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10/10/2017 Benefit-Cost Analysis - MnDOT

Planning & Programming

Benet-Cost Analysis for Transporta on Projects


1 PURPOSE

This document is intended to provide guidance to perform benet-cost analysis for highway projects. The
guidance includes:

Background informa on on benet-cost analysis and how it may t into the project
development process.
Discussion of economic terms and principles.
Review of relevant stages in conduc ng a benet-cost analysis for highway projects.
Advice on using benet-cost results.

This Guidance is based on User Benet Analysis for Highways, AASHTO, August 2003.

This document presents benet-cost analysis guidance for highway improvement projects in the following
sequence:

Sec on 2 What is Benet-Cost Analysis?


Sec on 3 How Does Benet-Cost Analysis t into the Project Development Process?
Sec on 4 Economic Terms and Principles
Sec on 5 Conduc ng a Benet-Cost Analysis
Sec on 6 Ques ons
Appendix A (/planning/program/appendix_a.html) Recommended Economic Values
Example Spreadsheet (/planning/program/pdf/Example-Calc.pdf)

2 WHAT IS BENEFIT-COST ANALYSIS?

A benet-cost analysis is a systema c evalua on of the economic advantages (benets) and disadvantages
(costs) of a set of investment alterna ves. Typically, a Base Case is compared to one or more Alterna ves
(which have some signicant improvement compared to the Base Case). The analysis evaluates incremental
dierences between the Base Case and the Alterna ve(s). In other words, a benet-cost analysis tries to
answer the ques on: What addi onal benets will result if this Alterna ve is undertaken, and what
addi onal costs are needed to bring it about?

The objec ve of a benet-cost analysis is to translate the eects of an investment into monetary terms and
to account for the fact that benets generally accrue over a long period of me while capital costs are
incurred primarily in the ini al years. The primary transporta on-related elements that can be mone zed are
travel me costs, vehicle opera ng costs, safety costs, ongoing maintenance costs, and remaining capital
value (a combina on of capital expenditure and salvage value). For some kinds of projects, such as bypasses,
travel mes and safety may improve, but opera ng costs may increase due to longer travel distances. A
properly conducted benet-cost analysis would indicate whether travel me and safety savings exceed the
costs of design, construc on, and the long-term increased opera ng costs.

Benet-cost analyses have been used as a tool by project managers to help evaluate preliminary concepts
during early planning studies, to evaluate alterna ves and select a Preferred Alterna ve as part of project
environmental documenta on, and to evaluate poten al design and construc on staging op ons as part of
detailed design and/or construc on. A benet-cost analysis provides monetary measure of the rela ve
economic desirability of project alterna ves, but decision-makers o en weigh the results against other non-
mone zed eects and impacts of the project.

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3 HOW DOES BENEFIT-COST ANALYSIS FIT INTO THE PROJECT DEVELOPMENT PROCESS?

A benet-cost analysis is a tool for assis ng project managers when they are evalua ng and comparing
dierent alterna ves. Alterna ve comparisons are done at dierent points in the project development
process, including: concept development, environmental documenta on, design, and construc on. Results
from a benet-cost analysis, along with public input and environmental documenta on, can be used to
evaluate both the mone zed and non-mone zed eects and impacts of alterna ves when a decision needs
to be made.

Although the benet-cost analysis always tries to answer the ques on, From an economic perspec ve, are
the benets worth the investment? This ques on is posed in dierent ways at dierent points in the project
development process.

Project planning: From an economic perspec ve, are the benets of building a road
worth the project costs (compared to the current system)?
Design and environmental study: From an economic perspec ve, are the benets of
loca on A worth the project costs? How does loca on A compare to B or C?
Construc on planning: From an economic perspec ve, are the benets of closing some
or all lanes during construc on worth the trac delay and diversion costs (compared to
keeping some lanes open)?

In principle, an ideal benet-cost analysis would project and evaluate all possibili es, but this is neither
possible nor prac cal, since it would involve large uncertain es.

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4 ECONOMIC TERMS AND PRINCIPLES

Before discussing the method for conduc ng a benet-cost analysis, it is helpful to understand the basic
economic terms and principles that are commonly used. These can be grouped into three categories:
benets, costs, and discoun ng. They are discussed in detail below.

4.1 HIGHWAY USER BENEFITS

Benets of a transporta on investment are the direct, posi ve eects of that project; that is to say, the
desirable things we obtain by directly inves ng in the project. For example, the improvement may reduce the
number or severity of crashes, eliminate long delays during peak hours, or reduce circuitry of travel (provide
a shorter route). In highway benet cost analysis, the usual procedure is that benets are rst es mated in
physical terms and then valued in economic terms. This means that the analyst has to rst es mate the
number of crashes eliminated, the travel me saved, and/or vehicle-miles reduced before assigning or

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calcula ng monetary values.

