Questions 1 & 2 ask for cash flows only, no present values. They are a critical part of the problem, but since the problem is primarily about capital budgeting, 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. ______________________________________________________

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $194 with a resulting contribution margin of $73.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $39,500 a year to inspect the CD players. An average of 2,100 units turn out to be defective - 1,680 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 $210,000. The machine would last for four years and would have salvage value at that time of $19,000. Brisbane would also spend $450,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $24,000. This new control system would reduce the number of defective units to 390 per year. 340 of these defective units would be detected and repaired at a cost of $41 per unit. Customers who still received defective players would be given a refund equal to 120% 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?

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2. What is the Year 3 cash flow if Brisbane replaces its current system?

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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 8%, what is the net present value if Brisbane keeps using its current system?

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4. Assuming a discount rate of 8%, what is the net present value if Brisbane replaces its current system?