Financial Assumptions and Parameters
From Wisconsin Economic Analysis Guidelines
Transportation Engineering Economic Analysis computations are strongly influenced by several key assumptions and economic factors. If these assumptions are not consistent, there can be confusion about the merits of one proposal over another. For example, if two studies used different assumptions for the value of a driver’s time and the cost of gasoline, it would be difficult to compare the results.
This guideline has been prepared to help assure that all studies use the same financial assumptions. To the extent possible, this guideline attempts to draw on authoritative sources that are well-researched and regularly updated. Data sources are noted and/or hyperlinked to facilitate updating this document regularly.
The discount rate is a reflection of the time-value of money. Simply stated, the promise of receiving a dollar in the future is not as valuable as actually having a dollar today (many purchases or investments could be done with an actual dollar in hand, that cannot be done with a promised future dollar). In addition, there is an element of risk: the promised dollar may not actually appear at the scheduled future time. Therefore, in Engineering Economic Analysis future costs and benefits are "discounted" back to the base year applying an annual percentage rate.
When applying interest rates or discount rates, it is important to distinguish between the "nominal" and "real" rates. A "nominal" rate, such as the published rate for a mortgage, includes a factor to account for inflation. (Inflation is the general increase in the prices of products and services, or in other words the long-term decline in the purchasing power of a dollar). A "real" interest rate excludes the inflation percentage, and is therefore always a smaller number than the nominal rate. For example, if the nominal rate on a bank loan is 5% per year and inflation is 2% per year, the real interest rate on the loan is 3%.
The selection of an appropriate discount rate was traditionally a subject of considerable debate and controversy among transportation economists, since it requires predicting the long-term growth of the American economy. In 1996, a market-based approach for determining the discount rate became available when the US Treasury Department began issuing Treasury Inflation-Protected Securities (TIPS), a special type of US government bonds. The principal and interest payments on TIPS bonds are adjusted for inflation twice a year. Since all inflation risks are covered by the US government, the TIPS bond pays a true nominal rate, which is set through a competitive auction process. As a result, TIPS provides a measure of the discount rate as determined through the collective action of thousands of investors (not just a handful of economists).
The real discount rate for transportation economic analysis calculations for the Wisconsin DOT is 2.50%. This is based on the results of the US Treasury Department's 20-year TIPS bond auction on 15-Jan-09.
|Real Discount Rate for Economic Analysis Calculations|
|Source: US Treasury TIPS Auction.|
The costs of operating a commercial truck or bus are different from the costs associated with automobiles. While a distinction is necessary to account for these differences, for most studies it is sufficient to divide highway vehicles into two classes: autos and commercial trucks. In this context we use the term "autos" generically to cover all types of personal motor vehicles such as cars, pick-up trucks, vans, sport-utility vehicles, and even motorcycles. Trucks are defined as vehicles with 3 or more axles, encompassing various types of medium- and heavy-duty highway vehicles. For simplicity, in most studies it can be assumed that all autos use gasoline and all trucks use diesel fuel.
In a few cases, it will be necessary to add a third class of vehicles, namely buses. This should be done of the proportion of buses in the traffic stream exceeds 1% of total vehicles; typically this occurs only in downtown areas of larger cities and in locations where charter/tour bus operations are frequent (e.g. near casinos). Although buses seldom comprise more than a small percentage of the vehicles on the road, each bus carries several passengers. Therefore, the delays buses experience must be multiplied by the (average) number of adult passengers on board. Bus vehicle operating costs and the bus operator's time may be valued at the same rates that are used for commercial trucks. It is generally not necessary to do a special analysis of school buses: since most children are not in the work force, their time is not assigned an economic value for this purpose. For simplicity, in most studies it can be assumed that all buses use diesel fuel.
The percentages of different types of vehicles using a highway can be obtained from vehicle classification counts. This data is published annually in the Wisconsin Vehicle Classification Data book and is available electronically in the TRADAS database. If no local count is available, in is generally acceptable to use available data from a similar location.
Vehicle Operating Costs
The costs of operating an auto, truck, or bus include an operations component (fuel, oil, tires, maintenance) and an ownership component (depreciation, insurance, licensing and registration fees and taxes).
