Year Revenue Increases 1 $19,800 2 27,000 3 32,400 4 32,400
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.
Required:
1. Compute the payback period for the new equipment.
2. Compute the ARR. Round the percentage to two decimal places.
3. CONCEPTUAL CONNECTION Compute the
your first guess for IRR. Should Dr. Avard purchase the new equipment? Should she be
concerned about payback or the ARR in making this decision?
4. CONCEPTUAL CONNECTION Before finalizing her decision, Dr. Avard decided to call
two plastic surgeons who have been using the new procedure for the past 6 months. The
conversations revealed a somewhat less glowing report than she received at the conference.
The new procedure reduced the time required by about 25% rather than the advertised
50%. Dr. Avard estimated that the net operating
unaffected). Using this information, recompute the NPV of the project. What would you
now recommend?
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