Airport Parking Garage Lighting Solutions (2015)

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40 The most widely used methodology for formal business case analysis is the benefit-cost analy- sis (BCA). This is an economic analysis comparing the benefits and the costs for the lifecycle of each initiative, and measures the overall economic value of the investment in terms meaningful to decision makers. The generally accepted industry practice is to use benefit-cost ratio (BCR) and net present value (NPV) as standard criteria for judging the lifecycle economic value of a program, although other metrics exist. The BCA can be thought of as a decision support tool that helps program managers and decision makers choose among different courses of action and efficiently acquire and manage capital assets. The purpose of this analysis is to assess, in economic terms, whether the value received from a particular investment is outweighed by its costs. Under FAA guidelines, the value received, usually referred to as “benefits,” considers the transportation system as a whole. It incorporates benefits accrued by passengers, airlines, airports, and the FAA. Costs include the total costs throughout the investment’s lifecycle. These include initial acquisition costs, operations and maintenance (O&M) costs, and any required costs for mid-lifecycle technology upgrades, usually referred to as a “tech refresh.” These concepts are described in more detail below, using guidance compiled in ACRP Synthesis 13: Effective Practices for Preparing Airport Improvement Program Benefit-Cost Analysis (Landau and Weisbrod, 2009): • Benefit: The net value to society of all positive aspects of a construction project, acquisition, or other program, over the course of its lifecycle. Societal benefits cover all private, federal, and other public entities affected by the project. The term is usually used to focus on the economic value of such benefits, especially those that can be quantified. When benefits are expected to occur but cannot be measured in monetary terms, then they may be acknowledged in qualita- tive terms. However, qualitative benefit measures cannot be used in formal BCA as there are no monetary values to compare to costs. • Cost: The net value to society of all expenses of a project over the course of its lifecycle. Costs include capital costs, O&M costs, tech refresh costs, and any termination costs. Capital costs refer to the investment, construction, and acquisition costs associated with the initial imple- mentation of the project. O&M costs typically include labor, materials, supplies, and equip- ment costs. Tech refresh costs refer to costs incurred for mid-lifecycle technology upgrades. Termination costs cover dismantling and site restoration, as well as salvage value if the analy- sis time-frame ends before the useful life of the applicable facilities and equipment. • Benefit-Cost Analysis: A business case analysis that evaluates the net economic value of an investment to society, by comparing the societal benefits associated with the project to its life- cycle costs. The term is usually used to mean a quantitative comparison of the economic value of benefits to costs, but can also include qualitative aspects. Because BCAs consider future economic value, they are inherently uncertain and therefore typically include a risk analysis. This risk adjustment expresses benefits and costs as probability distributions, and can be used C H A P T E R 7 Cost-Benefit Considerations

Cost-Benefit Considerations 41 to quantify the uncertainty, conduct sensitivity analysis, and incorporate varying degrees of pessimism or optimism. Figure 26 illustrates the process that is traditionally used to develop business planning prod- ucts for a broad range of airport and air traffic control investments. The process begins with identifying the objectives. This step helps identify other reasonable, feasible, and effective solu- tions that meet the objectives. The process then moves on to identifying, quantifying, and esti- mating costs and benefits, ranking and evaluating initiatives through benefit-cost ratios and other investment metrics, and performing sensitivity and risk analyses. Airports are subject to a regulatory requirement to conduct a BCA for capacity-related projects funded through the federal Airport Improvement Program (AIP). Specifically, a BCA is required when $10 million or more in AIP discretionary funding is requested (FAA, 2011, p. 65769). As a result, lighting projects for airport parking structures are not subject to this requirement. However, FAA standards are still useful as a source for best practices. Even if a formal process is not required, conducting a BCA will help inform airports’ investment decisions in regards to lighting projects. If the airport decides not to conduct a BCA, the principles described here will still be useful as general business planning guidance for lighting projects. The sections below further describe key BCA concepts, including project lifecycle, benefits analysis, cost estimating, risk adjustment, and determination of the overall economic value. References are provided at the end of this document should the reader want to explore these concepts in more detail. 7.1 The Project Lifecycle Selection of an appropriate project lifecycle enables costs and benefits of various alternatives to be evaluated objectively. Project requirements play a large part in determining the lifecycle. Normally the physical life of the asset would determine the lifecycle. For example, for a shuttle bus, runway, or airport terminal, suitable lifecycles might be 10, 20, and 30 years, respectively. For lighting projects, however, the physical life of lamps is most likely not the best choice of lifecycle duration for the economic analysis, since these are easily replaced. Selection of an evaluation period long enough to account for the increasing maintenance costs and periodic tech refreshes is important. Where a business case analysis is undertaken comparing different technologies with different longevities, a compromise intermediate lifecycle period is typically Figure 26. The BCA process. Source: MCR Federal.

