Guidance for Calculating the Return on Investment in Transit State of Good Repair (2019)

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45 C H A P T E R 4 Introduction This chapter provides step-by-step instructions on using the Return on Investment Calcula- tor developed as part of this research project and accompanying this report. The instructions include detailed explanations of the input requirements, the methodology behind the tool, and information on interpreting the results. Two worked examples are also provided to illustrate the use of the tool. Tool Overview The Return on Investment Calculator tool is a Microsoft Excel spreadsheet and is designed to run on Microsoft Excel 2010 or higher. The tool is composed of the following four worksheets: • Inputs • Cost Profiles • Calculations • Results The tool is configured to analyze a specific SGR investment or program of investments for one or two transit modes. For analyses of more than two modes, one can perform multiple analyses using the tool and sum the resulting costs and benefits to determine the overall return for the analysis. The Inputs worksheet is the only sheet requiring user input. A detailed explanation of the data input will be discussed in the following sections. The Cost Profiles and Calculations worksheets are pre-populated sheets used to perform the ROI calculations. The Results worksheet presents the Return on Investment Calculator results in the form of graphs and summary tables. The tool is designed to perform ROI calculations on two modes simultane- ously. If only one mode is analyzed, the inputs of the second mode can be left blank. The cells are color coded for easy differentiation between cells requiring user input and cells with tool calculation formulas that should not be edited. The color scheme is explained in Figure 4-1. There are no locked fields or calculations in the tool, and the tool does not utilize plug-ins or macros. The outputs of the tool are calculated automatically as inputs are updated, and the results are presented in the Results worksheet. Tool Documentation

46 Guidance for Calculating the Return on Investment in Transit State of Good Repair Inputs The Inputs worksheet contains the necessary parameters required for the ROI calculations. The worksheet includes general parameters, parameters for base and investment case, and EJT results. The operation and maintenance parameters and demand modeling parameters are dis- played when appropriate options are selected in the General Parameters section. Parameters The following steps describe the process of entering the parameters in the Required Param- eters, General Parameters, and Automobile-Related Parameters sections of the Return on Investment Calculator. The tool contains default values for most of these parameters that the user may choose to override in the Override (blue) column. The user can add notes on any over- ride values in the notes column. The parameters are shown in Figure 4-2. [Light Blue] User input needed [White] Contains constant or formula: Should not be edited or changed by the user [Light Grey] Description or default value used by the tool; Should not be edited or changed by the user Figure 4-1. Tool color scheme. Figure 4-2. Required, General, and Automobile-Related Parameters.

