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The initial outlay for the machine would be 850,000 for the purchase of the Vulcan MoldMaker, approximately

155,000 for

changes to the plant, and additional costs for shipping,installatio n, and testing, bringing the overall initial outlay to an estimated 1.01 million.

Thecost of the Vulcan MoldMaker could be offset by 130,000 as a result of selling the six oldsemiautomated stampi ng machines. The Weighted Average

Cost of Capital (WACC) for Fonderia Di Torino is 9.86%. This percentagewas calculated by multiplying the cost of each capital by its

weight and then adding the two. The weight of debt was given as 33%. The cost of debt given was 6.8%. This number wasbased on the interest rate of loans to the

company from Banco Nazionale di Milano. Thecorporate tax rate for Fonderia di Torino is 43%. The weight of equity was given as 67%. Thecost of equity used was

9.86%. This number was calculated by multiplying the companys betaof 1.25 by the equity risk premium of 6% and adding it to the risk free return of 5.3%.

The beta,equity risk premium and risk free return were given in the case. A sensitivity analysis of the discount rate was performed. As mentioned above, the

WACCcalculated for Fonderia di Torino is 9.86% and the IRR of the project is 12.34%. A NPV profilewas put together and it confirmed that the new machine would be profitable

at discount ratesup to 12.34%. This provides a cushion in the WACC of almost 3% for any changes in the cost of debt or the cost of equity that may cause the

WACC to increase. Of course, any decrease in theWACC would prove the purchase of the new machine to be even more profitable. Utilizing

the WACC computed above, a review of the annual cash flows for the new projectshows a positive net present value (NPV). In addition, the internal rate of

return (IRR) iscalculated to be 12.34% and the modified internal rate of return (MIRR) is calculated to be11.08%. Both of these are greater than the calculated

WACC of 9.86%. An analysis of thepayback period for this project shows payback in 4.91 years. This figure is below the 5yearexpectation that is set by

management. All of these factors point to investment in the machinebeing a sound decision.

The effect of inflation was

briefly looked at in the analysis of the reduction of operating costs. If an inflation rate of 3% were applied to the operating costs for the eight-year life of the

newmachine, the purchase begins to look even more favorable as NPV of the cash flows almostdoubles and the IRR increases by more than 2%. In addition, the payback period of

the VulcanMoldMaker is reduced to 4.69 years. Fonderia Di Cerini has several unknown variables that should be considered when making

thedecision of whether the new machine should be purchased. One of the factors is that there aretwenty-two machine operators and three maintenance

workers that may not be allowed to belaid off due to union agreements. If Francesca Cerini could negotiate with the union and hireworkers that are not needed for the Vulcan

Mold-Maker (25 workers at 4.13/hour) as janitors,then the company would never achieve payback and would have a negative NPV of 455,093.If Cerini

had to hire the unused workers at their current rate of pay (7.33/hour for machineworkers and 7.85/hour for the maintenance workers), then

new project would actually costmore to operate than current machines. If the machine were purchased the company wouldhave to be able to agree with the labor union on

the reduction of twenty-five employeeswithout financially stressing the company. The company could negotiate a buyout of theemployees.

The buyout could not exceed 144,000 or 5,760 per employee because the NPVwould be negative at that point. If company feels a buyout is possible at this

price they couldgo forward with the project. Another factor to consider is the contracts with the originalequipment manufacturers (OEM). These contracts are

stated to be relatively longterm contracts but they are not guaranteed. The uncertainty of the contracts and the length of the contracts could pose a threat to

thecompany. Econ omic news suggests that Europe is trending toward an economic slowdown. The companymay face changes in demand that

will affect the sales. Since the company manufacturesprod ucts for top of the line cars, sales would seem to be inelastic to economic slowdowns.Consid

ering weather or not to expand during an economic slowdown should be kept in mind. Purchasing the Vulcan-Mold Maker will decrease medical

claims. Back injury medical claimshave doubled since 1998 due to the demand on employees to lift heavy objects. The mix of casting products has

shifted toward heavy items. If the new automated machine is purchased,the demand to lift heavy objects will decrease. Although it is

unquantifiable at this point, thereshould be a decrease in medical claims leading to a saving in insurance costs. The current semi-automated process requires

workers to be trained frequently to attainconsistenc y in mold quality. The Vulcan MoldMaker is a fully automated machine. Human errorwould play a considerably less

role in the process. This would lead to a lower rejection rate,lower scrap rates, and an increase in quality. One would assume that money would

be savedusing an automated machine. The Vulcan-Mold Maker has a maximum capacity that is 30% higher than the current sixmachines. The

current machines are only operating at 90% of capacity. The company could add 40% more capacity if this purchase was made. At the

present time there is no need formore space. In the future if the company would like to expand into other areas of manufacturing, they would have space to do so

without adding additional costs to a newinvestment. What this could add to the bottom line right now is unknown.

If Francesca Cerini can

negotiate the release of the 24 workers that are dedicated to thecurrent process but will not be needed with the purchase of the new machine, then

Fonderia DiCerini should proceed with this project. Not only because of the positive NPV presented by thecash flows, but also due to the other factors that are unquantifiable

at this time such as theadditional capacity from the Vulcan MoldMaker as opposed to the current machines; theadditional floor space in the factory that

can be freed up for other uses; the potential costsavings in administrative, training, medical, insurance, and training costs; and a lower rejectionrate and

reduction in scrap rates. Unfortunatel y, the success of the purchase of the Vulcan MoldMaker does rely on the successof negotiations with the labor union. If the release of the

unneeded workers cannot benegotiated, then the new machine should not be purchased until more favorable labornegotiations can be reached