Fonderia Di Torino free essay sample

In order to determine the attractiveness of the investment it is important to determine the financial impact that the new Vulcan mold-maker will have on the firm if it replaces their current machines. It will be necessary to take into consideration both quantitative and qualitative measures. This project should be considered an independent project that is accepted or rejected on its own merits. The project will be decided from a cost/benefit standpoint by looking at the projects projected discounted cash flows, the calculated NPV of the project, the IRR and PI. Finally, the projects other qualitative advantages and disadvantages must also be considered before the project is accepted or rejected. Question 1: What is the basic nature of the problem in this case? Answer: The basic nature of the problem in this case is all about capital budgeting issue that was being faced by Fonderia di Torino S. p. A. in decided to have some resources investments in order to manage their production throughputs. Managing director of this specialty foundry must decide whether to approve a major investment to automate part of her plants production process. The case presents information sufficient to build cash-flow forecasts of production costs incremental to the investment. Discounted-cash-flow (DCF) analysis reveals that the investment project is attractive but that the benefits hinge on important assumptions about the plants business volume, the managers ability to lay off workers over the objections of a labor union, and the hurdle rate. 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. Question 6: Are the qualitative issues that we should address but which are not reflected in the DCF analysis? In order to determine the attractiveness of the investment it is important to determine the financial impact that the new Vulcan mold-maker will have on the firm if it replaces their current machines. It will be necessary to take into consideration both quantitative and qualitative measures.