The benets of a transporta on investment are typically es mated by comparing the amount of travel me,
vehicle miles traveled and expected number of crashes for the Alterna ve to the Base Case. The physical
projec on of the change brought about by each alterna ve is usually accomplished by engineering analysis.

The second step is transla ng these physical benets into monetary values.

Travel-Time Savings
Travel- me savings typically generate the greatest amount of benet. These savings are calculated based on
the dierence in travel me between the Base Case and an Alterna ve. Travel me is o en expressed as
vehicle-hours traveled (VHT) and can be es mated using computer models, spreadsheets, and/or travel me
runs, depending on the level of analysis needed and data availability.

The es ma on of travel me savings should include both the driver and passengers in the vehicle (i.e.,
vehicle occupancy rates). In many cases, vehicle occupancy rates vary between peak and o-peak hours as
well as between alterna ves. Several vehicle occupancy rates may be used to represent dierent condi ons.

The valua on of travel me savings is calculated using standardized cost-per-hour-per-person gures for
dierent vehicles (auto or truck).

Vehicle Opera ng Cost Savings


When transporta on improvements are made, the cost of opera ng vehicles along a par cular facility or set
of facili es can change. Opera ng costs can change because the number of miles driven changes, as in the
case of a shorter bypass or a reduc on in circuitry or diversion of trips, or it can change because of changes
in the number of stops or speed-cycle changes.1

The number of vehicle-miles traveled (VMT) is the most common variable that aects vehicle opera ng
costs. Once the change in vehicle miles is es mated, the valua on of vehicle opera ng costs is calculated
using standardized cost-per-mile gures for dierent vehicles (auto or truck). However, if signicant benets
are expected from other types of changes in travel characteris cs, such as reducing the number of vehicle
stops, reducing the number of speed-cycle changes, and possibly changes in pavement condi on, those
benets can also be es mated.

Safety Benets
Safety benets are one of the principal benets that can result from transporta on improvements. Benets
occur when the number of crashes is reduced and/or the severity of the crashes is reduced on a facility or
set of facili es because of the transporta on improvement. Standard engineering methods can be used to
evaluate both the poten al crash reduc ons and/or changes in severity.

MnDOT Oce of Trac Engineering has developed a standard set of economic values for dierent crash
severi es.2 These values are applied to the change in the number and severity of crashes to obtain monetary
benets.

4.2 COSTS
In economic terms, the cost of a transporta on investment is the value of the resources that must be
consumed to bring the project about. The total value of construc on and any addi onal maintenance costs
must be es mated. It is important to note that the analysis does not emphasize who incurs the cost but
rather aims to include any and all costs that are involved in bringing about the project.

Capital Costs
Capital costs make up the total investment required to prepare a highway improvement for service, from
engineering through landscaping. When possible, capital costs should be grouped into similar life-cycle
categories. These include: engineering, right of way, major structures, grading and drainage, sub-base and
base, surfacing, and miscellaneous items. These life-cycle groupings make it easier to calculate remaining
capital value. Es mates of capital cost, ranging from detailed engineers es mates to planning-level cost
es mates, should be as rened as appropriate for the projects stage in the project development process.

Major Rehabilita on Costs


Within a benet-cost analysis period, future investments may be needed to maintain the serviceability of a
major transporta on facility. For example, with a new or reconstructed highway, pavement overlays may be
required 8, 12 or 15 years a er the ini al construc on year. The cost of overlays or other major preserva on
ac vi es should be included in the analysis and allocated to the year when they are an cipated to occur.

Rou ne Annual Maintenance Costs


When evalua ng transporta on investments, it is important to account for the future opera ng and
maintenance costs of the facility. Bridges require preven ve maintenance, and roadway lanes have to be

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plowed and patched each year. In the case of an upgraded roadway, it is necessary to es mate the marginal
or addi onal maintenance costs that would be required for the Alterna ve as compared to the Base Case.
For a new facility (new alignment), the en re addi onal maintenance costs should be included as the
incremental increase in costs.

Remaining Capital Value (RCV)


Many components of a project retain some residual useful life beyond the benet-cost analysis period
(typically 20 years). At the end of the analysis period, the infrastructure that has been put in place generally
has not been completely worn out, and will con nue to provide benets to drivers and travelers into the
future. It is important to reect this value in the analysis.

The remaining capital value is calculated by determining the percentage of useful life remaining beyond the
analysis period, and mul plying that percentage by the construc on cost for that component. The es mate
of the remaining capital value at the end of the analysis period is then converted to a present value and
subtracted from the ini al capital cost.

4.3 DISCOUNTING
For most transporta on investments, costs are incurred in the ini al years, while the benets from the
investment accrue over many years into the future. When assessing the costs and benets of a project, it is
necessary to take into account the me value of money by conver ng the costs and benets that take place
in dierent years into a common year. This process is known as discoun ng. Discoun ng converts future
costs and benets that occur in dierent years into a value for a common year (present value).

