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Highway Engineering 2
Introduction
General objective : to furnish the appropriate information about the outcome of each
alternative so that the selection can be made.
Some of the specific objectives in carrying out economic evaluation are:
Two components:
– first cost (design, row (right of way), construction)
- continuing cost (annual maintenance, operation and administration)
Cost common to both project can be excluded - since the concern
is in cost differences.
For most capital projects, a service life must be determined and
Estimate salvage value at end of service life (salvage value is the
worth of an asset at the end of its service life)
Road User Costs
PW – the most straight forward since represent current value of all the costs that will be incurred
over the lifetime of the project.
𝐶𝑛
PW =
(1+𝑖)𝑛
𝐶𝑛 = Facility and user costs incurred in year n
n = service life
i = discount rate
Example:
As a routine maintenance work, RM.20 000/- each is to be spent on a particular stretch of a
highway during the 3rd year, 5th year and the 7th year.
Calculate the total present worth of these expenditures, if the annual discount rate is 12%.
Present Worth
Example:
As a routine maintenance work, RM.20 000 each is to be spent on a particular stretch of a
highway during the 3rd year, 5th year and the 7th year.
Calculate the total present worth of these expenditures, if the annual discount rate is 12%.
1 1 1
RM 20,000
1.12
3
1.12 5
1.12 7
Net Present Worth (NPW)
NPW – present worth of both cost and benefit (net: difference in cost and benefit of a
project)
Discount rate (i) used to convert money to particular time -> depends on risk and
economic conditions
Use cash flow diagram to depict costs and revenues (benefit)
Benefits are treated as + ve and costs are treated - ve
Select project with a positive NPW or highest NPW
𝐵𝑛 −𝐶𝑛
NPW = [ ] Or
(1+𝑖)𝑛
where,
Bn is the benefit of the nth year,
Cn is the cost of the nth year,
n is the number of years.
Net Present Worth (NPW)
Example 1 NPW
The cost of improving an existing road, 25 km stretch is RM 4 million per km. The costs of
road users, accident and maintenance for with and without improvement are tabulated
below for a 10 year period after the completion of the improvements. Assuming a
discount rate of 10% find out whether the project is economically viable. Use NPW
method.
Year (n) Road User Costs Accident Costs Maintenance Costs Benefit NPW
With Without With Without With Without
0 -100 -100
1 105.5 126.5 1.1 3.1 3.5 2.5
2 110.3 132.2 1.1 3.1 3.5 2.5
3 115.8 138.9 1.2 3.5 3.5 2.5
4 121.6 145.8 1.2 3.7 3.5 2.5
5 127.6 153.0 1.3 3.8 3.5 2.5
Example 1 NPW
Year (n) Road User Costs Accident Costs Maintenance Costs Benefit NPW
With Without With Without With Without
6 134.0 161.0 1.3 4.0 3.5 2.5
7 140.7 168.9 1.4 4.0 3.5 2.5
8 147.8 177.0 1.5 4.4 3.5 2.5
9 155.1 186.2 1.6 4.7 3.5 2.5
10 162.9 195.2 1.6 4.9 3.5 2.5
Total
…Continued
Cost of improvements = RM 4 million x 25 km = 100 million
NPW = RM --- million, since the NPW is positive, the project is economically viable
Net Present Worth (NPW)
The department of Traffic is considering three improvement plans for a heavily traveled
intersection within the city. The intersection improvement is expected to achieve three
goals : to improve travel speeds, to increase safety and to reduce operating expenses for
motorists. The annual dollar value of savings compared with existing conditions for each
criterion as well as additional construction and maintenance costs is shown in table. If the
economic life of the road is considered to be 50 years and the discount rate is 3 percent,
which alternative should be selected? Solve the problem using the NPW methods for
economic analysis.
Example 2 NPW
The ratio of the present worth (PW) of Net project benefits (all of the savings, revenue &
etc) and Capital costs is called the benefit – cost ratio (BCR).
BCR used to show extend to which investment will result in benefit to society
Negative flows are considered costs and positives flows as benefits.
The saving in the transport cost are considered as benefits.
If the B/C ratio is more than one, the project is worth undertaking.
Need to do comparison to determine added benefit with added investment
BCR 2/1 = (B2 – B1) / (C2 – C1)
The economic analysis of highway schemes is generally done by computing the total
transport cost which consists of the following components:
I. Cost of construction of the facility
II. Cost of maintenance of the facility
III. Road user cost
IV. Cost to the society
The agencies providing the facility incurs expenditure in construction which includes land
acquisition, earthwork, road pavement and structures. These agencies also invest money
in maintenance.
Example 1 BCR
The department of Traffic is considering three improvement plans for a heavily traveled
intersection within the city. The intersection improvement is expected to achieve three
goals : to improve travel speeds, to increase safety and to reduce operating expenses for
motorists. The annual dollar value of savings compared with existing conditions for each
criterion as well as additional construction and maintenance costs is shown in table. If the
economic life of the road is considered to be 50 years and the discount rate is 3 percent,
which alternative should be selected? Solve the problem using the BCR methods for
economic analysis.
Alternative Construction Annual Annual Travel Annual Annual
Cost Saving in Time Benefits Operating Additional
accident Savings Maintenance
Cost
I $ 185 000 $ 5 000 $ 3 000 $ 500 $ 1 500
ll $ 220 000 $ 5 000 $ 6 500 $ 500 $ 2 500
lll $ 310 000 $ 7000 $ 6 000 $ 2 800 $ 3 000
BCR l/DN = [(-1500 + 5000 + 3000 + 500) / (185 000 x (A/P -3-50)]
BCR ll/DN = ?
BCR lll/ll or BCR lll/DN =