Comparing Capital Investments

In: Other Topics

Submitted By bart1234
Words 938
Pages 4
Memorandum:
To: Maurry Tamarkin
Oct. 2, 2002
Subject: Fonderia di Torino S.p.A. Analysis of the Vulcan Mold-Making machine has been valued as was requested by
Fonderia di Tortina. In order to assess the economic benefits, we started by comparing the cash flows, specifically the outflows after taxes for both mold-making systems see
(exhibit 1-1). We assumed that two machines produce the same quantities of products, despite the fact that they have different capacities. Relying on this assumption, we found the present values of costs associated with each machine using the discount rate 9.9% of
Weighted Average Cost of Capital. Then in order to be able to compare each project on an annual basis, we determined the equivalent annual costs by using the annuity factor related with each machine and examined the outcomes to see which machine would be least expensive to acquire and operate. We can conclude from this analysis that the
Vulcan Mold-Maker has lower annuity payments than the six current machines and therefore we might conclude that NPV analysis might warrant the investment into the new machine assuming that other related factors would be in favor of the new investment. However, when assessing the economic benefits there were many qualitative factors that needed to be considered. For example:
• Cerini was unsure whether the tough collective bargaining agreement her company had with the employees’ union would allow her to lay off the 24 operators of the semi automated machines. Reassigning the workers to other jobs might be easier, but the only positions needing to be filled were those of janitors, who were paid 4.13 an hour. This is a critical issue for Fonderia di Torina because the current labor costs are 334,356.19 for workers and maintenance. The new machine would incur a cost of 116,754.40 for labor…...

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