In general, economic analysis of transporta on investment uses constant dollars; ina on is not included in
the es mates of costs and benets. The present value (PV) of a future cost or benet can be determined
using the formula:

Where:

PV = present value

AB (or
= annual benet (or annual cost)
AC)

r = the discount rate

yi = the year in which the benet or cost occurs

the year of analysis (i.e., the year to which the future


yo =
dollars are discounted)

In an economic analysis all costs and benets are given in constant dollars (no ina on) and are discounted
to the year of analysis. The year of analysis is usually the current year.

Example
A new sec on of highway is es mated to cost $5,000,000. Construc on will occur in 2010. The year of
analysis is 2005. If the discount rate is 3.6 percent for the year 2005, what is the present value of the
construc on cost?

PV = ?

AC = $5,000,000

r = 0.036

n = 2010 2005 = 5

PV = 5,000,000/(1 + 0.036)5

PV = $4,189,587.13

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PV = $4,200,000 (Rounded)

To understand the economic logic of discoun ng, consider the $5 million construc on example. If the $5
million is spent today (2005), that is $5 million in present value. If the project can wait un l 2010, the money
could be put into a bank where it earns interest, or put into other projects where it generates immediate
benets. The amount that needs to be deposited into the bank to have $5 million in 2010, using a 3.6
percent discount rate, is only $4.2 million the present value of the cost of the project in 2010. The same
logic applies to benets.

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5 CONDUCTING A BENEFIT-COST ANALYSIS

This sec on presents a stages-based methodology for conduc ng a benet cost analysis. These stages apply
directly to highway improvement projects, and can be used, with some modica on, for other types of
transporta on investments. Guidance for conduc ng benet-cost analyses for other types of transporta on
improvements is referenced in Technical Memorandum No. 04-05-1M-01 Implementa on of Minnesota
Statewide Transporta on Plan Cost-Eec veness Policy.

Highway improvement projects generally increase the capacity of exis ng facili es or systems, and/or
improve the safety of exis ng facili es or systems. Analysis of these types of projects involves the following
four stages:

1. Planning the analysis and dening its scope.


2. Performing engineering analyses of the alterna ves.
3. Calcula ng the present value of project costs and benets.
4. Evalua ng the results benet-cost analysis.

Figure 3 shows the analysis stages, the basic inputs, and the results.

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Planning the benet-cost analysis and performing the engineering analysis (the rst two stages) require
careful thought. The analysis should capture the appropriate benets and cost dierences between the Base
Case and the iden ed Alterna ves. These rst two stages are the most complicated and require the most
me and eort. The economic calcula on stage is a rela vely short and straigh orward process. Evalua on
and interpreta on of the results requires judgment and experience. The process of conduc ng a benet-cost
analysis can be itera ve: the process may require going back to a previous stage to verify results and explore
sub-alterna ves.

The four analysis stages are discussed in more detail below.

5.1 STAGE 1: PLANNING THE ANALYSIS AND DEFINING ITS SCOPE

A successful benet-cost analysis produces credible results at a level of detail that is appropriate for its
intended use and the projects level of scru ny. The ini al planning ac vi es should dene a common
framework for comparing the eects of an Alterna ve against the Base Case. Important elements to dene
early in the analysis process include the highway scenarios to be analyzed, the start and end years for the
analysis, the geographical area considered, and the approach that will be used to analyze travel behavior. It is
essen al that all alterna ves be developed and analyzed to the same level of detail; this should be
accounted for in the planning stage. A common framework can be established by comple ng the following
three steps:

1. Dene the purpose of the analysis and the appropriate level of detail.
A rst step in establishing a framework for the analysis is to dene the purpose of the benet-cost analysis.
Will results from the analysis be used to choose between alterna ves? Is the analysis being done to show
that the Preferred Alterna ve is economically feasible for inclusion in the nal environmental
documenta on? Or is the analysis being done to test programming scenarios? Iden fying the purpose of the

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analysis helps to dene the level of detail appropriate for the study.

Two other factors also help dene the appropriate level of detail: available data and analysis budget.
Available data varies by project and inuences the level of detail appropriate for the benet-cost analysis.
Data sources range from tradi onal engineering methods to sophis cated regional travel demand models.
The availability of this data varies with each project. Benet-cost analysis planning should establish what
data is available, and then verify that the available data suits the analysis purpose and provides the
appropriate level of detail for the benet-cost analysis. The analysis budget inuences the appropriate level
of detail as well. The level of detail should be consistent throughout the analysis (the same for the Base Case
and Alterna ves) and commensurate with the available budget.

Figure 4 below shows the rela onship between level of data and level of analysis. In the event that the
available data lacks the desired level of detail for a scru nized project, a sensi vity analysis should be
considered.

