The Brisbane Manufacturing Company produces a single model of a CD player. Each

Question

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $201 with a resulting contribution margin of $79. 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 1,900 units turn out to be defective - 1,330 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 $18,000. Brisbane would also spend $610,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $20,000. This new control system would reduce the number of defective units to 390 per year. 325 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 one-and-a-half 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?

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?

PLEASE show how you got your answers, where the numbers are coming from in the problem and provide the exact answers. THANK YOU!

Explanation / Answer

ALTERNATIVE 1: KEEP USING THE CURRENT SYSTEM Present Value (PV ) Of cash flow=(Cashflow)/(1+i)^N i=discount rate=6%=0.06, N=Year of cash flow Refund cost=Variable cost*number of units refunded N (1330*75) (1900-1330)*(201-79) A B=A/(1.06^N) Year Inspection cost Repair cost Refund cost Total cost PV of cash flow 1 $41,000 $            99,750 $       69,540 $210,290 198386.7925 2 $41,000 $            99,750 $       69,540 $210,290 187157.3514 3 $41,000 $            99,750 $       69,540 $210,290 176563.539 4 $41,000 $            99,750 $       69,540 $210,290 166569.3764 TOTAL 728677.0593 Net Present value (NPV)= $           728,677 ALTERNATIVE 2: REPLACE THE CURRENT SYSTEM Refund cost=Variable Cost+(0.5*Sales Price)*Number of units refunded (325*50) (390-325)*(201-79+0.5*201) N A B=A/(1.06^N) Year X-Ray machine Salvage Value Worker training Inspection cost Repair cost Refund cost Total cost PV of cash flow 0 $190,000 $610,000 $800,000 800000 1 $61,000 $             16,250 $              14,463 $91,713 86521.22642 2 $61,000 $             16,250 $              14,463 $91,713 81623.7985 3 $61,000 $             16,250 $              14,463 $91,713 77003.5835 4 ($18,000) $61,000 $             16,250 $              14,463 $73,713 58387.20415        1,103,535.81257 Net Present value (NPV)= $                 1,103,536 1 Year 3 cash flow if Brisbane keeps using its current system= $210,290 2 Year 3 cash flow if Brisbane replaces its current system= $91,713 3 Net Present value if Brisbane keeps using its current system= $            728,677 4 Net Present value if Brisbane replaces its current system= $        1,103,536

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.