# Pavement Design Questions and Answers – Economic Analysis

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This set of Pavement Design Multiple Choice Questions & Answers (MCQs) focuses on “Economic Analysis”.

1. Which of the below is not a method used for the economic analysis of the pavements?
a) Rate of return method
b) Cost-benefit method
c) Annual cost method
d) Average cost method

Explanation: There are three main methods being used to conduct the economic analysis of the pavements. They are the annual cost method, rate of return method and the cost-benefit method. The average cost method is not used to perform economic analysis.

2. The economic analysis is concerned with the source of financing, analysis of cost-benefit to the road users and consequences.
a) True
b) False

Explanation: Economic analysis is not concerned with the source of financing; the financial analysis considers it. Economic analysis is the analysis of cost-benefit to the road users and the consequences to the society of the scheme and establishing economic viability.

3. The project is said to be worth undertaking if the benefit-cost ratio is ______
a) Less than 1
b) Less than 5
c) More than 1
d) More than 5

Explanation: There are many ways to analyse the cost-benefit of the pavement for economic analysis. The simplest method is to take the ratio of benefit to cost. If the ratio is greater than 1, then the project would be worth undertaking. The benefits would be higher than the cost of the project.
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4. The following data is available for the economic analysis of a project. Determine the benefit-cost ratio for the same.
Total annual highway cost of existing highway = ₹ 1,36,340
Total annual road user cost of existing highway = ₹ 23,52,300
Total annual highway cost of proposal = ₹ 3,80,290
Total annual road user cost of proposal = ₹ 12,58,250
a) 5.49
b) 4.49
c) 3.49
d) 2.49

Explanation: The equation for the benefit-cost ratio is given by:
$$\frac{B}{C}=\frac{R-R_i}{H_i-H}$$
In the equation, R is the total annual road user cost of the existing pavement and Ri is the road user cost of the newly proposed highway. H is the total annual highway cost of the existing pavement and Hi is the total annual highway cost of the newly proposed highway. Using the values from the question,
$$\frac{B}{C}=\frac{2352300-1258250}{380290-136340}=4.49$$
The ratio is greater than 1, so the proposal should be taken forward.

5. ______ is used to refer to for the economic evaluation of highway projects.
a) IRC:SP:30-2001
b) IRC:SP:20-2001
c) IRC:SP:30-2009
d) IRC:SP:20-2009

Explanation: The code IRC:SP:30-2009 is used as the manual for the economic evaluation of highway projects in India. The manual gives guidelines on various topics like the introduction to economic analysis, cost computation and assumptions and economic evaluation.

6. What is the formula to find the viability of a proposal using the rate of return method?
a) $$R=\frac{0+A-M}{P}×100$$
b) $$R=\frac{0+A+M}{P}$$
c) $$R=\frac{0+A+M}{P}×100$$
d) $$R=\frac{0+A-M}{P}$$

Explanation: $$R=\frac{0+A-M}{P×100}$$ is the correct formula used to find the percentage of rate of return. Since it is a percentage, the ratio must be multiplied with 100. O refers to the savings in annual road user cost, A is the annual savings in accident cost, M is the additional maintenance cost per annum and P refers to the capital cost of the improvement.

7. ______ is the foundation on which the economic analysis is done.
a) Time cost
b) Value of money
c) Time value of money
d) Money value of time

Explanation: The time value of money is an important concept and it forms the basis or the foundation for the economic analysis. The concept takes into account the value of money in the future. Say, 100 rupees today will not be worth 100 rupees next year, it might be worth 500 rupees.

8. It is proposed to improve the existing highway for ₹ 145 lakhs. Estimate the annual cost of the pavement if it to last for 15 years and the rate of interest is 6%.
a) 13.94 lakhs
b) 13.49 lakhs
c) 14.93 lakhs
d) 14.39 lakhs

Explanation: The formula to find the annual cost is as below:
$$C=P \frac{i(1+i)^n}{(1+i)^n-1}$$
Using the values given in the question,
P = 145 lakhs i = 6% n = 15 years
$$C=145×\frac{0.06×(1+0.06)^{15}}{(1+0.06)^{15}-1}$$=14.93 lakhs

9. The following data is available for the economic analysis of alternate proposals for the same project. Conduct an economic evaluation and determine which of the two should be chosen for execution?
Total annual highway cost of existing highway = ₹ 1,16,940
Total annual road user cost of existing highway = ₹ 13,82,870
Total annual highway cost of proposal A = ₹ 2,65,422
Total annual road user cost of proposal A = ₹ 10,22,465
Total annual highway cost of proposal B = ₹ 3,30,300
Total annual road user cost of proposal B = ₹ 10,53,224
a) None
b) A and B
c) B
d) A

Explanation: The economic evaluation can be done using the benefit-cost method. The ratio is given by:
$$\frac{B}{C}=\frac{R-R_i}{H_i-H}$$
In the equation, R is the total annual road user cost of the existing pavement and Ri is the road user cost of the newly proposed highway. H is the total annual highway cost of the existing pavement and Hi is the total annual highway cost of the newly proposed highway.
Considering proposal A,
$$\frac{B}{C}=\frac{R-R_A}{H_A-H}$$
$$\frac{B}{C}=\frac{1382870-1022465}{265422-116940}$$=2.43
Now considering proposal B,
$$\frac{B}{C}=\frac{R-R_B}{H_B-H}$$
$$\frac{B}{C}=\frac{1382870-1053224}{330300-116940}$$=1.56
The ratio for both proposals is greater than 1. The proposal having the highest ratio is preferred. So, proposal A must be taken forward.

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