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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Suggested Citation:"Chapter 7 Measure Calculation." National Academies of Sciences, Engineering, and Medicine. 2022. A Guide to Computation and Use of System-Level Valuation of Transportation Assets. Washington, DC: The National Academies Press. doi: 10.17226/26667.
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Section 7.1 Calculating Value for Groups of Assets describes how the asset value cal- culation may be applied to groups of assets. It includes a discussion on the potential errors and challenges of aggregation and the treatment of uncer- tainty. The section also provides steps for completing the calculation. Section 7.2 Preparing Financial Statements addresses the application of asset value in Section 7.3 Asset Value-Related Measures introduces a set of additional supporting measures that are related to asset value. Section 7.4 Practice Assessment 7-1 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Once one has established all of the parameters for the asset val- ue calculation, the task remains to calculate value for individual assets or groups of assets. One should compare the asset value - culating overall value, one may calculate other supporting mea- sures, such as the cost to maintain value, asset sustainability ratio, asset consumption ratio, and others. Chapter 7 Measure Calculation

The discussion of how to calculate asset value has thus far focused on how to perform the calculation for a single asset or asset component. This section ad- dresses the question of how to perform the calculation for groups of assets. The following subsections provide an overview of the calculation process and key Overview The steps detailed in Chapter 3 to 6 detail all of the building blocks of the asset value calculation. The only remaining step to calculate the value of a given asset or component at time t is to subtract depreciation from the initial asset value : - ditional analysis may be required to address these and other issues. component. This and other calculation issues may arise depending on the level - nentization (discussed in Chapter 3). Asset Aggregation either the asset value calculation is performed for individual assets or compo- by over-aggregating. When data are aggregated one relies on averaging to ob- tain an aggregate result. Provided the groups of assets are homogenous in their - Section 7.1 Calculating Value for Groups of Assets Chapter 7. Measure Calculation 7-2 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 7. Measure Calculation / Section 7.1 Calculating Value for Groups of Assets ples of situations where aggregation may not be appropriate include: cost; Depreciation is non-linear; but is being valued at the asset level rather than component level; and/or One or more assets or components are fully depreciated. Table 7-1 - and then at an aggregate level combining the two assets. The table shows the performed separately for each asset the total current value is calculated as $8.2 - ed is $4.2 million – substantially less! The culprit responsible for the error in this case is the treatment of depreciation. an asset is fully depreciated its value is assumed to be equal to its residual value - tion in which the average age is used. - - ate level of detail based on the approach and the asset characteristics. 7-3 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 7-1. Approaches for Calculating Depreciation Measure A B Total if Calculated by Asset Total if Assets are Aggregated Initial Value ($ million) 11.0 22.0 33.0 33.0 Residual Value ($ million) 1.0 2.0 3.0 3.0 Age (years) 24 60 N/A 48 Useful Life (years) 50 50 N/A 50 Depreciation ($ million) 4.8 20.0 24.8 28.8 Current Value ($ million) 6.2 2.0 8.2 4.2

Chapter 7. Measure Calculation / Section 7.1 Calculating Value for Groups of Assets Treatment of Uncertainty The quantitative approaches described in this guide are deterministic – they assume that calculation parameters are known with certainty. In reality key number of factors. also depend on economic and demographic factors well outside of the con- trol of an asset manager. on one’s assumptions. - dress some of the inherent uncertainties underlying the calculations given if they rely on highly variable parameters derived through observations of large populations of assets. numeric calculations. Uncertainty is inevitable in calculations of asset value; the question for the analyst is whether the level of uncertainty is tolerable given the manner in which the results of the calculation will be used. The approach rec- time and resources are available – perform sensitivity analyses to show the de- gree to which changes in key parameters would impact the results of the anal- an accompanying sensitivity analysis should also address changes in treatment Calculation Steps The following steps are recommended for calculating current asset value for one or more asset classes and components. These build on the results of prior - 7-4 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 7. Measure Calculation / Section 7.1 Calculating Value for Groups of Assets 7-5 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Calculating Value for Groups of Assets Review the Level of Detail in the Calculations Review the decisions made on the level of detail in the asset value calcula- tion made in Step 1. Combine assets to perform a more aggregated analysis if - sis further if key parameters such as costs and useful lives are found to vary within subgroups of assets. Apply the approach selected previously to calculate initial value for each as- set group, asset or component. Note that in cases where treatments besides initial purchase/construction are included in the analysis and depreciation is based in part or entirely on age, the initial value should be calculated as of the time of the most recent treatment. (but may not be the same as that of a “like new” asset unless the most recent treatment was replacement or reconstruc- tion). Calculate Depreciation Apply the selected approach to calculate depreciation for each asset group, asset or component. Calculate Asset Value - preciation. Sum the results across components, assets and/or asset classes to obtain total asset value. Conduct Sensitivity Analysis Document the impact of changes to key parameters on the calculations of asset value.