Tool Documentation 47 The items in the Required Parameters section are needed for any analysis and may change from one analysis to another. These are as follows: 1. Analysis Start Year. Beginning or base year of the analysis. 2. Analysis Period (years). Period over which costs and benefits are tabulated. 3. Annual Transit Trips (millions)—Mode 1. Annual transit trips for Mode 1 as of the base year. A value must be entered here to support calculation of user benefits. 4. Annual Transit Trips (millions)—Mode 2. Annual transit trips for Mode 2 as of the base year. Leave blank if only one mode is being analyzed. 5. Predict Year-by-Year Costs Based on Average Age? Specifies whether to predict year-by-year agency O&M costs, energy costs, and fuel consumption using base year values and changes in average asset age, or to use user-specified year-by-year values. By default, this parameter is set to Yes, meaning that values will be predicted using base year values and changes in average asset age. 6. Travel Demand Model Used? Specifies whether or not results from a travel demand model should be used for predicting changes in transit ridership and automobile travel. If No is selected, which is the default, then changes in ridership and automobile travel are predicted based on the changes in EJT using the estimate of elasticity of demand with respect to time. If Yes is selected, then additional fields are shown (described below) for entering travel demand model results. 7. Calculate Additional Auto Congestion Cost? Specifies whether an additional congestion cost is calculated based on the change in VMT for automobiles. This is the cost—to other road users and society—of the congestion caused by each additional vehicle mile. By default, this value is set to No if a travel demand model is used and Yes if it is not, since a travel demand model typically incorporates congestion effects. The items in the General Parameters section are needed for any analysis but typically will not change from one analysis to another. All of these parameters are populated with defaults based on review of the available literature. Chapter 2 discusses the derivation of the default values. The parameters in this section are as follows: 1. Discount Rate. This rate reflects the time rate of money and is used for calculating the present value of future costs and benefits. The default value is 4 percent. 2. Personal Value of Time ($/hr). This parameter represents the cost to a transit passenger or automobile occupant in changes in travel time. The default value is $12.88 per hour. 3. Environmental Cost per Gallon of Fuel—Transit ($). This parameter represents the cost to society of consumption of a gallon of fuel, including air, noise, and water pollution. The default value is $0.46 per gallon of diesel fuel. 4. Elasticity of Transit Demand wrt Time. This parameter represents the change in transit demand with respect to time (measured using EJT). The default value is −1.00, meaning that transit demand decreases proportionally to increases in time traveled. This parameter is used only in cases where the parameter Transit Demand Model Used? is set to No. 5. Percentage of Change in Trips to/from Autos. This represents the percentage of lost transit trips that results in additional automobile trips, and likewise the percentage of new transit trips that results from a shift from automobiles to transit. The default value is 56 percent. This parameter is used only in cases where the parameter Transit Demand Model Used? is set to No. The items in the Automobile-Related Parameters section are used to quantify costs specifically associated with changes in automobile use. These parameters typically will not change from one analysis to another and are populated with defaults based on review of the available literature. Chapter 2 discusses the derivation of the default values. The parameters in this section are as follows: 1. Auto Operating Cost ($/mi). This represents the average cost per mile to an automobile user to operate an automobile considering fixed and variable costs such as fuel, oil, tires, and maintenance. The default value is $0.54 per mile.

48 Guidance for Calculating the Return on Investment in Transit State of Good Repair 2. Environmental Cost of Autos ($/mi). This parameter represents the cost to society of each automobile mile driven, including air, noise, and water pollution. The default value is $0.07 per mile. 3. Additional Auto Congestion Cost ($/mi). This parameter represents the cost—to other road users and society—of the congestion caused by each additional vehicle mile. The default value is $0.04 per mile. This parameter is used only in cases where the parameter Calculate Additional Auto Congestion Cost? is set to Yes. 4. Average Vehicle Occupancy (people/vehicle). This is the average number of occupants per vehicle. The default value is 1.1. 5. Average Auto Trip Length (miles). This is the average length in miles of an automobile trip that substitutes for a transit trip. The default value is 5 miles. 6. Average Auto Trip Duration (minutes). This is the average duration in minutes of an automobile trip that substitutes for a transit trip. The default value is 22 minutes. Initial O&M Cost Values This input table appears when the response to Predict Year-by-Year Costs Based on Average Age? is Yes. This section requires users to input the details required to predict year-by- year costs based on average age of the assets. A snapshot of the table is presented in Figure 4-3. The parameters in this section are as follows: 1. Mode. Type of transit mode to model. Four options are available in the dropdown: Bus, Light Rail, Heavy Rail, and Commuter Rail. Other modes should be represented using one of these, using Bus for cases where vehicles have an expected life of 10 to 20 years, and Light Rail for cases where vehicles have a longer life. If only one mode is being analyzed, leave the Mode 2 column blank. 2. Energy Cost ($ millions). Specifies the cost of energy consumption (e.g., fuel or electricity) for each mode in the base year in millions of dollars. 3. Agency Energy Consumption (000 gallons). Specifies thousands of gallons of fuel con- sumed for each mode in the base year. This field should be left blank in cases where no fuel is used for the mode or if the mode is not being analyzed. 4. Other Agency O&M Costs—Vehicles ($ millions). Specifies O&M costs for vehicles in the base year for each mode in millions of dollars. This should be left blank if vehicles are not being analyzed, or if the mode is not in use. 5. Other Agency O&M Costs—Guideway ($ millions). Specifies O&M costs for guide- way in the base year for each mode in millions of dollars. This should be left blank if Figure 4-3. Initial O&M Cost Values.

