The Brisbane Manufacturing Company produces a single model of a CD player. Each
ID: 2569498 • Letter: T
Question
The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $205 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 $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 $180,000. 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 $25,000. This new control system would reduce the number of defective units to 350 per year. 280 of these defective units would be detected and repaired at a cost of $48 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. 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?
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?
Explanation / Answer
1. What is the Year 2 cash flow if Brisbane keeps using its current system?
Answer: Negative cashflow of $114,800
2. What is the Year 2 cash flow if Brisbane replaces its current system?
Answer: Positive Cashflow of $48,372
3. Assuming a discount rate of 6%, what is the net present value if Brisbane keeps using its current system?
Answer: Negative NPV of $398,941
4. Assuming a discount rate of 6%, what is the net present value if Brisbane replaces its current system?
Answer: Negative NPV of $585,268
If Brisbane keeps using its current system Year1 Year 2 Year 3 Year 4 Total Inspection Charges ($41,000) ($41,000) ($41,000) ($41,000) Defective Unit repair cost (1260 x $75) ($94,500) ($94,500) ($94,500) ($94,500) Refund to customer (540 x $205) ($110,700) ($110,700) ($110,700) ($110,700) Contribution (1800 x $73) $131,400 $131,400 $131,400 $131,400 Net Cashflow ($114,800) ($114,800) ($114,800) ($114,800) PV @ 6% 0.9434 0.9 0.8396 0.7921 Present Value ($108,302) ($103,320) ($96,386) ($90,933) ($398,941)Related Questions
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