Dallas Texas April 25-29
1977.
Printed
Transportation
Engineering Journal of ASCE Vol. 104 No. TE1
Reprinted by permission of ASCE.
1978 pp 55-67.
3
in
pro-found
apply-ing
and selection of transportation
development
plans has had a
influence on the type and quantity of information required.
The need to involve the public in the decision-making
process has
created a requirement for mechanisms through which the opinions
desires and concerns of the public can influence the decisions.
These changes in the purpose and scope of the planning process have
resulted in a search for new analytical tools or new ways of
old techniques
that are responsive to the expanded scope and
objectives of the process.
re-lated
in this paper it
Before beginning to examine the topic of concern
The
well
to
describe
what
does
not
consider.
be
the
paper
may
is
not
concerned
with
the
economic
market
behavioral
or
paper
models usually used to predict travel behavior and the travel
Nor is it concerned
with the means of obtaining or
impacts.
the sources of funds required to implement the selected plans.
Both of these topics are important to the process of plan selection
and in some instances they may be of greater importance
than the
results of ecomonic
analyses to the decision makers.
an-swer
This
with the analytical tools required to
paper is concerned
three basic questions relevant to plan selection.
First is a
particular plan a wise investment of public funds or should the
to implement
the plan be spent elsewhere or not
resources necessary
Secondly which plan of a group of alternatives is
spent at all
some set of objectives
economically better to accomplish
Finally
what priority should be placed on each element of a selected plan
from an economic
point of view
engi-neering
econ-omy
EVOLUTION
OF ECONOMIC ANALYSIS TECHNIQUES
FOR TRANSPORTATION
PLANNING
evalu-ating
analysis of transportation
plans had its roots in the
which
has
been
and
remains
an important aspect of
economy
education.
The
of
an engineers
teaching engineering
purpose
is to provide
the engineer with a methodology capable of
the tradeoffs
that exist among alternatives with different
initial costs operating
and maintenance
costs and life spans.
The application
of these principles to the analysis of
in
plans was a natural step when the major issue of relevance
of
the
the plan selection process was the economic
justification
proposed expenditure.
Economic
transporta-tion
road-ways
pro-vide
how-ever
In the
initial phases of governmental
in the financing
involvement
transportation
facilities the goal of providing improved
to aid and foster business
commerce and national defense was
clear.
Few questioned
the advisability
of the investment to
for these needs.
When the basic needs had been satisfied
the investment decisions
became more difficult.
Many state
and other groups charged with the planning
highway
departments
programming and implementation of transportation
improvements used
of
4
principles of engineering
economy as
projects would be built and in which
a basis for determining
order.
which
There are several techniques
that were used to assist in determining
which projects were wise investment decisions
and in deciding the
order of implementation to achieve the greatest public benefit.
Benefit/Cost
analysis is perhaps the most famous or infamous of
the techniques
although Equivalent
Uniform Annual Cost Net Present
Cost Rate of Return and other techniques were also used.
One or
more of these tools was capable of defining a best alternative or
a priority ranking
of projects when all relevant concerns
could be
measured
in
dollar values.
readily
With the expansion of concerns to include user impacts other than
those directly measurable in dollars came efforts to incorporate
these concerns into the existing analytical tools.
Many studies
were conducted
to define
the dollar value of time saved in travel.
Others have been concerned
with the value of injuries and deaths
that result from highway
improvements and others have dealt with
the conversion
of user comfort indices into dollar values
to be
in the economic
analysis.
in-corporated
The need to consider nontravel
related impacts has also resulted in
the development
of mechanisms
to estimate
the dollar values of air
pollution and noise impacts of the changes in property values and
the real estate tax base and of changes in employment
resulting
from transportation
Each additional concern
improvements.
has
the strain on the analytical tools by increasing the number
of assumptions and value judgments that must be accepted
by a
maker before the result of the analysis can be considered
Since it becomes nearly impossible to obtain agreement
from any
to use in
group of decision makers on the appropriate
assumptions
such an analysis and because
the results of the analysis can be
affected
by changes in these basic assumptions the single
index economic
analysis tools have fallen into disfavor.
in-creased
deci-sion
val-id.
ma-terially
prior-ities
require-ments
The
search for new techniques
that are better suited to the problem
evaluating
alternatives selecting plans and establishing
among plan elements in the context of present planning
and procedures
has resulted in the development
of a group of
achievement
and
in
the
of Cost
goals
analysis techniques
concept
These techniques
have the flexibility to address a
Effectiveness.
