Cost / Benefit Analysis in Practice

Home > Contents > Chapter 9 > Application 2

Author: Dr. Brian Slack

1. Seattle Monorail

The Elevated Transportation Company developed plans for a monorail project in and near downtown Seattle. The new "Green Line" would extend 14 miles and serve Seattle Center, downtown, and the stadium district. The project is intended to enhance transit options in a congested area. The predicted benefits include faster, more frequent, and more reliable transit service; savings in automobile operating and parking costs for drivers who switch to the monorail; and reduction in accidents. Three groups stand to benefit from the monorail project: transit riders, former drivers who switch to the monorail, and continuing auto users who may experience a slight decrease in traffic delays because bus and car trips have moved off the road.

Geographic Scope. The monorail project affects the Seattle metropolitan area. The regions most immediately affected by the project will be areas serviced by the proposed green line and the redeployed feeder bus services, including downtown Seattle, the Seattle Center, and the stadium district.
Time Period for Analysis. The time period for the analysis is from 2003 to 2029, which covers construction and 20 years of operation. A base year of 2002 is used for cost and benefit comparison, with values discounted to 2002 dollars.
Benefits, Magnitude, and Value. Travel time savings were valued at $10.10 per hour, which is half the average wage rate for the region in 2002. Those who switch travel modes from automobile to the monorail benefited from parking cost savings, based on the average market value for parking in downtown Seattle, and auto cost savings ($0.365 per mile, with an average trip length of 5.77miles). In an unusual step, improved transit reliability added 10% of travel time savings. Also unusual was the estimated benefit of freed-up road capacity: trips that switch from roads to monorail added $0.15 per vehicle-mile traveled. The rate of bus accidents multiplied by the average cost per accident gave the value of accident reduction. Riders switching from cars to monorail benefited by the amount of an average cost of accidents per passenger mile.

Other potential benefits attributed to the monorail were also identified but not included in the analysis because they are difficult or impossible to quantify. For example, the monorail will provide a more comfortable ride for transit passengers, and it could promote a more desirable form of development around its stations. Also, many communities with similar rail systems take pride in their transit system, even if they rarely use them.

Forecasted Benefit Values for Monorail Project, 2020
Benefit Type	Benefit Value (Millions, 2002$)
Value of travel time savings	$77.1
Parking savings	$28.7
Reduced auto operating/ownership costs	$11.2
Reliability	$7.7
Road capacity for drivers	$4.6
Reduction in bus-related accidents	$3.7
Reduction in auto-related accidents	$2.6
2020 Benefits	$135.6

Benefits accrue for 23 years from 2007 through 2029. A discount rate of 7.95% was used to estimate the total benefits, in 2002 dollars. The net benefits were evaluated to be $2,067,263,000.

The estimated costs for constructing and operating the monorail are $1.68 billion (in 2002 dollars). This includes a total capital cost of $1.26 billion and a total discounted stream of operating costs of $420 million (at approximately $29 million a year), using the same discount rate (7.95%). Operating costs were discounted over a span of 22 years, from 2008 through 2029.

Net present value B-C = $390,164,000
Benefit-cost ratio B/C = 1.23
Nominal Rate of Return = 7.95%

A team of outside engineers and contractors determined that there is a 60% chance the monorail project would come at or under budget and a 90% chance the project will come at 1.15 times the budget. The travel demand forecasters included a 10% range around their estimate of future monorail ridership. For the case where the costs are low and the benefits are high, a 9.9% return is expected. For the case where the costs are higher than expected and the benefits are lower, a 5.2% return is expected.

This project provides a thorough and straightforward benefit-cost analysis for a proposed transit investment. However, a drawback to the analysis is the lack of other transit alternatives considered. It would have been useful to compare the benefits and costs of a monorail system with that of a light rail system, a bus rapid transit (BRT) system, and an increase in highway capacity.

Source: DJM Consulting and ECONorthwest. Benefit-Cost Analysis of the Proposed Monorail Green Line. Prepared for the Elevated Transportation Company, Seattle, WA. August 28, 2002.