Asset value is an important component in an organization’s financial reports. Much of the prior guidance for calculating asset value has focused on this appli- cation. While this guide concentrates on the calculation of asset value to support TAM rather than financial reporting, an asset manager should remain mindful of how an agency develops its financial reports, how asset value is calculated in these reports, and any differences between TAM and financial reporting approaches. The following subsections summarize U.S. public agency financial reporting requirements, and discuss discrepancies between approaches used for asset valuation in financial reporting and TAM. Financial Reporting Requirements Financial reporting requirements for U.S. public agencies are detailed in GASB Statement 34 (1). This document requires public agencies to prepare basic finan- cial statements. These should include: y Assets, distinguishing between capital and other assets y Liabilities, distinguishing between long-term liabilities and other liabilities y Net assets, distinguishing among amounts invested in capital assets, net of related debt; restricted amounts; and unrestricted amounts y Revenues by major source y Expenses y Excess or deficiency before contributions y Contributions y Special and extraordinary items y Transfers y Change in net assets y Ending net assets Capital assets are included in the calculation of net assets, but are often presented in a separate table in the financial report. These are defined to include “land, improvements to land, easements, build- ings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period.” Infrastructure assets are further defined as “long- Section 7.2 Preparing Financial Statements Chapter 7. Measure Calculation 7-6 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 7-2. Example Statement of Capital Asset Activity – Oregon DOT Source: Oregon DOT (39) Beginning Balance Increases Decreases Ending Balance Buildings $282,559,529 $5,825,276 $(1,011,511) $ 287,373,294 Construction in progress - infrastructure 523,786,457 350,031,308 (253,454,458) 620,363,307 Construction in progress - other 26,461,827 17,021,568 (18,255,339) 25,228,056 Data processing software 106,812,614 24,478,495 (1,059,400) 130,231,709 Land 1,710,428,334 12,918,983 (1,570,400) 1,721,776,917 Land improvements 192.994.657 2,577,734 (286,774) 195,285,617 Land use rights (amortized) 781,932 - - 781,932 Leasehold improvements 3,999,333 13,500 - 4,012,833 Machinery and equipment 444,479,092 18,807,518 (25,186,989) 438,099,621 State highway and bridge system 14,465,090,764 379,248,721 (69,746,542) 14,774,592,943 Works of art and historical treasures 101,151 - - 101,151 Total capital assets $17,757,495,690 $810,923,103 $(370,571,413) $18,197,847,380

