TREATMENT OF DEFERRED COSTS IN ECONOMIC ANALYSES

ENGINEERS HAVE A TREMENDOUS RESPONSIBILITY TO SEE THAT THE LIMITED PUBLIC FUNDS WHICH CAN BE ALLOCATED TO THE PLANNING, DESIGNING, AND CONSTRUCTION OF THE NATIONS'S HIGHWAYS ARE USED TO THE BEST ADVANTAGE. THIS PAPER IS BASED ON THE PREMISE THAT THIS ALLOCATION OF FUNDS CANNOT PROPERLY BE MADE WITHOUT A THOROUGH EVALUATION OF THE ECONOMICS OF THE ALTERNATIVES. THE BENEFIT-TO-COST RATIO AND THE RATE-OF- RETURN METHODS OF RANKING ALTERNATIVES HAVE BEEN SUGGESTED AS PROCEDURES FOR MAKING SUCH ECONOMIC EVALUATIONS. HOWEVER, BOTH METHODS HAVE CERTAIN LIMITATIONS ON THEIR USE. AN ANALYTICAL ANALYSIS AND COMPARISON OF THE TWO METHODS SHOWS THAT THE RATE-OF-RETURN WILL BE A MORE SENSITIVE METHOD FOR RANKING ALTERNATIVES WHICH HAVE A HIGH ANNUAL COST OF MAINTENANCE AND A SHORT AMORTIZATION PERIOD. ON THE OTHER HAND, THE BENEFIT-TO-COST RATIO WILL BE A SENSITIVE METHOD OF RANKING ALTERNATIVES WITH LARGE CAPITAL COSTS WHICH ARE TO BE AMORTIZED OVER LONGER PERIODS OF TIME. IT WILL ALSO BE VERY SENSITIVE TO THE CHOICE OF AN INTEREST RATE FOR THIS CAPITAL. WHEN IT IS DESIRED TO COMPARE ALTERNATIVES WHICH HAVE A SIGNIFICANT DIFFERENCE IN CAPITAL COSTS, MAINTENANCE COSTS, OR AMORTIZATION PERIODS (SUCH AS ALTERNATIVES WITH DIFFERENT DESIGN STANDARDS) THERE IS A SERIOUS QUESTION OF THE ADEQUACY OF MERELY RANKING THE ALTERNATIVES BY THESE METHODS, BECAUSE THE RANKING COULD BE MISLEADING OR INCORRECT. SINCE THIS TYPE OF PROBLEM MAY BE IMPORTANT IN HIGHWAY PLANNING, THIS PAPER SUGGESTS THAT IT MAY PROVE DESIRABLE TO MAKE A MORE THOROUGH ECONOMIC ANALYSIS OF THESE ALTERNATIVES BY GRAPHICALLY COMPARING THE NET ANNUAL BENEFITS (ANNUAL GROSS BENEFITS MINUS COSTS) OF THE ALTERNATIVES, AND SELECTING THE ALTERNATIVES ON THE BASIS OF MAXIMIZING NET BENEFITS AT A SATISFACTORY RATE (OR RANGE OF SATISFACTORY RATES) OF RETURN ON THE INVESTED CAPITAL. /AUTHOR/

  • Supplemental Notes:
    • Vol 39, pp 9-15, 6 FIG, 1 TAB, 13 REF
  • Authors:
    • Renshaw, R W
  • Publication Date: 1960

Media Info

  • Monograph Title: Proceedings of the Thirty-Ninth Annual Meeting of the Highway Research Board, Washington, D.C., January 11-15, 1960
  • Serial:

Subject/Index Terms

Filing Info

  • Accession Number: 00201986
  • Record Type: Publication
  • Report/Paper Numbers: HS-002 276
  • Files: TRIS, TRB
  • Created Date: Aug 29 1971 12:00AM