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

Question

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?

Answer 1

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?