DE LA SALLE UNIVERSITY-DASMARINAS

College of Engineering, Architecture and Technology

Depart of Engineering
Civil Engineering Program

CEET 321: PRINCIPLES OF TRANSPORTATION ENGINEERING

FIRST SEM SY 2021-2022
Engr. Dolphy F Fadriquela

MODULE 3
Transportation Economics
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Gospel Devotion

Jeremiah 33:3
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Call unto me, and I will answer thee, and show thee great and mighty things, which thou
knowest not”
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Lesson1: Introduction to Transportation Economics

Transportation Economics
Transport economics is defined as the. study of the movement of people and goods
over space and time. It is a branch of economics that deals with the allocation of
resources within the transport sector.
1.1Transportation and Economic Development
Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

Assessing the economic importance of transportation requires the categorization of

the types of impacts it conveys.:

Core. The most fundamental impacts of transportation-related to the physical

capacity to convey passengers and goods and the associated costs to support this
mobility. This involves the setting of routes enabling new or existing interactions
between economic entities.

Operational. Improvement in the time performance, notably in terms of reliability, as

well as reduced loss or damage. This implies a better utilization level of existing
transportation assets benefiting its users as passengers and freight are conveyed
more rapidly and with fewer delays.

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Geographical. Access to a broader market base where economies of scale in
production, distribution, and consumption can be improved. Increases in productivity
from the access to a larger and more diverse base of inputs (raw materials, parts,
energy, or labor) and broader markets for diverse outputs (intermediate and finished
goods). Another important geographical impact concerns the influence of transport on
the location of activities and its impacts on land values.

Socioeconomic Benefits of Transportation

The term socioeconomic refers to the interaction between the social and economic
habits of a group of people. The prefix socio- refers to "the study of the behaviors of
people," including the ways they interact with one another or their family structures.

There is a wide range of economic benefits conveyed by transportation systems,

some direct (capacity and efficiency), some indirect (accessibility and economies of
scale), and some induced (multipliers and opportunities). They are impacting
transport supply and demand as well as the economy:

Direct Impacts. The direct benefits are mostly related to capacity and efficiency
improvements that impact users and operators, particularly in terms of time and costs
savings. Corporations involved in the provision of transport services earn an income
and are paying wages to their employees.

Indirect Impacts. The indirect benefits are mostly related to accessibility gains and
better economies of scale. While employers and the retail sector (as well as other
activities such as institutions) gain better access to labor or customers, the customers
of freight transport services (distribution centers, manufacturing, retailers) derive
some productivity gains that are the outcome of better transport services.
Landowners also usually derive higher rents from the increasing intensity of
passenger and freight traffic taking place in the vicinity.

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Induced Impacts. The induced benefits are mostly related to economic multipliers
and increased opportunities. Society benefits from increased mobility since
individuals have a wider range of options for their activities and the associated social
opportunities (education, social interactions, leisure). An economy usually becomes
more competitive, attracts new and expanded economic activities, and has more
complex distribution networks. At this level, transportation becomes a factor in
promoting economic competitiveness.

Lesson 2: Economics of Highway

Let us use Highway project as an example.

A good highway network provides several benefits to the general public and the
society at large.
Economic analysis of highways involves a thorough study of highway costs and benefits.
For this, different methods have been evolved:

Present Value
Net Present Value
Benefit-Cost Ratio

A comparative study of these methods yields valuable information.

Highway financing comprises the analysis of costs, different methods of financing

highway projects sources of revenue and different organizations involved

Highway administration involves the study of the administrative set-up in the country,

which is responsible for the maintenance and operation of the highway network for
providing maximum benefit to the society.

For the economic analysis of a highway project, a comparative economic study of

different alternatives of either a new project or an improvement to an existing road is
needed. For this, it is necessary to assess the benefits to the road-user on completion of
the improvements or the new roadway, and the cost of the highway transport in all its
aspects.

Primary or Direct Benefits:

1)Reduction in the operation costs and maintenance costs of vehicles.

