Fonderia di Torino

1. What are the economic benefits of acquiring the Vulcan Mold-Maker machine? In other words, what is the project’s NPV? This includes calculating initial outflows, cash flows during the lifetime of the project and salvage value. In other words, if you buy the mold maker, you will sell the old machines – what do you net from this sale, and when will you net it? The benefits of acquiring the Vulcan Mold Maker are that it requires less labor, and is generally more efficient as a machine, requiring less upkeep. The NPV of the new machine is -269985.99, and the NPV of the old machine is -36434.63. The machine would also free up new space for other things if necessary. The initial outflow is the cost of the machine, which is offset by the tax savings associated with the loss of the sale of the old machine, to yield an initial outlay of -813296.25.

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2. You have two alternatives – buy the new machine and sell the old machines or don’t buy the new machine and keep the old machine. How can you compare two investments with unequal lives? Which machine is the least cost machine? You can compare two investments with unequal lives by calculating the equivalent annual cost for each one. In this case, the one with the lower EAC is the option of keeping the old machine, as it is 8341.43 for that and 50340.24 to buy the new one.

3. What uncertainties or qualitative considerations might influence your recommendation? How, if at all, would an inflation rate of 3% (or higher) affect the attractiveness of the Vulcan Mold-Maker? The case says that the positive labor savings will be at least $5200 a year, but it could be more, so that is an uncertainty that needs to be accounted for, in that it could be significantly higher in the future. An inflation rate of 3% would be applied to all operating costs, but not depreciation. This would make the investment in each option less attractive, as the npv will become -275691.85 for buying the new machine and -51367.57 for keeping the old. Thus, it will make both of the options less attractive to investment. It would also raise the EAC of both to 51404.32 and 11744.3, respectively.

4. What other quantifiable factors should you consider? How should you consider the labor issues in this case? What about the greater efficiency that the new machine would have?

5. What are the qualitative factors to consider in this case, and how would they influence your decision? 6. What is your final decision – buy the new machine or don’t buy? You should write up your answers to the above questions and attach your spreadsheets used to find the answers to the numerical questions. I will not answer individual questions about this case – I don’t want to give any student an advantage over another. However, I will answer questions on the Discussion Board feature of blackboard, so everyone can see the questions and answers.

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