Scheme Appraisal for Highway Projects 59
and benefits are subject to errors of forecasting. A decision-maker will thus
feel more comfortable using it to rank a number of alternative highway
design options, rather than to assess the absolute desirability of only one
option relative to the existing ‘do-nothing’ situation, though this in some
cases may be the only selection open to him/her.
Although some limited recognition may be given to the importance of costs
and benefits that cannot be measured in monetary terms, say, for example,
the environmental consequences of the project in question, they tend to be
neglected, or at best downgraded, within the main economic analysis. Those
goods capable of measurement in monetary terms are usually attributed
more implicit importance even though, in terms of the overall viability of
the project, they may be less significant.
The first two disadvantages can be managed effectively by employing an expe-
rienced and competent decision expert to oversee use of the cost-benefit frame-
work.Problems arising from the third point may require use of one of the other
methodologies detailed later in the chapter. Some efforts have been made to
provide monetary valuations for intangibles to enable their inclusion in cost-
benefit. These techniques are in various stages of development.
3.4 Payback analysis,
Payback analysis is an extremely simple procedure that is particularly useful in
evaluating proposals such as privately funded highway projects where tolls will
be imposed on users of the facility in order to recover construction costs. The
method delivers an estimate of the length of time taken for the project to recoup
its construction costs. It does not require information on an appropriate inter-
est rate, but the lack of accuracy of the method requires that results from it
should not be given the same weight as those from formal economic techniques
outlined in this chapter, such as cost-benefit analysis. The method assumes that
a given proposal will generate a stream of monies during its economic life, and
at some point the total value of this stream will exactly equal its initial cost. The
time taken for this equalisation to occur is called the payback period. It is more
usefully applied to projects where the timescale for equalisation is relatively
short. The method itself does not address the performance of the proposal after
the payback period. Its analysis is thus not as complete as the more formal tech-
niques, and therefore its results, when taken in isolation, may be misleading. It
is therefore best utilised as a back-up technique, supplementing the information
from one of the more comprehensive economic evaluation methods.
While the method has certain shortcomings, it is utilised frequently by engi-
neering economists. Its strength lies in its simplicity and basic logic. It addresses
a question that is very important to the developer of a tolled highway facility,
as a relatively speedy payback will protect liquidity and release funds more
