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 $198 with a resulting contribution margin of $72. 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 - 1,400 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 $220,000. The machine would last for four years and would have salvage value at that time of $19,000. Brisbane would also spend $440,000 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 370 per year. 310 of these defective units would be detected and repaired at a cost of $43 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? 1214 Submit Answer Incorrect. Tries 3/99 Previous Tries 2. What is the Year 3 cash flow if Brisbane replaces its current system? Submit Answer Incorrect. Tries 4/99 Previous Tries 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? Submit Answer Tries 0/5 4. Assuming a discount rate of 8%, 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

=2000-1400

=600units

year 3 cash flow

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

= -$40,000 -($85*1400)-600*$198

=-$40,000-$119000-$118,800

= -277,800$

new system cash flow in year 3

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

= -[40,000+23,000increase]-310*$43-[370-310]*198*120%

= -$63,000-$13,330-$14,256

= -90,586

NPV

CURRENT SYSTEM

YEAR	cash flow	pv factor at 8%	present value
1-4	-277,800	3.3121	-$920,101[-$277,800*3.3121]

new system

YEAR	cash flow	pv factor at 8%	present value
1-4	-$90,586	3.3121	-$300,030[90586*3.3121]
0	-$220,000	1	-$220000
0	-$440,000	1	-$440000
4	19000	0.735	$13,965
		NET PRESENT VALUE	-$946,065[300030+220000+440000-13965]