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Previous notes about case This report is about the Vesuvio Fonderia Company which was founded by the Lombardi family in 1912 and which is specialized in the production of precision metal castings for the aeronautics, automobile, and construction industry. This company was a very important one in Italy which can be verified by the fact that it had been listed on the Milan Stock Exchange Market (1991). The main questions for the company to face are related to: ▪ Working with semi-automatic machines which have 6 years of usage. The new ones are highly automated and promise a higher expected life (8 years); ▪ In terms of work quality the old machines are less productive combined with a lack of consistency. In contrast,…show more content…
In both cases we would recommend the company to invest in the new Bond-O-Matic molding machine with a cost of capital of 17%. If we were assuming that the old semi-automated machines would still be working after 6 years and guaranteeing an operating life of 8 years, then we just had to compare the Net Present Values of both projects. In this case we only had to choose the less negative one because our calculation only contains the costs of both projects. On the other hand, if we were assuming that after six years we would have to buy new machines we must use the equivalent annual annuity approach because of the project's different time horizons. Either way we recommend the company to invest in the new Bond-O-Matic molding machine because that decision always provides the highest Net Present Value compared to its alternative. 5- Is there a problem of unequal lives? Who can you deal with it? In our case the "Vesuvio Fonderia" has to choose one out of two mutually exclusive projects. Either the company invests in a new Bond-O-Matic molding machine which needs to be replaced after eight years or they keep on working with their six old semi-automated ones. Those machines would probably need to be replaced after six years. Bond-O-Matic (FCF in 1000 lira) [pic] Semi-automated

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