broader range of issues without
the need to convert the impacts into
dollar values.
also
facilitate
the incorporation of
can
They
and
other
involvement
public
participation
into the
They do not however
eliminate the need for sound
process.
economic
analysis nor render the basic engineering economic
analysis
tools obsolete.
of
citi-zen
decision-making
5
condi-tions
alter-native
prudent expenditure of public funds to achieve desired
is still an important consideration
in the assessment of
Economic analysis can provide valuable information to
plans.
the decision maker that will help him or her to assess the prudence
of alternative investment decisions.
Ultimately the selection of a
of
plan is made by the decision maker based on his or her evaluation
the information provided.
The task of the engineer has been and
remains to select the analytical tools that will provide the
relevant to the decision maker in a manner that facilitates
of options available and clarifies the consequences
an understanding
of the alternative plans.
The
infor-mation
econo-mic
An-nual
pur-poses
BASIC
ECONOMIC
TOOLS
the purposes of this presentation the various types of
have been placed into one of the following
analysis techniques
five categories
Net Present Cost
Uniform
Equivalent
Rate of Return
Cost
Cost
Ratio or
Benefit/Cost
Different sources have used different terminology
Effectiveness.
Some authors
for these techniques.
distinguish between cases
where annual revenues or measurable benefits are anticipated and
in the Net
those where no such revenues or benefits are anticipated
Uniform Annual Cost categories.
Present Cost and Equivalent
However
the grouping provided in the preceding
is convenient
for the
of this presentation.
For
3
1
4
2
5
57
ap-propriate
the
and their applications it is
considering
techniques
to examine three elements of economic
analysis that are
These elements are
The period of
common to each technique.
The
the inflation rate and
the discount rate.
analysis
choice of values for each of these elements can have a significant
effect on the results of the economic
analysis and their meaning.
Before
2
3
1
selec-tion
Period
of Analysis
The peroid of analysis is the time over which
costs and benefits
The
associated with a particular plan are assumed to accrue.
of an appropriate
period of analysis is dependent
upon the
nature and purpose of the analysis.
Periods of between
30
and 50
plans.
years are frequently used for the analysis of transportation
compo-nents
increas-ing
In general the period of analysis should be consistent with the
revenues
cost will produce
length of time over which a nonrecurring
Since different components
of transportation
or benefits.
systems
have different useful lives the life of the longest lived
These components
and
are usually used.
are the rights-of-way
the fixed facilities.
these components may last longer
Although
than 30 to 50 years the discounted
costs and benefits are usually
that
time.
In
beyond
addition the reliability of
insignificant
estimates of costs and revenues or benefits decreases with
time horizons.
6
f
r
Shorter periods of analysis could be used for transportation
plan
evaluation
if it were possible to estimate
the salvage value of the
plan elements prior to the end of useful life.
The salvage value
could be considered
as a revenue
to be derived
from selling the
assets of the system at the end of the analysis period.
Since such
assets are seldom if ever sold the salvage value is probably more
difficult to estimate than the longer range operating
and
costs and benefits.
Using a life of 30 to 50 years renders
the
estimate of a salvage value insignificant and therefore it can
be ignored.
mainte-nance
de-pends
The important point about selecting a period of analysis is that
all alternative plans to be examined should use the same period of
analysis unless salvage values can be accurately
estimated for all
unused capital facilities at the end of the periods of analysis to
be employed.
The choice of the period of analysis therefore
on the judgment of the engineer regarding the accuracy of
estimating the future costs revenues
or benefits actual useful
life spans of system elements and salvage values of the various
For most long-range transportation
system components.
plan
a single 30
to 50 year period of analysis is selected and
potential salvage values are ignored.
compar-isons
Rate
Inflation
The inflation rate is an assumed rate of change in the value of the
dollar with time.
That is it is the rate of change of the consumer
price index or any portion of that index that is relevant to the
escalation in costs of transportation
goods and services.
The rate
of inflation is used to determine actual
cash outlays or revenues
or the dollar value
of benefits
at sometime in the future based on
the estimated costs revenues
and benefits in current dollars.
pres-ent
consider-ation
dis-count
Trends in the application
of economic
at
analysis techniques
are to ignore the effects of inflation as a separate
and to account
for inflation in the selection of a net
rate.
