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.
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The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $194 with a resulting contribution margin of $73.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $39,500 a year to inspect the CD players. An average of 2,100 units turn out to be defective - 1,680 of them are detected in the inspection process and are repaired for $80. 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 $210,000. The machine would last for four years and would have salvage value at that time of $19,000. Brisbane would also spend $450,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $24,000. This new control system would reduce the number of defective units to 390 per year. 340 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?

Answer 1

1.

CURRENT SYSTEM
DEFECTS DETECTED	1,680.00
REPAIR COST PER UNIT	$            80.00
TOTAL REPAIR COSTS	$ 134,400.00
UNDETECTED UNITS	420.00
2100-1680
REFUND COST PER UNIT	$          194.00
TOTAL REFUND COSTS	$    81,480.00
INSPECTION COST	$    39,500.00
TOTAL COSTS	$ 255,380.00

2.

PROPOSED SYSTEM
DEFECTS DETECTED	340.00
REPAIR COST PER UNIT	$            41.00
TOTAL REPAIR COSTS	$    13,940.00
UNDETECTED UNITS	50.00
390-340
REFUND COST PER UNIT	$          232.80
TOTAL REFUND COSTS	$    11,640.00
INSPECTION COST	$    63,500.00
TOTAL COSTS	$    89,080.00

3.

CASH FLOWS CALCULATIONS CURRENT SYSTEM
PARTICULARS	YEARS
	0	1	2	3	4	5
1. INITIAL INVESTMENTS
COST OF EQUIPMENT
WORKING CAPITAL
2. CASH FLOWS
CASH FLOWS FROM PROJECT		$ 255,380.00	$ 255,380.00	$ 255,380.00	$ 255,380.00	$ 255,380.00
WORKING CAPITAL						$                   -
OVERHAUL OF MACHINE IN 4 YEARS
SALVAGE VALUE OF EQUIPMENT						$                   -
TOTAL CASH FLOWS		$ 255,380.00	$ 255,380.00	$ 255,380.00	$ 255,380.00	$ 255,380.00
3. DISCOUNTING FACTOR		0.92593	0.85734	0.79383	0.73503	0.68058
8.00%
4. DISCOUNTED CASH FLOWS		$        236,463	$        218,947	$        202,729	$        187,712	$        173,807	$ 1,019,658
(3.*2.)

TOTAL COST = $1,019,658

4.

PARTICULARS	YEARS
	0	1	2	3	4	5
1. INITIAL INVESTMENTS
COST OF EQUIPMENT	$    210,000.00
ONE TIME TRAINING COST	$    450,000.00
2. CASH FLOWS
CASH FLOWS FROM PROJECT		$    89,080.00	$    89,080.00	$    89,080.00	$    89,080.00	$    89,080.00
SALVAGE VALUE OF EQUIPMENT						$    19,000.00
TOTAL CASH FLOWS		$    89,080.00	$    89,080.00	$    89,080.00	$    89,080.00	$ 108,080.00
3. DISCOUNTING FACTOR		0.92593	0.85734	0.79383	0.73503	0.68058
8.00%
4. DISCOUNTED CASH FLOWS		$          82,481	$          76,372	$          70,715	$          65,476	$          73,557
(3.*2.)
5. NET PRESENT VALUE	$    660,000.00	$    82,481.48	$    76,371.74	$    70,714.58	$    65,476.46	$    73,557.43	$ 1,028,601.69
(4. - 1.)

TOTAL COST = $1,028,601.69