Accounting for material-specific inflation rates in life-cycle cost analysis for pavement type selection

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.