Accounting for Material-Specific Inflation Rates in Life-Cycle Cost Analysis for Pavement Type Selection

  • Mack J
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Abstract

Life-cycle cost analysis (LCCA) is an economic procedure used to compare
competing pavement designs over a defined analysis period, considering
all significant costs expressed in equivalent present value dollars. A
primary input into an LCCA is the discount rate, which accounts for the
time value of money and converts future spending into present values.
This method makes the future rehabilitation costs equivalent to current
dollars and is essential in comparing the cost of alternative pavement
designs. All state highway agencies that use LCCA in pavement type
selection use a real discount rate, which removes the inflation portion
in the present value calculation. The primary reason to use a real
discount is that the analyst can use constant (today's) dollars in the
analysis for the future rehabilitation costs. However, the implicit
assumption in using a real discount rate is that inflation for all
materials matches the general rate of inflation. This study shows that
this assumption is not valid and that the inflation rates for asphalt
and concrete (the two primary pavement materials) are different.
Finally, the paper presents a procedure that highway agencies can use to
account for differences in material-specific inflation rates. This
procedure escalates today's constant dollar by the difference between
each material's expected inflation rate and the general inflation rate
and then discounts the escalated cost back by using the real discount
rate.

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Authors

  • James Mack

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