This section defines and explains how to calculate several measures that are typically used to summarize benefit-cost analyses:
Benefit/cost ratio (ratio of discounted benefits to discounted costs)
Net present value (discounted benefits minus discounted costs)
Cost-effectiveness (benefits that can be obtained for a particular cost or cost of achieving a particular benefit)
Internal rate of return (discount rate for which the net present value of the project is 0)
Payback period (number of years it takes for the cumulative discounted benefits to exceed the cumulative discounted costs).
The section also discusses the graphical representation of each measure and how these relate to each other.
The most appropriate method depends on the circumstances and agencies may choose to use multiple measures.
Examples
Decision: Which highway project to construct first
Goal: Maximize net public benefit
Type of measure: Benefit-cost ratio, to be compared across highway projects in order to rank them
Decision: Whether a new transit route should be instituted
Goal: To provide net public benefits
Type of measure: Net present value of the project
Decision: How to spend a given transit maintenance budget
Goal: Obtain the greatest benefit from the resources available
Type of measure: Cost-effectiveness of alternatives in order to rank them
Decision: What measures to pursue to lower aircraft noise to required levels
Goal: To meet noise standards at minimum cost
Type of analysis: Cost-effectiveness of alternatives in order to rank them
DfT (2006), Transport Analysis Guidance, Integrated Transport Economics and Appraisal, UK Department for Transport (www.webtag.org.uk/index.htm).
Todd Litman (2001), What’s It Worth? Life Cycle and Benefit/Cost Analysis for Evaluating Economic Value, Presented at Internet Symposium on Benefit-Cost Analysis, Transportation Association of Canada (www.tac-atc.ca); at www.vtpi.org/worth.pdf.
Todd Litman (2003), “Measuring Transportation: Traffic, Mobility and Accessibility,” ITE Journal (www.ite.org), Vol. 73, No. 10, October, pp. 28-32; at www.vtpi.org/measure.pdf.
LTNZ (2010), Economic Evaluation Manual (EEM), Land Transport New Zealand (www.landtransport.govt.nz); at www.nzta.govt.nz/resources/results.html?catid=401.
Michael Meyer and Richard Schuman (2002), “Transportation Performance Measures and Data,” ITE Journal (www.ite.org), November 2002, pp. 48-49; based on Measuring System Performance: The Keys to Establishing Operations as a Core Agency Mission, Office of Operations, Federal Highway Administration (www.ops.fhwa.dot.gov/nat_dialogue.htm).
Gerald Wilde (1984), “On the Choice of the Denominator in the Calculation of Crash Rates,” in S. Yager (ed.), Transport Risk Assessment, University of Waterloo Press (Waterloo).