There are two potential locations to construct an urgent care walk-in clinic to serve rural residents. The DN alternative is an option since the clinic is not a requirement; it would be a convenience for future patients. When incremental B/C analysis was applied at a discount rate of 8% per year, using the estimates summarized below, the results were: Rank by increasing total cost: DN, 1, 2 Location 1 vs. DN: B/C = 1.66 Conclusion: eliminate DN Location 2 vs.1: ?B/C = 0.50 Conclusion: select location 1 Location 1 2 Initial cost, $ 1,200,000 2,000,000 Annual M&O cost, $/year 80,000 75,000 Annual benefits, $/year 520,000 580,000 Annual disbenefits, $/year 90,000 140,000 Site suitability, years 10 20 Dr. Thompson, the designated lead physician of the clinic, wanted location 2 to be

selected. He has now challenged the estimates, especially the initial cost and disbenefits estimated for location 2. Besides, he calculated the B/C ratio for location 2 itself and obtained a value of 1.58, which he contends is very close to B/C = 1.66 reported for location 1, thus making the selection of location 1 a marginal decision. Answer the following questions using a spreadsheet, for the group of people who must decide if and where to construct the clinic: (a) Are the B/C ratios for the two locations correct as reported? (b) Can we select location 2 and still be economically justified? (c) How much less does location 2 have to cost initially to make it the better location? (d) If the initial cost of location 2 can’t be changed, is it possible to increase the benefits to select location 2? (e) Is the result the same if the disbenefits are completely neglected?

What will be an ideal response?


There are two potential locations to construct an urgent care walk-in clinic to serve rural
residents. The DN alternative is an option since the clinic is not a requirement; it would be a
convenience for future patients. When incremental B/C analysis was applied at a discount
rate of 8% per year, using the estimates summarized below, the results were:
Rank by increasing total cost: DN, 1, 2
Location 1 vs. DN: B/C = 1.66 Conclusion: eliminate DN
Location 2 vs.1: ?B/C = 0.50 Conclusion: select location 1
Location 1 2
Initial cost, $ 1,200,000 2,000,000
Annual M&O cost, $/year 80,000 75,000
Annual benefits, $/year 520,000 580,000
Annual disbenefits,
$/year

90,000 140,000
Site suitability, years 10 20
Dr. Thompson, the designated lead physician of the clinic, wanted location 2 to be selected.
He has now challenged the estimates, especially the initial cost and disbenefits estimated for
location 2. Besides, he calculated the B/C ratio for location 2 itself and obtained a value of
1.58, which he contends is very close to B/C = 1.66 reported for location 1, thus making the
selection of location 1 a marginal decision. Answer the following questions using a
spreadsheet, for the group of people who must decide if and where to construct the clinic:
(a) Are the B/C ratios for the two locations correct as reported?
(b) Can we select location 2 and still be economically justified?
(c) How much less does location 2 have to cost initially to make it the better location?
(d) If the initial cost of location 2 can’t be changed, is it possible to increase the benefits to
select location 2?
(e) Is the result the same if the disbenefits are completely neglected?

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