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Session #6: Economic Appraisal and Prioritization

HSM Roadway Safety Management Process. Session #6: Economic Appraisal and Prioritization. HSM Economic Appraisals and Prioritization Methods. Describe the Economic Appraisal Process Converting Crash Reduction Benefits to Present Value Dollars Describe the Project Prioritization Process

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Session #6: Economic Appraisal and Prioritization

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  1. HSM Roadway Safety Management Process Session #6: Economic Appraisal and Prioritization

  2. HSM Economic Appraisals and Prioritization Methods • Describe the Economic Appraisal Process • Converting Crash Reduction Benefits to Present Value Dollars • Describe the Project Prioritization Process • Ranking Projects by Economic Effectiveness Measures Learning Outcomes:

  3. Part B: Road Safety Management Process

  4. Determine if a project is economically justified Identify projects with the greatest value for the investment Engineering Economics

  5. HSM Part B – Economic Appraisal Estimate Crash Costs/Benefits • Estimate Change in Crashes • Use Part C – Predictive Methods • 2. Compute Annual Monetary Value • Societal Crash Costs by Severity • Translate Crashes into Dollars • 3. Convert to Present Value (PV) • Accounts for service life (“resilience”) and discount (Return On Investment)

  6. Crash Severity Categories K • K crash • One or more persons died within 30 days • A crash • Incapacitating injury • B crash • Non-incapacitating evident injury • C crash • Possible injury • O crash • No injuries - reportable property damage A B C O

  7. HSM Part B – Economic Appraisal Cost of Crashes by Severity Source: FHWA-HRT-05-051, October 2005

  8. HSM Part B – Economic Appraisal Estimate Project Costs • Estimate All Project-Related Costs • Up-Front Costs (e.g. Const, ROW) • Recurring Costs (e.g. Maintenance) • 2. Convert to Present Value (PV) • Up-Front already is PV

  9. Net Present Value: • A project with a NPV > zero = economically justified • Ranked from the highest to lowest NPV. • 2) Benefit-Cost Ratio: • Ratio > 1.0 = economically justified • Ranked from highest to lowest BCR • not valid for prioritizing multiple projects or multiple alternatives for a single project – (incremental benefit-cost analysis) • 3) Cost Effectiveness Index: • Related directly to project costs • Expressed as the annual cost per crash reduced • Ranked from the lowest to highest CEI Evaluation Methods

  10. HSM Part B – Economic Appraisal Convert Annual Benefits to Present Value * Equation slightly different if non-uniform

  11. HSM Part B – Economic Appraisal • Example: • reduce 5 fatal/injury crashes per year • reduce 11 PDO crashes per year • Project Cost (PVcost) = $3.0 M NPV = $3.9 M – 3.0 M = $0.9 M NPV >0 = justified

  12. HSM Part B – Prioritize Projects Prioritize Projects Chapter 8 • Economically justified improvements • Specific sites • Across multiple sites • Improvement projects • Cost • Mobility • Environmental impacts

  13. HSM Part B – Prioritize Projects Prioritization Methods • Ranking by economic effectiveness measures • Incremental benefit-cost analysis ranking • Optimization methods

  14. HSM Part B – Prioritize Projects Ranking by Economic Effectiveness Measures • Project costs, • Monetary value of project benefits, • Number of total crashes reduced, • Number of fatal and incapacitating injury crashes reduced, • Number of fatal and injury crashes reduced, • Cost-effectiveness index, and • Net present value (NPV)

  15. HSM Part B – Prioritize Projects Ranking by NPV (benefits – costs) Ranking by CEI (cost to reduce crash)

  16. HSM Part B – Prioritize Projects • Benefit/Cost Ratio • Used to determine the most valuable countermeasure(s) for a specific site or to evaluate economic justification of individual projects • Not valid for prioritizing multiple projects or multiple alternatives for a single project • As long as B/C Ratio > 1.0 OK (“EJ”) • Incremental B/C Ratio • Compares multiple alternatives/projects to each other to ensure that for every additional dollar (increment) spent, an equivalent (or better) incremental benefitis obtained