42 Airport Parking Garage Lighting Solutions suggested. Lifecycle periods of between 10 and 20 years are most common for airport projects and are suitable for airport-lighting projects. 7.2 Assumptions These assumptions are general in nature; more detailed assumptions are provided in the cost and benefit specific narratives below. The assumptions used here follow the guidelines provided by the FAA for business case planning for aviation infrastructure investments. They include: • The present value of a benefit or cost stream is derived using the discount rate specified by the Office of Management and Budget (OMB), typically 7%. • Benefits and costs are expressed in fiscal year (FY) constant dollars (i.e., real dollars). • Conversion of constant dollars into then-year (TY) values is achieved using Gross Domestic Product (GDP) deflators or a Consumer Price Index (CPI) inflation adjustment factor: – Bureau of Economic Analysis, Table 1.1.9. Implicit Price Deflators for GDP: http://www. bea.gov/iTable/index_nipa.cfm – OMB, Budget of the United States Government Fiscal Year 2014, Table 2–1. Economic Assumptions: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/ econ_analyses.pdf • The present value of a benefit or cost stream is derived using the discount rate specified by the OMB: – OMB Circular No. A-94 Appendix C: http://www.whitehouse.gov/sites/default/files/omb/ memoranda/2013/m-13-04.pdf Once a lifecycle stream of the present value of benefits and costs has been obtained, the net present value can be calculated by simply taking the difference between the two. 7.3 Estimating Benefits Benefits analysis is the process of identifying the physical or operational value of the goods or services that an initiative will yield over the analysis period. These are usually defined in physical or operational units (metrics) or terms that represent enhanced capability, which can then be quantified (FAA, 2013a). They can also be qualitative in nature, if quantification is not feasible. Typical benefits associated with airport parking garage lighting solutions might include utility cost savings, reduced CO2 and greenhouse gas (GHG) emissions, and improved safety. It is important to note that the FAA’s approach to benefits analysis takes a system-wide approach. When considering benefits, the economic welfare of all air transportation service providers and users is considered. In other words, the total economic value of the benefits of an investment is the sum of the individual benefits accrued to the airport operators, passengers, airlines, other aircraft operators, and the FAA. In airport garage lighting applications, the most likely beneficiaries are the airport operators, passengers, and other parking garage users. A general classification of benefit categories may include efficiency, environment, safety, and cost effectiveness. Note that this is a general classification that can be applied to any benefits analysis, but it does not necessarily follow that each initiative is predicted to achieve benefits in each of these four categories. Each of these categories is discussed further below. 7.3.1 Cost Effectiveness This refers to benefits that reduce the airport sponsor’s ownership costs or increase labor pro- ductivity. Cost-related benefits are measured either as potential cost savings or cost avoidance.

