Dr. Whitley Avard, a plastic surgeon, had just returned from a conference in whi

Question

Dr. Whitley Avard, a plastic surgeon, had just returned from a conference in which she learned of a new surgical procedure for removing wrinkles around eyes, reducing the time to perform the normal procedure by 50%. Given her patient-load pressures, Dr. Avard is excited to try out the new technique. By decreasing the time spent on eye treatments or procedures, she can increase her total revenues by performing more services within a work period. In order to implement the new procedure, special equipment costing $74,000 is needed. The equipment has an expected life of 4 years, with a salvage value of $6,000. Dr. Avard estimates that her cash revenues will increase by the following amounts:

She also expects additional cash expenses amounting to $3,000 per year. The cost of capital is 12%. Assume that there are no income taxes.

Should Dr. Avard buy the Machine?

If anybody can help thanks!

Explanation / Answer

Year 0 1 2 3 4 Increase in revenue - 19800 27000 32400 32400 Less: Additional Cash Expense - 3000 3000 3000 3000 Operating Cash Flow - 16800 24000 29400 29400 Initial Investment outlay -74000 - - - - Salvage Value inflow - - - - 6000 Cash Flow -74000 16800 24000 29400 35400 PV factor @12% 1 0.8929 0.7972 0.7118 0.6355 Total PV of Cash Flows -74000 15000.72 19132.8 20926.92 22496.7 3557.14 NPV 3557.14 Net Present Value (NPV) is positive , Hence Dr. Avard should buy the Machine.

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