The assumption implicit in this process is that costs
revenues and benefits will all be subject to the same rate of
If the engineer has reason to assume that the inflation
rates will be different for different components
of the costs
as has been the case for energy costs
revenues or benefits
to other items in the consumer price index in the past few
years separate inflation rates should be used for each component.
In general however
the use of present dollar values in conjunction
with a net discount rate is an acceptable
practice.
in-flation.
com-pared
in-terest
Discount
The
Rate
discount
rate is a measurement
of the time value
of money.
In
would
rather
have
general
person
$1.00 today than $1.00 1 year
If he had $1.00 today
from today.
he could invest it in an
account
at
5%
bearing
7% etc. and have $1.05 $1.06
a
6%
7
in-duces
$1.07 etc.
at the end of 1 year.
The rate of interest that
person to forgo an expenditure
today to have more to spend
at some future point in time is a measure of the discount rate for
that person.
People also borrow money to purchase homes cars and
other commodities and agree to pay
back the amount borrowed plus
an interest charge for the use of the money.
The rate of interest
that a person pays to borrow money is also a measure of the
a
dis-count
rate.
Both of the measures of discount rate described in the preceding
are estimates of the gross discount rate.
That is the effects of
inflation or the change in the value of the dollar are included
in the measure of the discount rate.
They are measures of the
market time value of money and inflation is present in the market
The net discount rate would be obtained by subtracting the
place.
inflation rate from the observed discount rate.
capi-tal
dis-count
an-nual
There have been and continue to be debates about the appropriate
discount rate to use when evaluating
In
public works projects.
low
net
discount
that
rates
favor
general
plans
require large
investments and have low annual operating
costs while high
rates favor projects with small capital costs and large
This occurs because the higher the discount
costs.
operating
the
less
future
costs and benefits have on the results.
rate
impact
Some have advocated
the use of an artifically high discount rate as
have
a measure of the risk involved
in the investment while others
that
for
the
rates
are
to
account
discount
high
suggested
necessary
alternative uses of public funds.
For now suffice to say that the
choice of a discount rate either a gross discount rate in
with an inflation rate or a net discount rate is an
It
feature of the analysis that should not be glossed over.
is hoped that the following
examination of the applicability of the
various techniques
and their use in the plan selection process will
assist the engineer in the selection of appropriate
discount and
inflation rates.
conjunc-tion
impor-tant
Net
Present
Cost
The Net Present Cost technique
is a measure of the value of all
costs associated with a plan throughout the period of analysis.
Execution
of the technique
begins with a time period by time period
of all expenditures
required to
usually year by year accounting
implement operate and maintain the facilities or services or
both throughout the period of analysis. Revenues if any are
from costs to obtain the net cost by
can be subtracted
time period.
The expenditures can be in inflated values if the
an-ticipated
pre-sent
analysis is to use inflated costs and a gross discount rate or in
current dollars if a net discount rate is to be used.
The sum of
for each time period is then discounted
expenditures
using the
worth factors appropriate
for the selected discount rate and
the number of time periods before the expenditure is expected.
The
is
sum of the present and future discounted
the
Net
expenditures
8
It represents
the total amount of money that would
Present Cost.
have to be on hand today to meet all project costs present costs
are paid directly and future costs are paid using the principal and
the interest that would accrue from the investment of the remaining
sum at the selected discount rate.
low-est
sen-sitivity
de-termine
an-nual
main-tenance
is helpful when there are two or
The Net Present Cost technique
tradeoffs
more alternatives for achieving the same goal involving
in the expected useful life of components
in terms of differneces
or tradeoffs between high initial cost--low recurring cost and low
The plan with the
initial cost--high recurring cost options.
the
is
the
most
economical
method
of achieving
cost
present
discount and inflation
desired result given that the appropriate
It would be appropriate
to conduct
rates have been selected.
tests using different inflation and discount rates to
how the result is affected by different assumptions.
Equivalent
Uniform Annual
Cost
Uniform Annual Cost is a measure of the average
The Equivalent
with the implementation operation and
associated
cost
As with the
the period of analysis.
of a plan throughout
all expenditures associated with the
net Present Cost technique
for by time period.