Many mes, uncertain data such as travel me or opera ng costs are given as a range. Sensi vity analyses
can be used to test the robustness of benet-cost results by analyzing the eect that the range of uncertain
data has on the nal benet-cost ra o. Analysis planning should include me and resources for sensi vity
analyses. A well-planned analysis will produce credible results consistent with the purpose of the analysis
and available data issues and budget.

2. Dene the base case, proposed alterna ve and corresponding study area.
Every analysis requires a deni on of the Base Case and Proposed Alterna ve(s). The Base Case is not
necessarily a "do nothing alterna ve, but it is generally the lowest capital cost alterna ve that maintains
the serviceability of the exis ng facility. In other words, the Base Case should include an es mate of any
physical and opera onal deteriora on in the condi on of the facility and the costs associated with the
periodic need to rehabilitate the major elements of the facility through the analysis period.

The Proposed Alterna ve(s) are a specic and discrete set of highway improvements that can be undertaken.
These improvements generally change travel mes, vehicle opera ng costs, and/or safety characteris cs
from the Base Case. Proposed alterna ves must also be reasonably dis nct from one another, i.e., slight
alignment shi s or changes that have li le to no impact on travel mes, safety, or opera ng costs need not
be considered as separate alterna ves from the benet-cost analysis standpoint. The Alterna ve should be
specied in as much detail as possible for purposes of es ma ng costs (capital and maintenance) and eects
on travel me, opera ng costs, and safety.

An appropriate study area should be chosen so that the majority of the eects of the project are included.

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The study area should be the logical geographical area within which travel will be aected by the investment
Alterna ve(s) to a material degree.

Benets of a project are derived from comparing the Base Case highway user data (travel me, opera ng
costs, and safety) that occur within the study area to those of the Alterna ve scenario(s).

3. Dene the analysis meframe and per nent years.


Every benet-cost analysis includes me-dependent elements that must be dened and held consistent
throughout the analysis. These elements are:

Analysis meframe
Years of construc on
First year of benets
Final year of analysis/year of remaining capital value (RCV)
Number of days in a year

Figure 5 depicts the dierent years used. The following text denes the relevant elements and gives typical
values where applicable.

Timeframe
The analysis meframe is the period of me for which project benets and related costs are compared and
evaluated. The general principles for selec ng an analysis period are:

The meframe should be long enough to capture the majority of benets, but not so
long as to exceed capabili es to develop good trac informa on.
The analysis meframe should be consistent with that used for other analyses being
under-taken for the project, such as transporta on demand fore-casts or life-cycle cost
models.
The meframe should be consistent for all alterna ves.
All benets and costs occurring or accruing over this meframe should be included in
the analysis.

An analysis period of 20 years is typical for transporta on improvement projects, because trac and
demographic informa on is generally available for this meframe.

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Years of Construc on
Construc on costs in a benet-cost analysis are assigned to the year or years in which they are an cipated to
occur. If the ming of incurred costs is not known, the construc on cost should be divided evenly over the
years of construc on. For example, if construc on is scheduled to last three years, 2001 to 2003, the cost of
construc on should be divided evenly between the years 2001, 2002, and 2003. Construc on costs are then
discounted to the year of analysis (dened in Economic Terms and Principles: Discoun ng).

First Year of Benets


The rst year of benets is the rst full year a er construc on of the Alterna ve is complete. For example, if
construc on is scheduled to be complete in fall 2005, the rst year of benets is 2006.

Final Year of Analysis/Year of Remaining Capital Value (RCV)


The nal year of analysis and year of remaining capital value are the same. For example, if the study has a
20-year benet-cost analysis (2001 to 2020), the nal year of analysis and year of remaining capital value is
2020.

The nal year of analysis is dened as the nal year of the benet-cost analysis.
The year of remaining capital value is dened as the year in which the remaining capital
value (salvage value) of a transporta on investment is assessed. Methods for calcula ng
the remaining capital value are discussed under Calcula ons (item 6 in Sec on 5.3).

Number of Days in a Year


The number of days in a year over which benets accrue depends on the trac characteris cs and the
proposed improvement. A typical capacity improvement done in an area with a high-level of commuter
trac (trips between home and work) should use 260 days, the number of weekdays (Monday through
Friday) in a year. Weekday eects for this example are chosen because trac volumes are consistently
highest at these mes throughout the year. However, if this same example were used with the improvement
being a new roadway that reduced trip length for all users by two-miles, benets would accrue over the 365
days in the year. Also, substan al benets may occur on weekends for projects in some areas (especially
where recrea onal trip pa erns exist). In these cases, weekend benets can be assessed separately and
added to the weekday analysis. In areas with lower commuter volumes, 365 days should be used. The
number of days assumed in a year should always be noted in the analysis documenta on.

