Midterm Individual Case
Fonderia di Torino, S.p.A is a manufacturing company who produces metal castings using six semi-automated molding machines. However, they are currently considering purchasing a Vulcan Mold-Maker machine to replace the six machines currently in place. The firm needs to consider all costs in deciding whether to keep the current machines or purchase the Vulcan Mold-Maker.
Buying the Vulcan machine will result in year 0 outflows of 1.01 million euros, but will enable the company to sell the old machines which will result in a net year 0 outflow of 880,000 euros. The cash flows of years 1-8 are summarized in table 1. Factoring in operating, maintenance and power cost, plus the benefits of a tax shield and increased labor efficiency, cash outflows in years 1-8 will be 13,439 euros. At a 9.855% discount rate , the net present value of buying the Vulcan Mold-Maker is negative 953,610 euros.
Because these two alternatives have different life spans, an effective annual cost (EAC) analysis must be conducted to properly compare the two options. The attached Excel spreadsheets show the results of the analysis. The table shows an EAC for the Vulcan machine of negative 177,806 euros, while the EAC of the six semi-automated machines is negative 179,870 euros. According to this analysis, the Vulcan machine is less costly.
There are numerous qualitative aspects surrounding the decision whether or not to purchase the Vulcan machine. In our calculations we assumed that if the machines were replaced, the workers who operated the old machinery would be disregarded. In reality however, it might not be that simple. The employees’ union will most likely not allow 24 workers to simply be let go. Another unquantifiable variable is the Vulcan machines impact on overall quality. The Vulcan Mold-Maker is supposed to increase the quality of the product while reducing waste, which while beneficial, the effects are not...