Cost-Benefit Considerations 43 Benefits in productivity and efficiency can be measured using a variety of metrics, for example as labor costs monetized using compensation information for employees. For airport-parking- lighting applications, reductions in energy costs, maintenance-related labor costs, and lamp- replacement costs are likely benefit candidates. 7.3.2 Efficiency This refers to benefits that improve the effectiveness of operations. Efficiency benefits are often measured as improvements to passengers’ opportunity costs, monetized through the economic value of time spent traveling, or aircraft-operating costs. For airport garage lighting applications, efficiencies that benefit the users (i.e., passengers and aircraft operators) are likely to be secondary to cost savings for the airport operator, at least in terms of quantifiable benefits. 7.3.3 Environment This refers to benefits that affect the environment. Typical environmental benefits associated with aviation infrastructure projects include decreased noise impact, improved air quality, and reduced GHG emissions. While there is no FAA-adopted methodology for monetizing GHG- emission reduction for a business case analysis, CO2 reduction is often used as a quantitative proxy for total GHG reduction. EUROCONTROL provides several alternatives for monetizing GHG emissions in its standards for BCA calculations (EUROCONTROL, 2013). For airport garage lighting applications, reduction in air pollutants and GHG emissions are likely environ- mental benefits. 7.3.4 Safety This refers to benefits that lower the risk of fatalities and injuries. Safety benefits are typically measured as a potential reduction in the number or severity of accidents. Safety-related benefits can be monetized using the economic cost of fatalities and injuries, using International Civil Aviation Organization injury classifications or other actuarial data. However, this method is only possible if a reduction in injuries or fatalities can be modeled as a function of the proposed improvements in airport garage lighting. In other cases, safety has to be treated as a qualitative benefit. 7.3.5 Quantitative Benefits In a quantitative benefit analysis, the identified benefits are evaluated using metrics that can be converted into monetary values for each year in the lifecycle. The benefits estimates are then fed into the overall economic analysis to compare benefits against costs. Some observed prac- tices for quantifying benefits are presented in ACRP Synthesis 13: Effective Practices for Preparing Airport Improvement Program Benefit-Cost Analysis (Landau and Weisbrod, 2009). Additionally, standard economic values used by the FAA to monetize benefits from the categories above are published annually by the Office of Investment Planning and Analysis (FAA, 2013b). 7.3.6 Qualitative Benefits In some cases, it may be impossible or impractical to produce quantified, monetary values for expected benefits. Benefits that are expected to occur but cannot be measured in monetary terms should still be acknowledged and described in qualitative terms. Although qualitative benefit descriptions do not affect BCA calculations, they are still useful for conveying the advantages of the initiative to stakeholders. They can help decision makers to choose among alternatives whose quantified benefits have similar orders of magnitude.

44 Airport Parking Garage Lighting Solutions Qualitative benefits will not have a numeric measure, so they should include a detailed description conveying the extent and scale of the improvements. The description should also illustrate the importance of these improvements to the stakeholders. In some cases a middle ground is possible, where benefits can be quantified, but not monetized (i.e., assigned a dollar value). Examples include reductions in GHG emissions, since there is no FAA-accepted standard for monetizing the value of CO2 or other GHG emissions. 7.3.7 Benefits in Airport Parking Garage Lighting Applications Cost effectiveness: Operations and maintenance cost savings. Next-generation lighting systems will likely provide reduced O&M costs as compared with the existing lighting system. This will stem from several factors, the drivers of which include: • Electricity savings. Use of more efficient bulbs and dimming technology may generate signifi- cant cost savings. • Maintenance costs (material and labor). Next-generation lighting systems are expected to utilize bulbs with a service life that has a longer mean time between failures. This will reduce the quantity of bulbs that need replacing and the labor required to do so. • Vehicle costs (maintenance and fuel). Next-generation lighting solutions may have fewer associated repair and maintenance activities. The use of vehicles (trucks, forklifts, scissor lifts, etc.) may be reduced, generating cost savings over the lifecycle. To quantify and monetize cost savings, it is expected that the following metrics will need to be captured. • Project lifecycle (operational years). • Power consumption (dimmed and full output). • Quantity of lamps. • Operating hours (times dimmed versus full output). • Electricity rates at various times of day/week/month: current and predicted. • Preventive/scheduled maintenance activities (frequency, costs for parts and materials, labor costs). • Corrective/unscheduled maintenance activities (frequency, costs for parts and materials, labor costs). • Cleaning (if not part of preventive maintenance). • Vehicle use needed for installation, preventive maintenance, corrective maintenance, clean- ing, fuel, vehicle maintenance, and procurement and lease costs should be considered. • Lost revenue from closed spaces due to maintenance. • Labor hours and rates (for actions described throughout the Work Breakdown Structure (WBS)). Environmental: GHG reductions. Since a major benefit of investing in new lighting tech- nology in an airport garage is reduced energy consumption, the associated GHG reductions warrant special treatment. In FAA analyses of the economic value of investments in air traffic technologies, an analogous situation often exists where the investment is projected to result in fuel savings. This can be the result, for example, of reduced taxi times or optimized airborne trajecto- ries. Fuel savings are monetized in a straightforward manner by the application of predicted fuel costs, which are provided by the FAA for this purpose (FAA, 2013b). Converting fuel savings to a reduction in GHG emissions is also relatively simple, since the relationship is established by the fuel-combustion process. Table 14 lists conversion factors for jet fuel savings to GHG emissions. A similar approach can be used for converting savings in electrical consumption to reduc- tions in GHG emissions. The U.S. Environmental Protection Agency (EPA) provides a GHG GHG Conversion Factor (lbs per lbs of jet fuel) CO2 3.149 H2O 1.230 SO2 0.000840 Source: Data from FAA 2013b, compiled by MCR Federal Table 14. GHG calculation examples— aircraft fuel savings.

