2. Additional revenue Dr. Whitely Avard, plastic surgeon, had just returned from

Question

2. Additional revenue Dr. Whitely Avard, plastic surgeon, had just returned from a conference during which she learned of a new surgical procedure for removing wrinkles around the eyes, reducing the time to perform the normal procedure by 50%. Given her student loan pressures, Dr. Avard was anxious to try out the new technique. By decreasing the time spent on eye treatments or procedures, she could increase her total revenues by performing more services within a work period. Unfortunately, in order to implement the new procedure, some special equipment costing $74,000 was needed. The equipment had an expected life of four years, with a salvage value of $6,000. Dr. Avard estimated that her case revenues would increase by the following amounts Revenue S19,800 S27,000 S32,400 S32,400 Year 4 She also expected additional case expenses amounting to $3,000 per years. The cost of capital is 12%. Assume there are no income taxes. Should Dr. Avard buy the machine?

Explanation / Answer

year cash flow exp net cash flow pv factor @12% present value 0 -74000 -74000 -74000 1 19800 3000 16800 0.8929 15000.72 2 27000 3000 24000 0.7972 19132.8 3 32400 3000 29400 0.7118 20926.92 4 32400 3000 29400 0.6355 18683.7 4 6000 6000 0.6355 3813 Net cash flow 3557.14 since net cash flow is positive, Dr avard should buy this machine

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