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2)Increase in revenue from the motor vehicles – vehicle registration tax, life tax, fuel tax,
income from passengers and goods transportation, excise and customs duties, sales tax,
and so on.

3)Saving in travel time – In the case of commercial vehicles, the time saved can be
utilized for additional trips and increased earnings.

4)Reduction in accidents due to improvements to an existing road – Costs of vehicle

damages and damages to other properties, injuries to road-users and loss of life can be
minimized or saved.
5)Benefits to the general public include land appreciation and increase in employment
opportunities.

Secondary or Indirect Benefits:

1)Increase in comfort, convenience and safety of the road-user.

2)Increase in educational, business, recreational, and health services values.

3)Increased value of natural resources owing to convenient access by road.

4) Improved mobility of essential goods and services, making them accessible even to
remote places.

5)Improved mobility for defense forces contributing to the security of the country.

Lesson 3: Highway Evaluation

Economic analysis is essentially a study for the future; the analysis

should, therefore, estimate the future traffic, costs and benefits. Alternatives
have to be studied. A number of possible alternatives should be evaluated including
the basic alternative of 'doing nothing', or maintaining 'status-quo'.

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Economic studies for highway purposes are done principally for the following
purposes:
To determine the feasibility study
To compare alternative locations
To evaluate various features of highway design, for example, the type of surface to
be used
To determine priority improvement

Cost of Highway Transportation:

Highway transportation cost is defined is the sum of the highway investment cost,
maintenance cost and operating cost, and the highway user costs.

Types of Cost Examples

Highway investment cost
 
Highway maintenance cost
Highway user cost
a) Motor vehicle operating cost
b) Travel time
 
c) Accident cost
Transit capital cost
Transit operating cost
Transit user cost
a) Transits money cost
 
b) Transit travel time cost
 
Engineering design, right-of-way, grading and
drainage, pavement
Mowing, care of roadside parks, lighting
 
Fuel, lubrication, tires
Total vehcle-hours of travel tives unit
value of time
Estimated accident rate times unit accident
cost
Terminal shops, administrative offices
Driver's wages ans operating cost od buses
 
Sum of fares paid, auto running costs to get
to terminal
Time for bus times unit value of time
Time riding bus times unit value of time

Benefits of Highway Improvements:

1) Direct benefits that result from a reduction of highway user costs
2) Indirect benefits, including benefits to adjacent property and the general public.

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PRESENT VALUE CONCEPTS
In economic studies it is important to recognize the time of value of money. Present
value is the concept that states an amount of money today is worth more than that
same amount in the future. In other words, money received in the future is not worth
as much as an equal amount received today. It is the current value of a future sum of
money or stream of cash flows given a specified rate of return.

 Present value states that an amount of money today is worth more than the
same amount in the future.
 In other words, present value shows that money received in the future is not
worth as much as an equal amount received today.
 Unspent money today could lose value in the future by an implied annual rate
due to inflation or the rate of return if the money was invest

The present value or present worth P of some single payment can be calculated as,

The present worth P, of a series of uniform annual end-of-period payment A can be

determined by,

Where:
P = present worth
F = single payment
A=uniform annual period end-of-payment
i = interest or discount rate per period
n = number of interest period, usually in years

Examples:

Present Value Example 1

Let's say you have the choice of being paid P100,000 today earning 3% annually or
P110,000 one year from now. Which is the best option?

a) Using the present value formula, the calculation is

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 , F=110,000, i = 3%, n = 1 year

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P = 110,000 (
¿ ¿ ¿ = P 106,796

b) PV = P106,796 or the minimum amount that you would need to be paid today to have
P110,000 one year from now. In other words, if you were paid P110,000 today and based on
a 3% interest rate, the amount would not be enough to give you P110,000 one year from
now.

c)Alternatively, you could calculate the future value of the P110,000 today in a year's time:
100,000 x 1.03 = 103,000

Present Value Example 2

Consider a scenario where you expect to earn a P250,000 lump sum payment in five
years' time. If the discount rate is 8.25%, you want to know what that payment will be
worth today.