Cost-Benefit Considerations 45 equivalence calculator that can be used for this purpose. The EPA’s calculator uses the Emis- sions and Generation Resource Integrated Database to convert reductions of kilowatt-hours into reductions of CO2 emissions. The EPA estimates a national average equivalence of 1 kWh = 6.8927 × 10-4 metric tons of CO2, using 2010 values (EPA, 2014). For more detailed analyses, regional conversion factors are also available. When comparing alternatives, quantifying the reduction in GHG emissions may be suffi- cient. Monetizing such reductions produces a richer analysis, however, as it allows for the con- sideration of tradeoffs between GHG emissions and other benefits and cost savings. The FAA guidelines for aviation-related BCAs do not include an accepted methodology for monetizing GHG emissions. However, since airport operators are only bound by FAA guidelines for large capacity-related airfield projects, other methodologies can be considered. One potential source is EUROCONTROL’s guidance for the conduct of BCAs (EUROCONTROL, 2013). GHG mon- etization approaches focus on the value of CO2 emissions. Methods exist for converting other GHGs to CO2 equivalents in order to obtain a more complete assessment. The computed CO2 equivalents are then monetized using the same price that is that used for CO2. EUROCONTROL’s recommended practice is based on future prices for the trading of CO2 allowances in the European Emissions Allowance system, which are shown in Table 15. This method could be adopted in the United States by using a U.S. market for trading carbon allowances. One option is the Regional Greenhouse Gas Initiative (RGGI) operated by a group of Northeast and Mid-Atlantic states. In the most recent auction conducted under RGGI, the median price for a one-metric ton CO2 allowance was $4.35 (Potomac Economics, 2014, p. 8). 7.3.8 Other Benefits While this discussion of benefits covers the key benefits likely to result from investments in new lighting technologies for airport parking garages, other benefits should also be considered. These benefits, which generally will be described as qualitative benefits, are described in more detail in the following. Safety. As discussed in the previous chapter, operational safety improvements are likely due to improved vertical illuminance, which improves pedestrian facial recognition and vehicle detection. However, quantifying this effect is difficult, unless a statistical model can be created that links lighting parameters to reductions in safety. Note that lighting-related safety is also influenced by factors that are not directly linked to the lighting technology under consideration, or where the link is partial. Examples include the provision of wayfinding features and the elimi- nation of glare. Security. The link between improved lighting and security, particularly reductions in prop- erty crime, has been established in numerous case studies and encoded in CPTED standards. CPTED guidance covers illuminance, uniformity, glare, and other lighting design parameters that affect security. As security improvements can be difficult to model and quantify, it is likely that security-related benefits should be treated as qualitative benefits. However, if security improvements can be linked to reductions in security-related labor costs or associated equip- ment, then the related benefits can be monetized as airport cost savings. Comfort. Comfort refers to the users’ perception of the lighting environment and is related to color, uniformity and both horizontal and vertical illuminance. For example, at the same illuminance level, white light is perceived to be more comfortable than yellowish light (Knight, 2010). While the existing level of comfort can be quantified using user surveys, these are often not practical for assessing proposed alternatives. Moreover, there is no accepted methodology for Year Low Base High 2014 $3.85 $6.11 $9.30 Source: Data from EUROCONTROL, 2013, compiled by MCR Federal Table 15. CO2 pricing per metric ton.

