# Unit 5 Assignment 2 – Profitable Investment

**Due**Sunday by 11:59pm**Points**50**Submitting**a text entry box or a file upload

Estimated time to complete: 2 hours

## Instructions

Dermatology Associates of Linwood is moving forward with the acquisition of the second practice discussed in Assignment 1. You have been meeting with Sharon, the second location’s practice manager, acquainting her with DAL’s operational standards. Sharon expressed concern about the immediate purchase of the Fraxel laser.

Sharon explained that the former practice physician-owner avoided purchasing one, because the return was not worth the investment. With the purchase price averaging $25,000, you definitely understand Sharon’s concern, but you also know Fraxel treatments at DAL are one of the leading services contributing to your overall revenue. This is primarily due to the fact that Fraxel treatments are classified as a cosmetic procedure, with payment required upfront from the patient.

- In an Excel document, use one of the concepts presented in chapter 9 to show Sharon why the investment would be profitable.
- Assume the opportunity cost of capital is 12%.
- Include cash flows for six months
- Assume the number of treatments you will need to perform each month.
- The treatment price at DAL’s existing clinic is $1,200. You will need to lower this price point to be more appealing to the new practice’s patient base.

- Below your calculation, insert a text box and provide the rationale for using the method you used, as well as the new price you set for the treatment. Word it as if you are speaking to Sharon, explaining how profitability is determined.
- Include any references in APA style in a textbox at the bottom of your Excel document.

*Please review the rubric to ensure that your assignment meets criteria.*

## Submit:

- Profitable Investment

## Rubric

HC306 Unit 5 Assignment 2 – Profitable Investment

Criteria | Ratings | Pts | ||||||
---|---|---|---|---|---|---|---|---|

This criterion is linked to a Learning OutcomeProfitability Concept |
| 15.0 pts | ||||||

This criterion is linked to a Learning OutcomeCash Flow |
| 15.0 pts | ||||||

This criterion is linked to a Learning OutcomeRationalePRICE-P |
| 15.0 pts | ||||||

This criterion is linked to a Learning OutcomeWriting Style, grammar, spelling and APA FormattingPRICE-I |
| 5.0 pts | ||||||

Total Points: 50.0 |

Unit 5 Assignment 1 – Purchase Proposal” aria-describedby=”msf0-previous-desc”>PreviousNext

**Expert Solution Preview**

Introduction:

In this assignment, we will be using a profitability concept presented in chapter 9 to determine the potential profitability of purchasing a Fraxel laser for the newly acquired practice. We will be assuming the opportunity cost of capital is 12%, including cash flows for six months, and assuming the number of treatments we will need to perform each month. We will also need to lower the treatment price to be more appealing to the new practice’s patient base. We will provide the rationale for using the method we used, as well as the new price we set for the treatment.

Answer:

The profitability concept we will be using to determine the potential profitability of purchasing the Fraxel laser is net present value (NPV). NPV is a method of evaluating the profitability of an investment by calculating the present value of the expected cash inflows and subtracting the initial investment. If the NPV is positive, the investment is expected to be profitable.

Assuming the purchase price of the Fraxel laser is $25,000 and the opportunity cost of capital is 12%, the calculated NPV for the Fraxel laser investment is as follows:

Month | Cash Inflow | Present Value |

——|————|————–|

1 | $8,400 | $7,500 |

2 | $16,800 | $14,000 |

3 | $16,800 | $13,400 |

4 | $25,200 | $19,700 |

5 | $25,200 | $18,000 |

6 | $25,200 | $16,100 |

Total | $117,600 | $88,700 |

The calculated NPV for the Fraxel laser investment is $63,080. This indicates that the investment is expected to be profitable.

To make the Fraxel laser treatment more appealing to the new practice’s patient base, we suggest lowering the treatment price to $1,000. This price point is lower than the treatment price at DAL’s existing clinic, but we anticipate a higher volume of patients at the new practice. This will result in a larger overall revenue for the Fraxel treatments.

We chose to use the net present value (NPV) method to calculate the potential profitability of the investment because it factors in the time value of money. By discounting the expected cash inflows at the opportunity cost of capital, the present value of the cash inflows can be compared to the initial investment. This provides a more accurate representation of the profitability of the investment than other methods such as payback period or ROI.

References:

Berk, J., DeMarzo, P., & Harford, J. (2017). Fundamentals of corporate finance (4th ed.). Pearson.