4.3. SR 06-16-2003 - Laserfiche WebLink

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Review of Benefit-Cost Analysis of Northstar Commuter Rail 5 in the future, while the value today is the present value. If $134 million is the future value, then it will have depreciated by 57 percent in fifteen years, which makes more sense than an Il-percent appreciation. In that case, however, the $134 million must be discounted to the present'for nineteen years by the annual interest rate. At the 4.5 percent interest rate used by MnDOT, this would reduce it to $58.1 million. At the 2.5 percent interest rate used by Anton, Lubov, this would reduce it to $83.8 million. Yet Anton, Lubov's table 4 uses $134 million for both the MnDOT and Anton, Lubov analysiS. Apparent]y, Anton, Lubov does not understand how to use discount rates. Summary-While all of the assumed benefits of the commuter rail line are questionable, three of the flaws in the analysis are quantifiable. · First, the benefit of vehicle operating cost savings must be reduced bY 54.5 percent, or $106.8 million, to account for the difference between variable vehicle operating costs of 13.1 cents and the 28.8 cents presumed in the analysis. · Second, the benefit of parking cost savings must be reduced by $34.6 million, which is the difference between MnDOT's and Anton, Lubov's calculations of this benefit. Since Anton, Lubov's methodology includes social benefits, not costs, its method is flawed. · Third, the future value of depreciated capital stock should be zeroed out. In 2022, when this future value is supposed to be achieved, MnDOT will want to continue running the commuter rail system at an operational loss, so its actual value at that time will be zero or negative. Making these three changes reduces total benefits by $275.8 million. Underestimates in Costs of Commuter Rail MnDOT and Anton, Lubov count only two costs: the capital cost of equipment and the annual operating cost. One difference between MnDOT and Anton, Lubov is that the latter adds $24 million in capital costs for connecting the commuter rail line with the Hiawatha light-rail line. Capital costs-With respect to capital costs, it should be noted that most rail projects end up costing far more than the original estimates. A recent study of public works projects found that North American rail projects cost an average of 41 percent more than their original estimates.2 While it is impossible to predict the cost overrun for any given project, it is worth noting that the habit of underestimating costs biases any benefit-cost analysis in favor of alternatives with a high capital cost. An alternative of simply running commuter buses on existing roads, for example, would appear even more favorable relative to commuter rail if the costs of rail were higher than predicted.