Questions 1 & 2 ask for cash flows only, no present values. They are a critical part of the problem. 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.

The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $204 with a resulting contribution margin of $72.

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 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 $180,000. The machine would last for four years and would have salvage value at that time of $21,000. Brisbane would also spend $440,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $20,000. This new control system would reduce the number of defective units to 380 per year. 320 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 120% of the purchase price.

1. What is the Year 3 cash flow if Brisbane keeps using its current system?

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

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?