Question

Questions 18 2 ask for cash flows only, no present values. They are a critical part of the problem, but since the problem is primarily about capital budgeting, they are not worth any points, and you have unlimited tries. Questions 3 & 4 require that you use the correct cash flows from 1 and 2 to determine the nat present values of the two alternatives. You should use the present value tables in the Coursepack. The Brisbane Manufacturing Company produces a single model of a CD player, Each player is sold for $206 with a resulting contribution margin of $72. Brisbane's management is considering a change yo u r needs 39.000 a year to inspect the CD players. An average of 2.100 units tum out to be defective 1.600 of them are detected in the inspection process and are repaired for 585. If a defective CD player is not identified in the inspection process, the customer who receives its given a n d of the purchase price The proposed quality control system involves the purchase of an x-ray machine for $220,000. The machine would last for five years and would have salvage value at that time of 18.000. Brisbane would sound $440,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by 21.000. This new control system woud reduce the number of defective units 390 per year 340 of these defective is the detected and red at a cost of per s ons who received defective players would be given a round equal to 120 of the purchase price Questions 1820 points unlimited tries 1. What is the show wa p ewn its current system 2010 2. What is the Year 3 cash flow of Brisbane replaces its current system? 1080 1/ Questions 38 45 points eachStries each) (NOTE: When computing present values, use the present value factors from the tables on page 118 in the Coursepack 3. Asing a contrate of what is the net prevent value if shane k a ngis current system? 4. Assuming a discount rate of what is the net present value frisbane replace is current system

Answer 1

cash flow for current system

Total defective units-detected

=2100-1680

=420 will be refunded

year 3 cash flow

Annual inspection cost -repairing cost *units repaired- refunded units

= -$39,000 -($85*1680)-420*206

=-$39000-$142,800-$86,520

= -$268,320 [use negative sign]

new system cash flow in year 3

annual inspection cost -repairing cost*units repaired - refunded units

= -[$39,000+$21,000 increase]-340*$48-[390-340]*206*120%

= -$60,000-$16,320-$12,360

= -$88,680 [use negative sign]

NPV is difference between present value of cash inflow and cash outflow

positive net present value means that the project is better

CURRENT SYSTEM

YEAR	cash flow	pv factor at 8%	present value
1-5	-$268,320	3.993[1/1.08]1+[1/1.08]2+[1/1.08]3+[1/1.08]4+ [1/1.08]5	-$1,071,402	[$268,320*3.993]
		NPV = -$1,071,402

new system

YEAR	cash flow	pv factor at 8%	present value
1-5	$-88,680	3.993	-$354,100 [88,680*3.993]
0	$-220,000	1	-$220,000
0	-440,000	1	-$440,000
5	$18,000	0.681	$12,258
		NET PRESENT VALUE	-$1,001,842[-354100-220000-440000+12258]