The Initial Outlay for The

8/3/2019 The Initial Outlay for The

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The initial outlayfor the machine

would be850,000 for thepurchase of the

Vulcan Mold-Maker,

approximately155,000 for


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changes to

the plant, andadditional costs for

shipping,installation, and testing,bringing theoverall initial

outlay to

an estimated1.01 million.


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Thecost of the

Vulcan Mold-Maker could

be offset by130,000 as aresult of sellingthe six oldsemi-

automated stampi

ng machines. TheWeighted Average


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Cost ofCapital

(WACC)for Fonderia Di

Torino is 9.86%.This

percentagewascalculated by

multiplying the

cost of eachcapital by its


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weight and then

adding thetwo. The weight of

debt was given as33%. The cost ofdebt given was

6.8%. This numberwasbased on the

interest rate ofloans to the


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company from

Banco Nazionaledi Milano.

Thecorporate taxrate for Fonderiadi Torino is 43%.

The weight ofequity was given

as 67%. Thecostof equity used was


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9.86%. This

number wascalculated

by multiplying thecompanys betaof1.25 by the equityrisk premium of

6% and adding it

to the risk freereturn of 5.3%.


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The beta,equity

risk premium andrisk free return

were given in thecase. A sensitivity

analysis of thediscount rate was

performed. As

mentioned above,the


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WACCcalculated

for Fonderia diTorino is 9.86%

and the IRR of theproject is 12.34%.A NPV profilewasput together andit confirmed that

the new machinewould be profitable


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at discount

ratesup to 12.34%.This provides a

cushion in theWACC of almost

3% for anychanges in the

cost of debt or the

cost of equity thatmay cause the


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WACC to

increase. Ofcourse, any

decrease intheWACC would

prove thepurchase of the

new machine to be

even moreprofitable. Utilizing


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the WACC

computed above,a review of the

annual cash flowsfor the new

projectshows apositive net

present value

(NPV). In addition,the internal rate of


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return (IRR)

iscalculated to be12.34% and the

modified internalrate of return

(MIRR) iscalculated to

be11.08%. Both of

these are greaterthan the calculated


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WACC of 9.86%.

An analysis ofthepayback period

for thisproject shows

payback in 4.91years. This figure

is below the 5-

yearexpectationthat is set by


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management. All

of these factorspoint to investment

inthe machinebeinga sound decision.

LABOR COSTS

ANALYSIS

The effect ofinflation was


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briefly looked at in

the analysis ofthe reduction of

operating costs.If an inflation rate

of 3% wereapplied to the

operating costs for

the eight-year lifeof the


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newmachine, the

purchase beginsto look even more

favorable as NPVof the cash flows

almostdoubles andthe IRR increasesby more than 2%.

In addition, thepayback period of


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the VulcanMold-

Maker is reducedto 4.69 years.

Fonderia Di Cerinihas several

unknown variablesthat should be

consideredwhen making


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thedecision of

whether the newmachine should

be purchased.One of the factors

is that therearetwenty-two

machine operators

and threemaintenance


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workers that may

not be allowed tobelaid off due to

union agreements.If Francesca Cerini

could negotiatewith the union andhireworkers that

are not neededfor the Vulcan


21/45

Mold-Maker (25

workers at4.13/hour) as

janitors,then thecompany wouldnever achievepayback andwould have a

negative NPV of455,093.IfCerini


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had to hire the

unused workersat their current

rate ofpay (7.33/hour

formachineworkers

and 7.85/hour for

the maintenanceworkers), then


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new project would

actually costmoreto operate than

current machines.If the machine

were purchasedthe company

wouldhave to be

able to agree withthe labor union on


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the reduction of

twenty-fiveemployeeswithout

financiallystressing the

company. Thecompany could

negotiate a

buyout oftheemployees.


25/45

The buyout could

not exceed144,000 or

5,760 peremployee becausethe NPVwould benegative at that

point. If company

feels a buyout ispossible at this


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price they couldgo

forward with theproject. Another

factor to consideris the contracts

with the original-equipment

manufacturers

(OEM). Thesecontracts are


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stated to be

relatively long-term contracts

but they are notguaranteed. Theuncertainty of the

contracts andthe length of the

contracts couldpose a threat to


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thecompany. Econ

omic newssuggests that

Europe istrending toward an

economicslowdown. The

companymay face

changes indemand that


29/45

will affect the

sales. Since thecompany

manufacturesproducts for top of

the line cars, saleswould seem tobe inelastic to

economicslowdowns.Consid


30/45

ering weather or

not toexpand during an

economicslowdown should

be kept inmind. Purchasingthe Vulcan-Mold

Maker willdecrease medical


31/45

claims. Back

injury medicalclaimshave

doubled since1998 due to

the demand onemployees to liftheavy objects.

The mix of castingproducts has


32/45

shifted toward

heavy items. Ifthe new

automatedmachine is

purchased,thedemand to lift

heavy objects will

decrease.Although it is


33/45

unquantifiable at

this point,thereshould be a

decreasein medical claims

leading to a savingin insurance

costs. The current

semi-automatedprocess requires


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workers to be

trained frequentlyto attainconsistenc

y in mold quality.The Vulcan Mold-

Maker is a fullyautomated

machine. Human

errorwould play aconsiderably less


35/45

role in the

process. Thiswould lead to a

lower rejectionrate,lower scrap

rates, and anincrease in quality.

One would

assume thatmoney would


36/45

be savedusing

an automatedmachine. The

Vulcan-MoldMaker has a

maximum capacitythat is 30%

higher than the

currentsixmachines. The


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current machines

are only operatingat 90% of

capacity. Thecompany could

add 40% morecapacity if thispurchase wasmade. At the


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present time there

is no need formorespace. In the

future if thecompany would

like to expand intoother areas

of manufacturing,

they would havespace to do so


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without adding

additional costs toa newinvestment.

What this couldadd to the bottomline right now is

unknown.CONCLUSIONS

If FrancescaCerini can


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negotiate the

release of the 24workers that are

dedicatedto thecurrent

process but willnot be needed

with the purchase

of the newmachine, then


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Fonderia DiCerini

should proceedwith this project.

Not only becauseof the positive

NPV presented bythecash flows, but

also due to the

other factors thatare unquantifiable


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at this time such

as theadditionalcapacity from the

Vulcan Mold-Maker as opposed

to the currentmachines;

theadditional floor

space inthe factory that


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can be freed up for

other uses; thepotential

costsavings inadministrative,

training, medical,insurance,

and training costs;

and a lowerrejectionrate and


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reduction in scrap

rates. Unfortunately, the success of

the purchase ofthe Vulcan Mold-Maker does relyon the successofnegotiations with

the labor union. Ifthe release of the


45/45

unneeded workers

cannotbenegotiated, then

the new machineshould not be

purchased untilmore favorable

labornegotiations

can be reached

Date post:	06-Apr-2018
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The Initial Outlay for The

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