Revenues
can be
plan must be accounted
The
of
for
each time
sum
if appropriate.
expenditures
into
its
cost
the
present
using
appropriate
period is converted
Then the annual capital recovery amount for the
discount rate.
discount rate is computed.
period of analysis and the appropriate
Annual
Cost
is
the
sum of all such annual
Uniform
The Equivalent
amounts.
It
annual income
the
represents
average
capital recovery
all
with the
associated
would
be
to
meet
that
required
expenditures
the
of
analysis.
period
plan for
sub-tracted
tech-niques
ap-propriate
Uniform Annual Cost and the Net Present Cost
Equivalent
Uniform Annual Cost is
differ only in that the Equivalent
the Net Present Cost times the capital recovery factor for the
Both are useful
period of analysis and discount rate.
methods
of
alternative
a
for examining
achieving
desired condition
differ
in
the
time
alternatives
when the
sequence of payments.
be
Present
Cost
a
more
The Net
might
meaningful analysis if the
is
accustomed
to
the amount of a bond
maker
considering
issue that would have to be floated to pay all project costs for
The Equivalent
Uniform Annual Cost might be
period of analysis.
decision
maker
is
in
useful
if
the
accustomed
to thinking
more
annual
terms of
budgets.
The
de-cision
Rate
of Return
was developed
The Rate of Return technique
as a guide to investment
is expected from the implementation
of a
options when a revenue
As with the Net Cost techniques
i.e. Net Present Cost and
plan.
9
re-turn
alter-native
com-mon
Re-turn
gener-ated.
for by
Uniform Annual Cost expenditures are accounted
Equivalent
time period and either discounted
to the present cost or converted
Revenues
to the annual cost.
are similarly enumerated
by time
to the same base.
The difference between the
period and reduced
And the
and the cost is the return on the investment.
revenue
divided by the cost is the Rate of Return.
It can be seen that this technique
can be applied to evaluate
investment strategies that do not necessarily achieve a
The Net Cost techniques
require that each alternative
goal.
of the
there is no measurement
provide the same function because
in the computational
The Rate of
form.
degree of achievement
in terms of the revenue
measures achievement
technique
The alternative that provides the highest Rate of Return is
the most economical
and is the best at generating
revenue
per dollar
ben-efits
spent.
Re-turn
invest-ment
An extension of the Rate of Return involves the substitution of
of a particular
for revenues.
For example the construction
result
in
in
vehicle
costs and in
a
operating
might
savings
highway
Even though no toll will be charged the operating
travel time.
into equivalent
cost savings and the travel time savings converted
dollars can be considered
as the price the public would be willing
the Rate of
to pay to use the new facility.
In this instance
is a measure of the
return received by the public for an
of savings in time
of public funds.
Note that the computation
against
and money requires that a base condition be established
which all alternatives must be measured.
Benefit/Cost
Ratio
an-nual
The
to the Rate of Return
Ratio is similar in concept
Benefit/Cost
that
the
numerator
the
fraction
is
the total benefit
of
except
and
not
the
difference
between
benefits
revenue
revenues and
of
of cost
costs.
the technique
Application
requires an accounting
time
with
the
These
costs
can
either
other techniques.
by
period as
discounted
to
their
be
to an average
present value or converted
The benefits must also be accounted
for by time period
cost.
and their value in dollar amounts discounted
to their present value
the
or converted
to
annual value.
The benefits divided by
average
the costs is the Benefit/Cost
Ratio.
implemen-ting
con-dition
of Benefit/Cost
Ratio to the analysis of alternative
Application
The costs
plans requires that a base condition be established.
used in the denominator
are the increases in the costs of
an alternative over the base
operating and maintaining
and the benefits are the differences in costs incurred by
the public as a result of the expenditure
as compared to the base
condition.
Other benefits that may accrue to the public include a
reduction
in travel time a decrease in automobile accidents
and
The
deaths an increase in accessibility and perhaps others.
10
into
important point is that these benefits must be converted
dollar values if they are to be included in the Benefit/Cost
Ratio.
Ratio is a measure of the value or benefit as
The Benefit/Cost
The
measured in dollar amounts achieved from the dollar spent.
Ratio provides the most
alternative with the highest Benefit/Cost
benefit
for the dollar.
pro-vided
land-use
The Benefit/Cost Ratio was used as the standard form of economic
The results
analysis for public works projects for many years.
estimate of the economic
value of a
a simple understandable
concerns
over
As
the
of
such
plan.
projects
proposed
consequences
to
include
environmental
social
expanded
impacts
impacts and
were
made
to
force
the
impacts attempts
analytical technique
these concerns.