The two most frequently cited estimates of the average operating cost per mile autos are the US Internal Revenue Service (IRS) Standard Mileage Rates and the American Automobile Association (AAA) publication Your Driving Costs. As indicated in the table below the average of these two figures should be used.
|Computation of Auto Operating Costs Per Mile|
|Source||Cents Per Mile (2009)||Weight|
|IRS 2009 Standard Mileage Rate for Business Miles Driven||55.0||50%|
|AAA 2008 Composite National Average Cost Per-Mile||54.1||50%|
|2009 Weighted Average||54.6|
Trucks & Buses
About every two years Transport Canada (the equivalent of FHWA) commissions a comprehensive study of truck operating costs in Canada and the United States (including freight companies with cross-border operations). The report uses a case study approach. It includes direct operational costs such as fuel, tires, maintenance, insurance, and equipment ownership/leasing, as well as administrative overhead. Based on the data in the 2007 report for Ontario and the 2005 report for the Great Lakes Region, the recommended average cost per mile for trucks is shown in the table below. This figure may also be used for buses.
|Truck Operating Costs Per Mile||2007||2009|
|Including Driver Wages||$2.747||$2.833|
|Excluding Driver Wages||$1.783||$1.839|
|Source: Transport Canada: Operating Costs of Trucks Final Report 2005 and 2007. Calculation based on 80% weighting of 5 Axle Semi operating 160,000 kilometers per year and 20% weighting of Straight Truck operating 80,000 kilometers per year in 2007 in Ontario = CAD $1.931/km less 33.3% labor cost and 5% profit. Exchange rate 1.074781 USD/CAD as per Page 11 of 2007 report. The 2005 report indicates that costs are very similar in Ontario and the US Great Lakes Region and shows labor costs as 36% of total costs. Adjustment to 2009 calculated using the Federal Reserve Bank GDP Implicit Price Deflator.|
While the vehicle operating costs per mile described above include the cost of fuel, some projects directly affect fuel consumption (for example, in congested work zones vehicles may be operating at low speeds, resulting higher fuel consumption per mile driven). In these cases it is necessary to consider fuel prices directly.
Fuel prices are the most volatile component of vehicle operating costs. For example, according to the US Energy Information Administration (EIA), the average retail price of gasoline in the Midwest opened the year 2008 at $3.00 per gallon, peaked at $3.99 in June, and dropped to $1.63 in December. In 2009 the prices ranged from $1.81 (January) to $2.64 (June). Therefore, when conducting engineering economic analysis studies it is essential to use long-term averages to minimize the effects of price fluctuations.
Given the substantial short-term fluctuations in fuel prices, it must be recognized that long-term fuel price estimates are highly uncertain. In addition, when fuel prices trend upward, consumers and trucking companies tend to become more interested in purchasing fuel-efficient vehicles to help control their cost per mile traveled. To avoid doubt-filled predictions of future fuel prices and future fuel economy, the annual average fuel prices for the most recent calendar year should be used for all future years (i.e. no escalation or decline in long-run fuel prices). This data is shown in the table below, specifically the EIA 2009 annual average fuel prices for all grades of gasoline and all types of diesel in the Midwestern US.
|2009 Annual Average Weekly Fuel Price (Midwest)|
|Product||Average Price Per Gallon|
|Source: US Energy Information Administration.|
Fuel Consumption at Idle
Vehicles that are stopped with the engine running (idling) consume a significant amount of fuel:
- Autos: 0.48 gallons/hour (1.8 L/h) according to Natural Resources Canada
- Trucks: 0.82 gallons/hour (3.1 L/h) according to US EPA
Effect of Operating Speed on Fuel Consumption
Data for trucks is less readily available, but an August 2008 report from a truck manufacturer states that, "a general rule of thumb is that every mph increase above 50 mph reduces fuel mileage by 0.1 mpg". Limited truck fuel efficiency data from Oak Ridge National Laboratory indicates that average heavy truck fuel economy is approximately 5 to 5½ miles per gallon for long-haul semis (it is probably a bit better for smaller local delivery trucks). Therefore, on an interim basis, for the purpose of these guidelines it has been assumed that truck fuel consumption per mile is 4 times the auto fuel consumption and the shape of the speed/fuel economy curve for autos has been used to estimate that relationship for trucks.
A further refinement (which is beyond the scope of the current guidelines) would be to consider the fuel consumption effects of changes in the number of starts and stops (speed-change cycles) using detailed computer modeling.
|Operating Speed vs Fuel Economy for Autos and Trucks|
|Speed (mph)||Auto MPG*||Truck MPG**||Auto Gal/Mile||Truck Gal/Mile|
| * Estimated based on fitted curve. |
** Estimated based on 25% of auto fuel efficiency from fitted curve.
Source: West, et al, Development and Verification of Light-Duty Emissions and Fuel Consumption Values
for Traffic Models, Federal Highway Administration 1997, quoted in US Department of Energy
Transportation Energy Data Book, Edition 27-2008, Table 4.22.
Value of Travel Time
In accordance with the AASHTO Red Book recommendations, the value of time for auto drivers and adult auto and bus passengers should be set at 50% of the mean hourly wage rate. The value of time for truck and bus drivers should be 100% of total driver compensation (wages and benefits).
