Fonderia di Torino S.P.A. Case Study
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Keep using the old machine incurs higher cost(higher EAA) than replacing it with the new one. Therefore assuming sales are equal for both cases, when sales is smaller than 328338.07 and greater than 434036.67, Fonderia di Torino S.p.A should definitely replace the old machine with the new automated machine.
Benefit over time
The three scenarios illustrated above clearly shows that the investment in the new machine creates greater value to the company, unless there should be some unexpected turnout in sales. By acquiring the Vulcan Mold-Maker machine Fonderia di Torino S.p.A will be able to replace labor intensive required semi-automated machines with automated machines, thus reducing medical claims. The company will also benefit from higher levels of product quality and lower scrap rates. 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 considerable influence on the outcome of the NPV.
Lastly, the latest economic news suggests that the economies of Europe are headed for a slowdown which will also have a strong impact on the outcome of the NPV.
How about the inflation rate of 3 percent (or higher)? Will that affect the attractiveness of the Vulcan Mold-Maker? The answer is no. Inflation rate does not affect NPV since NPV is always calculated using real rate or nominal rate “consistently.”
3. Should Francesca Cerini proceed with the project?
Francesca Cerini should proceed with the project since the figures above show that the new project generates more value to the company than the old one. Moreover, replacing the semi-automated machine with the Vulcan Mold-Maker offers strategic benefits in the long run as previously discussed.