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Calculate the PV = P250,000( ¿5 = 168,190
1+ 025

Present Value Example 3:

In 25 years the residual or salvage value of a certain highway will be 15 million
pesos. Determine the present value of that sum, using an interest rate of 5%.

* Salvage value is the amount that an asset is estimated to be worth at the end of its useful life.

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Solution

Present value = 4,429,542.00 pesos.

Present Value Example 4:

The user benefits for a certain highway are estimated to be a uniform P4,250,000 per
year. Determine the present worth of those benenfits assuming an interest rate of 8%
and an analysis period of 25 years.

Solution:

A= P4,250,000
r =8%
n = 25 years

Using the second Formula,

Or,
(1+i )n
P = A 
i(1+i)n
P = 45,367, 358.

Net Present Value Criterion

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 The Net Present Value (NPV) criterion is the principal government investment project
evaluation criterion. The cash flows consist of a mixture of costs and benefits
occurring over time. Net present value is merely the algebraic difference between
discounted benefits and discounted costs as they occur over time.

What Net Present Value Can Tell Us

NPV accounts for the time value of money and can be used to compare similar
investment alternatives. The NPV relies on a discount rate that may be derived from
the cost of the capital required to invest, and any project or investment with a
negative NPV should be avoided.

An investment with a negative NPV will result in a net loss. This concept is the basis
for the Net Present Value Rule, which dictates that only investments with positive
NPV values should be considered.

The formula for NPV is:

Bo−Co B 1−C 1 Bt−Ct

NPV = 0 + 1
+…+ t
(1+i) (1+i) (1+i)

Where:
B = benefit, C= cost, i = discount rate, t = year

NPV Example 1:
From the given data, determine the Net Present Value.
Road repair project:
5 yrs.; i = 4% (real discount rates, pesos)

Year 1 2 3 4 5
Benefits (B) 0 60,000 60,000 60,000 60,000
Cost (C) 150,000 0 0 25,000 0
B-C -150,000 60,000 60,000 35,000 60,000
Disc. factor (1.04)1 = 1.04 (1.04)2 = 1.082 (1.04)3 = 1.125 (1.04)4 = 1.169 (1.04)5 = 1.217
Disc. Annual -144,231  55,453  53,333  29,940  49,302
cash flows          

NPV = -144,231+ 55,453+53,333 + 29,940 +49,302 = 43,797

Question: Go or not Go

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Answer: A single project with a positive NPV is a GO.

Difference between PV and NPV

Present value (PV) is the current value of a future sum of money or stream of cash
flow given a specified rate of return. Meanwhile, net present value (NPV) is the
difference between the present value of cash inflows and the present value of cash
outflows over a period of time.

Cost –Benefit analysis

A benefit-cost ratio (BCR) is a ratio used in a cost-benefit analysis to summarize the
overall relationship between the relative costs and benefits of a proposed project. If a
project has a BCR greater than 1.0, the project is expected to deliver a positive net
present value to a firm and its investors.

Formula:

Cost-Benefit Analysis Formula

Benefit-Cost Example 1
A company is contemplating on hiring two new programmers. They expect the programmers
to increase the revenue by 25% while incurring an additional cost of P2,250,000 in the next
one year. The promoter decides whether to go ahead with the recruitment based on cost-
benefit analysis. If the revenue of the company in the current year is P11,000,000 and the
relevant discount rate is 5%.

Solution:

Particulars Values
Current Revenue 11,000,000
Discount rate 5%
Benefit 2,750,000
Costs 1,750,000

PV of benefit = Benefit/(1+i) = 2,750,000/(1+.05) = 2,619,048

PV of cost = Cost/(1+i) = 1,750,000/ (1+0.05) = 1,666,667

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B/C = 2,619,048/1,666,667 = 1.57

Net Present Value = 2,619,048 – 1,666,667 = 952,381

Decision: Since both the method of cost-benefit analysis suggests that the promoter
should go ahead with the recruitment.