5.2 STAGE 2: ENGINEERING ANALYSIS


Once the benet-cost analysis is planned, data needs to be assembled and/or generated for the Base Case
and the Alterna ve(s). Data used in MnDOT benet-cost analyses can be obtained from several engineering
sources: eld data collec on ac vi es, MnDOTs Trac Oce, project-level travel/trac modeling results,
other general engineering approaches, and professional judgment.

The engineering analyses are alterna ve-specic and o en require a substan al amount of eort. Data
produced during the engineering analyses (for the Base Case and Alterna ve(s) include:

Benet-related data
Average annual daily trac volumes (AADT)
Daily vehicle-hours traveled (VHT)
Daily vehicle-miles traveled (VMT)
Other opera onal changes such as daily number of
stops of speed-cycle changes
Annual number of crashes and severity for the Base
Case and predicted change(s) to number of crashes
and severity based on improvement Alterna ve(s)
Cost-related data
Capital costs
Annual maintenance and rehabilita on costs

A. Benet-Related Engineering Analysis


Decisions about appropriate level of detail made while planning the benet-cost analysis become important
when genera ng benet-related data. The appropriate level of detail helps dene the tools and methods
that should be used. Regardless of the tools and methods used to generate data, the analysis should
maintain a consistent base (e.g., model base, travel- me base route, etc.) and level of detail for all
alterna ves.

Several tools and methods can generate trac volumes (AADT), travel- me (VHT), and vehicle-mile (VMT)
data for benet-cost analyses. Tools and methods include regional travel demand models, local opera ons
models, and engineering judgment and other methods. The appropriate tools and methodologies depend on

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the study area and Base Case dened during analysis planning. Figure 6 shows project traits and typical
tools/methods. In cases where the most typically-used tool is not available, a combina on of tools can be
used. For example, a regional travel demand model may be used for VMT/VHT informa on, but a local trac
opera ons model may be used to es mate the number of speed-cycle changes.

When genera ng travel- me and vehicle opera ng data, it is important to account for VHT or VMT changes
both on the highway being studied and in the highway system aected by it. For example, one alterna ve
may add a lane to the study highway, which results in an increase in vehicle-miles traveled on the highway
facility itself (i.e., a racts trips into the study corridor). However, the new lane may lead to a decrease in the
number of vehicle-miles traveled on other facili es in the area. Regional travel demand models are useful for
es ma ng trac diversion eects. If a regional travel demand model is not available, and signicant trac
diversion is likely, trac shi s should be es mated using other methods such as route diversion curves and
travel me es mates.

Travel-Time Data
Travel- me data (vehicle-hours traveledVHT) is o en generated using travel demand models (e.g.,
TRANPLAN or TP+) or trac opera ons models (e.g., Synchro/SimTrac, CORSIM), by making measurements
of exis ng (Base Case) travel mes and adjus ng them for the Alterna ve(s), or using general engineering
approaches and judgment. Travel demand models are the primary source for producing VHT data for large
projects. They are best suited for analyzing system-wide impacts of various alterna ves. Trac opera ons
models can produce peak hour VHT data for smaller, localized improvement projects. It is important to
convert VHT informa on from peak hour into daily VHT informa on when using a trac opera ons model.
For a very simplis c approach, AADT can be converted to VHT by mul plying the AADT by the es mated me
needed to travel the corridor in the Base Case and the Alterna ve(s).

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Vehicle Opera ng Data


Vehicle opera ons typically include miles traveled and number of stops or speed-cycle changes. (Although
idling costs and grade changes could also be evaluated, among others.) The number of vehicle-miles traveled
should be forecast for the Base Case and the Alterna ve(s) using the usual range of engineering tools and
methods, o en similar to those used to es mate travel me savings. AADT can be converted to VMT by
mul plying the AADT by the es mated distance traveled in the corridor in the Base Case and Alterna ve(s).
When hand-calcula ng this, it is important to capture all of the signicant trac diversions (route changes)
as part of this calcula on. If using a peak-hour model, es mates of miles of travel should also be converted
from peak hour to daily values. To do this, the analyst must understand the travel behavior for the peak hour
and relate this to a daily basis.

Vehicles aected by addi onal stops must go through a speed-cycle change (traveling at posted speeds,
braking to stop, restar ng and accelera ng to posted speed). The number of stops or speed-cycle changes
can be es mated using trac opera ons models or general engineering approaches and judgment, for
example es mate the propor on of daily trac stopped by a signal. If using a peak hour trac opera ons
model, stops must be converted to a daily basis.

Safety Data
The safety analysis results in the number of crashes expected for each severity type (fatal, type A injury, type
B injury, type C injury, and property damage only). These es mates are made for the Base Case and the
Alterna ve(s) for the rst year of benets and the nal year of analysis. The numbers are es mated based on
exis ng and an cipated future crash rate, severity rate, and AADT or VMT.

