Question

Questions 1 & 2 ask for cash flows only, no present values. Although they are a critical part of the problem, since the problem is a capital budgeting problem, 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 $206 with a resulting contribution margin of $72.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $38,500 a year to inspect the CD players. An average of 2,200 units turn out to be defective - 1,540 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 $210,000. The machine would last for five years and would have salvage value at that time of $20,000. Brisbane would also spend $650,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $25,000. This new control system would reduce the number of defective units to 380 per year. 315 of these defective units would be detected and repaired at a cost of $42 per unit. Customers who still received defective players would be given a refund equal to 150% 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?  

Incorrect.

Tries 3/99

Previous Tries

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]

3. Assuming a discount rate of 6%, what is the net present value if Brisbane keeps using its current system?  

4. Assuming a discount rate of 6%, what is the net present value if Brisbane replaces its current system?  

Answer 1

Requirement 1
	Year 3 cash flow if Brisbane keeps using its current system
		Inspection costs		38500
		Repair costs		130900	=1540*85
		Refund costs		135960	=(2200-1540)*206
		Cash flow Total		305360
Requirement 2
	year 3 Cash flow if Brisbane replaces its current system
		Depreciation on X-ray machine		38000	=(210000-20000)/5
		Training of worker		130000	=650000/5
		Annual Inspection cost		63500	=38500+25000
		Repair costs		13230	=315*42
		Refund costs		20085	=(380-315)*206*150%
		Cash flow Total		264815
Requirement 3
	Assuming Discount rate of 6%, net present value, if Brisbane keeps current system.
	Year	Cash flow	PVIF@6%	Present Value
	0		1
	1	305360	0.94339623	288075.4717
	2	305360	0.88999644	271769.3129
	3	305360	0.83961928	256386.1443
	4	305360	0.79209366	241873.721
	5	305360	0.74725817	228182.7557
		Net present Value		1286287.406
Requirement 4
	Assuming Discount rate of 6%, net present value, if Brisbane replaces the current system.
	Year	Cash flow	PVIF@6%	Present Value
	0		1
	1	264815	0.94339623	249825.4717
	2	264815	0.88999644	235684.4073
	3	264815	0.83961928	222343.7804
	4	264815	0.79209366	209758.2834
	5	264815	0.74725817	197885.173
		Net present Value		1115497.116