After volunteering to put an MNET-414 homework problem on the board, you had the bright idea to invent whiskey-scented writing markers. You plan to make a fortune and close down your manufacturing operation after four years. You estimate that you could sell 100,000 markers in the first year of your operation, 200,000 in the second, 300,000 in the third, and 400,000 in the fourth year. Your Mechanical Engineering friend says he could build you a combination whiskey-still and marker press to manufacture your invention. The machine can produce up to 200,000 markers per year, but you must sell the markers immediately after production because they have a short shelf-life. (Your roommate will consume them if you try to hold extras) You expect the machine to have a four year life, and you don’t want to assume any salvage value because you may have to skip town on short notice and hide in the Caribbean if the liquor-licensing authorities pursue you.
If you buy one or more machines now, while your M.E. friend is unemployed, each will cost only $10,000. If you wait to buy a machine at any time later, the machine cost will be $15,000. The campus loan shark will lend you money at an annual interest rate of 60%. Since the machine’s capacity is only 200,000 markers per year, you will need to buy a second machine sometime before the beginning of the third year, to get you through the last two years of sales.
• When should you buy the second machine? Now? End of first year? End of second year?