In: Accounting
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $185 with a resulting contribution margin of $73. Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $41,000 a year to inspect the CD players. An average of 1,800 units turn out to be defective - 1,260 of them are detected in the inspection process and are repaired for $80. 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 $590,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $22,000. This new control system would reduce the number of defective units to 370 per year. 300 of these defective units would be detected and repaired at a cost of $50 per unit. Customers who still received defective players would be given a refund equal to 150% of the purchase price.
Questions 1 & 2 [0 points; unlimited tries]
1. What is the Year 3 cash flow if Brisbane keeps using its current system?
2. What is the Year 3 cash flow if Brisbane replaces its current system?
Questions 3 & 4 [5 points each; 5 tries each] [NOTE: When computing present values, use the present value factors from the tables on page 118 in the Coursepack]
3. Assuming a discount rate of 6%, what is the net present value if Brisbane keeps using its current system?
4. Assuming a discount rate of 6%, what is the net present value if Brisbane replaces its current system?
(a) Year -3 Cash Flow using Current System | ||||||
Units | Rate | Value($) | Period | Discounting Factor | Present value($) | |
Inspection cost | $41,000 | 3 | 0.8396 | $34,424 | ||
no of deffectives | 1800 | |||||
Detected | 1260 | 80 | $1,00,800 | 3 | 0.8396 | $84,632 |
Undetected | 540 | 185 | $99,900 | 3 | 0.8396 | $83,876 |
Net cash Flow in Year -3 | $2,02,931 | |||||
(b) Year -3 Cash Flow using Proposed System | ||||||
Units | Rate | Value($) | Period | Discounting Factor | Present value($) | |
Inspection cost | $63,000 | 3 | 0.8396 | $52,895 | ||
no of deffectives | 370 | |||||
Detected | 300 | 50 | $15,000 | 3 | 0.8396 | $12,594 |
Undetected(Refund value 125% 0f present sale price) | 70 | 277.5 | $19,425 | 3 | 0.8396 | $16,309 |
Net cash Flow in Year -3 | $81,798 |
(c)Present system | ||||||
Units | Rate | Value($) | Period | Discounting Factor | Present value($) | |
Inspection cost | $41,000 | 1 to 5 | 4.2124 | $1,72,708 | ||
no of deffectives | 1800 | |||||
Detected | 1260 | 80 | $1,00,800 | 1 to 5 | 4.2124 | $4,24,610 |
Undetected | 540 | 185 | $99,900 | 1 to 5 | 4.2124 | $4,20,819 |
Net present value of Inspection /defective cost | $10,18,137 |
(d)Proposed system | ||||||
Units | Rate | Value($) | Period | Discounting Factor | Present value($) | |
Initial investment | $1,90,000 | 0 | 1 | $1,90,000 | ||
Worker training | $5,90,000 | 0 | 1 | $5,90,000 | ||
Inspection cost | $63,000 | 1 to 5 | 4.2124 | $2,65,381 | ||
Salvage Value | -$21,000 | 5 | 0.7473 | -$15,693 | ||
no of deffectives | 370 | |||||
Detected | 300 | 50 | $15,000 | 1 to 5 | 4.2124 | $63,186 |
Undetected(Refund value 150% 0f present sale price) | 70 | 277.5 | $19,425 | 1 to 5 | 4.2124 | $81,826 |
Net present value of Inspection /defective cost | $11,74,700 |