Chapter 7. Measure Calculation / Section 7.2 Preparing Financial Statements lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets.” GASB 34 cites as examples of infrastructure assets roads, bridges, tunnels, drainage systems, water and sewer systems, dams and lighting systems. GASB 34 requires that cap- ital assets are valued using historic costs. Capital assets should be depreciated, but if an agency elects to use the “modified approach” described in Chapter 2 for its infrastructure assets, it is not required that these are depreciated. Instead, the cost to maintain these assets at a specified level of service is established and expensed within the year the cost is incurred. Tables 7-2 and 7-3 provide examples showing how capital assets are present- ed in public agency finan- cial reports. Table 7-2 is an excerpt from the Oregon DOT financial statement (39). It shows the beginning bal- ance, increase, decrease and ending balance for each type of capital asset. The value of the state highway and bridge system is reported as a single item in the table with a begin- ning balance of approximate- ly $14.5 billion and an ending balance of approximately $14.8 billion. In this case, the agency depreciates the value of the system, showing a decrease of $69.7 million from annual depreciation. Table 7-3 is an excerpt from Michigan DOT showing how this agency reports changes in capital assets (40). Here roads and bridges are reported separately. They are included in the category of “Capital assets, not depreciated” as Michi- gan DOT uses the GASB 34 modified approach. The Oregon and Michigan examples are typical of other public agency financial reports. These examples are prepared in a manner that complies with GASB 7-7 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 7-3. Example Statement of Capital Asset Activity – Michigan DOT Source: Michigan DOT (40) Beginning Balance Additions Deletions Ending Balance Capital assets, not depreciated it: Roads $12,860.9 $123.1 $(922.4) $ 12,061.6 Land 3,146.5 7.8 - 3,154.3 Bridges 2,693.9 266.1 (34.4) 2,925.6 Construction in progress 1,744.4 1,002.5 (472.3) 2,274.7 Computer software projects in progress 6.8 2.4 (6.8) 2.4 Land rights 0.4 0.2 - 0.6 Capital assets, depreciated: Equipment 241.2 9.6 (3.4) 247.4 Buildings 168.9 5.4 (0.1) 174.1 Blue water Bridge infrastructure 32.1 3.5 - 35.6 Railroads 173.7 - - 173.7 Rest areas & welcome centers 120.9 - - 120.9 Land improvements 54.5 2.0 (0.6) 55.9 Airports 1.8 - - 1.8 Computer software project - 6.8 - 6.8 Less accumulated depreciation for: Equipment (106.9) (11.5) 2.7 (115.6) Buildings (88.0) (7.1) 0.1 (95.1) Blue water bridge infrastructure (14.2) (1.4) - (15.6) Railroad (54.6) (4.1) - (58.7) Rest area and welcome center (51.9) (2.7) - (54.6) Land improvements (14.1) (2.7) 0.3 (16.4) Airports (1.0) (0.1) - (1.1) Computer software project - (1.1) - (1.1) Total capital assets $20,915.3 $1,398.7 $(1,436.7) $20,877.2

Chapter 7. Measure Calculation / Section 7.2 Preparing Financial Statements - the presentation is relatively compact and omits many details that may be of Resolving Discrepancies in Approaches cost to maintain the transportation system which is valuable for supporting - cost to maintain rather than attempting to derive a separate calculation of de- calculate asset value based on replacement cost or market value rather than - and obtain further detail on the value by system or asset subclass where possible. It is important to establish “line of sidebar). asset value should use common assumptions costs and asset lives. Where it is not feasible to use common assump- should be well documented. Over time it may - proaches either by revising the asset valuation approach or presenting additional information - ent calculations of asset value. 7-8 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Establishing Line of Sight Between Asset Registers Often there are discrepancies be- tween the asset register used for hierarchy and inventory data used resolve these discrepancies, so there is a clear “line of sight”.

