Scheme Appraisal for Highway Projects 61
Example 3.1 Contd
Payback period
On the basis of simple payback, the cheaper option A is preferred to option
B on the basis that the initial outlay is recouped in nearly one year less.
Present worth
The formula that converts an annualised figure into a present worth value,
termed the series present worth factor (P/A), is expressed as:
Assuming i=0.08 and n= 20
therefore:
On the basis of its present worth valuation, option B is preferred, having a
net present value over twice that of option A. Thus, while payback is a useful
preliminary tool, primary methods of economic evaluation such as net
present value or internal rate of return should be used for the more detailed
analysis.
Present worth
Present worth
option A
option B
=- + ¥
=+
=- + ¥
=+
27 5 9 818
22 09
50 10 9 818
48 18
.
.
.
.
PA=()()- ()()
=
108 1 008108
9818
...^2020
PA=+()() 111 inn- ()i()+i
Option A NAS years
Option B NAS years
===
===
C
C
0
0
27 5 5 4
50 8 6 25
.
.
Option A Option B
Initial cost (£m) 27 50
Annual profit (£m) 5 10
Discount rate (%) 8 8
Life (years) 20 20
Table 3.5Comparison
of two options using
payback analysis
3.5 Environmental appraisal of highway schemes,
While the cost-benefit framework for a highway project addresses the twin objec-
tives of transport efficiency and safety, it makes no attempt to value its effects