The crash rates and severity used in the safety analysis should reect the level of detail appropriate for the
benet-cost analysis. Crash rates and severity are given for dierent facility types (freeway, expressway), for
specic corridors, and for specic sites (roadway segments or intersec ons). The analyst must determine if
the safety analysis should be system-level, corridor-specic, or site-specic based on the Alterna ve(s)
proposed. System-level analyses are appropriate for projects that cause trac to shi between facility types.
Corridor-specic analyses are appropriate when improvements cover a larger area but trac pa erns are
an cipated to remain the same. Site-specic analyses are ng when improvements are site-specic and do
not change trac pa erns. The level of detail used in the safety analysis should be consistent for the Base
Case and Alterna ve(s).

Exis ng crash rates and severity are used for all Base Cases, and for the Alterna ve(s) in system-level safety
analyses and corridor-level analyses where the facility-type changes. System-level safety analyses typically
use exis ng crash rates and severity (historical averages) available from MnDOT District Trac Engineering
oce (for roadways under MnDOT jurisdic on) for dierent facility types. In this case, the forecast AADT or
VMT data should be given for each facility type (e.g., freeway or non-freeway). Safety impacts will be evident
by the change in AADT or VMT per facility-type throughout the system. Some corridor-level analyses include
a facility-type change between the Base Case and the Alterna ve(s). Safety impacts will be evident if the
corridors facility-type, and therefore the crash rate and severity rate, changes.

For corridor-level analyses where the facility-type does not change, and in site-specic analyses, Hazard
Elimina on Safety (HES) tools can be used to es mate reduc on in crashes and/or severity. A worksheet
aiding in the calcula ons is available from MnDOT at: h p://www.dot.state.mn.us/traceng/safety/
(h p://www.dot.state.mn.us/traceng/safety/)

It is important to remember that all numbers (VHT, VMT, number of crashes, etc.) are needed for each year
in the study meframe. VHT, VMT, and crash data are o en generated only for one or two years (e.g., base
year and nal year of analysis) of the study meframe and these results are then interpolated/extrapolated
for other years in the analysis meframe.

Figure 7 illustrates data interpola on.

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B. Cost-Related Engineering Analysis


Construc on costs and maintenance costs should be generated or gathered during the engineering analysis
stage of the benet-cost analysis. Cost es mates should be appropriate for the stage in the project
development process. Maintenance costs should include rou ne maintenance (e.g., plowing, debris removal,
etc.) and periodic rehabilita on (e.g., mill and overlay).

Roadway rehabilita on costs for the Base Case should consider the type and extent of pavement distress and
the rate of deteriora on due to the level of trac volumes using the facility. The rehabilita on schedule used
in the benet-cost analysis for the Base Case should be based on MnDOTs Pavement Management System
recommenda ons or on recommenda ons from the District Maintenance Engineer. Rehabilita on costs for
other roadway components, such as bridges, should be evaluated separately and approved by the District
Maintenance Engineer.

The Alterna ve(s) usually involve new construc on and include only rou ne maintenance. A 20 year benet-
cost analysis typically assumes no rehabilita on costs under new-construc on Alterna ve(s). If the benet-
cost analysis meframe is longer than 20 years, refer to the rehabilita on schedules listed in the MnDOT
Pavement Selec on Process (Technical Memorandum No. 04-19-MAT-02).

C. Improvements with the Most Eect


When obtaining ini al benet-cost results or considering which alterna ves have the greatest impact, the
overall trac volume aected by the alterna ve should be considered. Changes that aect all trac
generally result in more benet than changes that aect only por ons of the trac. For example, capacity
improvements generate benets only during mes when the facility is congested. If conges on is limited to a
few hours (peak hours), then capacity improvements will aect only a small por on of the daily users. Table
1 gives addi onal examples by lis ng types of highway improvements and the poten al level of daily trac
aected.

Table 1 Trac Aected by Highway Improvements

Highway Improvement Amount of Daily Trac Aected

Adding lanes to a facility that is congested during peak


Peak-period frac on of daily trac
hours

Depends on percentage of mainline green me (30 to 50 percent of daily


Removing a trac signal (mainline free-ow)
trac)

Changing the speed limit All trac traveling at the speed limit

Selec ng an alignment that reduces trip length All trac traveling on the new facility

As the alterna ves are analyzed, results should be tested for their reasonableness, when compared to the
poten al volumes impacted (for example, cumula ve changes in travel me as compared to the trac
impacted). If results seem out-of-step with impacts, the assump ons and analysis methods should be
reviewed.

