economic analysis

1. Highway Economic Analysis
Concepts in HDM-4
By
Dr. Yogesh Shah
Assistant Prof., CED

2. Highway Economic
Analysis and Financial
Analysis
2

3. Difference between Economic And
Financial Analysis
 Financial Analysis:
 Concerned with the sources of financing a project (by
floating bonds or by levying toll), and
 Availability of funds and the allocation of funds.
 Financial profitability of the project.
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4. Difference between Economic And
Financial Analysis
 Economical Analysis:
 Concerns with the economic viability of the project
considering all the Engineering Aspects.
 Deal with the economic costs and benefits from the point
of view of the country as a whole.
Engineering Aspects
 Deal primarily with the technical construction process and the
operating of the project after it is completed, as well as with the
estimates of capital and operating costs.
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5. Highway Economic
Analysis
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6. Terms Related to Economic Analysis
 Time Horizon
 The investment for highway construction, maintenance, and its
benefits are spread over a time span, and is called as the time
horizon of economic assessment.
 This is generally selected as twenty to thirty years for a
highway project, depending on policy or type of road.
 Time horizon, basically, is the economic analysis period.
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7. Terms Related to Economic Analysis
 Interest Rate
 It is the interest paid or the return obtained at the end of one
year,
 Expressed as a percentage of the capital at the beginning of
the year.
 Interest rate can be either simple rate or compound rate.
 Eg : Rs 100 ; Interest Rate = 10%, Time Horizon = 10 years
 Rs. 100 worth today is Rs. 200/- after 10 years (Simple Interest)
 Rs. 100 worth today is Rs. 259/- after 10 years (Compound Interest)
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8. Terms Related to Economic Analysis
 Discount Rate
 Discounting is the process of calculating the present worth of a
future payment.
 Discount rate is the interest rate at which future payments are
reduced to a present time.
 Eg : Rs 100 ; Discount Rate = 10% per annum, Time Horizon = 10
years
 Rs 259/- at the end of 10 years, when discounted at 10 % per annum,
amounts to Rs 100/- at the present time.
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9. Highway Economic Analysis
Highway Economic Analysis
Costs Benefits
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10. Total Transportation Costs
10

11. Total Transportation Costs
Road Agency Cost – RAC:
1. Construction Cost
2. Maintenance & Operation Cost over
the design life
Road User Cost (RUC)
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12. Total Transportation Costs –
Construction Costs
1
• Survey, Investigation And Design Cost
2
• Land Acquisition Cost
3
• Construction Costs
4
• Supervision, Quality Control
5
• Administration Charges
12

13. Total Transportation Costs –
Maintenance Costs
1
• Ordinary repairs
2
• Periodic repairs
3
• Operation expenses
4
• Supervision and operational charges
13

14. Total Transportation Costs –
Road User Costs
1
• Vehicle Operation Cost
2
• Travel Time Cost
3
• Accident Cost
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15. Total Transportation Costs –
Road User Costs - VOC
Variable Cost
(i) fuel consumption,
(ii) spare parts,
(iii) tyre wear
(iv) lubricants
(v) maintenance labour cost
(i) depreciation
(ii) value of the passengers time
(iii) wages of the crew
Fixed Cost
Capital Cost
Registration fees
Insurance
Road permit charges
Road and other taxes
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16. Total Transportation Costs –
Road User Costs – Travel Time Cost
Travel Time Cost
(i) Value Of Occupation Time
(ii) Value Of Goods In Transit
(iii) Value Of Time Of Commercial Vehicle
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17. Total Transportation Costs –
Road User Costs – Accident Cost
Accident Cost
(i) Cost of Human Fatal Accident
(ii) Loss Due To Injury
(iii) Cost of Hospitalization
(iv) Damage To Property Vehicle
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18.  In economic analysis, one is concerned with economic costs
and not financial costs.
 Financial costs are easy to determine, because they
represent the actual amount one has to pay to get a road
constructed and maintained.
 The cost after removing the taxes levied from financial cost
is Economic cost.
 Economic Cost = Financial Cost - Taxes
Difference Between Economic
and Financial Cost
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19. Factors Affecting Road User
Costs
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20. Factors Affecting Road User Costs
Road Way Factors
(i) Pavement width
(ii) Surface type and riding quality
(iii) Vertical profile
(iv) Horizontal geometry
(iv) Number of junctions per Km
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21. Factors Affecting Road User Costs
Traffic Factors
(i) Traffic Volume
(ii) Traffic Composition
(iii) Speed
(iv) Congestion
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22. Factors Affecting Road User Costs
Vehicle Factors
(i) Type
(ii) Age
(iii) Make
(iv) Engine horse-power
(iv) Power - Weight ratio
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23. Total Benefits
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24. Total Benefits
Benefits from Highway Improvement
Road User
Benefits
Social Benefits
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25. Total Benefits – Road User Benefits
Road User Benefits
(i) Vehicle operating cost saving
(ii) Value of travel time savings
(iii) Value of savings in accident cost
(iv) Savings in maintenance cost
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26. Total Benefits – Social Benefits
Social Benefits
(i) Improvement in administration, Law and order and
defense
(ii) Improvements in health and education
(iii) Improvements in agriculture, industry, trade, mining
and environmental standards
(iv) Appreciation in value of land adjacent to roads.
NOT Considered in HDM-4
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27. Techniques of Economic
Evaluation
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28.  Study of Alternatives :
 Economic analysis is carried out to determine the most
realistic solution from among a number of alternatives.
 For example : Two-lane road needs some maintenance.
 For this we select following alternatives:
Alternative 1 = Do-nothing; Alternative 2 = Resealing
Alternative 3 = Strengthening
 Economic Analysis compares ‘Do-nothing’ alternative with
all other alternatives to select the most attractive one.
Techniques for Economic
Evaluation
28

