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 $198 with a resulting contribution margin of $78. 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 $220,000. 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 $23,000. This new control system would reduce the number of defective units to 390 per year. 320 of these defective units would be detected and repaired at a cost of $41 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? * Tries 0/99 2. What is the Year 3 cash flow if Brisbane replaces its current system? * 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 8%, what is the net present value if Brisbane keeps using its current system? * Tries 0/5 4. Assuming a discount rate of 8%, what is the net present value if Brisbane replaces its current system? * Tries 0/5

Answer 1

Xfx2 Year 3 cash flow if Brisbane keeps using the current system inspection costs -$41,500.00 repair cost on defect identified units $ 132,000.00 refund on the defect unidentified units $ 87,120.00 total cash flow in Year 3 $ 260,620.00 net present value if Brisbane replaces its current system annual cash flow $ 94,252.00 present value annuity factor @ 8% 3.993 present value of net annual cash flows -$376,348.24 salvage value of x ray machine present value factor @ 8% present value of salvage value $ 20,000.00 0.681 $ 13,620.00 Year 3 cash flow if Brisbane replaces its current system inspection costs -$ 64,500.00 repair cost on defect identified units $ 13,120.00 refund on the defect unidentified units -$ 16,632.00 total cash flow in Year 3 $ 94,252.00 cost of x ray machine training cost present value of initial cash outflow -$ 220,000.00 -$430,000.00 $ 650,000.00 net present value if Brisbane replaces its current system -S 1.012,728.24 net present value if Brisbane keeps using the current system annual cash flow -$ 260,620.00 present value annuity factor @ 8% 3.993 present value of net cash flows -$ 1,040,655.66 net present value if Brisbane keeps using the current system -$ 1,040,655.66

for formulas and calculations, refer to the image below -

B8 X fx 2 Year 3 cash flow if Brisbane keeps using the current system inspection costs -41500 repair cost on defect identified units =-(1760*75) refund on the defect unidentified units --(2200-1760) *198 total cash flow in Year 3 =SUM(D3:05) net present value if Brisbane replaces its current system annual cash flow =$D$12 present value annuity factor @ 8% =ROUND(-PV(8%,5,1),3) present value of net annual cash flows =H3*H4 salvage value of x ray machine present value factor @ 8% present value of salvage value 20000 =ROUND(-PV(8%,5,0,1),3) =H7*H8 Year 3 cash flow if Brisbane replaces its current system inspection costs =-41500-23000 repair cost on defect identified units =-(320*41) refund on the defect unidentified units --(390-320)*198*1.2 total cash flow in Year 3 =SUM(D9:D11) cost of x ray machine training cost present value of initial cash outflow -220000 -430000 =SUM(H11:H12) net present value if Brisbane replaces its current system =H5+H9+H13 net present value if Brisbane keeps using the current system annual cash flow =$D$6 present value annuity factor @ 8% =ROUND(-PV(8%,5,1),3) present value of net cash flows =D15*D16 net present value if Brisbane keeps using the current system =D17

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