5.3 STAGE 3: ECONOMIC VALUATION


Highway improvement projects are generally those projects that correct safety, capacity, or system deciency
problems. Once physical benets have been determined (Stage 2), they need to be mone zed and
aggregated for the analysis period. The economic valua on also includes es ma ng the capital cost,

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maintenance cost, and remaining capital value. A spreadsheet has been developed to aid in the economic
valua on calcula ons. The spreadsheet helps simplify calcula ons and organizes the results. But before
experimen ng with the spreadsheet, it is helpful to understand the basic steps in the economic valua on
stage of a benet-cost analysis. Economic valua on consists of two parts: (A) highway user benet
calcula on, and (B) cost calcula on. The two parts of valua on are described in detail below.

A. Highway User Benet Calcula on


There are four steps in calcula ng total highway user benet:

1. Assemble highway user data (VMT, VHT, other opera ng costs, and safety informa on) for the rst year of
benets and the nal year of analysis at a minimum. If detailed annual es mates are not available,
interpolate between these two data points to compute informa on for each year in the analysis meframe
(the spreadsheet aids in this calcula on). Data genera on and interpola on must be done for the Base Case
and the Alterna ve(s). Table 2 shows a calcula on table with VHT data in columns A and B. A calcula on
table like this should also be prepared for vehicle opera ng costs, one for vehicle-miles traveled and one for
speed-cycle changes, and safety.

2. Compute the dierence in travel me, vehicle opera ng costs, and safety between the Base Case and the
Alterna ve for each year in the analysis. Table 2 shows an example of the dierence for VHT in column C.
Figure 8 also depicts this dierence and shows the dierence is the benet of the Alterna ve as compared to
the Base Case.

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Compute the total benet for travel me, vehicle opera ng costs, and safety accrued during the analysis
meframe. Total benet is calculated as follows:

Find the annual savings for each year in the analysis period. Annual savings are found by
mul plying the dierence in travel me, vehicle opera ng costs, and safety by the
number of days in the analysis year (may not be applicable for safety), and then
mul plying by the appropriate unit cost (e.g., dollars per person-hour traveled, dollars
per vehicle-mile traveled, dollars per speed-cycle change, or dollars per crash) for each
year in the analysis period. This should be done for each year in the analysis meframe.
Travel- me unit costs should reect the percent autos and trucks, auto occupancy in
peak and o-peak periods, and value of me per person for autos and trucks. The
analyst should use vehicle occupancy data collected for the project area or corridor, for
example through origin-des na on studies. If none is available, Table 3 lists auto
occupancy data for dierent areas of Minnesota. Vehicle opera ng unit costs should
include percent autos and trucks and variable opera ng costs for autos and trucks.
Crash costs should account for crash severity. Use the values of me, variable opera ng
costs, and costs for each crash severity provided by MnDOT OIM (Table A.1 in Appendix
A). Annual benet is shown in column D in Table 2
Discount the annual benets back to the year of analysis. This should be done for travel
me, vehicle opera on costs, and safety for each year in the analysis meframe. The
present value of annual benets is shown in column E in Table 2.
Find the overall savings for travel me, vehicle opera ng costs, and safety by summing
the present value of the annual benet for each year in the analysis meframe. Table 2
shows the overall travel me savings in the bo om row, column E.

Table 3: Vehicle Occupancy Rates

. Peak/O-Peak/Overall

Automobile Occupancy Rates, Minneapolis-St. Paul (a) (No Sta s cal Dierence)

Seven-County Metro Area 1.30

Automobile Occupancy Rates, Greater Minnesota (b) Urban Rural Overall

State-wide Average 1.72 1.31 1.60

Truck Occupancy Rate (b) Overall

State-wide Average 1.02

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(a) Source: 2010 Metropolitan Council Travel Behavior Inventory (TBI) Home Interview Survey

(b) Source: 2009 Na onal Household Travel Survey (NHTS), Minnesota data

3. Find the total user benet of the Alterna ve(s) as compared to the Base Case by summing the overall
savings for travel me, vehicle opera ng costs and safety. Table 4 shows an example spreadsheet tallying
total highway user benet. This is the nal step in calcula ng the total highway user benet.

B. Cost Calcula on
There are ve steps in calcula ng agency cost:

1. Construc on costs for the Proposed Alterna ve should be es mated and allocated to the an cipated year
of expenditure. If the ming of expenditures is not known, the construc on cost should be divided evenly
over the years of construc on. Discount the construc on costs from the year(s) of an cipated expenditure
back to the year of analysis. If the Base Case has construc on costs, those should be allocated to the year(s)
of an cipated expenditure and discounted as well.

2. Maintenance costs for each year should be es mated if an alterna ve has a signicant eect on
maintenance costs. Start by es ma ng the cost of maintenance incurred in each year of the analysis
meframe. This should be done for both the Base Case and the Alterna ve(s).

3. The constructed infrastructure typically retains some value at the end of the benet-cost analysis period.
This value is called remaining capital value (see deni on of RCV, Sec on 4.2) and it is evaluated at the end
of the analysis period (in the nal year of analysis) and discounted to the year of analysis.

