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The purpose of economic evaluation of project alternatives is to ensure that the project selected for implementation from a mutually exclusive set is the one with the highest benefits. This type of evaluation is often termed ex-ante analysis, conducted to identify the specific project where resources should be allocated. A number of analytic techniques may be used to evaluate mutually exclusive alternatives. Similarly, alternatives may be evaluated under different policy scenarios, or missions. In this paper four analytic techniques are discussed. The Cost Effectiveness technique essentially identifies the project with the least cost per unit benefit, while the Benefit Cost ratio technique is directed toward designating the project with the highest benefit per unit cost, both at a specified interest rate. The Internal Rate of Return technique attempts to identify the project that provides the highest return to the investor within a specified project life. The Pay off Period technique on the other hand, helps to identify the project that provides a specified return to the investor in the fastest possible time frame. Three missions are also identified in the paper; Mission A, constrained resource perspective; Mission B, investment perspective; and Mission C, face value perspective. Each mission can be paired with a specific analytic technique resulting in varying solutions in determining the best alternative. A case study is presented using the four analytic technique and three missions among a set of eight mutually exclusive highway safety alternatives. Results show under compatible assumptions, and for a given program mission, the choice of the analytic technique does not affect the outcome of the evaluation. However, for a given analytic technique, the outcome of the evaluation may be affected by the choice of the program mission. These findings underscore the importance of defining the program mission at the outset, before actual economic analysis of alternatives is conducted. Even though the case study involves a highway safety project, the principles presented are relevant for all public projects (e.g. transit, airports, etc.) involving the investment of taxpayers resources.

On The Relationship Between Program Missions And Analytic Techniques In Evaluation Of Mutually Exclusive Alternatives