46 Airport Parking Garage Lighting Solutions monetizing customer comfort. For these reasons, benefits associated with comfort are most likely to be treated as qualitative benefits. Note that there may be interdependencies between comfort- related benefits and other benefits, notably safety and security. Whenever interdependencies exist, care must be taken to avoid double counting the associated benefits. 7.4 Estimating Costs 7.4.1 Work Breakdown Structure A WBS is a mechanism for identifying the set of activities needed to complete an investment decision, from initial planning to decommissioning. The establishment of a formal WBS ensures benefits and costs are identified in a systematic and comprehensive manner. While the WBS is generally established as part of the cost estimating process, it provides a structure for comparing benefits against costs throughout the entire acquisition lifecycle. To establish a WBS for lighting-related projects for airport parking structures, the FAA’s Acquisition Management System (AMS) WBS version 5.0 was used. The cost elements in Table 16 from FAA AMS WBS 5.0 were identified as relevant for evaluating the principal cost and benefit drivers. Each element in the proposed WBS is described in more detail in the following. WBS Element 1.1—Research, Engineering, and Development. Activities associated with exploring new opportunities for service delivery, solving problems with current operations, Phase 1: Mission Analysis 1.1 Research, Engineering, and Development Phase 2: Investment Analysis 2.1 Investment Analysis Phase 3: Solution Implementation 3.1 Hardware 3.2 Integration 3.3 Training 3.4 Program Management 3.5 Systems Engineering 3.6 Test and Evaluation 3.7 Technical Data 3.8 Implementation Planning, Management, and Control 3.9 Implementation Engineering 3.10 Site Preparation, Installation, Test, and Activation Phase 4: In-Service Management 4.1 Maintenance 4.2 Program Planning, Authorization, Management, and Control 4.3 Integrated Logistics Support 4.4 Technical Data 4.5 Hardware Modification and Support 4.6 Utilities 4.7 Decommissioning Source: MCR Federal analysis Table 16. Sample work breakdown structure.

Cost-Benefit Considerations 47 defining and stabilizing requirements, maturing operational concepts, and mitigating risk. These activities generate information to quantify and characterize capability shortfalls, service needs and requirements, benefit expectations, and design alternatives. WBS Element 2.1—Investment Analysis. Activities associated with analyzing alternative solutions in preparation for an investment decision; all activities associated with detailed planning for the alternative selected for implementation; solicitation of offers from potential suppliers; and development of required program documentation. WBS Element 3.1—Hardware. All physical products and equipment procured to accomplish the goals of the investment program. It is expected that hardware will primarily consist of commer- cial off-the-shelf products, though customization may be necessary, in the following categories: • Lamps, • Fixtures, • Controls, • Ballasts/drivers, • Wiring, and • Transformers. While trucks, forklifts, scissor lifts, and/or tools may also be necessary for implementation and maintenance, it is anticipated these assets might also have been needed for the existing lighting infrastructure and therefore may not be an extra expense beyond the status quo. WBS Element 3.2—Integration. Activities associated with technical and engineering services during installation and integration of the technical solution into a larger host system or opera- tional environment. WBS Element 3.3—Training. Activities associated with planning, developing, and establishing training for operators and maintainers. WBS Element 3.4—Program Management. Activities associated with business and admin- istrative planning, organizing, directing, coordinating, controlling, and approval actions to accomplish overall program objectives. WBS Element 3.5—Systems Engineering. Activities associated with planning, directing, and controlling a totally integrated engineering effort for a solution. Specific activities include requirements, definition, and allocation; analysis, design, and integration; supportability, main- tainability, and reliability engineering; quality assurance; interface management; human factors engineering; security engineering; safety engineering; technical risk management; and specialty engineering. WBS Element 3.6—Test and Evaluation. Activities associated with testing during product development to determine whether engineering design and development activities are complete; whether the product will meet specifications, security certification, and authorization criteria; and whether it is operating properly so as to achieve acceptance. WBS Element 3.7—Technical Data. Activities associated with planning and reviewing pro- gram and contractor technical data. Technical data includes items such as engineering draw- ings, notebooks, maintenance handbooks, operator manuals, maintenance manuals, installation drawings, and all contract data deliverables. WBS Element 3.8—Implementation Planning, Management, and Control. Activities associ- ated with implementation planning, control, contract management, and business management. Specific activities include planning, organizing, directing, coordinating, estimating, scheduling, controlling, and approving actions to accomplish program implementation.