When calcula ng remaining capital value, rst es mate the useful life of the investment elements (see Table
5). The capital cost should be broken into elements such as preliminary engineering, right-of-way, major
structures, roadway grading and drainage, roadway sub-base and base, and roadway surface. Right-of-way
costs can include the cost of land and buildings. The useful life of the land and buildings should be
considered separately. Table 5 shows that the useful life of land is 100 years; however, the useful life of an
acquired building is dependent on if it will be demolished as part of the highway improvement, or if it will be

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resold. Buildings that will be demolished have a useful life of zero years. The useful life of a building that will
not be demolished is the same as the useful life of land (100 years).

A er determining the useful life, calculate the percent of useful life remaining at the nal year of analysis
(see Table A.2 in Appendix A). Mul ply that percent by the ini al construc on cost and discount that amount
back to the year of analysis. If the Base Case involves capital expenditures, the remaining capital value should
be calculated for the Base Case as well.

1. Find the total present cost for the Base Case and Alterna ve(s). Table 6 shows the total present cost as the
sum of the discounted annual costs found for each year in the analysis meframe. Annual costs are
calculated by adding the construc on and ongoing maintenance costs, and subtrac ng the discounted
remaining capital value for each year in the analysis.

PV(Costs) = PV(CostALT) PV(CostBASE)

PV(x) = Present Value of x

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5.4 STAGE 4: EVALUATION


The result of the benet-cost analysis can be shown as benet-cost ra o and/or as net present value. These
results show if the Alterna ve is economically jus ed compared to the Base Case. When mul ple
alterna ves are being considered, an incremental benet-cost ra o analysis can be used to determine which
Alterna ves are the most economically desirable. Each evalua on method is described below.

Benet-Cost Ra o
A er the future streams of costs and benets are discounted, the sum of the discounted benets is divided
by the sum of the discounted cost. This can be represented by the following formula:

B/C = PV(Benets)

PV(Costs) = Present Value of x

B/C = Benet-cost ra o

PV(x) = Present Value of x

If the result is greater than or equal to 1.0, the infrastructure improvement is economically jus ed.

Incremental Benet-Cost Ra o
If more than one alterna ve is considered for a single project, an incremental benet-cost ra o can be used
to determine which Alterna ve(s) are the most economically desirable (op mize addi onal benets gained
for the added cost). This can be represented by the following formula:

IB/C = PV(Benets)

PV(Costs)

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IB/C = Incremental benet-cost ra o

Change in the present value of x (between two


=
Alterna ves)
PV(x)

This is also called the Challenger-Defender Method. Alterna ves are ordered from least expensive to most
expensive. The analysis begins by taking the rst two alterna ves, the less expensive Alterna ve is called the
defender and the more expensive alterna ve is called the challenger.

The change in net benets between these two alterna ves is divided by the dierence in net costs. If the
result is greater than or equal to 1.0, the increase in benet of the challenging Alterna ve is equal to or
greater than its increase in costs and the challenger then becomes the defender and is compared to the
next Alterna ve. If the result is less than 1.0, the current defender is retained and the new challenger
becomes the next Alterna ve on the list. Comparisons of the challenger to defender are made un l all
Alterna ves have been considered. The surviving defender is the most economically ecient.

Net Present Value


All costs and benets in future years are discounted to the year of analysis using the adopted discount rate.
The future stream of discounted costs is subtracted from the future stream of discounted benets. This can
be represented by the following formula:

NPV = Net Present Value

PV(x) = Present Value of x

If the sum of the discounted benets is greater than the sum of the discounted costs, the net present value is
posi ve and the infrastructure improvement is deemed to be economically jus ed.

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6 QUESTIONS
If you have any ques ons concerning the processes discussed in this guidance or encounter a situa on not
specically covered herein, please call John Wilson at 651-366-3732 or send email to
john.wilson@state.mn.us (mailto:john.wilson@state.mn.us).

Benet cost analysis of transit projects should be performed using the methodology described in Transit
Coopera ve Research Program Report 78, Es ma ng the Benets and Costs of Public Transit Projects: A
Guidebook for Prac oners, Transporta on Research Board, 2002

Benet cost analysis of airport projects should be performed using the methodology described in FAA
Airport Benet-Cost Analysis Guidance, Federal Avia on Administra on, December 15, 1999.

Footnotes
1. A speed-cycle change is the process of going from the posted or cruising speed to a stop and then back to
the ini al speed. In this process, addi onal opera ng costs for braking and accelera ng are incurred. back

2. The standard crash values are based on value of single life recommended by the US DOT adjusted to
include other costs related to crashes. The standard values also account for all of the injuries involved in a
typical crash type. For example, most mes in Minnesota, more than one person is involved in a fatal crash.
The standard crash values account for the average cost of all injuries per crash. The injury sta s cs are based
on the three most recent years of Minnesota crash data. back

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