Wage rate estimates for each of Wisconsin’s metropolitan areas (and for the state as a whole) are prepared annually by the United States Bureau of Labor Statistics. These estimates are shown in Table 1. For studies in metropolitan areas, the local rates should be used. For studies in rural portions of Wisconsin, the statewide average rates should be used. For example, in 2008 the statewide mean hourly wage was estimated at $18.92, so for autos travel time would be valued at $9.46 per hour (50% of $18.92).
|Monetary Value of Travel Time – Auto Drivers and Adult Passengers|
|Fond du Lac|
|Wisconsin Statewide Average|
Trucks & Buses
The trucking industry shares a nationwide labor pool (many of the heavy truck drivers operating in Wisconsin are based in other states), so it is appropriate to use the Bureau of Labor Statistics national average wage rate tables. A weighted average of buses, light trucks, and heavy trucks is applied as shown in Table 2. As recommended by the Red Book (page 5-4) 20% is added for fringe benefits.
|Truck/Bus Driver Compensation Per Mile Driven|
|Bus drivers, transit and intercity|
|Truck drivers, heavy and tractor-trailer|
|Truck drivers, light or delivery services|
|Weighted Average Hourly Wage Rate|
|Fringe Benefits 20%|
|Estimated Total Driver Compensation|
Sources: Bureau of Labor Statistics May 2008 Metropolitan Area All-Occupation Wage Estimates, AASHTO Red Book Page 5-4
Escalation Rate for Value of Time
A previous edition of this document stated that the real value of time should be escalated to account for growth in real wages through time, as suggested in the AASHTO Red Book. Nevertheless, an analysis of wage data from the Bureau of Labor Statistics indicates that from 1980-2009, the real growth in wages in the United States was less than 0.1% per year. Therefore, this step may be omitted as a simplification.
When an auto or bus carries more than one person, the economic analysis calculations must be multiplied by the number of adult passengers to account for the value of travel time accurately. This adjustment is not necessary for commercial trucks (although many long-distance trucks have a reserve driver on board, Federal regulations limit the number of hours a truck driver can work, so for these purposes it may be assumed that the second driver is off-duty).
The collection of highway vehicle occupancy data is inexact. It typically involves standing on an overpass and looking through windshields as vehicles pass by. Ideally only passengers over 16 years old would be counted as adults, but in practice the observer often has only a fraction of a second to decide who is a child and who is an adult (senior citizens should be counted as adults).
In 2009, auto occupancy rates collected by the Southeast Region for the Metropolitan Milwaukee freeway system stood at approximately 1.11 during the AM Peak period. As shown in the chart, after falling in the 1980s and early 1990s, this figure plateaued in the late 1990s and appears to be remaining steady. Occupancy is known to be somewhat higher during non-peak hours and has therefore been adjusted upward to 1.25 on an all-day basis and this value may be used statewide in the absence of local data.
For public transit buses, average passenger loading data can usually be obtained from the local transit operating company. The systemwide annual average occupancies for Wisconsin public transportation operators are shown in the table below; these figures may need to be adjusted upward or downward for specific routes or times of the day (for example, buses operating on Wisconsin Avenue in Milwaukee or State Street in Madison have occupancies much higher than the systemwide average).
Charter and tour buses typically have a capacity of either 45 or 57 passengers; for these buses it is recommended to assume 30 passengers per bus, which is approximately 60% of capacity. No multiplier is used for school buses, since it is assumed that all passengers are children.
|Wisconsin Vehicle Occupancy Estimates (2009)|
|Milwaukee Freeways (Peak Hours)||1.11|
|Autos (Daily Average)||1.25|
|Annual Average Passenger Occupancy for Wisconsin Transit Systems (2007)|
|Area||Passenger Miles (1000s)||Revenue Miles (1000s)||Passenger Occupancy|
|Fond du Lac||400.9||402.6||1.00|
|Source: APTA 2009 Public Transportation Fact Book, Appendix B.|
Monetary Value of Crashes
Assigning a monetary value to crashes is essential for analyzing road safety projects, but it can generate considerable debate. While it is fairly straightforward to compute the cost of repairing vehicles and other property damaged in crashes, the human costs of crashes are more difficult to assess.