This section discusses how to calculate a set of performance measures re- lated to asset value: the cost to maintain current value, asset consumption ratio, asset sustainability ratio, asset renewal funding ratio, and net pres- ent value. for calculating the measure and a discussion of the measure’s strengths and limitations. (9) Cost to Maintain Current Value The cost to maintain current asset value helps answer an important question any asset owner is inclined to ask: “how much money do we need to value by determining annual depreciation for a system. If an agency spent this amount on its sys- - - ments and costs required for an asset – and to maintain service while the asset is being treated – may bear little resemblance to the cost of constructing a new Section 7.3 Asset Value-Related Measures Chapter 7. Measure Calculation Cost to Maintain Current Value Average annual asset preservation, rehabilitation and replacement fund- period, is predicted to result in an ending asset value equal to the value at the start of the period. 7-9 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 7. Measure Calculation / Section 7.3 Asset Value-Related Measures asset value. The reported cost should include all of the costs modeled in the may include other treatments not modeled in the agency’s calculation of asset value. One challenge in using this measure is that the cost to maintain assets’ current is inevitable that the asset inventory will initially decline in condition somewhat. - tions and value. Asset Sustainability Ratio likely to gain value. - (41) (9). in asset spending. Like the cost to maintain current - maintenance methods and asset condition across - - - pending on the approach used. Asset Sustainability Ratio The ratio of annual asset expendi- tures, omitting improvements, to the cost to maintain current value. All types of expenditures included in the cost to maintain current value should be included in the calculation of asset expenditures. 7-10 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 7. Measure Calculation / Section 7.3 Asset Value-Related Measures - Asset Consumption Ratio portion of the asset that remains after accounting - centage of an asset remains to be consumed. This - - (41). Note this measure is meaningful only in cases where current replacement cost is used as the of depreciation is calculated. inventory. It can be a valuable measure for helping summarize trends over time - condition. an asset. Does this mean the asset has failed or still operating but in need of re- placement given it has reached its economic useful life and/or is now obsolete? - ing the assumed useful lives and how these were derived. Asset Funding Ratio whether an agency’s planned investments are suf- - Asset Consumption Ratio The ratio of current asset value to the initial value of an asset when purchased or constructed. Asset Funding Ratio The ratio of asset preservation, reha- bilitation and replacement funding planned over a 10-year period to the total funding required over the same period to achieve and maintain the agency’s desired state of good repair. 7-11 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

Chapter 7. Measure Calculation / Section 7.3 Asset Value-Related Measures comprehensive view of how an agency’s assets are performing over time. - tion: funding needed to achieve and maintain the desired state of good repair rather than the cost to maintain current value. In the case that the desired state - - (9) (42). - value for making comparisons over time or between agencies. Net Present Value - costs. When economic value is used as the basis for calculating asset value then the resulting value of an asset is its NPV. If the NPV is positive then the asset or investment is considered worthy of invest- ment. If the NPV is negative then the converse is can still use asset value to support the calculation of NPV when comparing two two basic ways: - strategy compared to another. 7-12 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Net Present Value - - ed costs of an asset or investment.

Chapter 7. Measure Calculation / Section 7.3 Asset Value-Related Measures benefits consumed by the asset. This can be significant if one has established a non-linear pattern of benefit consumption as described in Chapter 6, or if an asset is fully depreciated in one of the alternatives being evaluated (in which case it yields no benefits compared to an asset with remaining value). Table 7-4 Illustrates the use of asset value in an NPV calculation. The table shows the NPV of an improved asset management strategy, Strategy B, com- pared to a base case, Strategy A. In Strategy B treatments are performed over the life of an asset, resulting in an increase in cost. With discounting applied, this increased cost total $82 million over 20 years. While Strategy B costs more, it re- sults in greater value at the end of the analysis period: $320 million for Strategy B versus $0 for Strategy A. Applying discounting, the increased value of Strategy B is $146 million. The NPV of Strategy B compared to Strategy A is $64 million, the difference between the increase in value of $146 million and increase in costs of $82 million. In this example depreciation is assumed to be linear, and thus the same in each alternative. The example excludes consideration of additional factor which may further support an improved asset management approach, such as the in- creased maintenance cost or potential for asset failure in the case of Strategy A. Integrating the Measures For some applications it can be useful to present a set of multiple measures from the set described above, along with additional context concerning how the measures are defined and should be interpreted. Table 7-5 provides an exam- ple set of calculations. In this example, an asset inventory has an initial value of $120 million. Accumu- lated depreciation is $30 million, resulting in a current value of $90 (the initial 7-13 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 7-4. Example NPV Calculation (values in $ millions) Year A: Base Case B: Improved Asset Management Discount Factor (4% Annual Discount Rate) Discounted Change in Costs (B-A) Treatment Cost Asset Treatment Cost Asset 0 400 400 400 400 1.00 0 7 0 260 20 320 0.76 15 14 0 120 100 380 0.58 58 20 0 0 20 320 0.46 9 Discounted Change in Treatment Cost (B-A) 82 Discounted Change in Asset Value (B-A as of the end of the analyis) 146 NPV of Improved Asset Management (Increase in Asset Value – Change in Cost) 64