  17. Benefit/Cost Analysis HSM Part B – Prioritize Projects B/C = $1,800,268/$500,000 = 3.6

  18. HSM Part B – Prioritize Projects Incremental Benefit-Cost Analysis -An extension of the benefit-cost ratio (BCR) method Perform a BCR evaluation for each improvement project Arrange projects with a BCR > 1.0 in increasing order based on their estimated cost Beginning at the top of the list, calculate the difference between the first and second project’s benefits and cost, If the BCR > 1.0, the project with the higher cost is compared to the next project. If the BCR < 1.0, the project with the lower cost is compared to the next project Repeat this process. The project selected in the last pairing is considered the best economic investment

  19. HSM Exercise III – Prioritize Projects Incremental BCR • Step 3: Compute IBCR for 1st Pair of Projects PVbenefits 2 – PVbenefits 1 PVcosts 2 – PVcosts 1 Incremental BCR = Where: PVbenefits 1 = Present value of benefits for lower-cost project PVbenefits 2 = Present value of benefits for higher-cost project PVcosts 1 = Present value of cost for lower-cost project PVcosts 2 = Present value of cost for higher-cost project

  20. HSM Part B – Prioritize Projects Ranking by BCR Ranking by Incremental BCR Example in next few slides Incremental BCR = (PVbenefits 2 – PVbenefits 1) / (PVcosts 2 – PVcosts 1)

  21. Incremental Benefit/Cost Analysis HSM Part B – Prioritize Projects B/C between site 1 and 2 = $3,255,892 - $1,800,268 = 2.08 > 1.0 therefore $1,200,000 - $500,000 Alt. 1 no longer good

  22. Incremental Benefit/Cost Analysis HSM Part B – Prioritize Projects B/C between site 2 and 3 = $2,566,476 - $3,255,892= -9.85 < 1.0 therefore $1,270,000 - $1,200,000 Alt. 3 doesn’t make sense Stay with Alt. 2

  23. Incremental Benefit/Cost Analysis HSM Part B – Prioritize Projects B/C between site 2 and 4 = $3,958,768 - $3,255,892 = $2,100,000 - $1,200,000 0.78 < 1.0 Therefore Alt. 4 doesn’t make sense, Stay with Alt. 2 Alternative 2 is the best!!

  24. Prioritization Methods Optimization Maximize benefits within a fixed budget and other constraints • Linear programming • Integer programming • Most widely used • Usable with MS Excel and with Safety Analyst • Dynamic programming (see HSM Section 8.2.2)

  25. How Do We Properly Consider “Other” Factors? HSM Part B – Prioritize Projects

  26. Project Prioritization - Example Goals Weighting HSM Part B – Prioritize Projects

  27. Multi-Objective Resource Allocation Alternative A Weight Criterion Performance Measures MeasuredValue CriterionScore 25 = 4 100 X Affordability 35 3 X Improve Safety = 7 40 280 X Score for Alternative A ReduceCongestion 210 = 35 6 X C C C Score for Alternative A 590 HSM Part B – Prioritize Projects Alternative C Criterion Performance Measures MeasuredValue Weight CriterionScore Alternative B Criterion Performance Measures MeasuredValue Weight CriterionScore 25 = 5 125 X Affordability 35 3 X 25 = 4 100 X Affordability EconomicDevelopment = 3 40 120 X 35 3 X Score for Alternative A EconomicDevelopment = 6 40 240 X ReduceCongestion = 35 2 70 X Score for Alternative A ReduceCongestion = 35 9 315 X Score for Alternative C 315 Score for Alternative B 655

  28. How to Set Priorities? How does your agency prioritize projects?

  29. HSM Economic Appraisals and Prioritization Methods • Described the Economic Appraisal Process • Converting Crash Reduction Benefits to Present Value Dollars • Described the Project Prioritization Process • Ranking Projects by Economic Effectiveness Measures Learning Outcomes:

  30. HSM Economic Appraisals and Prioritization Methods Questions and Discussion?

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