Tool Documentation 49 the mode includes no guideway, if guideway is not being analyzed, or if the mode is not in use. 6. Other Agency O&M Costs—Facilities ($ millions). Specifies O&M costs for facilities in the base year for each mode in millions of dollars. This should be left blank if the mode includes no facilities, if facilities are not being analyzed, or if the mode is not in use. 7. Other Agency O&M Costs—Other ($ millions). Specifies O&M costs for other assets not included as vehicles, guideway, or facilities, such as support systems. These costs are specified in millions of dollars. This should be left blank if there are no such costs to include, or the mode is not in use. 8. Average Age—Vehicles (years). Specifies the average age for vehicles for each mode. Changes in age are used to predict future O&M costs. This should be populated in cases where the corresponding base year cost is populated. 9. Average Age—Guideway (years). Specifies the average age for guideway for each mode. Changes in age are used to predict future O&M costs. This should be populated in cases where the corresponding base year cost is populated. 10. Average Age—Facilities (years). Specifies the average age for facilities for each mode. Changes in age are used to predict future O&M costs. This should be populated in cases where the corresponding base year cost is populated. 11. Average Age—Other (years). Specifies the average age for other assets for each mode. Changes in age are used to predict future O&M costs. This should be populated in cases where the corresponding base year cost is populated. Base Case Values by Year and Investment Case Values by Year In these sections, one specifies values by year for the base and investment cases, defined as described in the guidance in Chapter 3. The specific fields shown in these sections depend on the value specified for the parameter Predict Year-by-Year Costs Based on Average Age? If the user enters Yes for this option, then for each case he or she must specify: • Capital Investments ($ millions). Capital costs by year in millions of constant dollars. • Other Investments ($ millions). Other non-capital costs by year in millions of constant dollars, if relevant. These are included as costs in calculating BCR. • Average Age (years). Average age for each mode and asset group described above. Values are required only for cases where base year values are populated. • Other Social Costs ($ millions). Other social costs not otherwise captured in the analysis, if relevant. These are specified in millions of constant dollars. A snapshot of the input table in this case is presented in Figure 4-4. If the user enters No for the parameter Predict Year-by-Year Costs Based on Average Age?, then for each case he or she must specify: • Capital Investments ($ millions). Capital costs by year in millions of constant dollars. • Other Investments ($ millions). Other non-capital costs by year in millions of constant dollars, if relevant. These are included as costs in calculating BCR. • Energy Costs ($ millions). Energy costs by year in millions of constant dollars. • Agency Energy Consumption (000 gallons). Energy consumption by year in thousands of gallons of fuel. These fields should be left blank in cases where no fuel is consumed for the assets being analyzed. • Other Agency O&M Costs ($ millions). Other O&M costs besides energy consumption by year in millions of constant dollars. • Other Social Costs ($ millions). Other social costs not otherwise captured in the analysis, if relevant. These are specified in millions of constant dollars. A snapshot of the input table in this case is presented in Figure 4-5.

Figure 4-4. Snapshot of base case and investment case tables if year-by-year cost predicted by age is selected.

Figure 4-5. Snapshot of base case and investment case tables if year-by-year cost prediction by age is not selected.

