Question

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $208 with a resulting contribution margin of $77. 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 1,800 units turn out to be defective - 1,260 of them are detected in the inspection process and are repaired for $85. 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 $20,000. Brisbane would also spend $430,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $21,000. This new control system would reduce the number of defective units to 360 per year. 310 of these defective units would be detected and repaired at a cost of $45 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 3 cash flow if Brisbane keeps using its current system? Submit Answer Tries 0/99 2. What is the Year 3 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

cash flow for current system

Total defective units-detected

=1800-1260

=540

year 3 cash flow

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

= -41500 -(1260*85)-540*208

=-41500-107100-112320

= -260920

new system cash flow in year 3

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

= -[41500+21000increase]-310*45-[360-310]*208*120%

= -62500-13950-12480

= -88930

NPV

CURRENT SYSTEM

YEAR	cash flow	pv factor at 6%	presnt value
1-5	-260920	4.21236	-1099089

new system

YEAR	cash flow	pv factor at 6%	presnt value
1-5	-88930	4.21236	-374605[88930*4.21236]
0	-200000	1	-200000
0	-430000	1	-430000
5	20000	0.74725	14945
		NET PRESENT VALUE	-989660$

NEW SYSTEM IS BETTER AS IT REULTS IN LOWER CASH OUTFLOW