Solution-23.doc

Fonderia di Torino S.p.A

INTRODUCTION

Fonderia di Torino’s specialization is the production of precision metal castings for the use in automotive, aerospace, aerospace, and construction equipment. The company stood out because of its quality products. It was awarded for its quality parts. Its products included safety parts like crankshafts, transmissions, transmissions, brake calipers, ales, wheels and various steering!assembly parts. It grew slowly but steadily since its foundation.

 The mainly "uropean "uropean customers of Fonderia Fonderia di Torino Torino were original!equipment original!equipment manufacturers manufacturers #$"%&. The $"%s insisted on quality products. The $"%s gave preferential treatment to Fonderia di Torino. The con'dential market!demand information that Fonderia di Torino received helped increase the precision of production scheduling and the company received relatively long!term supply contracts from the $"%s.

Francesca (erini, the great!grandda great!granddaughter ughter of )enito (erini, is the managing director of Fonderia di Torino. In *ovember of + she was faced with the decision of purchasing an automated molding machine called the -ulcan %old!%aker. %old!%aker. The machine would produce the sand molds into which molten iron was poured to get iron castings. The -ulcan %old!%aker would replace an older machine and also some of the work force. It would make room room for additional capacity and epansion. The sand molds currently used to make castings were prepared in a semi!automated process. The semi!automated process was labor intensive for the workers. It required training and retraining to meet the consistency in mold quality and demanded heavy lifting from workers. %edical claims had recently doubled as the mi of casting products moved toward heavy items.

ANALYSIS

 The economic bene'ts of of acquiring the -ulcan -ulcan %old!%aker %old!%aker machine include higher quality products. ince the company is supplying parts for higher quality cars, higher quality products are important when the company is negotiating longer!term contracts. The machine also has lower raw material scrap rates, which will save raw material costs. /nother bene't is the company will employ twenty!'ve less workers. workers. The cost of managing, training, insuring and other costs associated with employing those additional employees is eliminated. /ny issues with union employees will be decreased due to the lower number of union employees.

 The initial outlay for the machine would be 012, for the purchase of the -ulcan %old! %aker, approimately 0322, for changes to the plant, and additional costs for shipping, installation, and testing, bringing the overall initial outlay to an estimated 03.3 million. The cost of the -ulcan %old!%aker could be o4set by 035, as a result of selling the si old semi!automated stamping machines.

 The 6eighted /verage (ost of (apital #6/((& for Fonderia 7i Torino is 8.19:. This percentage was calculated by multiplying the cost of each capital by its weight and then adding the two.  The weight of debt was given as 55:. The cost of debt given was 9.1:. This number was based on the interest rate of loans to the company from )anco *azionale di %ilano. The corporate ta rate for Fonderia di Torino is ;5:. The weight of equity was given as 9ect is 3+.5;:. / *?- pro'le was put together and it con'rmed that the new machine would be pro'table at discount rates up to 3+.5;:. This provides a cushion in the 6/(( of almost 5: for any changes in the cost of debt or the cost of equity that may cause the 6/(( to increase. $f course, any decrease in the 6/(( would prove the purchase of the new machine to be even more pro'table.

@tilizing the 6/(( computed above, a review of the annual cash Aows for the new pro>ect shows a positive net present value #*?-&. In addition, the internal rate of return #I==& is calculated to be 3+.5;: and the modi'ed internal rate of return #%I==& is calculated to be 33.1:. )oth of these are greater than the calculated 6/(( of 8.19:. /n analysis of the payback period for this pro>ect shows payback in ;.83 years. This 'gure is below the 2!year epectation that is set by management. /ll of these factors point to investment in the machine being a sound decision.

LABOR COSTS ANALYSIS

 The e4ect of inAation was brieAy looked at in the analysis of the reduction of operating costs. If an inAation rate of 5: were applied to the operating costs for the eight!year life of the new machine, the purchase begins to look even more favorable as *?- of the cash Aows almost doubles and the I== increases by more than +:. In addition, the payback period of the -ulcan %old!%aker is reduced to ;.98 years.

Fonderia 7i (erini has several unknown variables that should be considered when making the decision of whether the new machine should be purchased. $ne of the factors is that there are twenty!two machine operators and three maintenance workers that may not be allowed to be laid o4 due to union agreements. If Francesca (erini could negotiate with the union and hire workers that are not needed for the -ulcan %old!%aker #+2 workers at 0;.35Bhour& as >anitors, then the company would never achieve payback and would have a negative *?- of 0;22,85. If (erini had to hire the unused workers at their current rate of pay #0