The inclusion
to include
of all of the factors of
served to obscure the meaning of the result particularly
concern
when certain impacts were considered
positive by some and negative
and
when
of
some
others
concern
by
impacts
are simply different
of
benefits
counted.
Ratios can
measures
already
Benefit/Cost
valuable information regarding the economic consequences
of
if applied to measurable benefits.
alternative decisions
However
other techniques
are required to evaluate the performance
of
with respect to items of concern
that cannot be readily
into equivalent
dollar benefits.
converted
pro-vide
alter-natives
objec-tives
Cost
Effectiveness
de-gree
Cost-Effectiveness
to permit the examination
analysis was developed
the economic performance of alternatives with respect to
that did not lend themselves to conversion
into equivalent
The process requires that all costs be reduced
dollar benefits.
Uniform Annual Cost.
These
to a Net Present Cost or an Equivalent
or the
costs are then divided by the measure of effectiveness
In cases where
two or more
an objective is achieved.
to which
the Net
plans achieve the desired objective to the same degree
When
themselves are Cost-Effectiveness
Cost techniques
measures.
the lowest
different plans provide different degrees of achievement
is usually the most desirable.
Care
cost per unit of effectiveness
of the technique however
must be exercised in the application
an alternative with twice the effectiveness
may not be worth
twice the cost although both alternatives have the same Cost
of
be-cause
Effec-tiveness.
alterna-tive
re-garding
Cost-Effectiveness
analysis can assist a decision maker by providing
information regarding the relative economic
efficiency of
for
some
or
a
set of objectives.
It
achieving
objective
plans
has the advantage
over Benefit/Cost
in that tradeoffs
techniques
the achievement
of different objectives
by different
are clearly indicated rather than obscured in the
form of the technique.
Cost Effectiveness
cannot however
information
relative
to
the
economic
of any
justification
provide
nor can it provide for the analysis of
of the alternatives
different objectives.
that are designed to accomplish
alter-natives
computa-tional
alterna-tives
11
of Basic
Summary
Economic
TooZs
imple-menting
bene-fits
Five basic
types of economic analysis tools are available to assist
of selecting alternative
Each
describing the consequences
plans.
that
a
of
the
costs
of
technique
requires
complete accounting
alternative plans be prepared
operating and maintaining
When revenues or
by time period for the period of analysis.
to
be
these
are
estimated
two must be accounted
for by time
life.
the
period throughout
project
The tools also require that a
of
inflation
period
analysis an
rate and a discount rate be
Care should be exercised in the selection of the analysis
period discount rate and inflation rate to insure that the results
provide meaningful information to the decision maker.
in
se-lected.
The Net Cost techniques
of the
are applicable to the evaluation
economics
of two or more plans for achieving the same objective or
The Rate of Return and Benefit/Cost
Ratio techniques
objectives.
are useful for examining the economic
justification of a group of
alternatives with respect to measurable public benefits.
In this
case the alternatives do not have to satisfy the same objective
or
set of objectives and may in fact be completely unrelated.
the performance
of
analysis is valuable
for examining
different alternatives with respect to a set of objectives which do
not lend themselves
to measurement
in terms of dollar benefits.
The
selection of an economic
in
the
for use
analysis technique
of transportation
plans depends upon the nature of the decision
required and the nature of the decision maker.
Cost-Effectiveness
evalua-tion
PLAN
SELECTION
PROCESS
1
or selecting a plan for implementation
process of developing
can be thought of as a five step process
define the
formulate alternative
problem
identify the constraints
evaluate alternative plans and
select a plan for
plans
The process or modifications of it may be quite
implementation.
formal in structure or so informal that neither engineer nor
maker is aware of it.
Recent trends
have been towards a
more formalized approach
as a means of structuring citizen
and providing a mechanism for addressing environmental
social and land-use issues.
The
or
deci-sion
partici-pation
de-signed
both
2
4
3
5
4
The
the
problem definition step is perhaps the most critical step in
The plans that are formulated as alternatives are
process.
to solve the problems as understood
The
by the engineer.
information developed
the
maker
assist
decision
to
the
engineer
by
addresses the performance of the alternative plans with respect to
their ability to solve the problems as defined.
