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LIFE CYCLE BENEFIT
AND
COST ANALYSIS
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Typical Life Cycle Profile
Initial Capital
Benefits
Costs
Cost
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Year
Dollars
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Steps for Economic Analysis
Step 1: Establish design alternatives
Step 2: Determine activity timing
Step 3: Estimate costs (Agency and user)
Step 4: Discount life cycle costs Step 5: Analyze the results
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Adjusting for Present Value
tt A
rPV
+
=
)1(1
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
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What if we want to determine how
much a $ 1,000 benefit in 30 years isworth to us today?
Example of Discounting
. .,dollars with todays purchasingpower)
Discount rate is 3%
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Plug values into discounting formula:
Example (continued)
Do calculations:
$4120.41199x000,1$ ==PV
3030 000,1$)03.1( yearPV +
=
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Discount 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 projectselection or design
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Life-Cycle Cost Analysis (LCCA)
Subset of BCA The blue bars on the life cycle
LCCA reveals lowest life-cycle costalternative for a project
Used only when all design alternativesyield same benefits
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How to Get Best LCCA Results
Evaluate all reasonable designalternatives for the project
analysis periods
Evaluate all relevant costs that vary
among the alternatives
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Cost Items Used in LCCA
Agency Costs
Design and engineering
Land acquisition
Construction
econs ruc on e a a on
Preservation/Routine Maintenance
User Costs At Work Zones
Delay
Crashes
Vehicle Operating
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Limitations of LCCA Cannot compare design alternatives
that have different benefits (e.g.,reconstruct road vs. reconstruct road
Cannot, of itself, answer question ofwhether an improvement is worth
pursuing (i.e. the project has a positivenet present value)
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Benefit Cost Analysis (BCA)
BCA compares discounted value of
projects benefits to discounted valueof its costs
The blue and red bars on the life
cycle profile BCA is the superset of LCCA and
focuses on finding out the benefits from
different alternatives of the project.
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BCA Formula
BCA is done using the basic multi-year
discounting formula:
)()1(
1
0
ttN
tt
CostBenefitr
PV
+
==
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Applications of BCA BCA is used to address the following
resource allocation decisions: Whether or not to pursue an improvement
different benefits
Select among competing projects in samemode
Select among competing projects indifferent modes
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Challenges of BCA Calculation of benefits and costs over life
cycle is often difficult Agency costs associated with projects can be hard
to ascertain
User costs and benefits are critical User benefits are purpose for building the road but maybe hard to measure and value
Uncertain forecasts of traffic, delays, and crash rates
Valuation of time and safety is often controversial Externalities and social impacts resist
quantification
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Discounting Discounting is the backbone of Economic
analysis Use of a discount rate facilitates comparisonof the costs and benefits of alternativetr ns ort tion ro ects over time
Dollars can be: Relocated in time Any combination of flows can be summed into a
single value at a single point in time
Lump sums can be converted to annual flows
Discount rate is distinct from inflation rate
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Conclusions EA has an important role in Transportation
Asset Management EA tools are versatile and can accommodate
a large number of variables as well as
uncertainty EA informs Decision Makers, about which
alternative to choose out of a given
alternatives
