Once the two parameters of project life and discount rate are set in place, these allow all costs and benefits to be directly compared at the same point in time. The decision-maker must now choose the actual mechanism for comparing and analysing the costs and benefits in order to arrive at a final answer for the net benefit of each of the project options under consideration. Any of the three techniques listed earlier in the chapter can be used for this purpose:

·         Net present value (NPV)

·         Internal rate of return (IRR)

·         Benefit/cost ratio (B/C).

The NPV will estimate the economic worth of the project in terms of the present worth of the total net benefits. The IRR will give, for each option under consideration, the rate at which the net present value for it equals zero, with the B/C ratio based on the ratio of the present value of the benefits to the present value of the costs. For the last two methods, if the options under consideration are mutually exclusive, an incremental analysis must be carried out to establish the best performing one in economic terms. All three methods depend on discounting to arrive at a final answer.

All, if used correctly, should give answers entirely consistent with each other, but the specific technique to be used varies with the circumstances. Thus, while the chosen technique is, to a certain extent, down to the preference of the decision-maker, it is nonetheless dependent on the type of decision to be taken within the analysis. If the decision is whether or not to proceed with a given project, the result from the chosen technique is compared with some predetermined threshold value in order to decide whether the project is economically justified. Once a discount rate/minimum acceptable rate of return is set, any of the above methods will give the same result. Assuming a discount rate of 10%, the project will be economically acceptable if the NPV of the net benefits at 10% exceeds zero, if the IRR is above 10% or if the B/C ratio at 10% exceeds unity.

In the case of an independent project where choosing one does not exclude the possibility of proceeding with one or all of the others, all techniques yield the same result, the critical question being the choice of discount rate. In choosing between mutually exclusive projects where choice of one immediately excludes all others, the most straightforward method involves choosing the option with the maximum NPV of net benefits.

There may however be situations where it is required to rank order a number of highway projects, on the basis that there is a set quantity of resources available for developing a certain category of project, and the decision-maker wishes to have a sequence in which these projects should be approved and constructed until the allotted resources are exhausted. In these cases, ranking based on NPV may be of limited assistance, since high cost projects with slightly greater NPV scores may be given priority over lower cost ones yielding greater benefits per unit cost. A correct course of action would be to rank the different project options based on their benefit/cost ratio, with the one with the highest B/C score given the rank 1, the second highest score given the rank 2, and so on.

Selecting a criterion for deciding between project options can be contentious. Some decision-makers are used to incorporating certain techniques in their analyses and are loath to change. IRR is rarely mentioned in the preceding paragraph, yet a number of national governments have a preference for it. This inclination towards it by some decision-makers is to some extent based on the fact that many have a background in banking and thus have an innate familiarity with this criterion, together with the perception that its use does not require a discount rate to be assumed or agreed. The latter statement is, in fact, incorrect, as, particularly when evaluating a single project, IRR must be compared with some agreed discount rate. Other supplementary methods of analysis such as cost effectiveness analysis and the payback period could also be used to analyse project options.