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This is the pages we were given to find the cash flows and annuities of the old machine and new machine. I am

having serious trouble from lack of guidance from teacher. image1.jpgimage0.jpg


The current six machines required 12 workers per shift' (24 in total) at EUR 14.66 per
worker per hour, plus the equivalent of two maintenance workers, each of whom was paid
EUR 15.70 an hour, plus maintenance supplies of EUR6,000 a year. Bellucci assumed that
the semiautomated machines, if kept, would continue to consume electrical power at the
rate of EUR 15,300 a year.
The Thor MM-9 molding machine was produced by an American company in
Allentown, Pennsylvania. Fonderia del Piemonte had received a firm offering price of
USD1.9 million from the American firm. Since the prevailing exchange rate between
the euro and the U.S. dollar was 1.06 USD per euro, the price in euros was EUR 1.8 mil-
lion. The estimate for modifications to the plant, including wiring for the machine's
power supply, was EUR 100,000. Allowing for EUR50,000 for shipping, installation,
and testing, the total cost of the Thor MM-9 machine was expected to be EUR 1.95 mil-
lion, all of which would be capitalized and depreciated for tax purposes over eight years.
Bellucci assumed that, at a high and steady rate of machine utilization, the Thor MM-9
would be worthless after the eighth year and need to be replaced.
The new machine would require two skilled operators (one per shift), each receiv-
ing EUR22.72 an hour (including benefits), and contract maintenance of EUR 120,000
a year, and would incur power costs of EUR40,000 yearly. In addition, the automatic
machine was expected to save at least EUR30,000 yearly through improved labor effi-
ciency in other areas of the foundry.
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 the workflow. With the auto-
mated machine, almost half of that space would be freed for other purposes-although
at present there was no need for new space.
Certain aspects of the Thor MM-9 purchase decision were difficult to quantify.
First, Bellucci was unsure whether the tough collective-bargaining agreement her com-
pany had with the employees' union would allow her to lay off the 24 operators of the
semiautomated machines. Reassigning the workers to other jobs might be easier, but the
only positions needing to be filled were unskilled jobs, which paid EUR9.13 an hour.
The extent of any labor savings would depend on negotiations with the union. Second,
Bellucci believed that the Thor MM-9 would result in even higher levels of product
quality and lower scrap rates than the company was now boasting. In light of the ever-
increasing competition, this outcome might prove to be of enormous, but currently un-
quantifiable, competitive importance. Finally, the Thor MM-9 had a theoretical
maximum capacity that was 30% higher than that of the six semiautomated machines;
but those machines were operating at only 90% of capacity, and Bellucci was unsure
when added capacity would be needed. There was plenty of uncertainty about the eco-
nomic outlook in Europe, and the latest economic news suggested that the economies of
Europe might be headed for a slowdown.
The foundry operated two shifts a day. It did not operate on weekends or holidays. At maximum, the
foundry would produce for 210 days a year.


Part Four Capital Budgeting and Resource Allocation
OEMs had provided cheap loans to Fonderia del Piemonte to support capital expansion.
Finally, the company received relatively long-term supply contracts from the OEMs and
had a preferential position for bidding on new contracts.
Fonderia del Piemonte, located in Turin, Italy, had been founded in 1912 by Bellucci's
great-great-grandfather, Benito Bellucci, a naval engineer, to produce castings for the
armaments industry. In the 1920s and 1930s, the company expanded its customer base
into the automotive industry. Although the company barely avoided financial collapse
in the late 1940s, Benito Bellucci predicted a postwar demand for precision metal cast-
ing and positioned the company to meet it. From that time, Fonderia del Piemonte grew
slowly but steadily; its sales for calendar-year 2015 were expected to be EUR1.3 billion.
It was listed for trading on the Milan stock exchange in 1991, but the Bellucci family
owned 55% of the common shares of stock outstanding. The company's beta was
estimated at 1.25.
The company's traditional hurdle rate of return on capital deployed was 7%, although
this rate had not been reviewed since 2012. In addition, company policy sought payback
of an entire investment within five years. At the time of the case, the market value of the
company's capital was 33% debt and 67% equity. The prevailing borrowing rate Fonderia
del Piemonte faced on its loans was 2.6%. The company's effective tax rate was about
43%, which reflected the combination of national and local corporate income-tax rates.
Bellucci, age 57, had assumed executive responsibility for the company 15 years
earlier, upon the death of her father. She held a doctorate in metallurgy and was the
matriarch of an extended family. Only a son and a niece worked at Fonderia del
Piemonte, however. Over the years, the Bellucci family had sought to earn a rate of re-
turn on its equity investment of 12%-this goal had been established by Benito Bellucci
and had never once been questioned by management.
The Thor MM-9 Machine
Sand molds used to make castings were currently prepared in a semiautomated process
at Fonderia del Piemonte. Workers stamped impressions in a mixture of sand and adhe-
sive under heat and high pressure. The process was relatively labor intensive, required
training and retraining to obtain consistency in mold quality, and demanded some heavy
lifting from workers. Indeed, medical claims for back injuries in the molding shop had
doubled since 2012 as the mix of Fonderia del Piemonte's casting products shifted to-
ward heavy items. Items averaged 25 kg in 2015.
The new molding machine would replace six semiautomated stamping machines
that together had originally cost EUR423,000. Cumulative depreciation of EUR 169,200
had already been charged against the original cost and six years of depreciation charges
remained over the total useful life of 10 years. Fonderia del Piemonte's management
believed that those semiautomated machines would need to be replaced after six years.
Bellucci had recently received an offer of EUR 130,000 for the six machines.
The current yield on euro-denominated bonds issued by the Italian governments was 1.7%. Bellucci assumed
that the equity risk premium would be 5%. Also, she believed that current bond yields in Europe effectively
impounded an expectation of no inflation over the next 10 years.

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