Dr. Whitely Avard, plastic surgeon, had just returned from a conference during w

Question

Dr. Whitely Avard, plastic surgeon, had just returned from a conference during which she learned of a new surgical procedure for removing wrinkles around he eyes, reducing the time to perform the nomal procedure by 50%. Given her student loan pressures, Dr. Avard was anixous to try out the new technique. By decreasing the time spent on eye treatments or procedures, she cou.d increase her total revenues by performing more sevices within a work period. Unfortunately, in order to implement the new procedure, some speical equipment costing $74,000 was needed. The equipment had an excepted life of four yeras, with a salvage value of $6,000. Dr. Avard estimated that her case revenues would increase by the following amounts:

She also expected addtional case expenses amounting to $3,000 per years. The cost of capital is 12%. Assume there are no income taxes.

Question: Should Dr. Avard buy the machine?

Year Revenue 1 $19,800 2 $27,000 3 $32,400 4 $32,400

Explanation / Answer

Cash inflows = revenue - additional case expenses

YES Dr. Avard can buy the machine as the NPV is Positive

NPV of new machine Year Cash flows Disc Fact@12% Disc Cash flows 0 -74000 1.000 -74000.00 1 16800 0.893 15000.00 2 24000 0.797 19132.65 3 29400 0.712 20926.34 4 29400 0.636 18684.23 4 6000 0.636 3813.11 NPV 3556.33

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