52 Guidance for Calculating the Return on Investment in Transit State of Good Repair Figure 4-6. Effective Journey Time Results. Other Parameters This section has only one input parameter, Investment Need ($ millions), in which the user needs to input the initial value of investment need, and the future value for base case and invest- ment case scenario. These values should be specified in millions of constant dollars. The change in investment need, if specified, is used to determine the change in residual value for the invest- ment case, as discussed in Chapter 3. Effective Journey Time Results This section of the Inputs sheet requires the results of the EJT calculation for both modes. These results can be obtained by using the EJT Calculator tool developed as a part of TCRP Research Report 198 (described previously). Four values are specified for each of two modes: 1) the initial value in the base year; 2) the value at the end of the analysis period for the base case; 3) the value in the second year of the analysis period in the investment case (following any initial investments); and 3) the value at the end of the analysis period in the investment case. The values can be left blank if the mode is unused. The parameters for EJT are shown in the Figure 4-6. In this example, the analysis start year is 2018 and a 20-year analysis period is specified. Travel Demand Model Results If the user selects Yes in the question of Travel Demand Model Used?, then the table of travel demand model results is shown at the bottom of the Inputs sheet. This table needs to be populated by the results obtained from the travel demand model for the modes. An initial value and future values for the base and investment cases should be populated for the following: • Annual Transit Trips Modeled (millions)—Mode 1. Millions of transit trips modeled for Mode 1. Typically, this value will be equal to the value for the parameter Annual Transit Trips (millions)—Mode 1. If the two are different, the travel demand model results are scaled accordingly. • Annual Transit Trips Modeled (millions)—Mode 2. Millions of transit trips modeled for Mode 2. Typically, this value will be equal to the value for the parameter Annual Transit Trips (millions)—Mode 2. If the two are different, the travel demand model results are scaled accordingly. • Annual Auto VMT (millions). Millions of automobile VMT. • Annual Auto VHT (millions). Millions of automobile VHT. Figure 4-7 presents a snapshot of the table. Cost Profile The Cost Profile worksheet in the tool is used to predict the year-by-year costs based on average age. Appendix C describes the derivation of the cost profiles shown on this sheet. This sheet should not be edited or deleted by the user.

Tool Documentation 53 Calculations The Calculations worksheet contains year-by-year calculations of costs and benefits. This sheet should not be edited or deleted by the user. Results The Results worksheet contains the summary outputs of the Return on Investment Calcu- lator. There are four summary tables and two summary charts, each showing the estimated benefits and costs of implementing the investment scenario. The cells in this worksheet are all calculated from other inputs and should not be edited. The results automatically update when the Inputs worksheet is edited. The four tables are Summary Measures; Agency Benefits; User Benefits; and other Social Benefits of the invest- ment. The two charts are Summary Results and Benefits of Investment. A partial view of the Summary Results worksheet is shown in Figure 4-8. Summary Measures The Summary Measures section, shown in Figure 4-9, summarizes the total costs and benefits of the potential improvements from the investment in discounted and undiscounted terms. Costs and benefits are calculated by subtracting base case costs from investment case costs. The ben- efits are organized into three categories: Agency, User, and Social. The costs are organized into two categories: Capital Investments and Other Investments. These subtotals are calculated by summing the costs and benefits estimated in the other sections of this worksheet. The present value of the subtotals is presented as a chart in Summary Results. The results of the ROI calculation are summarized using the following four ROI measures: • Net Present Value (NPV) shows what the investment is “worth” in today’s dollars. It is calculated as the present value of the benefits (i.e., the entire stream of benefits discounted to the present) less the present value of the costs (including initial capital costs and other costs discounted to the present). An investment with an NPV greater than 0 is deemed to be worthwhile. • Benefit/Cost Ratio (BCR) is the ratio of the benefits of the investment to its costs. The ratio is calculated as the present value of the benefits divided by the present value of the costs. A BCR greater than 1 indicates that the benefits of the investment outweigh its costs. Note that in calculating BCR, changes in capital investments and other investments are treated as costs, while changes in other transit agency, user, and social costs are treated as benefits (or disbenefits in the case that they increase). • Internal Rate of Return (IRR) is the discount rate at which benefits and costs are equal. IRR is expressed as a percentage. A project with an IRR greater than the discount rate used for the analysis has benefits greater than costs and a positive economic value. IRR allows projects with different costs, different benefit flows, and different time periods to be compared. Figure 4-7. Travel Demand Model Results.

Figure 4-8. Results worksheet.

Tool Documentation 55 • Payback Period is the number of years it takes for the net benefits (benefits minus costs) to equal, or to pay back, the initial investment costs. The calculation of payback period is made using undiscounted costs. The payback period varies inversely with BCR. That is, a shorter payback period yields a higher BCR. Agency Benefits This section shows the estimated agency benefits broken down into categories of Reduced Energy Costs, Reduced Other O&M Costs, and Increased Residual Value in both discounted and undiscounted terms. Figure 4-10 shows the agency benefits table. User Benefits This section shows the estimated user benefits broken down into categories of Reduced Transit Travel Time, Reduced Automobile Travel Time, Reduced Vehicle Operating Costs, and Increased Consumer Surplus. User benefits are predicted in cases where EJT is reduced and/or trips are shifted from automobiles to transit. The change in consumer surplus captures offsetting effects of travel time changes resulting from mode shifts. Figure 4-11 shows the user benefits table. Figure 4-9. Summary Measures. Figure 4-10. Agency Benefits.

