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

Question

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?

Answer 1

(a) Row 9 verifies the overall B/C values (screen image #1, row 9)
(b) No, the increment in total costs is not justified since ?B/C = 0.5 < 1.0
(c) Goal seek finds ?B/C = 1.00 at $1,903,102 (screen image #2, cell C2)
(d) Goal Seek finds ?B/C = 1.0 at $589,869 (screen image #3, cell C3)
(e) Columns E and F (screen image #4) indicate that location 2 is economically
justified with ?B/C = 3.02 when disbenefits are neglected.