1. Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine. 1. What is the initial outlay? -The initial outlay is the Net Investment of $813,296. 2. What are the benefits over time? – The benefits over time include higher quality products, lower scrap rates, which will save raw material costs. The company will employ twenty-five less workers which equates to lower costs in terms of managing, training, and insuring those employees. Lastly the foundry will create 30% more floor space which has not yet been used for due to the old machines current location. 3. What is an appropriate discount rate?
– The appropriate discount rate should be 9. 86%. 4. Does the NPV warrant the investment in the machine? – Yes the NPV warrants the investment of the machine as shown in the excel file. 2. What uncertainties or qualitative considerations might influence your recommendation? How (if at all) would an inflation rate of 3% (or higher) affect the attractiveness of the Vulcan Mold-Maker? Please estimate the impact on NPV from a change in any of those elements Some uncertainties that will affect our decision will include: the twenty-two machine operators and three maintenance workers that may not be allowed to be laid off.
By cutting their pay to janitorial status, it would affect the NPV in a negative way and if they are required to maintain their current level of income then the project may cost more to fund it then rather just keep the original machines. Another factor to weigh is the structure of the contracts between the company and the OEM’s. The economy in Europe is another factor that needs to be accounted for as the downturn may pose a threat to the company. Lastly if the purchase is made it would allow for future expansion as more floor space becomes available.
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