This topic covers all elements of Deterioration Modelling in JunoViewer Web
Why Use Residual Value in your BCA Model?
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Fritz Jooste Administrator Posts: 81
2/13/2020
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Fritz JoosteAdministrator Posts: 81
Please Note: this post applies to Benefit Cost Analysis (BCA) models that use a strict definition of costs for a benefit function, such that the scale of the "Cost of Use" parameter is directly comparable to treatment costs. If your model uses a surrogate parameter, such as a Pavement Condition Index (PCI) in lieu of actual costs (i.e. an "area under the curve model", as explained in this post), then you should NOT include Residual Value in your model. This is because Residual Values are calculated in terms of actual costs, and will therefore dominate your surrogate cost parameter and push all treatments to the end of the modelling period.
Excepting the situations noted above, if you are using one of JunoViewer's Benefit Cost Analysis (BCA) models then you should ideally be taking into account the Residual Value for the segment for each of the evaluated strategies. This post deals with WHY you should be using a Residual Value. For details on HOW the Residual Value can be calculated, please see this post.
If you do not consider the use of a Residual Value in your BCA calculations, then you model may favor strategies that postpone treatments beyond the last year of the modelling period. By postponing the last treatment in this way, the strategy is less costly from a treatment cost perspective, but it leaves the segment in a worse condition.
The use of the Residual Value will penalize strategies where the last treatments are postponed beyond the modelling period, and reward strategies that place a treatment near the end of the modelling period. The figures below explain the difference between using or not using a Residual Value.
Let us first consider the top figure. There are two strategies. There is a Road Use Cost (orange bars) and a Treatment Cost (green bars) for each. For each strategy, the total of the orange bars will be compared to the corresponding total for the Do-Nothing option to determine which strategy has the highest NPV, ICBR or BCR (depending on which model you are using).
Now you can see that Strategy 2 has a much higher treatment cost because of the Overlay, but only a marginal improvement in Road Use Costs. So it is very unlikely that Strategy 2 (or any strategy like it) will be chosen. However, in this case the model is not considering that Strategy 2 leaves the segment in a much better condition than Strategy 1. To get the model to consider the final condition of the road, we need to implement a Residual Value calculation.
Consider now the next figure in which the model takes into account Residual Value (RV). The RV is shown as the red bar at the end, and is subtracted from the total Road Use Costs. So leaving the segment in a better condition, means that the total road use costs is lower. In the case of Strategy 1, the RV is small (it can even be negative depending on how it is calculated) and thus the strategy is effectively penalized. But in the case of Strategy 2, the RV is high and this can compensate for the cost of the second treatment (Overlay).
So in most cases, unless you have a specific reason for not using a Residual Value as part of your BCA models, you should set up your model to use a Residual Value calculation. Doing this is quite easy, because JunoViewer can take care of the bulk of the calculations (including cost discounting) for you. Please refer to the post on Residual Life calculation for more details.
edited by admin on 2/13/2020
edited by admin on 2/13/2020
edited by admin on 5/7/2020
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