The city of Garden Ridge, Florida, has received designs for a new patient room wing to the municipal hospital from two architectural consultants. One of the two designs must be accepted in order to announce it for construction bids. The costs and benefi ts are the same in most categories, but the city fi nancial manager decided that the estimates below should be considered to determine which design to recommend at the city council meeting next week and to present to the citizenry in preparation for an upcoming bond referendum next month.
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Design A
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Design B
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Construction cost, $
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10,000,000
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15,000,000
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Building maintenance cost, $/year
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35,000
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55,000
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Patient usage copay, $/year
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450,000
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200,000
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.
The patient usage copay is an estimate of the amount paid by patients over the insurance coverage generally allowed for a hospital room. The discount rate is 5%, and the life of the building is estimated at 30 years.
(a) Use incremental B/C analysis to select design A or B.
(b) Once the two designs were publicized, the privately owned hospital in the directly adjacent city of Forest Glen lodged a complaint that design A will reduce its own municipal hospital's income by an estimated $500,000 per year because some of the day-surgery features of design A duplicate its services. Subsequently, the Garden Ridge merchants' association argued that design B could reduce its annual revenue by an estimated $400,000, because it will eliminate an entire parking lot used by their patrons for short-term parking. The city fi nancial manager stated that these concerns would be entered into the evaluation as disbenefits of the respective designs. Redo the B/C analysis to determine if the economic decision is still the same as when disbenefi ts were not considered.