This paper reports on an attempt to apply a shadow pricing system: "The Little-Mirrlees (LM) Method" to a new road project between Ipoh and Kuala Kangsar in west Malaysia. The paper includes an outline of the project with particular reference to the benefits and costs involved, and a discussion of the 1M method of project appraisal as applied to highway projects. Particular difficulties discussed are the valuation of time saving, the conversion to the LM numeraire of the consumer surplus arising from generated traffic, and the distribution of savings into real savings and tax savings. An account is given of the derivation of the factors needed for the appraisal, namely the standard conversion factor; the shadow price of land; the shadow wage rate; the shadow prices for construction and maintenance; and vehicle operating costs at shadow price. The cut-off rate of discount was estimated to be 10-12 per cent. The best estimate of internal rate of returns was 16.41 per cent for a 25 year return which closely compared with 16.90 per cent obtained from a conventional appraisal. Risk analysis yielded a distribution that indicated a 4 per cent chance of the rate of return falling below 10 per cent, a 15 per cent chance of below 12 per cent, and a 50 per cent chance that it would exceed 15 per cent. It is pointed out that this is tolerable with a cut-off rate of 10 to 12 per cent and therefore the project is judged to be economically acceptable. /TRRL/

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  • Corporate Authors:

    London School of Economics and Political Science

    Houghton Street, Aldwych
    London WC2A 2AE,   England 
  • Authors:
    • Anand, S A
  • Publication Date: 1976-9


  • English

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Filing Info

  • Accession Number: 00145415
  • Record Type: Publication
  • Source Agency: Transport and Road Research Laboratory (TRRL)
  • Files: ITRD, TRIS
  • Created Date: Apr 27 1977 12:00AM