The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $186 with a resulting contribution margin of $77.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $41,500 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 $190,000. The machine would last for five years and would have salvage value at that time of $19,000. Brisbane would also spend $460,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $23,000. Brisbane expects this new control system to reduce the number of defective units to 390 per year. 325 of these defective units would be detected and repaired at a cost of only $50 per unit. Customers who still receive defective players will be given a refund equal to 120% of the purchase price. 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?