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

The equipment should be purchased (the NPV is positive and the IRR is larger than the cost of capital)

Year 0 1 2 3 4 Revenue Losses 19800 27000 32400 32400 Cash Expense -3000 -3000 -3000 -3000 Salvage value 6000 Initial Investment -74000 Cash Flow -74000 16800 24000 29400 35400 PV Factor 12% 1 0.892857143 0.797194 0.71178 0.635518 Present Value Of Cash flow -74000 15000 19132.65 20926.34 22497.34 Present Value Of Cash flow 3556.332

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