56 Guidance for Calculating the Return on Investment in Transit State of Good Repair Social Benefits This section shows the estimated social benefits broken down into categories of Reduced Emissions—Transit, Reduced Emissions—Autos, Reduced Automobile Congestion, and Reduced Other Social Costs. Figure 4-12 shows the social benefits table. Summary Results Chart The Summary Results Chart, shown in Figure 4-13, displays the estimates from the Summary Measures table, showing benefits as a stacked column rising above the x-axis and costs as a stacked column descending below the x-axis. The benefits and costs are broken down by type. Benefits of Investment Chart Figure 4-14 shows the benefits of investment scenario in a chart format. The present values of the benefits are presented as stacked columns, one for agency benefits and the other for user/ social benefits. Worked Example This section presents two worked examples illustrating the use of the tool. These examples use illustrative data and are intended to help users understand the tool and how it might be applied in practice. See the pilots in Chapter 6 for practical, real-world examples of using the tool as well. Example 1: Single Mode Analysis The first worked example demonstrates the ROI analysis for the single mode of light rail and uses all default parameters in the tool where applicable. This example illustrates the impact Figure 4-11. User Benefits. Figure 4-12. Social Benefits.

Tool Documentation 57 Figure 4-13. Summary Results chart. Figure 4-14. Benefits of Investment chart.

58 Guidance for Calculating the Return on Investment in Transit State of Good Repair of deferring major capital investments over a 20-year period. In the base case of this example, capital investments are deferred until the year 2033. In the investment case, there is an upfront, initial capital investment and then another investment in year 2029. Note that all input values are for illustrative purposes only. Input Data This section illustrates the input requirements for the ROI analysis of one mode of transit. Inputs are provided for the general parameters, initial O&M cost data, investment data for base case and investment case across the analysis period, investment needs for base case and invest- ment case scenarios, and EJT results for the mode of transit. Step 1: Enter the Required, General, and Automobile-Related Parameters. The default input of the tool is used for all available parameters, thus the only required input is the annual transit trip in millions. As the analysis is only for one mode, the annual transit trips data for Mode 1 is entered and the data cell for Mode 2 is left blank. The completed table is illustrated in Figure 4-15. Step 2: Enter Initial O&M Cost Values. The entirety of this table is visible because the default option of predicting year-by-year cost based on average age in the General Parameters Figure 4-15. Example 1 parameters.

Tool Documentation 59 section is Yes. Select Light Rail from the dropdown in the Mode description cell and enter the data as presented in Figure 4-16. This table requires input of the initial operations and main- tenance cost of the transit mode before the analysis period. As the analysis is only for one mode, the second column remains blank. Step 3: Enter the Base Case Value by Year. Enter the base case capital and other investment values over the analysis period. Also enter the average age of vehicles, guideway, facilities, and other infrastructure for Mode 1. Note in this case the age increases for each asset type through- out the analysis period. Figure 4-17 shows the illustrative values to enter. The average age for the transit mode elements is required to predict the year-by-year cost. As the analysis is only for one mode, the data cells corresponding to Mode 2 are left blank. Step 4: Enter the Investment Case Values by Year. Enter the investment case capital and other investment values over the analysis period. Also enter the average age of vehicles, guide- way, facilities, and other infrastructure for Mode 1. Note in this case that the age remains constant for each asset type. Use the illustrative values in Figure 4-18. The average age for the transit mode elements is required to predict the year-by-year cost. As the analysis is only for one mode, the data cells corresponding to Mode 2 are left blank. Step 5: Enter Other Parameters and EJT Results. Enter the initial value and future value of investment need for the base case and investment case scenarios and the EJT results for the transit mode from the data presented in Figure 4-19. The EJT results are obtained using the EJT Calculator developed as a part of TCRP Research Report 198. Review Results Figure 4-20 shows the summary values of the agency, user, social, and total benefits and costs of the investment case scenario. The values are presented in undiscounted dollars and in present value dollars. The figure indicates that the NPV of the investment case is approximately $265 million. The benefit–cost ratio of 1.49 indicates that every dollar of investment yields a benefit of 1.49 dollars over the analysis period. The internal rate of return is 21.70 percent, which is higher than the 4 percent discount rate, indicating the investment has benefits greater than costs and a positive economic value. Figure 4-16. Example 1 Initial O&M Cost Values.

