Question

IMPORTANT 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 $195 with a resulting contribution margin of $74. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $40,000 a year to inspect the CD players. An average of 2,000 units turn out to be defective - 1,600 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 $190,000. The machine would last for four years and would have salvage value at that time of $21,000. Brisbane would also spend $470,000 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 400 per year. 330 of these defective units would be detected and repaired at a cost of $48 per unit. Customers who still received defective players would be given a refund equal to 120% of the purchase price. Questions 1 & 2 [O 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?

Answer 1

cash flow for current system

Total defective units-detected

=2000-1600

=400units

year 3 cash flow

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

= -40000 -(75*1600)-400*195

=-40000-120000-78000

= -238000$

new system cash flow in year 3

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

= -[40000+21000increase]-330*48-[400-330]*195*120%

= -61000-15840-16380

= -93220

NPV

CURRENT SYSTEM

YEAR	cash flow	pv factor at 6%	presnt value
1-4	-238000	3.465	-824670$	[238000*3.465]

new system

YEAR	cash flow	pv factor at 6%	presnt value
1-4	-93220	3.465	-323007
0	-190000	1	-190000
0	-470000	1	-470000
4	21000	0.792	16632
		NET PRESENT VALUE	-966375$