Incorporating Asset Values in Investment Decision...
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Incorporating Asset Values in Investment Decision-making 9 th National Conference on Transportation Asset Management Making Asset Management Work in your Organization San Diego, California April 17, 2012 1 Michelle Dojutrek (Presenter) S. Labi Purdue University
Transcript of Incorporating Asset Values in Investment Decision...
Incorporating Asset Values
in Investment Decision-making
9th National Conference on Transportation Asset Management
Making Asset Management Work in your Organization
San Diego, California
April 17, 2012
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Michelle Dojutrek (Presenter)
S. Labi
Purdue University
Outline
Traditional Considerations for Investment Evaluation
Limitations of Traditional Considerations
Assumptions in using Asset Value in Investment Evaluation
Expression of Asset Value
Methodologies for assessing:
◦ Short-term impacts of investments on asset value
◦ Long-term impacts of investments on asset value
Importance of Asset Valuation in Investment Evaluation
Conclusions
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Traditional Considerations
in Investment Evaluation
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Traditional Considerations
Effectiveness (Benefits)
1. Preservation (increase in condition or service life)
2. Mobility (congestion mitigation)
3. Safety
4. “Positive” externalities
Cost
1. Agency cost
2. User cost
3. Community costs / adverse externalities
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Limitations of Traditional Considerations
Traditional considerations involve different
performance criteria
Thus:
Inputs to investment analysis have different units or dimensions
Investment analysis plagued by “Apples vs. Oranges” dilemma
Difficult to select projects in portfolios having multiple asset
types and multiple performance criteria
Difficult to assess tradeoffs across program areas in terms of
the multiple performance criteria
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Options for addressing this problem
include:
◦ Conversion of all investment impacts into dollars
and using economic analysis
◦ Multiple-criteria decision-making
◦ Using Asset Value Enhancement as the key
criterion in the investment decision making
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Assumptions
1. An investment leads to an enhancement (or degradation) in at least one of the following categories of asset value:
Value in terms of facility longevity or condition
Value in terms of mobility
Value in in terms of safety
Economic development value
Social value
Value in terms of environmental quality
Etc.
2. Such increase in asset value can be determined using existing analytical methods
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Using Asset Value as the key Criterion
in Investment Evaluation
Which expression of asset value to be
used in the investment analysis?
◦ Pre-investment value (EV): Value of the
asset before the investment
◦ Post-investment value (FV): Actual or
expected value of the asset after the investment
◦ Added value (AV): Increase (or decrease) in
asset value due to the investment (= FV – EV)
◦ Combinations of the above
Relative Value: (AV/RV)
Ratio of final to existing value (FV/EV); etc.
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Not altered by the investment.
Not to be used alone for analysis.
Short-term Impacts of
Investments on Asset Value
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Asset Value
Time
Accumulated traffic,
accumulated climate,
etc.
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Time
Accumulated traffic,
accumulated climate,
etc.
Asset Value
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F
CF
C1
CA
A Z C3
CE C4
W E
C2
CD D
tA tE Time or Usage
PreservationYear (tD, tF)
Asset
Condition
Asset
Value
Year of
Investment
Time
Accumulated traffic,
accumulated climate, etc.
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F
CF
C1
CA
A Z C3
CE C4
W E
C2
CD D
tA tE Time or Usage
PreservationYear (tD, tF)
Asset
Condition
Effectiveness: Performance Jump (PJ or ΔV)
Relative Effectiveness: PJ/CD or ΔV/V
Cost-effectiveness: PJ/$ of investment
Asset
Value
Year of
Investment
NOTE: The change in value with respect to cost removes bias of large
projects that skew value ranking with large initial construction costs.
Time
Accumulated traffic,
accumulated climate, etc.
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F
CF
C1
CA
A Z C3
CE C4
W E
C2
CD D
tA tE Time or Usage
PreservationYear (tD, tF)
Asset
Condition
Effectiveness: Reduction in the Rate of Depreciation (S1 - S3)
Relative Effectiveness: (S1 - S2) /V
Cost-effectiveness: (S1 - S2)/$ of investment
S1
S2
NOTE: The change in value with respect to cost removes bias of large
projects that skew value ranking with large initial construction costs.
Asset
Value
Year of
Investment
Time
Accumulated traffic,
accumulated climate, etc.
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Value enhancement depends on intensity of the investment
S1
F
CF
CA
A Z
W E
CD D
tA tE Time or Usage
PreservationYear (tD, tF)
Asset
Condition
Asset Reconstruction
Asset Rehabilitation
Minor routine maintenance
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S2
S2
Asset
Value
Year of
Investment
Time
Accumulated traffic,
accumulated climate, etc.