Figure 4-17. Example 1 Base Case Values by Year. Figure 4-18. Example 1 Investment Case Values by Year.

Tool Documentation 61 Figure 4-19. Example 1 Other Parameters and EJT Results input. Figure 4-20. Example 1 results—Summary Measures. Example 2: Two Modes Analysis The second example illustrates how to use the tool with two different modes of transit. This example uses alternative options to the default options in the tool to illustrate how the tool works in such scenarios. All input values are for illustrative purpose only. Input Data This section illustrates the input requirements for the ROI analysis of two modes of transit. Inputs are provided for the general parameters, investment data for base case and investment case across the analysis period, investment needs for base case and investment case scenarios, EJT results for both the modes of transit, and the travel demand model results. Step 1: Enter the Required, General, and Automobile-Related Parameters. In this example, the default options in the general parameters are changed. Specifically, the value for Predict Year-by-Year Costs Based on Average Age is set to No, and the value for Travel Demand Model Used is set to Yes. All other default input values remain the same. The annual transit trips value for Mode 1 and 2 is added. The completed table is illustrated in Figure 4-21.

62 Guidance for Calculating the Return on Investment in Transit State of Good Repair Figure 4-21. Example 2 Required, General, and Automobile-Related Parameters. Step 2: Enter the Base Case Value by Year. Enter the base case capital and other invest- ment values over the analysis period. Also enter the energy cost, agency energy consumption, other agency O&M costs, and other social cost predictions for the analysis period. These costs are total costs for both the modes. These values need to be entered, as we chose not to predict year-by-year cost by the tool in the general parameters. The values are shown in Figure 4-22. Step 3: Enter the Investment Case Values by Year. Enter the investment case capital and other investment values over the analysis period. Also enter the energy cost, agency energy con- sumption, other agency O&M costs, and other social cost predictions for the analysis period as a total of both the modes. The values are shown in Figure 4-23. Step 4: Enter Other Parameters and EJT Results. Enter the initial value and future value of investment need for the base case and investment case scenarios and the EJT results for both the transit modes from the data presented in Figure 4-24. The EJT results are obtained using the EJT Calculator developed as a part of TCRP Research Report 198. Step 5: Enter the Travel Demand Model Results. Enter the results of the travel demand model with the initial and future value of annual transit trips for both modes and annual auto VMT and VHT for base case and investment case scenarios. This table is filled as the option of using travel demand model was selected in the general parameters section in Step 1. Figure 4-25 shows the data input for travel demand model results.

Figure 4-22. Example 2 Base Case Values by Year. Figure 4-23. Example 2 Investment Case Values by Year.

64 Guidance for Calculating the Return on Investment in Transit State of Good Repair Review Results Figure 4-26 presents the summary values of the agency, user, social, and total benefits and costs of the investment case scenario. The values are presented in undiscounted dollars and in the present value dollars. The figure shows that the NPV of the investment case is approximately $644 million. The benefit–cost ratio of 2.20 indicates that every dollar of investment yields a benefit of 2.20 dollars over the analysis period. The internal rate of return is 28.19 percent, which is higher than the 4 percent discount rate, indicating the investment has benefits greater than costs and a positive economic value. Figure 4-24. Example 2 Other Parameters and EJT Results. Figure 4-25. Example 2 Travel Demand Model Results. Figure 4-26. Example 2 results—Summary Measures.