Benefit-Cost Example 2

Two road projects to illustrate the use of cost-benefit analysis. The sum of the present value
of expected benefits from Project 1 is P 2.5 billion with the sum of the present value of
associated costs of P1.5 billion On the other hand, the sum of the present value of expected
benefits from Project 2 is P500 million with the sum of the present value of associated costs
of P250,000 million. Discuss which project is better based on cost-benefit analysis.

Solution:

Particulars Road Project 1 Road Project 2

Sum of PV of expected benefits 2.5 billion 500 million
Sum of PV of associated costs 1.5 billion 250 million

1)Benefit-Cost Ratio = ∑PV of all the Expected Benefits / ∑PV of all the
Associated Costs

Road Project 1 = 1.67

Road Project 2 = 2.0

2)Net Present Value = ∑PV of all the Expected Benefits – ∑PV of all the
Associated Costs

Road Project 1 =1.0 billion

Road Project 2 = 0.25 billion

Decision: As per the benefit-cost ratio, Project 2 has a higher value then it is better
than Project 1, while the net present value Project 1 is higher than Project 2, then it is
better than Project 2. The net present value gets the preference. Therefore, Project 1
will be considered better.

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Benefit-Cost Example 3

A company is performing the cost-benefit analysis of 3 different business options.

They expect a return rate of 12% which is reflected in a corresponding discount rate.

Option 1 Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Costs -5,000 -5,000 -1,000 -500 -500 -1,000 -1,000
Benefits 0 0  3,000  5,000  5,000  4,000  4,000
Net Cash Flow -5,000 -5,000  2,000  4,500  4,500  3,000  3,000
   
Option 2 Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
-
Costs -1,000 -1,000 -1,000 -500 -500 -1,000
15,000
Benefits 0  2,500  5,000  5,000  5,000  5,000  5,000
-
Net Cash Flow  1,500  4,000  4,000  4,500  4,500  4,000
15,000
   
Option 3 Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Costs -3,000 -3,000 -2,500 -1,000 -500 -500 -500
Benefits 0 0  3,000  4,000  4,000  3,000  3,000
Net Cash Flow -3,000 -3,000  500  3,000  3,500  2,500  2,500

Solution:

1. Compute the discounted Cost and discounted benefit:

Cost Benefit
Dc = n and Db = n
(1+r ) (1+ r)

r = 12%

2. Create another table for the 3 options.

Sample calculations on discounted cost and discounted benefit for option 1.

Year 0,
5000
Dc = 0 = 5,000
(1+0.12)

Year 1,

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 5000
Dc = 1 = 4,464
(1+0.12)

Year 2:
1000
Dc = 2 = 797
(1+0.12)

Option 1 Now  1  2  3  4  5  6
Costs -5,000 -5,000 -1,000 -500 -500 -1,000 -1,000
Benefits  –    –    3,000  5,000  5,000  4,000  4,000
Net Cash Flow -5,000 -5,000  2,000  4,500  4,500  3,000  3,000
 Discounted Costs -5,000 -4,464 -797 -356 -318 -567 -507
 Discounted Benefits  –    –    2,392  3,559  3,178  2,270  2,027
Calculated Results for Option 1:
Present Value of Costs:               12,009
Present Value of Benefits:           13,424
Benefit Cost Ratio:                       1.12

Option 2 Now  1  2  3  4  5  6
Costs -15,000 -1,000 -1,000 -1,000 -500 -500 -1,000
Benefits  –    2,500  5,000  5,000  5,000  5,000  5,000
Net Cash Flow -15,000  1,500  4,000  4,000  4,500  4,500  4,000
 Discounted Costs -15,000 -893 -797 -712 -318 -284 -507
 Discounted Benefits  –    2,232  3,986  3,559  3,178  2,837  2,533
Calculated Results for Option 2:
Present Value of Costs:               18,510
Present Value of Benefits:           18,325
Benefit Cost Ratio:                       0.99

