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Session #7: Example Problem - Economics

HSM Roadway Safety Management Process. Session #7: Example Problem - Economics. HSM Exercise II & III – Economical Appraisal Process & Prioritizing Projects. Learning Outcomes:. Apply the Economic Appraisal Process to a Safety Countermeasure

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Session #7: Example Problem - Economics

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  1. HSM Roadway Safety Management Process Session #7: Example Problem - Economics

  2. HSM Exercise II & III – Economical Appraisal Process & Prioritizing Projects Learning Outcomes: • Apply the Economic Appraisal Process to a Safety Countermeasure • Calculate the Economic Benefits of a Safety Countermeasure • Prioritize a Set of Safety Countermeasures • Cost Effectiveness • Net Present Value (NPV) • Incremental Benefit-Cost Ratio (BCR)

  3. HSM Exercise II – Economical Appraisal Process Identified Safety Countermeasures for a Roadway Network to be Evaluated Table 8-3. Summary of Countermeasures

  4. HSM Exercise II – Economical Appraisal Process HSM Sample Problem 7.9Convert Two-Way Stop to Roundabout Intersection #2

  5. HSM Exercise II – Economical Appraisal Process What are the benefits and costs associated with the selected countermeasure? and Head-On

  6. HSM Exercise II – Economical Appraisal Process FACTS - CMF for installing a single-lane roundabout in place of a two-way stop-controlled intersection: From HSM Chapter 14 • CMF Total Crashes = 0.56 • CMF Fatal & Injury Crashes = 0.18

  7. HSM Exercise II – Economical Appraisal Process ASSUMPTIONS - The roadway agency has the following information: • Calibrated SPF and dispersion parameters for the intersection being evaluated, • Societal crash costs associated with crash severities, • Cost estimates for implementing the countermeasure, • Discount rate (minimum rate of return), • Estimate of the service life of the countermeasure, and • The roadway agency has calculated the EB-adjusted expected average crash frequency for each year of historical crash data.

  8. HSM Exercise II – Economical Appraisal Process Intersection #2 Information

  9. HSM Exercise II – Economical Appraisal Process A Five-Step Process The following steps are required to solve the problem. Calculate the expected average crash frequency at Intersection 2 without the safety countermeasure (roundabout). Calculate the expected average crash frequency at Intersection 2 with the safety countermeasure (roundabout). Calculate the change in expected average crash frequency for total, fatal and injury, and PDO crashes. Convert the change in crashes to a monetary value for each year of the service life. Convert the annual monetary values to a single present value representative of the total monetary benefits expected from installing the countermeasure at Intersection 2.

  10. HSM Exercise II – Economical Appraisal Process Step 1: Calculate expected crash frequency WITHOUT the Roundabout Nexpected(total) Nexpected(F&I) Annual AADT The Part C prediction method can be used to develop the estimates. Table 7-3 summarizes the EB-adjusted expected crash frequency by severity for each year of the expected service life of the project.

  11. HSM Exercise II – Economical Appraisal Process Step 2: Calculate expected crash frequency WITH the Roundabout for F&I Crashes and Total Crashes Nexpected roundabout (FI) = Nexpected (FI) × CMF(FI) Nexpected roundabout (total) = Nexpected (total) × CMF(total)

  12. HSM Exercise II – Economical Appraisal Process Step 2: Calculate expected crash frequency WITH the Roundabout for F&I crashes Table 7-6. Expected Average FI Crash Frequency at Intersection 2 x =

  13. HSM Exercise II – Economical Appraisal Process Step 2: Calculate expected crash frequency WITH the Roundabout for Total crashes Table 7-7. Expected Average Total Crash Frequency at Intersection 2 x =

  14. HSM Exercise II – Economical Appraisal Process Step 3: Calculate the expected change in crash frequency for total, fatal & injury, and PDO crashes ΔNexpected(total) = Nexpected(total) – Nexpected roundabout (total) ΔNexpected(FI) = Nexpected(FI) – Nexpected roundabout (FI) ΔNexpected(PDO) = Δ Nexpected(total) – ΔNexpected(FI)

  15. HSM Exercise II – Economical Appraisal Process Step 3: Calculate the expected change in crash frequency for total, fatal & injury, and PDO crashes WITH the Roundabout at Intersection 2

  16. HSM Exercise II – Economical Appraisal Process Step 4: Convert Change in Crashes to a Monetary Value (Dollars) AM(PDO) = ΔNexpected(PDO) × CC(PDO) AM(FI) = ΔNexpected(FI) × CC(FI) AM(total) = AM(PDO) + AM(FI) Where: AM(PDO) = Monetary value of the estimated change in average PDO crash frequency for year, y; CC(PDO) = Crash cost for PDO crash severity; AM(FI) = Monetary value of the estimated change in fatal and injury average crash frequency for year y; CC(FI) = Crash cost for FI crash severity; and AM(total) = Monetary value of the total estimated change in average crash frequency for year y

