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 $80.

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 2,000 units turn out to be defective - 1,600 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. Competitors are expected to improve their quality control systems in the future, so if Brisbane does not improve its system, sales volume is expected to fall by 480 CD players a year for the next four years. In other words, it will fall by 480 units in the first year, 960 units in the second year, etc..

The proposed quality control system involves the purchase of an x-ray machine for $300,000. The machine would last for four years and would have salvage value at that time of $19,000. Brisbane would also spend $790,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $23,000. This new control system would reduce the number of defective units to 400 per year. 330 of these defective units would be detected and repaired at a cost of $47 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 2 cash flow if Brisbane keeps using its current system?  

2. What is the Year 2 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

Ans 1 Current sysytem Cash Outflow in Year 2 Other cost Year 2 Year 1 Year 3 Year 4 Repaired in Inspection process (1600*75) 120000 120000 120000 120000 Refund to customers (2000-1600)*201 80400 80400 80400 80400 Inspection cost 41000 41000 41000 41000 Decrease in sales(contribution loss (480*2*80) 76800 38400 115200 153600 Total cash otflow except varible cost 318200 Ans 279800 356600 395000 Ans 2 New Sysytem Cash Outflow   Year 2 Year 1 Year 3 Year 4 Repaired in Inspection process 330*47 15510 15510 15510 15510 Refund to customers (400-330)*201*1.5 21105 21105 21105 21105 Annual Cost 64000 64000 64000 64000 Total cash outflow 100615 salvage vale -19000 Total cash outflow 100615 100615 81615 Initial cost in new sysytem Machine 300000 Training Cost 790000 Initial cost in new sysytem 1090000 Ans 3 Calculation of NPV-Current System Year Cash outflow Discount Factor 8% Discount Cash outflow 1 279800 0.9259 259074.1 2 318200 0.8573 272805.2 3 356600 0.7938 283080.6 4 395000 0.7350 290336.8 NPV 1105297 -1105297 Cash outflow Ans 24Calculation of NPV-New System Year Cash outflow Discount Factor 6% Discount Cash outflow 0 1090000 1 1090000 1 100615 0.9259 93162.04 2 100615 0.8573 86261.15 3 100615 0.7938 79871.43 4 81615 0.7350 59989.46 NPV 1409284 Its cash outflow -1409284 If you need any more clarification, do let me know

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