56 Highway Engineering
Net present value
To obtain this figure, the discounted costs are subtracted from the discounted
benefits:Benefit-cost ratio
In this case, the discounted benefits are divided by the discounted costs as
follows:Internal rate of return
This measure of economic viability is estimated by finding the discount rate at
which the discounted benefits equate with the discounted costs. In this example,
this occurs at a rate of 28.1%.Summary
All the above indicators point to the economic strength of the project under
examination. Its NPV at just over £38 million is strongly positive, and its B/C
ratio at just below 2.5 is well in excess of unity. The IRR value of over 28% is
over four times the agreed discount rate (6%). Together they give strong
economic justification for the project under examination. Knowledge of these
indicators for a list of potential projects will allow decision-makers to compare
them in economic terms and to fast track those that deliver the maximum net
economic benefit to the community.3.3.7 COBA
Within the formal highway appraisal process in the UK for trunk roads, cost-
benefit analysis is formally carried out using the COBA computer program
(DoT, 1982) which assesses user costs and benefits over a 30-year period –
assumed to be the useful life of the scheme – in order to obtain its net present
value. (The current version of the programme is COBA 9.) This is divided by
the initial capital cost of the scheme and expressed in percentage terms to give
the COBA rate of return.
The COBA framework involves comparing each alternative proposal with
the ‘do-minimum’ option, with the resulting net costs and benefits providingBCratio=∏
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