The Brisbane Manufacturing Company produces a single model of a CD player. Each player is sold for $199 with a resulting contribution margin of $76.

Brisbane's management is considering a change in its quality control system. Currently, Brisbane spends $38,000 a year to inspect the CD players. An average of 2,000 units turn out to be defective: 1,400 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 $210,000. The machine would last for four years and would have salvage value at that time of $18,000. Brisbane would also spend $470,000 immediately to train workers to better detect and repair defective units. Annual inspection costs would increase by $21,000. Brisbane expects this new control system to reduce the number of defective units to 350 per year. 295 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 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 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?

Answer rating: 100% (QA)

Solution 1 Computation of Year 3 Cash Flow Using Current System Annual Inspecti... View the full answer