Fonderia Del Piemonte S.P.A

Abstract

The managing director of this specialty foundry must decide whether to approve a major investment to automate part of her plant's production process. The case presents information sufficient to build cash-flow forecasts of production costs incremental to this investment. Discounted cash flow (DCF) analysis reveals that this investment project is attractive but that the benefits hinge on important assumptions about the plant's business volume, the manager's ability to lay off workers over the objections of a labor union, and the hurdle rate. This case provides an update for the case Fonderia de Torino (UVA-F-1350). Excerpt UVA-F-1764 Rev. Apr. 3, 2017 Fonderia del Piemonte S.p.A. In November 2015, Martina Bellucci, managing director of Fonderia del Piemonte S.p.A., was considering the purchase of a Thor MM-9 automated molding machine. This machine would prepare the sand molds into which molten iron was poured to obtain iron castings. The Thor MM-9 would replace an older machine and would offer improvements in quality and some additional capacity for expansion. Similar molding-machine proposals had been rejected by the board of directors for economic reasons on three previous occasions, most recently in 2014. This time, given the size of the proposed expenditure of nearly EUR2 million, Bellucci was seeking a careful estimate of the project's costs and benefits and, ultimately, a recommendation of whether to proceed with the investment. The Company Fonderia del Piemonte specialized in the production of precision metal castings for use in automotive, aerospace, and construction equipment. The company had acquired a reputation for quality products, particularly for safety parts (i.e., parts whose failure would result in loss of control for the operator). Its products included crankshafts, transmissions, brake calipers, axles, wheels, and various steering-assembly parts. Customers were original-equipment manufacturers (OEMs), mainly in Europe. OEMs were becoming increasingly insistent about product quality, and Fonderia del Piemonte's response had reduced the rejection rate of its castings by the OEMs to 70 parts per million. . . .