Question

Questions 1 & 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 net 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 $207 with a resulting contribution margin of $80. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $41,500 a year to inspect the CD players. An average of 2,200 units turn out to be defective - 1,760 of them are detected in the inspection process and are repaired for $75. If a defective CD player is not identified in the inspection process, the customer who receives it is given a full refund of the purchase price. The proposed quality control system involves the purchase of an x-ray machine for $200,000. The machine would last for five years and would have salvage value at that time of $22,000. Brisbane would also spend S460,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $23,000. This new control system would reduce the number of defective units to 380 per year. 310 of these defective units would be detected and repaired at a cost of $50 per unit. Customers who still received defective players would be given a refund equal to 120% of the purchase price. Questions 1 & 2 [0 points; unlimited tries 1. What is the Year 2 cash flow if Brisbane keeps using its current system? Submit Answer Tries 0/99 2. What is the Year 2 cash flow if Brisbane replaces its current system? Submit Answer Tries 0/99 Questions 3 & 4 [5 points each; 5 tries each] [NOTE: When computing present values, use the present value factors from the tables on page 118 in the Coursepack] 3. Assuming a discount rate of 6%, what is the net present value if Brisbane keeps using its current system? Submit Answer Tries 0/5 4. Assuming a discount rate of 6%, what is the net present value if Brisbane replaces its current system? Submit Answer Tries 0/5

Answer 1

Answer Page No o Tota la costa Teenbified defecks - 1960 Repair cost per unit = $75 Tobal repain cost 1460$ 46 = $ 132000 undetected conils - 2300 - 1460 = 440 Retwnd price per voit = $207 Total orekond cost = 440 x$204 = $91080 Inspection cost - $41,500 Total cost - 32000 + 91080 + 41500 264580 [ Total cost $264580]

Page. No * Total cost Identified defecto e 310 Repuis cook per unit = $50 Total crepair cost = 310 * $50 $ 15,500 ondebecked chils = 380 – 310 = 70 Refund price per unit - $ 2009 x 120 •%. = $ 248 Tot al erebond comf = 70% $248 - $14360 Inspection cost $41500 + $223000 = $64500 Tot al costo - 15500 + 17360 +64500 $94360 " Total cost = $97360

Page No ③ ☺ glets presente vode Discount erate = 6% Ntong years = 6 ni-5 67= 67. pv@ (n, wt) - Torin Particular Year Year 1 Year a Year 3 Year 4 Year 5 initial investment cash out flows : Discounting 264580 264580 264580 264580 264580 0.9434 018899 0.8396 0.921 0.7473 vrate Present value Hay 960$ $ 235956 $222141 $209574 $19772) $111949 cost oba $1114491 Nel present value

Page No ® pelo presents value Discount orate = 6. = 91 n = 5 years pv @ (0,01) = Particular Year i 1 Year 1 Year 2 Year 3 Year 4 Years $660,000 Fritid investment 200,000 + 460,000 Kash outflow $94360 $94360 $97360 $ 94360 97360 Salvage - $22000 1675360 $75360 $95360 $75360 $75360 Discount viate@67 019434 0.8899018396 0.4921 0.4473 Present value $660,000 $71095671095 $11095 $71095$ 41095 $355475 Total costas net present # 355445 I value