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

Calculation of Net Present Value of of Invetment decision by Dr.Whitley Avard Year Cash outflow Net Cashinflows Discount Factor (@12%) Discounted Cashflow 0 $                              -74,000 1.00 $                                           -74,000 1 $                             16,800 0.89 $                                            15,000 2 $                             24,000 0.80 $                                            19,133 3 $                             29,400 0.71 $                                            20,926 4 $                             35,400 0.64 $                                            22,497 Total Net Present Value $                                               3,556 Working Note: Calculation of Net Cashinflows Year Revenue Increases (A) Additional Expenses (B) Salvage value (C,) Net Cashinflows (A)-(B)+ (.C) 1 $                                19,800 $                                3,000 $                               - $                                            16,800 2 $                                27,000 $                                3,000 $                               - $                                            24,000 3 $                                32,400 $                                3,000 $                               - $                                            29,400 4 $                                32,400 $                                3,000 $                      6,000 $                                            35,400 Conclusion: By Investing in the new machine, Dr. Avard can earn a Net Present Value of $ 3,556 over the four years time period, i.e at the end of expected useful life of the equipment. The Net Present Value means the excess of present value of cash inlows during the useful life of the equipment including the salvage value over the cost of equipment incurred at present. Considering the Net Present Value alone Dr.Avard can buy the machine provided the expected cash flows materialises.

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