48 Airport Parking Garage Lighting Solutions WBS Element 3.9—Implementation Engineering. Engineering activities associated with site surveys, design, analysis, and studies. Specific activities may include civil, electrical, mechanical, architectural, industrial, and other engineering services associated with developing plans and specifications for installation of the technical solution. WBS Element 3.10—Site Preparation, Installation, Test, and Activation. Activities associ- ated with site preparation, installation, acceptance testing, operations testing, and checkout of hardware, software, and equipment to achieve operational status. Specific activities include: • Preparation and installation: Activities associated with site preparation, equipment installa- tion, acceptance testing, and checkout of hardware and software to achieve operational status. • Test and evaluation: Activities to verify and validate operational readiness following installa- tion of the technical solution. • Acceptance inspection and commissioning: Activities associated with preparing for and achieving declaration of operational readiness and full operational capability. • Decommissioning and removal of replaced assets: All activities associated with the termination and removal of a decommissioned system or equipment. WBS Element 4.1—Maintenance. Activities associated with preventive and corrective main- tenance of hardware needed to maintain or restore fielded assets to an operational condition. Specific activities include: • Failure identification • Failure localization and isolation • Disassembly, removal, and replacement or repair in-place • Reassembly, checkout, and condition verification • Packaging and shipping components to repair facilities. WBS Element 4.2—Program Planning, Authorization, Management, and Control. Activi- ties associated with planning, authorizing, and managing actions that must be accomplished for operation and maintenance. WBS Element 4.3—Integrated Logistics Support. Activities associated with executing, moni- toring, evaluating, and adjusting integrated logistics support for systems, facilities, and equipment over their operational life. WBS Element 4.4—Technical Data. Documentation activities, including engineering draw- ings, operator manuals, maintenance manuals, repair and test procedures, logistics management information, and other technical data associated with the operations and maintenance of opera- tional systems, facilities, and equipment. WBS Element 4.5—Hardware Modification and Support. Activities associated with the analysis, design, test, and implementation of modifications during the fielded technical solu- tion’s lifecycle to include tech refresh. WBS Element 4.6—Utilities. Recurring utility costs including water, electric, gas, oil, etc. WBS Element 4.7—Decommissioning. Activities associated with disposition of decommis- sioned systems and equipment at the end of the fielded technical solution’s lifecycle. 7.4.2 Costs Costs are determined by populating the WBS above. This approach sequentially organizes work by functional category. It is important to time phase costs by year, and to capture the lowest level of detail available.

Cost-Benefit Considerations 49 Non-recurring costs. The non-recurring capital-investment costs will be the total expenses incurred in Phases 1 through 3 of the WBS presented above, which includes mission analysis, investment analysis, and solution implementation. The technical solution drives the cost analy- sis, and its development is the focus of the mission and investment analyses. The capital costs will vary considerably depending on the size of the parking structure and the condition of the exist- ing lighting system (if not a greenfield installation) and the extent to which it can be retrofitted for the next-generation lighting solution. There may be parts of the existing system that can be reused in the next-generation system. The physical equipment (WBS Element 3.1) needed for the next-generation lighting system is expected to consist of lamps, fixtures, controls, ballasts/drivers, wiring, and transformers. Determining what may be reused or retrofitted to an existing system may result in costs savings as compared to a greenfield installation. The implementation of the technical solution will span numerous cost elements found in Phase 3. Site preparation, installation, integration, and testing are key steps in the process along with engineering and program management. These activities may involve costs from one or more contracted vendors as well as from program-office staff working for the airport operator. Recurring costs. The recurring costs will stem from the operations- and maintenance-related costs of Phase 4, In-Service Management. There are expected to be several recurring cost drivers. Maintenance will include the preventative and corrective actions needed to maintain the next- generation lighting system throughout its deployed lifecycle. Maintenance costs include the cost of the materials as well as the labor and equipment needed to perform the repair or replacement. Electricity costs of the next-generation lighting systems are expected to be lower through the use of more efficient bulbs and dimming technologies, but may constitute the largest overall cost. Decommissioning may be assumed to be outside the scope of the analysis, if it is assumed the lighting system will still be functioning and necessary at the end of the lifecycle. Program management of operations may not vary significantly from the status quo. 7.5 Lifecycle Economic Value To assess the economic value of a potential investment, benefit and cost streams need to be standardized across the same lifecycle durations and discounted at prevailing rates to determine their respective present values. Benefits can then be compared against costs using evaluation cri- teria such as NPV, BCR, return on investment (ROI), internal rate of return (IRR), and payback period. These methodologies for assessing the lifecycle economic value are described in more detail below. 7.5.1 Quantitative Versus Qualitative Evaluation In determining the economic value of an investment using the BCA methodology, the focus is on quantitative measures, especially those that can be monetized. Advantages of quantified measures include ease of comparison, the ability to analyze the impact of changes, and explana- tory power. The latter can be particularly useful when investment alternatives are reviewed by stakeholders or decision makers. The use of quantified benefits can minimize some of the risks associated with the subjective evaluation of investments, such as the introduction of biases. When investments can be quantified but not monetized, special care must be taken in the use of the resulting benefit computations. In particular, it must be clearly established that the quantified metric represents a system benefit. The links between the investment, the operational

