CE 443: Pavement Design & Rehabilitation

Lecture 8
Life-cycle Cost Analysis
For
Combining Costs and Benefits of a
Highway Asset Preservation Action
Benefits and Costs

What is a “Cost”?
Agency cost: money directly spent by agency in:
- facility construction
- facility preservation
- facility operations
User cost: money spent by facility users, either:
- directly (highway tolls, transit fares)
- indirectly (crash costs, travel time
costs, vehicle operation costs)
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Quantification of Benefits and Costs
What is a “Benefit”
Synonym: Effectiveness
Non-monetary
Increase in asset condition
Service life extension
Area bounded by performance Curve

Monetary
To agency (direct): asset tolls, salvage
To users (indirect): Reduction in indirect costs
borne by facility users (increased
safety; decreased travel time or VOC) 3
Combining Costs and Benefits using
Monetary Life-cycle Analysis (LCA)

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 Monetary Life Cycle Analysis

What does this mean?

- All benefits are monetary or can be converted
into monetary equivalents
- All costs are monetary or can be converted
into monetary equivalents

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• Cash Flow Illustrations
• The 5 Variables in any Cash Flow
Diagram
• Equivalence Equations

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The basis for engineering economics:
1. Economic efficiency is a key criterion
for evaluation of a civil engineering
system
2. The value of money changes over time
($1,000 today is not the same as $1,000 in
1993, and is not the same as $1,000 in
2017)

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Simple Interest vs. Compound Interest
1. Simple Interest
Let’s say in Dec 2003 you borrowed $1000 with 5%
simple interest
Year Principal Interest Total Amount Owed at the End of
The Year (=Principal + Interest)

Dec 2003 $1000 $1000

Dec 2004 $50 $1050

Dec 2005 $50 $1100

Dec 2006 $50 $1150

Dec 2007 $50 $1200

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2. Compound Interest
Let’s say in Dec 2003 you borrow $!000 with 5%
compound interest
Year Principal Interest Total Amount Owed at the End of
The Year (=Principal + Interest)

Dec 2003 $1000 - $1000

Dec 2004 $1000 $50 $1050

Dec 2005 $1050 $52.5 $1102.5

Dec 2006 $1102.5 $55.13 $1157.63

Dec 2007 $1157.63 $57.88 $1215.51

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The Concept of Cash Flows
Umer’s recent expenses:
Apr 5: Umer’s Dad gives him $10,000
Apr 10: Car Rental, Lahore- MCE Risalpur $70
Apr 13: Pays Tuition Fees $6,000
Apr 14: Receives $800 gift from In-Laws
Apr 15: Pays mess charges $400

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CASH FLOW TABLE
DATE CASH FLOW ($)

Dec 5 +10,000
Dec 10 -70
Dec 13 -6,000
Dec 14 +800
Dec 15 -400
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Cash Flow Diagram
$10,000 $70 $6,000 $800 $400

5th 10th 13th 14th 15th

Money spent (going out) : upward arrows

Money received (coming in): downward
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Cash Flow Diagrams for Civil
Engineering Projects

- Yearly intervals, typically, (not monthly, weekly,

etc.)
- Amounts received or incurred during year are
assumed to have happened …
… at end of year, or
… at beginning of year
(choose only 1 of above conventions, and stick to it)

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Example:
Construction of Motorway (M-2)
Toll Road
Dec 2000-- Initial Contract Cost: $8 million
Dec Each year of 2001-2008-- Toll receipts:
$2 million at end of every year
Dec 2004 -- Major Maintenance $3 million
Dec 2006 --Minor Maintenance $1 million

Draw the Cash Flow Diagram for this example.

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 Solution:
3m 1m

8m 2m 2m 2m 2m 2m 2m 2m 2m

2000 2001 2002 2003 2004 2005 2006 2007 2008

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The 5 Variables in any Cash Flow Diagram

P - Present Amount
F - Future Amount
A - Annual Amount
i - Interest Rate
N - Analysis Period

Typically, we’re given 4 of the above variables and

we will need to calculate the 5th, using
equivalence equations.
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Discussion of the 5 Variables
1. Present Amount, P
Amount received or incurred in Year 0. Typically a large
amount, e.g., initial construction cost, initial money
collected for car loan, etc. P=Fx 1/(1+i)^N

2. Future Amount, F
A future amount that is equivalent to a given present amount
(received or incurred).
Also called “discounted amount”.
May be incurred (or paid) at end of analysis period or anytime
within the analysis period. F=Px (1+i)^N

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3. Annual Amounts, A
Amount received or incurred every year

Also called “Annuities”

Generally referred to as “uniform amounts” but only called

“annual amounts” when the units of time is years.
Capital recovery Factor= CRF=(i(1+i)^N)/(((1+i)^N)-1)

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4. Analysis Period, N
Is the total time over which we are carrying out
economic evaluation for a system.
For CE systems, this is typically in years.
Depends on system type and expected life of the
system.
Examples: 20-30 years for highway pavements
50 years for RC bridges, 70 years for steel
bridges, 100 years for some dams.
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5. Interest Rate, i
Represents the extent to which money changes in value
over time.

