The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $191 with a resulting contribution margin of $74.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $42,000 a year to inspect the CD players. An average of 1,900 units turn out to be defective - 1,520 of them are detected in the inspection process and are repaired for $85. 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 $20,000. Brisbane would also spend $580,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $21,000. This new control system would reduce the number of defective units to 400 per year. 345 of these defective units would be detected and repaired at a cost of $44 per unit. Customers who still received defective players would be given a refund equal to 150% 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?