The analytical
tools both economic and other selected for use in the decision
of alternative
process are chosen to clarify the consequences
plans.
If the decision
maker has a different perception
of the problems to
12
use-ful
be addressed by the planning process the techniques
selected for
the analysis and the information provided by them will not be
for selecting a plan.
Despite this rather obvious conclusion
the problem definition task is frequently
not given the attention
it deserves.
be-cause
other-wise
applica-tion
accepta-bility
adverse-ly
The
identification
and proper treatment of constraints is also an
A
important step.
plan that is best for solving a problem but
fails to satisfy minimum standards of acceptability
is of no value.
otherwise
be
an
can
However
acceptable
plan
adversely affected
it satisfies assumed constraints
that increase costs or
affect its feasibility.
Car must be exercised in the
of constraints
to insure that minimum standards of
are met without
unduly imposing constraints that may
affect plan selection.
formulation of alternatives involves the judicious application
different concepts to the solution of stated problems.
Here the
and
to
into
uses
each
experience
concept
judgment
develop
engineer
Alternatives
should represent the range of
an implementable
plan.
feasible options available
so that the selection
process will not
exclude potentially
acceptable
plans.
The
of
The evaluation
of alternatives has already received
a great deal of
attention
in this paper.
The function of this step is to perform
all such analyses as are relevant to the selection of a plan.
It
is in this step that the economic
tools
are
applied
analysis
along
with other analyses of the performance of the alternative plans
with respect to the issues of concern.
se-lection
re-sults
recom-mendation
When the analyses are completed the engineer planner or analyst
has the responsibility to make a recommendation
regarding the
The recommendation
of a plan.
should be based on the
of the analyses performed
and supported by them.
The
is
decision
not
the
decision.
The
must
be made
however
his
or
the
decision
maker
based
on
her
own
of the
by
interpretation
is
results.
It
to
note
that
the
results
of the
important
analytical
constitute
do
not
a
but
should
decision
identify
analytical process
of selecting alternative plans.
the consequences
Integration
of Economic
Analysis
into
Plan
Selection
Process
The process of selecting a transportation
plan for implementation
and the implementation of that plan will involve the expenditure of
The decision maker in these instances is acting as
public funds.
In this position
the
an agent or representative of the people.
decision maker is pledged to the judicious use of public funds for
the public welfare.
In order to discharge this responsibility the
decision maker should be concerned
with information regarding the
of the investment required to implement
the alternative
prudence
The function of economic analysis is to provide this
plans.
infor-mation.
13
The economic
selected to provide
analysis technique
or techniques
information relative to the economic advisability
of alternative
is
If there is a
plans
dependent
upon the nature of the problem.
well-defined
the Net
objective that either is or is not achieved
Cost techniques
will provide a basis for examining the economic
of alternative plans.
If however the objective or
consequences
are
such
that
different
objectives
plans will provide different
of achievement
the Rate of Return Benefit/Cost
Ratio or
Cost-Effectiveness
The Rate of Return
should be applied.
techniques
and Benefit/Cost
Ratio are valuable
for determining if the return
The
or benefits exceed the costs and if so by how much.
valuable
analyses are
for defining the cost per unit
of achievement
of some objective or set of objectives.
de-grees
Cost-Effectiveness
The tools selected for a particular situation should be those that
will best define the economic
of alternative plans for
consequences
the decision maker.
The problem definition task should be designed
to identify the function of the plan as viewed by the decision maker
and the issues relevant to the selection.
Only then can an
evaluation
be
defined.
process
effec-tive
signifi-cant
The
constraints within which plans are developed
can have
their
on
economic
It
impacts
consequences.
might be assumed
for example that all plans must meet interstate standards.
Design
to less rigid standards might produce
solution
a much less expensive
is only slightly less desirable than the plans that satisfy
which
the constraints.
Failure to consider the less expensive alternative
result
in
a
rejection of all plans or in the selection of a
may
that
is
plan
more costly than necessary to accomplish
the desired
objectives.
eco-nomic
sat-isfying
consider-ation.
The engineer should examine each constraint carefully to insure that
adherence
to constraints
does not preclude the consideration
of the
When appropriate the costs of satisfying constraints
plan.
should be provided so that the decision maker understands
their
In some instances alternative
implications.
methods of
the intent of a constraint
should be proposed for
The economic
implications of satisfying various constraints
influence on the plan selection process.
can have a significant
best
con-cept
The
alternatives is to insure that each
purpose of developing
that represents a potentially
feasible solution is given every
opportunity to be selected as the best plan.