29.  Marginal or Incremental Analysis :
 This includes the analysis in the following order :
Analysis (1) : Comparing Alternative 2 against Alternative 1
Analysis (2) : Comparing Alternative 3 against Alternative 2
 The results will establish whether the incremental
investments will yield the desired benefits.
Techniques for Economic
Evaluation
29
Used for Budget Optimization Analysis in HDM-4

30.  Three common methods of economic evaluations
normally adopted are as follows:
1) Benefit - Cost Ratio Method
2) Net Present Value Method
3) Internal Rate of Return Method
Techniques for Economic
Evaluation
30

31.  Benefit - Cost Ratio Method
 Procedure is to discount all costs and benefits to their
present worth and calculate the ratio of the benefits to
costs.
 Negative flows are considered as costs whereas positive
flows as benefits.
 If the B/C ratio is more than one, the project is worth
undertaking.
Techniques for Economic
Evaluation
31

32.  Net Present Value Method
 The stream of costs/benefits associated with the project
over an extended period of time is calculated and is
discounted at a selected discounted rate to give the
present value.
 Benefits are treated as positive and costs as negative and
the summation give the Net Present Value (NPV).
Techniques for Economic
Evaluation
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33. 1. If the NPV is positive, for the chosen discount rate, then
the alternative is acceptable.
2. If the NPV is negative, for the chosen discount rate, then
the alternative is unacceptable. (discounted costs
exceeded benefits )
NPV Decision Rule













n
i
n
i
i
r
C
B
NPV
0 )
1
( 33

34.  Internal Rate of Return Method
 Internal rate of return is that discount rate, for which the
NPV value is zero.
 If the rate of return thus calculated is more than the
market interest, then the project is adjudged to be
acceptable.
Techniques for Economic
Evaluation
34

35. Discount Net
Rate (i) Discount Present
12.0% Rate (i) Present
Investments Profits Present 0.0% 7500
or or Net Value Present 3.0% 6326
Year Costs Benefits Benefits Factor Value 6.0% 5281
a b c d = c-b e = 1/(1+i)^a f = d*e 9.0% 4347
12.0% 3508
0 10000 0 -10000 1.0000 -10000 15.0% 2752
1 0 6500 6500 0.8929 5804 18.0% 2068
2 0 3000 3000 0.7972 2392 21.0% 1447
3 0 3000 3000 0.7118 2135 24.0% 881
4 0 5000 5000 0.6355 3178 27.0% 365
30.0% -109
33.0% -544
Total 10000 17500 7500 3508 36.0% -944
39.0% -1315
NPV = 3508 42.0% -1657
45.0% -1975
IRR = 29.3% 48.0% -2271
NPV and IRR Calculation
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36. NPV and IRR Calculation
-4000
-2000
0
2000
4000
6000
8000
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
Discount Rate (%)
Net
Present
Value
(M$)
NPV at 12%
Discount Rate
Internal Rate
of Return
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37. NPV Versus IRR
- The IRR and NPV will not necessarily rank the alternatives by the same order
- Always use NPV to compare project alternatives
-4000
-2000
0
2000
4000
6000
8000
10000
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
Discount Rate (%)
Net
Present
Value
(M$)
NPV at 12%
Discount Rate
Internal Rate
of Return
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38. 38
Multiple Rates of Return
Net
Year Benefits
0 -500
1 1150
2 -660
NPV at 12% 0.64
IRR #1 10%
IRR #2 20%
Discount
Rate NPV
0% -10.0
2% -6.9
4% -4.4
6% -2.5
8% -1.0
10% -0.0
12% 0.6
14% 0.9
16% 0.9
18% 0.6
20% 0.0
22% -0.8
24% -1.8
26% -3.0
28% -4.4
30% -5.9
Multiple Rates of Return
-12.00
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
0% 5% 10% 15% 20% 25% 30% 35%
Discount Rate (%)
Net
Present
Value
(M$)

39. 39
No Rate of Return
Net
Year Benefits
0 200
1 300
2 350
NPV at 12% 747
IRR #NUM!
Discount
Rate NPV
0% 850.0
2% 830.5
4% 812.1
6% 794.5
8% 777.8
10% 762.0
12% 746.9
14% 732.5
16% 718.7
18% 705.6
20% 693.1
22% 681.1
24% 669.6
26% 658.6
28% 648.0
30% 637.9
No Rate of Return
0
100
200
300
400
500
600
700
800
900
0% 5% 10% 15% 20% 25% 30% 35%
Discount Rate (%)
Net
Present
Value
(M$)

40. Alternatives NPV
0.0
3.7
6.7
5.5
 When comparing project-alternatives, the Net Present Value
(NPV) is used to select the optimal project-alternative (alternative
with highest NPV)
Optimal Alternative:
Highest NPV
Project
Comparison of Alternatives
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41.  When comparing the economic priority of different
projects, a recommended economic indicator is the NPV
per Investment ratio
Projects
Selected Alternative
Overlay 25 mm
Reseal 25 mm
Overlay 40 mm
NPV/Investment
8.4
5.2
2.1
P
R
I
O
R
I
T
Y
Ranking Projects
Project
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42. Projects Selected
Alternative
Overlay
Reseal
Overlay
Reseal
Overlay
NPV per
Investment
8.4
5.2
4.0
1.5
0.5
P
R
I
O
R
I
T
Y
NPV
16.8
15.6
20.0
3.0
5.0
Investment
(Total 22)
2.0
3.0
5.0
2.0
10.0
Available Budget
Budget Constraints Simple Methodology
Budget Constraint Cut Off (50% of 22)
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43. Output of HDM-4 Economic Indicator
Summary
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44. END
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