CVEN9405 Chap.1 Cost-Benefit Appraisal
Cost-Benefit Appraisal
Transport appraisal compares a proposal with a forward-looking base case and counts only the impacts caused by the choice between them. The chapter follows the published cost-benefit analysis sequence from defining options and standing through impact measurement, monetisation, discounting, net present value, sensitivity analysis and a conditional recommendation.
The calculations matter, but the planning judgement begins earlier: decide whose welfare counts, keep transfers separate from real resource effects, state the time horizon and preserve important effects that cannot be monetised credibly. Worked practice shows how the sign and margin of NPV can change when benefits, delivery costs or the discount rate move.
What this chapter covers
- 01
Forward-looking base cases and genuinely incremental impacts
- 02
Standing, transfers and the population whose welfare counts
- 03
Physical indicators before monetary valuation
- 04
Real cash flows, discount rates and present values
- 05
NPV as an efficiency measure rather than a complete verdict
- 06
Scenario, one-way and switching-value sensitivity tests
Worked example · free
Find the switching reduction in annual benefits
- +1Compute central present value of benefits: $1.60 million × 3.387 = $5.4192 million.
- +1At the switching point, required annual benefit = $5.00 million / 3.387 = $1.4762 million.
- +1Allowable fall = $1.60 million - $1.4762 million = $0.1238 million each year.
- +1Percentage fall = 0.1238/1.60 = 7.74%. Benefits falling by more than about 7.7% would make NPV negative.
Key terms
- Appraisal Standing
- The defined population whose benefits and costs count in an appraisal, used to decide whether a payment is a transfer or a net impact.
- Incremental Impact
- A change caused by an option relative to the forward-looking base case, excluding effects that would occur anyway.
- Present Value
- The current equivalent of a future benefit or cost after discounting for timing and opportunity cost.
- Switching Value
- The value of an uncertain input at which the preferred decision changes, often where NPV reaches zero.
- Distributional Effect
- The pattern of gains and losses across groups or places, reported separately from aggregate efficiency when needed.
Cost-Benefit Appraisal FAQ
Why is the base case not simply the current situation?
A base case describes what is expected without the proposal over the appraisal horizon. Demand, maintenance, prices and other policies may change even if the project is not built. Freezing all conditions at today's values can misstate incremental benefits and costs, so each forecast assumption needs a defensible no-project path.
Does a positive NPV prove that a project should proceed?
A positive NPV means monetised benefits exceed monetised costs for the stated standing and assumptions. Decision makers must still consider uncertainty, unmonetised impacts, distribution, delivery risk and legal or strategic constraints. The margin and sensitivity results show whether a small modelling change can reverse the efficiency result.
How should an unmonetised transport effect be handled?
Define the effect in physical or qualitative terms, provide the best available evidence and explain its likely importance relative to monetised impacts. Do not silently assign zero merely because a defensible monetary value is unavailable. Keeping the effect visible helps the decision maker understand what NPV excludes.
Why must appraisal standing be declared before valuing impacts?
Standing identifies the people and organisations whose welfare counts in the calculation. A payment can be a loss to one group and a gain to another, so expanding or narrowing standing may turn a reported cost into an internal transfer. Declare the boundary first, then trace each impact consistently across affected groups and avoid counting both a resource effect and its financial reflection.
What does a switching value contribute beyond a standard sensitivity table?
A switching value finds the precise change in an uncertain input that makes NPV equal to zero. It therefore converts a vague statement about risk into a testable threshold. Compare that threshold with an evidence-based range for demand, capital cost, value of time or another driver; the recommendation is robust only when the required reversal looks implausible.
How should residual value be treated at the appraisal horizon?
If an asset still delivers service after the chosen horizon, excluding all remaining value can unfairly penalise a long-lived option. Estimate residual value with a method consistent with the asset's remaining service potential, discount it from the final year, and test the assumption. Do not use residual value as a plug that forces a preferred option to pass.
Exam move
Build every appraisal from the same six-line setup: option, base case, standing, horizon, units and uncertain drivers. Only then create the cash-flow table. Practise discounting one net flow by hand so the timing convention is automatic, then use a spreadsheet for longer streams while preserving the same visible formula. Recalculate one example with a higher discount rate and confirm that later benefits lose present value.
Next, turn the central result into a sensitivity exercise by reducing demand, increasing capital cost or solving for a switching value. Write the recommendation in conditional language: state the preferred option, central NPV, assumption that can reverse the sign, material unmonetised impacts and distributional concern. For self-checking, reconcile the undiscounted stream, discounted stream and final NPV separately.
A sign error at year zero or a nominal-real mismatch should be found before interpretation. Finish revision by explaining why a transfer may cancel within one standing but still matter to particular groups.
