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long corridor with a BRT link to the central business greatest net benefit to the local area, region, or nation, district of a city, using assumptions for the peak hours by comparing the monetary value of benefits and costs and peak direction of traffic. It assumes a set of typi- of each alternative (U.S. GAO 2005). The benefits cal BRT features, including busway profiles, stations, and costs will depend on the features of the project, vehicles, fare collection systems, and other safety and estimates of future travel demand, and characteristics passenger information systems. of the local area or region, such as the local economic Accordingly, the costs of the hypothetical BRT and transportation conditions. Transportation agen- system are calculated. The analysis assumes reason- cies are typically required to do a detailed cost/benefit able values for transit and auto modes shares, travel analysis to justify investment in a particular project. speeds, and vehicle occupancies on the corridor, and Such an analysis compares project alternatives with average values for traveler wage rates, auto oper- the "no build" base case, to determine a locally pre- ating costs, bus transit fares, and other conditions ferred alternative. required to set up the scenario. These values can be To enable comparison of alternatives, it is nec- altered to reflect locally-specific values. Net bene- essary to standardize the categories of benefits and fits and costs are calculated on an annual basis over costs that are considered and the methodology that the lifetime of the project. Also included is a sen- is used to calculate them. Direct benefits to users sitivity analysis that shows how the net benefits, of the transportation system include travel time sav- costs, and final cost/benefit ratio of the project vary ings, vehicle operating expenses and out-of-pocket when the assumed values are altered. This report pro- expenses, and reduced crash costs. Other direct ben- vides information on how the hypothetical analysis efits can accrue to users and non-users, such as reduc- was conducted, thus providing a methodology that tions in emissions, noise, and other environmental planners can use as a reference. Additionally, a sen- impacts. While these impacts can be relatively simple sitivity analysis shows the conditions under which to estimate, much variation exists in how benefits are converting an arterial lane to BRT may and may not monetized. Indirect benefits can arise from increased be favorable. economic development and land development; these A printout of the base case analysis spreadsheet are often difficult to estimate, and therefore are often is included as Appendix B. omitted in transportation cost/benefit analyses. The costs against which these benefits are weighed are also similarly varied. The construction, operation, and SECTION 2 OVERVIEW OF maintenance costs of a project are relatively easier to COST/BENEFIT ANALYSIS estimate than the costs of traffic delays during con- struction or the costs of long-term environmental Cost/benefit analysis (also called benefit-cost impacts. analysis) is a method used to evaluate public expen- The most critical component of a cost/benefit diture decisions. The analysis involves identifying analysis for a BRT project is likely to be the esti- and quantifying all the benefits and costs that will mation of impacts on vehicle delay and transit rider- accrue to society if a project is undertaken. Cost/ ship. While the calculation of these impacts will benefit analysis thus helps determine the economi- differ with every project, it is possible to evaluate cally efficient investment alternative, i.e., one that hypothetical projects using plausible ranges for key maximizes the net benefit to society from an allo- parameters (such as traffic volume and transit rider- cation of resources. For transportation projects, this ship) so as to illustrate how these parameters influence involves estimating a dollar value for benefits to the outcome. The calculation of benefits is particularly users of the facility, a value for social benefits, and important and will depend on assumptions about the comparing these benefits to project capital, opera- study area of the project, the monetary values assumed tions, and maintenance costs. Total costs are sub- for the benefits and costs, and the duration over which tracted from total benefits to calculate net benefit. the different costs and benefits will occur (i.e., short term or long term). Costs and benefits are usually cal- culated cumulatively over a project period that rep- Purpose of Analysis and Steps resents some reasonable planning horizon, depend- The purpose of a cost/benefit analysis is to deter- ing on the nature of the project; 10 to 30 years is most mine the project alternative that would provide the commonly used (ITE 2009). 3
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Since benefits and costs often occur at differ- Appropriate Measures for ent times over the lifespan of a project, they must Cost/Benefit Analysis be adjusted according to when they occur. Because There are several measures to compare benefits to many costs usually occur in the early stages of a costs in a cost/benefit analysis. The Federal Highway project, while benefits are spread out over a number Administration recommends the use of either the of years, discounting is used to bring all monetary Net Present Value (NPV) measure or the Benefit-Cost streams (both costs and benefits) to the same year, Ratio (BCR) to compare benefits to costs (FHWA i.e., usually the year in which the analysis is being 2003). These two most widely used measures have done. Due to the time cost of money and the value been used in the illustrative analysis in this project placed on immediate consumption, future benefits and are described herein. and costs are worth less than those incurred imme- NPV: All benefits and costs over the project's life- diately. To account for this, future benefits and costs cycle are discounted to present values and the costs are discounted and then summed to arrive at a pres- ent value. A project decision is then made by com- are subtracted from the benefits to obtain the NPV, paring the present value of the discounted stream of which must be a positive number for the project to benefits to the present value of the discounted stream be justified. When multiple project alternatives exist, of costs. The discount rate is applied to the benefits the alternative with the largest NPV of net benefits is and costs incurred in each year of the project's life typically the preferred alternative, though sometimes, cycle. other factors including project risks and funding avail- Cost/benefit analysis typically involves com- ability may play a role in the selection of an alterna- paring project alternatives with a No-Build base- tive with a lower, positive NPV (FHWA 2003). line scenario that assumes no action. The steps in BCR: The BCR is a ratio where the present value conducting such an analysis include the following of benefits (including negative benefits or disbenefits) (ECONorthwest 2002): is divided by the present value of the initial agency investment cost. When benefits exceed costs, the 1. Define the baseline and project scenarios ratio is greater than 1 and implies that the project is in terms of facility features and operational worth pursuing. characteristics 2. Set analysis period and define study area Limitations of Cost/Benefit Analysis (single roadway segment or entire network) 3. Determine relevant categories of benefits and Despite its many advantages, there are limitations costs that will be measured or monetized in a to conducting a cost/benefit analysis in the context way that avoids double-counting of converting a highway lane to a BRT lane. Transit 4. Analyze changes in travel activity resulting projects often have several impacts that cannot be from the project in terms of trips and vehicle easily measured or expressed in dollars and are thus, miles traveled, by mode omitted from the analysis. For example, future eco- 5. Monetize travel activity impacts to estimate nomic development impacts and spillover impacts in benefits and costs relative to the baseline other jurisdictions are often not taken into account by scenario. an agency focusing only on local costs and benefits. 6. Decide on an appropriate discount rate and Additionally, the distribution of benefits may discount future steam of benefits and costs to sometimes be as or more important than the actual present value values of calculated benefits. For example, transit 7. Estimate net benefits and cost/benefit ratios projects often bring benefits by providing mobility to 8. Measure or discuss those project impacts that people with low incomes, disabilities, or with other- cannot be monetized due to uncertainties in wise limited access to transportation options. The ben- monetary values or measurement efits to these groups may be as important to consider 9. Conduct sensitivity analysis to assess changes as travel time savings. in net benefits based on values of key input Another limitation is that the results of a cost/ variables such as traffic volume benefit analysis depend on assumptions for which 10. Evaluate and make recommendations to pur- justifiable alternative assumptions are always pos- sue project or not sible causing the final results to sometimes vary 4