Option 3 Now  1  2  3  4  5  6
Costs -3,000 -3,000 -2,500 -1,000 -500 -500 -500
Benefits  –    –    3,000  4,000  4,000  3,000  3,000
Net Cash Flow -3,000 -3,000  500  3,000  3,500  2,500  2,500
 Discounted Costs -3,000 -2,679 -1,993 -712 -318 -284 -253
 Discounted Benefits  –    –    2,392  2,847  2,542  1,702  1,520
Calculated Results for Option 3:
Present Value of Costs:                 9,238
Present Value of Benefits:           11,003
Benefit Cost Ratio:                       1.19

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 3. Summarize the result.

Rank Project Option BCR NPV

1  Option 3 1.19 1,764.82
2  Option 1 1.12 1,415.12
3  Option 2 0.99 -185.04

Discussion of Results
Option 3 is the best alternative, followed by Option 1. Option 2 has a BCR lower than 1 which
indicates that it is not profitable at all.

*The benefit cost ratio is a common indicator of the profitability of a potential investment or
project. While it does not cover all aspects of a cost benefit analysis, it indicates whether an
option is beneficial. As the BCR compares discounted benefits with discounted costs, it offers
a good indication of how big a buffer between benefits and costs is.
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Asynchronous Activity:

Problem 1:
You expect to earn a P150,000 lump sum payment in five years' time. If the discount
rate is 6.25%, compute what that payment will be worth today.

Problem 2:
In 20years the residual or salvage value of a certain highway will be 25 million pesos.
Determine the present value of that sum, using an interest rate of 6%.

Problem 3:
The user benefits for a certain highway are estimated to be a uniform P3,250,000 per
year. Determine the present worth of those benefits assuming an interest rate of 6%
and an analysis period of 30years.

Problem 4:
From the given data, determine the Net Present Value.
Road repair project:
6 yrs.; i = 5% (real discount rates, pesos)

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 Year 1 2 3 4 5
Benefits (B) 0 70,000 70,000 70,000 70,000
Cost (C) 150,000 0 0 25,000 0

Problem 5:
Given the following data:
Compute the Benefit-cost ratio and the Net Present Value

Particulars Values
Current Revenue 14,000,000
Discount rate 5%
Benefit 5,750,000
Costs 4,750,000

Problem 6:

From the given information of 2 alternative Projects.

Particulars Alternative 1 Alternative 2

Sum of PV of expected benefits 2.52 billion 550 million
Sum of PV of associated costs 1.275 billion 230 million

Discuss which project is better based on cost-benefit analysis

Problem 7:
Consider 3 different business options. Rate return rate of 11%. Determine the best
option. Year = 6.

Option 1 Now  1  2  3  4  5  6
Costs -5,000 -5,000 -1,000 -500 -500 -1,000 -1,000
Benefits  –    –    3,000  5,000  5,000  4,000  4,000

Option 2 Now  1  2  3  4  5  6
Costs -15,000 -1,000 -1,000 -1,000 -500 -500 -1,000
Benefits  –    2,500  5,000  5,000  5,000  5,000  5,000

Option 3 Now  1  2  3  4  5  6
Costs -3,000 -3,000 -2,500 -1,000 -500 -500 -500

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 Benefits  –    –    3,000  4,000  4,000  3,000  3,000
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References:
Highway Engineering by Paul H. Wright
Engineering Economics 3rd Edition by Chan S. Park
https://www.educba.com/cost-benefit-analysis-formula/
https://www.engineeringenotes.com/transportation-engineering/highway/highway-
economics-financing-administration-transportation-engineering/48874
https://www.dpwh.gov.ph/dpwh/2019%20DPWH%20ATLAS/Tables%20&%20Graphs
%20(Roads)/Road% https://www.educba.com/cost-benefit-analysis-formula/
https://www.educba.com/cost-benefit-analysis-formula/

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