Questions 1 & 2 ask for cash flows only, no present values. Since this problem i
ID: 2565638 • Letter: Q
Question
Questions 1 & 2 ask for cash flows only, no present values. Since this 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 $183 with a resulting contribution margin of $80.
Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $40,500 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 $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 $19,000. Brisbane would also spend $620,000 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 400 per year. 340 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 one-and-a-fourth times 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]
3. Assuming a discount rate of 8%, what is the net present value if Brisbane keeps using its current system?
4. Assuming a discount rate of 8%, what is the net present value if Brisbane replaces its current system?
Explanation / Answer
1) Calculation of Year 3 Cash Flow if Brisbane keeps using its current system:-
2) Calculation of Year 3 Cash Flow if Brisbane replaces its current system:-
3) Net Present Value if Brisbane keeps using its current system:-
4) Net Present Value if Brisbane keeps using its current system:-
Particulars Amount in $ Sales Revenue (2,000*$183) 366,000 Variable Cost [2,000*($183-$80)] (206,000) Inspection on CD Players (40,500) Repair Cost (1,600 units*$85) (136,000) Refund of Purchase Price (400 units*$183) (Contribution lost) (73,200) Total Cash Flow (Outflow) (89,700)Related Questions
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