National interest rate is determined by the Central Bank

or Federal Reserve Board ( State bank of Pakistan).

Individual lenders also have their own rates, but are

generally pegged to the federal rate.

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Summary – Equivalence Equations
Cash Flow Computational Formula Factor
Diagram Computation
P F=? F=P  SPCAF

The Single Payment Compound Amount Factor, SPCAF = (1 + i ) N

0 1 … … N SPCAF (i%, N).
P=? F P = F  SPPWF 1
SPPWF =
The Single Payment Present Worth Factor, (1 + i ) N
SPPWF (i%, N).
0 1 … … N
A=? A=? A=? A=? A=F  SFDF
i
The Sinking Fund Deposit Factor, SFDF (i%, SFDF =
0 1 2 … N N). (1 + i ) N − 1
F
A A A A F=A  USCAF
(1 + i ) N − 1
The Uniform Series Compound Amount Factor, USCAF =
0 1 2 … N USCAF (i%, N). i
F=?
P=? A A A A P = A  USPWF
(1 + i) N − 1
The Uniform Series Present Worth Factor, USPWF =
0 1 2 … N USPWF (i%, N). i  (1 + i) N
P A=? A=? A=? A=? A=P  CRF
i  (1 + i ) N
The Capital Recovery Factor, CRF (i%, N). CRF =
0 1 2 … N (1 + i ) N − 1
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Examples - Equivalence Equations

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Case 1
Description: Finding the future amount (F) to be
yielded by an initial amount (P) at the end of a given
period.

Example: Current car price is $20,000. Jim takes the

car now (Dec 2014) and agrees with the dealer to
pay nothing until Dec 2019 when he pays everything
at a go.
What price will he pay in 2019? Assume 5% interest
rate.

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Case 1 (cont’d)
Problem Definition:
This is a Single Payment Compound Amount Factor
(SPCAF) problem

P F=?
Cash Flow Diagram:

2014 2019
Computational Formula:

F = P  [(1 + i) ] n

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Solution to Case 1 Example:
Question: Current car price is $20,000. Jim takes the car
now (Dec 2014) and agrees with the dealer to pay
nothing until Dec 2019 when he pays everything at a go.
What price will he pay in 2019? Assume 5% interest rate.

Solution:

F = P  [(1 + i) n ] = 20,000[(1 + 0.05)5 ] = $25,526

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 Case 2:

Description: Finding the initial amount (P) that would

yield a future amount (F) at the end of a given period

Example: Jim has seen the 2028 model in a car magazine.

Wishes to buy that model when it is released in 2028, at
a price of $50,000 at that year.

2028 Model

How much should Jim put away now (2023) in order to be

able to pay for the car in 2028? 27
 Case 2 (continued):

Problem Definition:
This is a Single Payment Present Worth Factor (SPPWF)
problem P F

Cash Flow Diagram:

2023 2028

F
Computational Formula: P=
(1 + i ) n
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 Solution to Case 2 Example:

Question: Jim has seen the 2028 model in a car magazine.

Wishes to buy that model when it is released in 2028, at
a price of $50,000 at that year.

Solution:

F 50,000
P= = = $39,176
(1 + i ) n
(1 + 0.05) 5

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 Case 3:

Description: Finding the amount of uniform annual

payments (A) that would yield a certain future amount
(F) at the end of a given period.

Example: Jim has seen the 2028 model in a car magazine.

Wishes to buy that model when it is released in 2028,
at a price of $50,000 at that year.
Jim agrees to pay 5 yearly amounts until 2028, starting
December 2024 How much should he pay every year?

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Case 3 (continued):

Problem Definition:
This is a Uniform Series Sinking Fund Deposit
Factor (USSFDF) problem
A=? A=? A=? A=? A=?
Cash Flow Diagram:

2023 2028

Computational Formula: F
i
A= F
(1 + i ) − 1
n
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Solution to Case 3 Example:

Question :
Jim agrees to pay 5 yearly amounts, starting Dec 2024
until Dec 2028. How much should he pay every year so
he can end up paying full price ($50,000) in Dec 2028

Solution:
i 0.05
A= F = 50,000  = $9,048.74
(1 + i ) − 1
n
(1 + 0.05) − 1
5

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 Case 4:

Description: Finding the final compounded amount (F) at

the end of a given period due to uniform annual
payments (A).