In this phase of
the analysis the engineer must apply each concept
taking
advantage
of the unique features of the concept
for the development
of a
solution to the defined problems.
Economic evaluation
of components
or elements of a particular concept
may be necessary to insure that
the most economical
of that concept
is achieved.
application
con-sequences
The
evaluation
of alternative plans requires that the relevant
of the alternatives be described.
In general only the
differences
in the performance
of alternatives are relevant.
It is
14
anal-yses
worth
noting a second time that the purpose of the evaluation
to describe
the performance of the alternatives with respect
the issues of importance
as stated in the problem definition
in-vestment
pro-ject
is
to
task.
the economic
of alternative
consequences
it is necessary to examine the costs of a
in light of the anticipated
The costs used in the
impacts.
analysis should reflect the costs that would
actually be incurred
and maintain the plan not only for purposes
to implement operate
of economic
evaluation but also for subsequent financial planning
and budgeting.
This means that the costs should reflect current
market prices and should either be stated in current dollars or
inflated dollars using the best estimate or range of estimates of
the rate of inflation that will be experienced
over the course of
the period of analysis.
In
order to
define
decisions
distribu-tions
pre-sent
dis-count
annual-ized
For the comparison of alternatives that involve different
of expenditures over time costs must be converted
to the
cost or to an annualized cost using either a net or market
rate.
In order to accurately
portray the present or
cost the best estimate or range of estimates of the discount
rate that will be experienced
during the period of analysis should
be used.
If artificially high or low rates are used for either
or discounting
costs the meaning of the results of the
will
be
difficult
to explain to decision makers and will
analysis
not be useful for evaluating
the relative market value of
investment strategies.
in-flating
alterna-tive
avail-able
Cost-Effectiveness
as-sistance
pro-vide
nec-essary
ex-ceeds
When
different
of achievement
are obtained by different
of each plan must also
be estimated.
Measures of effectiveness
are usually directly
from information regarding the performance of alternatives.
The most cost effective
plan is the one with the lowest
value.
this form of analysis can be of
Although
in the selection of an alternative plan it does not
information relevant to the prudent expenditure of public
degrees
plans the return
benefit or effectiveness
funds.
order to determine if any plan is a wise investment it is
to determine if the
dollar value of benefits which accrue
to the public as a result of the expenditure
of public funds
the cost.
Much has been written regarding those consequences
investments that constitute
of transportation
benefits and how those
benefits should be valued.
As a general rule however
a benefit
should represent an actual
savings in cost to the public or a
good for which there is an established
savings in an economic
market value.
A consequence
that has no established
market value
is not an economic
good although it may represent a matter of
in the decision
Artificial pricing of such
process.
does not provide information relevant to the prudence
of
the proposed investment.
In
con-cern
conse-quences
15
at-tempts
concen-trates
Eco-nomic
envi-ronmental
com-paring
distribu-tions
of benefits to avoid
Care must also be exercised in the calculation
Ratios have
One
of
the
that
reasons
Benefit/Cost
double counting.
double
counted
with
is
that
benefits
have
been
been viewed
suspicion
when
Double
occurs
in some applications.
counting generally
all or
are made to expand the list of benefits to include
in
the
evaluation.
If
the
most items of concern
analysis
the results will
of economic
on the measurement
consequences
be easier to understand more useful and less likely to contain
double counts and other anomalies.
do not
that economic
analysis techniques
important to notice
issues
in
selection
address all
of concern
the plan
process.
are not in general useful for measuring
analysis techniques
the desirability of alternative plans with respect to social
and land-use goals.
They do provide a mechanism for
different
the costs of alternatives that involve
of expenditures
They can
throughout the period of analysis.
be used to evaluate the advisability
of an investment by comparing
the market value of benefits that accrue to the public with the
costs to be incurred.
Economic analysis can also be useful for
priorities among plans or among elements of a plan.
