Cost-Benefit Analysis and the Optimal Timing of Road Infrastructures

Abstract

Standard cost-benefit analysis is based on a static setting, allowing the decision to be made of whether or not a new infrastructure should be built, but not allowing the conclusion to be made of if it would be preferable to build it right now or in the future. In this paper, the optimal timing for building a road within a cost-benefit framework is addressed. A general approach for choosing the optimal timing, taking into account the characteristics of a road infrastructure, is proposed. A model of the expected net present value with two sources of uncertainty (gross domestic product growth and fuel prices) is proposed. Both these variables are assumed to be stochastic, so Monte Carlo simulation is used for the implementation of the model. A methodology is also proposed to estimate the thresholds that define the optimal starting time for the infrastructure. The model is applied to a real infrastructure currently under development and the rules that define the optimal timing for starting its construction are analyzed.