I hear claims about a 15 to 1 economic impact and a 2.75 to 1 Benefit/Cost Ratio. What's the difference?
Both answers are correct, but they answer different questions. Economists project that the Cincinnati Streetcar will cause new Downtown/OTR development worth $1.5 billion, or 15 times the cost of the streetcar. But that is simply a comparison of the cost of the streetcar to the cost of the buildings that are likely to be erected on account of its presence. A more sophisticated measure is a Benefit/Cost Analysis (a “BCA”). In a BCA, all costs and benefits are discounted to their Present Value because we’ll be investing $102 million up-front and about $2.3 million each year to operate the streetcar, but the benefits won’t happen all at once. So a new building that goes up in 2018 costing $10 million might be “worth” only half that much to us today. Another way to look at this is … would you take $5 today instead of waiting ten years to collect $10? Most people would. Same with the improvements in air-quality, congestion reduction and low-income mobility. They will be substantial, but they will occur over time. A true BCA looks at the entire stream of costs – the cost to build the streetcar in the early years plus the ongoing cost to operate it -- and then compares those costs to the benefits achieved in each year of its life. Those benefits are summed up year-by-year and “discounted” by a percentage equal to the cost of government funds, in this case, 4%. So a dollar’s worth of benefit that doesn’t actually happen until a year from now is worth only $0.96 in terms of its Present Value. Same with the operating costs – the costs of operating the streetcar five years from now are discounted back to the present. When this laborious summation of benefits and costs was tabulated by the economists studying the project, the result was a Benefit-Cost Ratio of 2.75 to 1. This is an astonishing finding. It’s as if you could deposit $1.00 in the bank when it opens for business tomorrow morning and then return at Noon to withdraw all your funds, finding that they had suddenly grown to $2.75. Who wouldn’t make an investment like that?
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