It
is
es-tablishing
alterna-tive
mainte-nance
ex-amined
CONCLUSION
The
role of economic
analysis in the plan selection process is to
of
information
provide
regarding the economic consequences
with the
In
economic
is
concerned
plans.
particular
analysis
and
of
the
costs
for
comparison
implementation operation
of alternative
In some instances these costs are
plans.
in light of the returns or benefits
that accrue to the-public
of
these
a
result
costs
some period of
incurring
throughout
as
of
The costs and benefits are measures of the expenditures
for
economic
goods required to carry out travel the basic activity
which
the plan is being considered.
anal-ysis
that
There are many important consequences
of alternative choices
addressed
economic
The
by
are not
analysis.
social environmental
and land-use impacts are relevant to the decision and information
should be provided to the decision.
regarding these consequences
in a fashion
All
of
these
should be presented
maker.
consequences
Neither
the
will
assist
in
the
choices
available.
that
defining
economic analysis nor the complementary analysis of noneconomic
is a decision.
It may represent
a recommendation
however
is the responsibility
of the technical evaluation but the decision
of the decision
maker.
im-pacts
anal-ysis
de-cision
differ-ences
The
responsibility of the engineer is to select the economic
tools and other methods of analysis that will provide the
maker with the most useful information regarding the
The basic tools available
for economic
among alternatives.
16
Cost-Effectiveness
as the Net Present Cost Equivalent
analyses can be categorized
Uniform Annual Cost Rate of Return Benefit/Cost
Ratio and
The judicious application
techniques.
of one or more
of these techniques
will provide valuable information that will
the economic
help the decision maker to understand
of
consequences
alternative investment strategies.
This information coupled with
information regarding other relevant consequences
of alternative
plans should form the basis for selecting an alternative for
implementation.
REFERENCES
1.
Bhatt
K.
Comparative
Research
Breen Jr.
L. Covault
Board Washington
2.
Analysis of Urban Transportation
Costs
Record 559 Transportation
Research
1976 pp. 101-116.
Transportation
F.
D.C.
3.
Carstens
No.
4.
6.
R.
L.
0.
Priority Analysis and Rank.
Traffic
Quarterly Oct.
Projects
Optimizing Economic
Transportation
TE4 Proc. Paper
Engineering
12529 Nov.
Return on Highway
Journal of ASCE Vol.
1976
665-672.
102
Eco-nomy
605-615.
Deen
T.
Analysis
5.
D.
Invest-ment
ing of Highway Improvement
1976 pp. 615-631.
Grant
E.
5th
Heckeroth
B.
and Skinner
Jr.
Requirements Transit
L.
ed.
H.
and Ireson W.
Ronald Press
pp.
E. Responses to Alternatives
Journal Nov. 1976 pp. 53-71.
R.
G.
Principles
of Engineering
Co. New York N.Y.
1970.
and Paulsen C. E. Highway User Benefit/Cost
Transportation
Engineering Journal of
Proc.
Paper 12524 Nov.
1976 pp.
Analysis in California
ASCE Vol. 102 No. TE4
7.
Text-book
Winfrey R.
Decision
Economic Analysis for Transportation--Guide
Makers
Highway
bility Washington
8.
User Federation
D.C. Mar.
1971.
for Safety
Winfrey R. Economic Analysis for Highways
Co. Scranton Pa. 1969.
17
for
and Mo
International
WASHINGTON
CONSULTATION
Walter
Assistant
OFFICE NEWS
AND
STANDARDS
Furen
Director
E.
cre-ated
Handbook
FSH 7709.16 was
The new Forest Transportation
Terminology
in response to a
This handbook was developed
distributed in June.
Decision
Investment
recommendation
from the FRT Transportation
Policies and Analysis June 1977.
authors of the study report found that policy changes had
new terms that were misunderstood and that existing terms
caused communication
difficulties.
They proposed to the Chief that
and FSH 7709.16
an official
transportation
glossary be developed
is the result.
The
list included all terms in the directives system and
and the
other applicable publications.
Two reviews by the Regions
the list appreciably and refined the definitions.
WO Staffs reduced
Final selection of the terms was based on four criteria
Initially the
1.
Retain
those
terms defined
by
law or regulations
Retain those terms that are unique to the Forest Service
including common terms that have been modified for Forest Service
2.
use
exist and
several definitions
3.
Retain those terms for which
and
the Forest Service definition is advisable to avoid confusion
com-ments
4.
Avoid
adding
or redefining
terms
that
affect
new
policy.
and the
the handbook must be correct and current
To be effective
be
in
We
and
must
other
agreement.
manual
handbooks
publications
We
welcome
revisions
to
the
latter
documents.
now
are
making
recommendations and corrections.
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