2. Rock County Airport Runway Extension

Rock County Airport is a freight airport in Southern Wisconsin with two runways. To allow the airport to serve larger and heavier aircraft, a project was proposed to reconstruct, strengthen, and extend an existing runway and taxiway from 5,400 ft. to 7,300 ft. and to install an instrument landing system (ILS). The shorter runway and resulting weight restrictions prevented fully loaded large cargo aircraft from landing at the airport. The runway extension project was intended to eliminate excess costs incurred because extra flights were required to compensate for the restrictions. Several alternatives were considered:

Base Case: Reconstruct the existing 5,400 ft. runway and taxiway. This is necessary to maintain the functioning of the runway.
Alternative Base Case: No Capital Investment. In the short term, this forces the airport to bear increasing costs over time for basic maintenance. In the long term, it is infeasible as the runway would eventually become unusable.
Project Case: Reconstruct and strengthen the existing 5,400 ft. runway and taxiway, extend it to 7,300 ft., and install new ILS. This alternative makes it possible for the airport to serve the larger aircraft needed by some area businesses.
Alternative Project Case: Reconstruct and strengthen a different existing 6,700 ft. runway and taxiway, extend it to 7,300 ft., and relocate the ILS. This presents significant adverse environmental impacts and precludes the possibility of future expansion.

The project area was the airport service area (Rock County) and the users. The study developed annual forecasts of airport demand and with and without proposed runway improvements, for the period from 2002 to 2035. This time period was used for calculation of the net present value of all benefits and costs.

The project benefits used in benefit-cost calculations were limited to user cost savings. They included air and ground time for the "users" of air cargo flights, i.e. the freight shippers and receivers, in this case, area businesses involved in manufacturing automobiles and automobile parts and distributing perishable food products. They all depend on rapid or just-in-time aviation logistics for shipping incoming supplies and outgoing products. Unable to use large aircraft at Rock County Airport, these users were incurring higher costs associated with a combination of three situations:

Some were using several smaller cargo aircraft for major shipments instead of a single larger aircraft, resulting in higher total aircraft operating costs;
Some were trucking cargo to or from a more distant airport with longer runways, resulting in higher ground transportation costs;
When neither option was available or feasible, some users experienced late or incomplete delivery of incoming cargo, resulting in higher costs from overtime labor or lost revenue from production slowdowns.

Additional safety and environmental benefits that could not be quantified in dollar terms were noted in the benefit-cost study, but excluded from the calculation of a benefit-cost ratio. Economic development benefits for retention of the area's automotive manufacturing cluster were identified and assessed, but they were also excluded from the benefit-cost analysis.

Costs were defined as capital costs for runway and taxiway construction, capital costs for instrument landing equipment, and ongoing maintenance costs. Capital costs expressed in constant 2001 dollars were $5.1 million for Alt. #1, $0 for Alt. #2, $15.0 million for Alt. #3 and $14.1 million for Alt. #4. Annual maintenance costs varied over time.

Using the State of Wisconsin's official 7% discount rate, the analysis found that both of the project alternatives had a significantly higher benefit than the base case. For purposes of sensitivity analysis, the project scenarios were compared to two different base cases — the more realistic "reconstruction" case and the more dramatic "no build" base case. Although Alternative #4 had a slightly higher B/C ratio, Alternative #3 was still selected due to its much lower environmental impacts and its capability for future expansion. The analysis was submitted to and approved by the Federal Aviation Administration in 2001, and the project was constructed in 2003.

Comparison of Alternatives
Project	B-C Ratio	Discount Rate	NPV of Net Benefit
Comparison Against Alternative #1 (reconstruction only) as Base Case
Alternative #3 (project case)	4.90	7%	+ $35.1 million
Alternative #4 (different runway)	5.27	7%	+ $35.8 million
Comparison Against Alternative #2 (no capital expenditure) as Base Case
Alternative #3 (project case)	3.23	7%	+ $30.5 million
Alternative #4 (different runway)	3.42	7%	+ $31.2 million

This example differs from the first case study by considering alternatives. Interestingly, the decision was made to select the less optimal option. Unspecified future expansion needs and non-quantified environmental grounds were used to justify the selection of alternative #3.

Source: Economic Development Research Group. Benefit-Cost Analysis for the Rock County Airport (JVL) Runway Extension. Prepared by Economic Development Research Group for Wisconsin Department of Transportation - Bureau of Aeronautics, submitted to Federal Aviation Administration. 2001.