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:
Year Revenue
1 $19,800
2 $27,000
3 $32,400
4 $32,400
She also expected additional cash expenses amounting to $3,000 per year. The cost of capital is 12%. Assume there are no income taxes.
Should Dr. Avard buy the machine?