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 $199 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 five years and would have salvage value at that time of $20,000. Brisbane would also spend $460,000 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 370 per year. 320 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 [0 points; unlimited tries) 1. What is the Year 2 cash flow if Brisbane keeps using its current system? Submit Answer Tries 0/99 2. What is the Year 2 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 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? eneral orderences on what is marked

Answer 1

1.

Identified Defects	1,400
Repair cost per unit	$             85
Total repair cost	$ 1,19,000
Undetected units	600
2000-1400
Refund price per unit	$           199
Total Refund cost	$ 1,19,400
Inspection cost	$     40,000
Total costs	$ 2,78,400

2.

Identified Defects	320
Repair cost per unit	$         43
Total repair cost	$ 13,760
Undetected units	50
370-320
Refund price per unit	$       239
Total Refund cost	$ 11,940
Inspection cost	$ 61,000
Total costs	$ 86,700

3.

PARTICULARS	YEARS
	0	1	2	3	4	5
INITIAL INVESTMENT
CASH OUTFLOWS		2,78,400.00	2,78,400.00	2,78,400.00	2,78,400.00	2,78,400.00
DISCOUNTING RATE		0.925925926	0.85733882	0.793832241	0.735029853	0.680583197
8%
PRESENT VALUE		$ 2,57,777.78	$ 2,38,683.13	$ 2,21,002.90	$ 2,04,632.31	$ 1,89,474.36	$ 11,11,570.47
TOTAL COST	11,11,570.47

4.

PARTICULARS	YEARS
	0	1	2	3	4	5
INITIAL INVESTMENT	$ 6,80,000.00
220000+460000
CASH OUTFLOWS		$     86,700.00	$     86,700.00	$     86,700.00	$     86,700.00	$     86,700.00
SALVAGE VALUE						$   -20,000.00
		$     66,700.00	$     66,700.00	$     66,700.00	$     66,700.00	$     66,700.00
DISCOUNTING RATE		0.925925926	0.85733882	0.793832241	0.735029853	0.680583197
8%
PRESENT VALUE	6,80,000.00	$     61,759.26	$     61,759.26	$     61,759.26	$     61,759.26	$     61,759.26	$    3,08,796.30
TOTAL COST	3,08,796.30