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

Answer of 0 year 2 cash flow using curent system Cash flow = cost do inspection + (number detected 1 x cost to fix) + (number shipped x purchase price) +(sales volume decrease in year ixem) =-40,000 - (1,600x 75)-(1600x195 = - 40,000 - (1,600 x 15 ) - (400x195) = $ – 238,000 @year a cash flow replacing coerent systems thnual inspection Cost = ongnal inspection Cost tirer case in inspection last = 40,000 + 21,000 =+61000 cost of fixing Difective = number Detected & cost do fix = 330 X 48 = 15840

Refund value = Defektive units shipped x lost to replace = (406-330) x (1.2 x 195) = 70 x 234 =$16380 Total cash flow = -61000 - 15840-16380 -93220 a. Total cash flow : $93220 . 3 Net present value using current system cost de inspection = $40,000 for year 1. Repaired units = 1600 x 75 = 120000 Refund = 400x 195 = 78000 Total = 40,000 +120000+78000 = $ 238,000

Present valul factor@tt cash flows 238,000 238.000 0.943 0.890 238.000 0.840 238,000 0.792 238,000 0.747 Net Dresent value = et present valuc Replaing current system? Cost o replacement - 470.000 +190,000 -- 31,000 = $ 639000 Cash flow (from) =-93820 : Present value dr annuity for 5 years (@6%) = - $93220X 4.312 -$-392643

Nct present value = cost of replacement present value dr annuity = - $392643 – 639000 = -1031643 L inet present valere - - $1031643.