Comparing Capital Investments Essay

956 words - 4 pages

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 ...view middle of the document...

Therefore the union’s decision could have a detrimental affect on the savings that
this project could generate from improved labor and maintenance costs.
• Cerini believed that the Vulcan Mold-Maker would result in even higher levels of
product quality and lower scrap rates than the company was now boasting. In light
of ever-increasing competition the outcome might prove to be enormous, but was
of currently unquantifiable, competitive importance.
• Vulcan Mold-Maker has a theoretical maximum capacity that was 30% higher
than that of the six semi-automated machines: but these were operating at only
90% of capacity and Cerini was unsure when added capacity would be needed.
• The latest economic news suggested that the economies of Europe were headed
for a slowdown. This area is also of great importance because a slowdown would
reduce all costs because the current machine would be producing less output.
Therefore this would have a material effect on all costs and hence the valuation of
both machines.
• Medical claims for back injuries in the molding shop had doubled since 1998 as
the mix of Fonderia di Torino’s casting products shifted toward heavy items.
(Items averaged 25 kilograms in 2000). This is another area that should be looked
at because the new machine will have fewer workers to get injured. Another
important consideration would be the expenses incurred to fix the current
problems leading to these injuries.
• With the current machines, more than 30% of the foundry’s floor space was
needed for the wide galleries the machines required: raw materials and in-process
inventories had to be staged near each machine in order to smooth work flow.
With the automated machines, almost half of this space would be freed for other
purposes (although at present there was no need for new space). There is an
opportunity cost for this space as it could be...

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