Example: Same as for Case 2 (Jim has seen the 2028 model
in a car magazine, and wishes to purchase it when it is
released in 2028).

Price of the car is not fixed.

Rather, the Dealer and Jim agree that Jim will pay
$5,000 every year starting Jan 2024 until Jan 2028. How
much will he end up paying for the car in 2028?

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Case 4 (continued):

Problem Definition:
This is a Uniform Series Compounded Amount
Factor (USCAF) problem
A A A A A

Cash Flow Diagram:

2023 2028

Computational Formula: F
(1 + i) n − 1
F = A 34
i
Solution to Case 4 Example:

Question:
Dealer and Jim agree that Jim will pay $5,000 every year
starting Jan 2024 until 2028. How much will he end up
paying for the car in 2028?

Solution:
(1 + i ) n − 1 (1 + 0.05)5 − 1
F = A = 5,000  = $27,628.16
i 0.05

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Case 5:

Description: Finding the initial amount (P) that would

yield specified uniform future amounts (A) over a
given period.

Example:
Jim takes the 2023 model now (in 2023). He has enough
money to pay for it, but rather decides to pay in annual
installments of $5,000 over a 5-year period (starting in Jan
2024 till Jan 2028).
How much should he set aside now so that he can make
such annual payments?

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Case 5 (continued):

Problem Definition:
This is a Uniform Series Present Worth Factor
(USPWF) problem
P=?
Cash Flow Diagram: A A A A A

2023 2028
Computational Formula:

(1 + i ) − 1 n
P = A
i (1 + i ) n 37
 Solution to Case 5 Example:

Question:
Jim rather decides to pay in annual installments of $5,000 over
a 5-year period (starting in Jan 2024 till Jan 2028).
How much should he set aside now so that he can make
such annual payments?

Solution:
(1 + i) n − 1 (1 + 0.05)5 − 1
P = A = 5,000  = $21,647.38
i(1 + i) n
0.05(1 + 0.05) 5

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Case 6:

Description: Finding the amount uniform annual

payments (A) over a given period, that would
completely recover an initial amount (P) such as a loan

Example:
Jim receives a loan of $25,000 to pay for the 2023 model
and take it right now. How much will he have to pay
back to the bank every year (starting Jan 2024) until
Jan 2028?

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Case 6 (continued):

Problem Definition:
This is a Capital Recovery Factor (CRF) problem.
(that is, the bank seeks to “recover its capital”
from Jim). P
A=? A=? A=? A=? A=?

Cash Flow Diagram:

2023 2028

Computational Formula: i(1 + i) n

A = P
(1 + i) − 1
n 40
 Solution to Case 6 Example:

Question:
Jim receives a loan of $25,000 to pay for the 2023 model and
take it right now. How much will he have to pay back to
the bank every year (starting Jan 2024) until Jan 2028?

Solution:
i(1 + i)n 0.05(1 + 0.05)n
A = P = 25,000  = $5,774.37
(1 + i) − 1
n
(1 + 0.05) − 1
5

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 Questions for practice…
• Five years from now, an airport authority intends to
rehabilitate its runways at a cost of $1.5 million. Ten
years from now, the runways will be replaced at a cost of
$5.8 million.
Assuming an interest rate of 8%, find the total present
worth of these costs.

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 Solution
• Five years from now, an airport authority intends to rehabilitate its
runways at a cost of $1.5 million. Ten years from now, the runways
will be replaced at a cost of $5.8 million.
Assuming an interest rate of 8%, find the total present worth of these
costs.
PW = ? 1.5 M 5.8 M

5 5

PW = 1.5M*SPPWF (8%, 5 years)

+ 5.8M*SPPWF (8%, 10 years) = 3.71M 43
 Questions for practice…
• A major corridor investment is expected to yield $50,000
per year in reduced crash costs, $200,000 per year in
reduced vehicle operating costs, and $405,000 per year in
travel time costs.
What is the combined present worth of these costs? Assume
the interest rate is 5% and the analysis period is 20 years.

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 Solution
• A major corridor investment is expected to yield $50,000
per year in reduced crash costs, $20,000 per year in
reduced vehicle operating costs, and $405,000 per year in
travel time costs.
What is the combined present worth of these costs? Assume
the interest rate is 5% and the analysis period is 20 years.

PW = (50,000 + 20,000 + 405,000)* USPWF (5%, 20)

= 5.92M
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• Benefits/Cost (B/C) Ratio
• Present Worth Benefit / Present Worth
Cost

For project worthwhile….

• PWB/PWC > 1

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