Case Analysis of Fonderia di Torino

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Outlook
Fonderia di Torino is looking for the purchase of Vulcan Mold-Maker automated molding machine by replacing its 6 semi-automated stamping machines. The major benefit from acquiring Vulcan Mold-Maker machine is the production of higher quality products. The higher quality products will be effective for the firm to negotiate long-term contracts with original-equipment manufacturers (OEMs). The new machine will have a lower scrape rate, which will be effective to save the cost associated with raw material. This report will include the analysis of the new capital investment project to determine whether the new machines should be accepted or not by Fonderia di Torino. The benefits and cost of the project will be analyzed in this report with the consideration of all qualitative and quantitative factors.
In order to assess the economic benefits from Vulcan Mold-Maker Automated machine, the cash outflows are compared with the existing six semi-automated machines to determine the net cost in eight years, which the firm has to face. In the analysis, it is assumed that both machines are performing the same level output instead of having different capacities. Along with this assumption, we calculated the present value of cash outflows by discounting the cash flows from 9.9% weighted average cost of capital (WACC). Then we calculated the present value of cash flows of each machine and then the annual payment in case of each machine t determine, which machine will be less costly for the firm. From the analysis and result, it can be concluded that Vulcan Mold-Maker Automated machine will have lower annual payments with improved business efficiency.
Capital Project Proposal
Fonderia di Torino has an offer to sell its old machines in €130000 and buy new machines t improve the business efficiency to increase its negotiating ability. The new machine will require only 2 workers, one for each shift, instead of 27 workers (24 for 2 shifts and 4 maintenance staff) in old machines, which would save a huge cost for the firm in terms of wages, training, insuring and other associated costs with the staff. Along with this, issues related to union will also be lowered due to decline in number of employees in union.
The total cost of the machine will be €1.01 million along with its original and other installation costs, which will be offset by the €130000 from the sale of old six machines. The new machine will improve overall efficiency of the firm and will provide more cash inflows due to saving in salaries and other associated costs. Vulcan Mold-Maker automated molding machine would also need 30% of the foundry's space, which will be half of the space used by old six semi-automated stamping machines. This space could be used for other purposes to increase the business significance and effectiveness. But at the same time, it is quite difficult for Fonderia di Torino for taking the decision of replacing six semi-automated stamping machines due to some qualitative factors as below:
• Cerini has a tough collective bargaining agreement with employee unions and she is unsure whether the union will allow her to lay-off 24 operators or not. The workers can be reassigned the job but it will cost €4.1 an hour, which will increase the cost of labour and maintenance and will reduce the savings from new machine. Thus, ...