50 Airport Parking Garage Lighting Solutions improvements that follow, and the quantified measure must be clearly defined. Presuming that the benefit in question has been properly vetted and defined, the associated metric can be use- ful in supporting the investment decision, particularly in cases where the monetized economic values of two competing alternatives are close. Qualitative benefits that cannot be expressed numerically can be used to augment the quanti- tative analysis by providing additional background information or highlighting a specific benefit mechanism. They can help stakeholders and decision makers understand differences between alternatives that have similar quantitative benefits. When qualitative aspects are included in the benefits case, the related descriptions should clearly describe the importance of the benefit under discussion. In other words, the mechanism by which the qualitative benefits provide value to the airport or its users must be well defined. 7.5.2 Discounting Most airport investments involve the expenditure of large blocks of resources (represented by costs) at the outset of the project in return for a future flow of benefits. Although these benefits and costs are in the form of dollars, year-to-year benefits and costs cannot simply be summed into totals and then compared. Rather, the analyst must take into account the fact that dollars paid out or earned in the near term are worth more in “present value” than are dollars paid out or earned in the far-term. This procedure establishes whether or not benefits exceed costs for any or all of the alternatives. The alternative that has the greatest net present value is considered the preferred choice. The process of converting future cash flows into present value is called discounting. The opportunity cost of money accounts for the need to discount dollar amounts to account for the passage of time. The opportunity cost of capital reflects the fact that, even without infla- tion, the present value of a dollar to be received a year in the future is less than the value of a dollar in-hand today. A dollar in-hand can be invested immediately and provide a return for a period of one year. A dollar to be received one year from now cannot provide a return for the investor during this period. Discounting requires the application of an annual discount rate to future benefits and costs. The annual discount rate (also known as the marginal rate of return of capital) represents the prevailing level of capital productivity that can be achieved at any particular time by investing resources, i.e., the opportunity cost. Because the FAA recommends the use of constant dollar cash streams, the discount rate should be net of inflation. This net-of-inflation rate is called the real discount rate. The real discount rate relevant to all airport projects to be funded with federal grant funds is set by the FAA at 7% (FAA, 2013b). This value, in turn, is established by guidance provided by the Office of Management and Budget (OMB, 1992). Note that for airport parking garage lighting applications, airports may not be required to use the FAA-specified discount rate. In that case, the airport should follow its internal guidance or use its own best estimate of the opportunity cost of money. Note that the process of discounting tends to put more weight on costs than on benefits. This is because costs tend to accrue earlier in the lifecycle of an investment, and discounting increases as time increases. 7.5.3 Legacy Case The legacy case represents the current lighting system and operating conditions, as well as near-term changes in assets, systems, facilities, people and processes that have already been funded. It does not include any additional investment (e.g., technology refreshment of system

Cost-Benefit Considerations 51 components) beyond what is already included in a program’s most recent budget approval. The legacy case service period typically differs from proposed alternatives, as its remaining economic service life is frequently less than the lifecycle of the proposed improvements. Economic analysis in support of investment decisions requires the lifecycle period of the legacy case to match that of the alternatives under considerations. This frequently necessitates the modeling of a legacy case refresh of hardware and software of similar capability (i.e., with no improved functionality), in order to match the lifecycles of the alternatives under evaluation. 7.5.4 Metrics The present value of incremental costs and benefits can be compared in a variety of ways to determine which, if any, option is most worth pursuing. In some cases, no alternative will gener- ate a net benefit relative to the base case—a finding that would argue for pursuit of the no-build or base-case scenario. The following are the most widely used present-value comparison methods: NPV, ROI, BCR, IRR, and payback period. These metrics are the key instruments used to measure the net economic value of an investment. In general, they are only applied to benefits and costs that can be monetized. Net present value is defined as the difference between the present value of cash inflows (ben- efits) and the present value of cash outflows (costs). The present value of benefits or costs is calculated as: PV FV i n( )= +1 where: PV is present value FV is future value i is discount rate n is period The factor used to discount future value is a function of the discount rate and the year in the lifecycle. Since a discount rate of 7% is standard for aviation investments, the resulting factors are independent of the investment under consideration. Computations for a 10-year lifecycle beginning FY 2014 are shown in Table 17. The NPV method requires that in order to warrant investment of funds, an alternative must have a positive NPV, and have the highest NPV of all tested alternatives. The first condition ensures that the alternative is worth undertaking relative to the base case, i.e., it contributes more in incremental benefits than it absorbs in incremental costs. The second condition ensures that maximum benefits (in a situation of unrestricted access to capital funds) are obtained. NPV is the most widely used and theoretically accurate economic method for select- ing among investment alternatives. However, NPV does have certain conceptual and analytical Fiscal Year: 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 PV Factor: 1.0000 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 Source: MCR Federal analysis Table 17. Factors for calculating present value.

