Fonderia Di Torino S.P.A.

1148 Words Nov 7th, 2010 5 Pages
Finance Case Study: Fonderia di Torino S.p.A.

Case Overview:
Company considering purchase of Vulcan Mold-Maker automated molding machine. Machine prepares sand molds into molten iron using iron castings, automates manual intensive process.

Questions:

1. Assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value (NPV) warrant the investment in the machine? Assume that with ordinary maintenance, the semi-automated equipment could be operated for two more years beyond its depreciable life.

Given:

Total Cost New Machine = 1,010, 000 Euros Depreciated over 8 yrs; replace after 8yrs.
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Labor costs will be reduced by almost 298,334.4 euros (24*7.33*8*210 + 2*3*7.85*8*210- 2*2*11.36*8*210=298,334.4) and additional 5,200 euros will be saved as a result from improved labor efficiency.

2. What uncertainties or qualitative considerations might influence our recommendation? How, if at all, would an inflation rate of 3 percent(or higher) affect the attractiveness of the Vulcan Mold-Maker? Please estimate the impact on NPV from a change in any of these elements.

 NPV and EAA proved that the company should invest in the new machine. However, there are still some uncertainties that might affect the attractiveness of the new machine. Federia Torino S.p.A still has to decide whether the tough collective-bargaining agreement the company has with the employees ' union would allow the company to lay off the 24 operators of the semi-automated machines. Reassigning the workers to other jobs might be easier, but the only positions needing to be filled are those of janitors, who are paid 4.13 euros an hour. The extent of any labor savings would depend on negotiations with the union. If the workers are reassigned as janitors, NPV will decrease due to increase in labor costs.
 Secondly, the company is still unsure when added capacity of the new machine would be needed. The old machines currently operate at only 90 percent of capacity. The projection as to how much capacity of the new machine will be utilized, will have a

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