Invest or not.

The Knox Glass opened in 1977 as a small Oklahoma City glass shop. It provides commercial glass and glazing services throughout the state of Oklahoma with primary focus on Oklahoma City. Some of its products are Storefront, door, mirror, curtain wall and interior glass installation, repair and replacement in: Edmond, Moore, Norman, and the Oklahoma City surrounding area.

The Company is considering purchasing a new glazing machine that has an estimated life of five years. The cost of the machine is $1,500,000 and the machine will be depreciated straight line over its five-year life to a residual value of $100,000.

The glazing machine will result in sales of 500 services in year 1. Sales are estimated to grow by 20% after first year and gradually decline to 5% over the life of the machine. The price per service is $2,000 each and is expected to increase by 2% every year. The service cost is $1,000 per service and is also expected to increase by 2% per year. The fixed cost for the entire operation is $100,000 per year.

Installation of the machine and the resulting increase in the operation will require an investment of $80,000 in net working capital immediately and an increase in various net working capital. The company has routinely hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%.