52 Airport Parking Garage Lighting Solutions limitations, which makes consideration of other present-value-evaluation methods appropri- ate in some instances. Return on investment. ROI provides a relative measure of the NPV. It can be used to com- pare different alternatives (although care must be taken to make sure the assumptions are consis- tent across the comparison). It is defined as the NPV divided by the present value of the lifecycle costs (i.e., discounted costs). Benefit-cost ratio. The BCR is defined as the present value of benefits divided by the pres- ent value of costs. A proposed activity with a ratio of discounted benefits to costs of one or more will return at least as much in benefits as it costs to undertake, indicating that the activity is worth undertaking. The principal advantage of the benefit-cost ratio is that it is intuitively understood by most people. Moreover, this method does provide a correct answer as to which objectives should be undertaken—defined as those with ratios greater than or equal to one. It is also less effective for comparing mutually exclusive projects of different scale or different levels of capital intensity and operating expense. Finally, scoping issues regarding the inclusion of common costs and benefits can cause variability in the derived BCR that the NPV methodol- ogy avoids. The BCR is computed as the present value of benefits divided by the present value of costs. The ratio measures efficiency of spending. The decision criterion is usually to accept only projects with a BCR greater than one, which indicates a positive NPV. An advantage of BCR is that it ignores project size, and therefore does not result in bias towards larger projects. This method is suitable for alternatives with unequal costs and unequal benefits. For monetized benefits, the BCR allows for analogies. For example, if the BCR = 2, the analogy is that for every $1 spent, there are $2 in benefits. Internal rate of return. IRR is defined as that discount rate which equates the present value of the stream of expected benefits in excess of expected costs to zero. In other words, it is the highest discount rate at which the project will not have a negative NPV. To apply the IRR criterion, it is necessary to compute the IRR and then compare it with the FAA-prescribed 7% discount rate or another discount rate used. A project with a higher IRR should generally be accepted over one with a lower IRR. If the real IRR is less than 7%, the project may not be worth undertaking relative to the base case. Payback period. The payback period measures the number of years required for the net ben- efits to recover the initial investment in a project. In other words, it measures the time required to recover a project’s original investment with discounted cash flows. Alternatives with shorter payback periods are generally preferred over those with longer periods. One characteristic of this evaluation method is that it favors projects with near-term benefits. However, the payback period method fails to consider benefits beyond the payback period. Also, it does not provide any information on whether an investment is worth undertaking in the first place. 7.5.5 Risk Adjustment BCA risk adjustment is an objective evaluation of the proposed investment to quantify the impact of uncertainty in the lifecycle of the investment. The estimation of benefits and costs is forward-looking, and therefore predictive in nature. Risk analysis provides methods for incorporating the probabilistic nature of such predictions. Identification and quantification of cost, benefit, and schedule risks enable the development of risk-adjusted estimates. Accounting for risk increases the likelihood that the delivered product will meet stated performance goals. Generally, three methods are used (Landau and Weisbrod, 2009):

Cost-Benefit Considerations 53 • Sensitivity analysis, where variations in the results are observed by changing one or several input variables at a time. Variables that are highly sensitive should be the focus of the subse- quent risk adjustment and stakeholder reviews. • Probabilistic methods, where distributions are applied to some or all input variables and sam- pling techniques are used to determine distributions surrounding the resulting metrics. • Scenario-based methods, where “low,” “medium,” and “high” scenarios incorporate varying degrees of pessimism or optimism about growth in demand or savings associated with future projects. A benefit of using probabilistic methods is that they allow the benefits and costs to be stated as confidence intervals. This type of analysis is performed by identifying key drivers of uncertainties in the benefits and costs. These variables are then assigned appropriate risk ranges, expressed as probability distributions. Variables that are associated with higher levels of uncertainty and variability are assigned greater risk ranges. Software tools such as Crystal Ball can then be used to calculate confidence intervals using a Monte Carlo simulation that runs a large number of iterations of benefit and cost estimates, using the probabilistic benefit and cost drivers as inputs. To ensure that the resulting BCA is conservative, it is standard practice to use the 20th percentile of the resulting benefit distribution and the 80th percentile of the cost distribution.