Chapter 7. Measure Calculation / Section 7.3 Asset Value-Related Measures value less depreciation). Based on these figures the ACR is 0.75, or $90 million divided by $120 million. It is further assumed the $5 million is required annually to maintain value, while $60 million would be required over a 10-year period to achieve the desired state of good repair for the agency. The cost to achieve the desired state of good re- pair averages $6 million per year. This is higher than the cost to maintain value, which would be expected if current conditions were somewhat less than the desired state of good repair. If projected expenditures are $5 million per year, then the ASR is 1.00 and the AFR is 0.83. ASR is calculated by dividing the annual expenditures by the cost to maintain, while ASR is calculated by dividing 10-year expenditures ($50 million) by the 10-year cost to achieve the desired state of good repair. 7-14 A Guide to Computation and Use of System-Level Valuation of Transportation Assets Table 7-5. Calculation of Value-Related Measures Row Measure Value Notes 1 Initial Asset Value ($M) 120 2 Depreciation ($M) 30 3 Current Asset Value ($M) 90 Row 1 minus Row 2 4 Cost to Maintain Value ($M) 5 Can be calculated based on annual depreciation or using management systems 5 Cost to Achieve the Desired State of Good Repair Over 10 Years ($M) 60 Should be calculated using the agency’s manage- ment systems 6 Projected Annual Expenditures 5 Can be calculated based on annual depreciation or using management systems 7 Projected Expenditures Over 10 Years ($M) 50 Should be based on the agency’s financial plan 8 Asset Sustainability Ratio (ASR) 1.00 Row 6 divided by Row 4 9 Asset Consumption Ratio (ACR) 0.75 Row 3 divided by Row 1 10 Asset Funding Ratio (AFR) 0.83 Row 7 divided by Row 5

practices for the calculation of value and related measures. In the table an has addressed some aspect of the asset value calculation in a comprehensive Section 7.4 Practice Assessment Chapter 7. Measure Calculation Practice Area Maturity Level Description Current Value Calculation Emerging Asset value is calculated for major assets at an aggregate level as Strengthening Asset value is calculated for major assets. Either the calculations are performed at an asset/component level or supplemental - gating asset value calculations. Advanced Asset value is calculated for major assets. Either the calculations are performed at an asset/component level or supplemental - gating asset value calculations. Sensitivity analyses are period- parameters. Balance Sheet Preparation Emerging reporting, but does not attempt to reconcile asset value in the Strengthening valuation are documented as a one-time exercise performed when preparing the TAM asset valuation. Advanced Consistent approaches are used where possible to prepare the reports where they remain. Asset Value-Related Measures Emerging Cost to maintain current value, ASR and asset ACR are or can be calculated using annual depreciation and expenditures. Strengthening Cost to maintain current value, ASR and asset ACR are or can be calculated using annual depreciation and expenditures. In addition, supplemental analysis is performed using the agency’s management systems to establish the cost to maintain current value. Advanced Cost to maintain current value, ASR, ACR and AFR are calculated and used to support investment decisions. Supplemental analysis is performed using the agency’s management systems to establish the cost to maintain current value and the cost to achieve the desired state of good repair. 7-15 A Guide to Computation and Use of System-Level Valuation of Transportation Assets

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Determining the value of a transportation organization's physical assets is important for both financial reporting and transportation asset management (TAM).

The TRB National Cooperative Highway Research Program's NCHRP Web-Only Document 335: A Guide to Computation and Use of System-Level Valuation of Transportation Assets details how to calculate asset value and use it to support application in TAM.

Supplemental to the document are summary of the research project activities and recommendations for implementation.

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