Cost Benefit Analysis of Washington-Richmond High-Speed Rail

Cost Benefit Analysis of Washington-Richmond High-Speed Rail Spring 2010
4. What is a Cost-Benefit Analysis?
A cost-benefit analysis is a term that typically refers to:
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• Helping to appraise, or assess, the case for a project or proposal; and
• An informal approach to making economic decisions of any kind. 16
In a transportation context, a cost-benefit analysis attempts to measure the dollar value of the benefits
and the costs to all the members of society where “society” is all residents of the United States on a net
present value basis. The benefits represent a dollar measure to the extent the lives of people are made
better by a project. The benefits represent the amount that all the people in society would jointly be
willing to pay to carry out the project, and feel as if they had generated enough benefits to justify the
project’s costs, accounting for the relative timing of those benefits and costs. In some cases, benefits
may be difficult to measure monetarily. Therefore, when preparing a cost-benefit analysis, it is helpful
to describe the nature of each major benefit. Benefits should be quantifiable (e.g., in number of users
making use of a transportation facility). Lastly, benefits should be measured in dollar terms, or
monetized. This allows the benefits to be directly compared to the monetary costs of the project.
Benefits and costs must be estimated for each year of the project after work has begun. These annual
benefits and costs must be discounted to the present using an appropriate discount rate so that a
present value of the benefits and a present value of the costs is appropriately calculated and compared.
The following provides a simplified example of discounted costs and benefits from a road project that
provides travel time savings to local travelers over the course of five years following a one-year period
of construction.
16 “Dictionary.com,” in , 2010.