The National Safety Council (NSC) has prepared estimates of the comprehensive costs of motor-vehicle crashes by combining the actual costs to society of deaths and injuries (wage and productivity losses), medical expenses, employers’ uninsured costs, administrative expenses for processing insurance claims, motor vehicle damage, and a measure of the value of lost quality of life which was obtained through empirical studies of what people actually pay to reduce their safety and health risks. The NSC estimates shown in Table 10 were most recently updated for 2007 and have been pushed forward to 2009 dollars using the GDP Implicit Price Deflator. The figures presented in the table below are on a per crash basis (not a per injury basis) and are intended for use in Engineering Economic Analysis (not as a safety project selection tool, nor as a means of establishing compensation in legal cases).
|Average Comprehensive Cost by Injury Severity|
|Injury Severity||2007||2009 (Est.)|
|Crash with Fatality||$4,100,000||$4,228,492|
|Incapacitating Injury (Type A)||$208,500||$215,034|
|Non-Incapacitating Injury (Type B)||$53,200||$54,867|
|Possible Injury (Type C)||$25,300||$26,093|
|Property Damage Only||$2,300||$2,372|
| Sources: National Safety Council, Estimating the Costs of Unintentional Injuries |
and St Louis Federal Reserve Bank, GDP Implicit Price Deflator.
Some analysis methods require the use of a single combined monetary value for all three injury severity levels. As shown in the table below, an analysis of Wisconsin crash data indicates that this value varies by facility type. In Wisconsin the injuries tend to be the most severe on the County Trunk Highway system, perhaps because it is comprised mainly of undivided highways with fairly high traffic speeds and includes some facilities built to relatively low design standards. Injuries on the Interstate system tend to be less severe, probably due to the physical separation of the two travel directions and other safety features such as wide shoulders and large clear zones. The lower severity of injuries on local streets probably results from the relatively low speeds on urban streets. The monetary values for Fatal and Property Damage Only crashes remain as indicated in the previous table.
| Average Comprehensive Cost for All INJURY Crashes |
Weighted Average of Type A, B, & C Injuries
|Local Streets & Highways||$49,017|
|County Trunk Highways||$68,255|
|State Trunk Highways||$55,446|
|All Wisconsin Streets and Highways Combined||$53,356|
| Sources: Data from 2004-2007 Wisconsin Crash Facts and |
National Safety Council, Estimating the Costs of Unintentional Injuries.
The section titled Analyzing Motor Vehicle Crashes includes suggested weighting factors for project selection in programs such as the Highway Safety Improvement Program (HSIP). After the non-monetary weighting is assigned, the project’s cost-effectiveness can then be evaluated using the Weighted Average Comprehensive Cost for All Wisconsin Crashes presented in the table below. This value was obtained by weighting the crash monetization data shown in the previous tables using the total number of Wisconsin crashes of each type.
| Average Comprehensive Cost for ALL Crashes |
Weighted Average of All Crash Types
|Local Streets & Highways||$32,012|
|County Trunk Highways||$65,762|
|State Trunk Highways||$48,955|
|All Wisconsin Streets and Highways Combined||$41,605|
| Sources: Data from 2004-2007 Wisconsin Crash Facts and |
National Safety Council, Estimating the Costs of Unintentional Injuries.
Crash Rate Increases During Construction
There are three reasons that additional accidents are expected when road work is taking place:
- There is evidence that the accident rate increases on the section of road affected by construction.
- Any traffic that diverts from the main highway will typically need to travel on roads built to a lower standard, which are likely to have a higher crash rate.
- The alternate route is usually longer than the main highway and includes more intersections. Since more vehicle-miles are traveled and there is more exposure to intersections, more crashes will occur.
On a preliminary basis until Wisconsin crash rates can be established for various facility and construction types, the rates published in Section 3 of the Quadro software manual should be used. These rates can be found at beginning on Page 3/2. The following assumptions may be made:
- Quadro road types D2M through D4M correspond to freeways with 2 through 4 lanes in each direction.
- Quadro road type D corresponds to multi-lane highways that are not freeways.
- Quadro road type S corresponds to two-lane undivided highways.
Highway Maintenance Costs
In Wisconsin the maintenance of state highways is an outsourced function performed by the 72 counties. An analysis of reimbursements to counties and costs incurred by directly the Wisconsin DOT for supplies and administration shows a close correlation between highway maintenance costs and vehicle-miles travelled as shown in the table below.
|Highway Maintenance - Annual Incremental Cost|
|$1.225/year Per Daily Vehicle Mile Travelled|
| Sources: Wisconsin DOT Bureau of Highway Operations |
2002-07 maintenance cost data and St Louis Federal
Reserve Bank, GDP Implicit Price Deflator.
Worked Example: Estimate the annual maintenance cost for a new highway bypass around a small city. The centerline length of the bypass is 10 miles and the projected Annual Average Daily Traffic is 10,000 (5000 in each direction).
10 centerline miles x 10,000 vehicles/day = 100,000 vehicle-miles travelled per day
$1.225/DVMT x 100,000 DVMT = $122,500/year (2009 dollars)