Long-term Impacts of
Investments on Asset Value
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Treatment Life
Pavement Condition
Age, Cumulative Loading, or Cumulative Weather Effects
Threshold Pavement Condition for Intervention
Pavement Performance Curve
“Time” of Treatment Application
Treatment Life
Pavement Condition
Age, Cumulative Loading, or Cumulative Weather Effects
Threshold Pavement Condition for Intervention
Pavement Performance Curve
“Time” of Treatment Application
Effectiveness: Investment Life, tIL = f-1(AV*)
Relative Effectiveness: tIL/AV*
Cost-effectiveness: tIL/$ of investment
Investment Life, tIL
Function describing Rate of
Decrease in Asset Value, AV = f(t)
Example: depreciation curve;
deterioration function
Year of the
Investment
Asset
Value
Age, or accumulated traffic
loading or climate
Critical or
trigger asset
value, AV*
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Treatment Life
Pavement Condition
Age, Cumulative Loading, or Cumulative Weather Effects
Threshold Pavement Condition for Intervention
Pavement Performance Curve
“Time” of Treatment Application
Treatment Life
Pavement Condition
Age, Cumulative Loading, or Cumulative Weather Effects
Threshold Pavement Condition for Intervention
Pavement Performance Curve
“Time” of Treatment Application
Effectiveness: Increase in Asset Value, IAV =
Relative Effectiveness: IAV/AV*
Cost-effectiveness: IAV/$ of investment
Investment Life, tIL
Function describing Rate of
Decrease in Asset Value, AV = f(t)
Example: depreciation curve;
deterioration function
Year of the
Investment, t*
Asset
Value
Age, or accumulated traffic
loading or climate
Critical or
trigger asset
value, AV*
_
*
1*
ILt
year i
i tIL
AV AVt
_
*
1 ILt
year i
i tIL
AVt
IAV
Pavement Condition
Age, Cumulative Loading, or Cumulative Weather Effects
Threshold Pavement Condition for Intervention
Pavement Performance Curve
“Time” of Treatment Application
Pavement Condition
Age, Cumulative Loading, or Cumulative Weather Effects
Threshold Pavement Condition for Intervention
Pavement Performance Curve
“Time” of Treatment Application
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Year of the
Investment, t*
Asset
Value
Age, or accumulated traffic
loading or climate
Critical or
trigger asset
value, AV*
Function describing Rate of
Decrease in Asset Value, AV = f(t)
Example: depreciation curve;
deterioration function
Effectiveness: Area bounded by the depreciation/deterioration curve, ADC =
Relative Effectiveness: ADC/AV*
Cost-effectiveness: ADC/$ of investment
*
( )ILt
t
f t dt
Importance of Asset Valuation in Investment Evaluation:
Multiple-criteria nature of highway investment impacts
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ASSET PROGRAM “CANDIDATE POOL”
∆IRI
Safety Management
System
(SMS)
Congestion Management
System
(CMS)
∆NBI Rating ∆Crash
Rate ∆ v/c Ratio
Note:
Performance measures
shown are examples only. ASSET PROGRAM “KNAPSACK”
Other Special
Programs
One or more of:
Economic
development
Customer
Satisfaction,
∆ v/c Ratio
∆Crash Rate
∆NBI Rating
∆IRI,
etc.
Bridge Management
System
(BMS)
Pavement Management
System
(PMS)
PMS Projects
BMS Projects
SMS Projects
CMS Projects
“Other” Projects
Optimal decision-making based on multiple performance measures
Importance of Asset Valuation in Investment Evaluation:
Multiple-criteria nature of highway investment impacts
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ASSET PROGRAM “CANDIDATE POOL”
Value
Safety Management
System
(SMS)
Congestion Management
System
(CMS)
Value Value Value
Note:
Performance measures
shown are examples only. ASSET PROGRAM “KNAPSACK”
Other Special
Programs
Value
Bridge Management
System
(BMS)
Pavement Management
System
(PMS)
PMS Projects
BMS Projects
SMS Projects
CMS Projects
“Other” Projects
Optimal decision-making based on multiple performance measures
Conclusions
Current evaluation methods do not consider the value of the existing asset
However, consistent with business practices, investments must be evaluated not only on basis of costs and benefits but also existing asset value
Asset value can be used alone or together with other criteria in investment evaluation
Asset value encapsulates multiple criteria in itself
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Questions?
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