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.
## Choosing MeasuresThe most appropriate method depends on the circumstances and agencies may choose to use multiple measures.
## ExamplesDecision: 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 Decision: How to spend a given transit maintenance budget Decision: What measures to pursue to lower aircraft noise to required levels ## SourcesDfT (2006), Todd Litman
(2001), Todd Litman
(2003), “Measuring Transportation: Traffic, Mobility and Accessibility,” LTNZ (2010), 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.), |