  17. HSM Exercise II – Economical Appraisal Process Step 4: Convert Change in Crashes to a Monetary Value (Dollars)

  18. HSM Exercise II – Economical Appraisal Process Step 4: Convert Change in Crashes to a Monetary Value (Dollars) Table 7-9. Annual Monetary Value of Change in Crashes

  19. HSM Exercise II – Economical Appraisal Process Step 5: Convert Annual Monetary Values to a Present Value Dollars PVbenefits = Total Annual Monetary Benefits × (A/F,i,y) Where the Service Life of the countermeasure provides Uniform benefits: (P/A,i,y) Where the Service Life of the countermeasure provides Non-Uniform benefits: (P/F,i,y) For each service of Service Life: (P/F,i,y) = (1 +i)(-y)

  20. HSM Exercise II – Economical Appraisal Process Step 5: Convert Annual Monetary Values to a Present Value Dollars Table 7-10. Convert Non Uniform Annual Benefits to Present Values

  21. HSM Exercise II – Economical Appraisal Process Conclusions for Intersection #2 • Net Present Value (NPV): • $5,675,500 – $695,000 = $4,980,000 • NPV > 0 = Economically justified • Benefit Cost Ratio (BCR): • $5,675,500 / $695,000 = 8 • BCR > 1.0 = Economically justified • Cost Effectiveness Index • $695,000/47.1 Total Crashes Reduced = $14,800

  22. HSM Exercise III – Prioritize Projects Which Project Countermeasure(s) to Fund? • Intersection 2 must now compete for funding with • Three other Intersections • Five Road Segments Table 8-3. Summary of Countermeasures

  23. HSM Exercise III – Prioritize Projects Lots of Choices! How to Choose?HSM Sample Problem 8.4 Table 8-4: Summary of the crash reduction, monetary benefits and costs for the safety improvement projects being considered $5,675,500 • Cost-Effectiveness (Cost to Reduce a Crash) • Net Present Value (NPV) • Benefit-Cost Ratio (BCR)

  24. HSM Exercise III – Prioritize Projects Simple Ranking Method: Cost Effectiveness Cost of the project Total crashes reduced Cost-Effectiveness = Table 8-5. Cost-Effectiveness Evaluation Crashes Reduced

  25. HSM Exercise III – Prioritize Projects Ranking by Cost Effectiveness(Lowest to Highest) Table 8-6. Cost-Effectiveness Ranking

  26. HSM Exercise III – Prioritize Projects Simple Ranking Method: Net Present Value(Ranked Highest to Lowest) NPV = Present Monetary Value of the Benefits – Project Cost Table 8-8. Net Present Value Results $5,675,500 $4,980,500

  27. HSM Exercise III – Prioritize Projects Not-So-Simple Method:Incremental Benefit-Cost Ratio • Step 1: Calculate BCR for each project • Step 2: Arrange by increasing Cost • Step 3: Compute IBCR for 1st Pair • Step 4: Pair winner of that matchup with the next project on the cost list • Step 5: Continue until there is only a single winner (“Preferred”)

  28. HSM Exercise III – Prioritize Projects Not-So-Simple Method:Incremental Benefit-Cost Ratio • Perform a BCR evaluation for each 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.

  29. HSM Exercise III – Prioritize Projects Incremental BCR: • Step 1: Calculate BCR for each project

  30. HSM Exercise III – Prioritize Projects Incremental BCR • Step 2: Arrange by increasing Cost

  31. 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

  32. HSM Exercise III – Prioritize Projects Incremental BCR • Step 3: Compute IBCR for 1st Pair of Projects Intersection 7 is higher cost; therefore subscript “2”

  33. HSM Exercise III – Prioritize Projects Incremental BCR Incremental BCR = (PVbenefits 7 – PVbenefits 12) / (PVcosts 7 – PVcosts 12) - $600,000 $100,000 $1,200,000 - $1,800,000 $200,000 - $100,000 -6 IBCR = = = RULE: If ICBR > 1, Higher Cost project is “preferred” ICBR < 1, Therefore, Intersection 7 is NOT “preferred” and Intersection 12 is retained and compared to the next alternative

  34. HSM Exercise III – Prioritize Projects Incremental BCR: • Step 3: Repeat IBCR calculation for the next for Pair of Projects Repeat IBCR calculation until all projects have been evaluated

  35. HSM Exercise III – Prioritize Projects Incremental BCR: Results Winner?

  36. HSM Exercise III – Prioritize Projects Ranking by Incremental BCR

  37. HSM Exercise II & III – Economical Appraisal Process & Prioritizing Projects Learning Outcomes: • Applied the Economic Appraisal Process to a Safety Countermeasure • Calculated the Economic Benefits of a Safety Countermeasure • Prioritized a Set of Safety Countermeasures • Cost Effectiveness • Net Present Value (NPV) • Incremental Benefit-Cost Ratio (BCR)

  38. HSM Exercise II & III – Economical Appraisal Process & Prioritizing Projects Questions and Discussion?

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