Fonderia Del Piemonte S.P.A. Case Solution
III. Analysis of Alternatives
Bellucci has to choose between investing in new machine: Thor MM3 and continuing the usage of older machine for the company’s operations. Both the alternatives are significant for the company but the new machine has the potential to provide benefit to the company but on the contrary; it has some issues that must be kept in mind while executing the investment for it. Moreover, the old machine is good but it has a negative NPV, which is giving less growth to the company. The further analysis is done of the both alternatives on the basis of their strengths and weaknesses.
Alternative 1: The use of old machine
Strengths
- The old machine is cheaper than the new machine.
- No layoff of labors would be done.
- The old machine can save 30000 Euro.
Weaknesses
- Less productive, which limits the company’s growth.
- More human labors are working.
- Negative NPV.
Alternative 2: The implementation of new machine
Strengths
- High production quality and high depreciation can give tax shield to the company.
- Decrease in human labor can give cost benefit to the company.
- The NPV is positive.
Weaknesses
- The company has to layoff the labors.
- The new machine has high cost.
- It takes large place and there is no salvage value.
IV.Recommendations
The overall recommended solutions for the new machinery Thor-MM3 is favorable for the company, because it creates higher growth opportunities for the business because of its productivity. The discounted cash flows reveals that the project is attractive for the company and has positive NPV. Moreover, there is high depreciation incurrence on the machine, which can provide tax shield to the company, enabling it to generate higher profit.
Furthermore, Thor-MM3 has the capacity to produce 30% more than the older machineries, which can give the economies of scale benefit to the company.
Both the recommendations can improve the company’s situation,but the company has to decide which one should it choose because there are pros and cons in both the recommendations, as buying the machine would also cause the massive cost incurrence and the company would have to let go of its labor force, which tends to create unfavorable situations for the company in terms of relationships with the labor union.
V. Conclusion
The difficulty which the company is facing is regarding making the final decision of choosing either to go with the new machinery or sticking to the current machine which is in the company’s use.. Although, there are some equally considerable pros and cons in both the choices, but there are two scenarios which put heavy weight in the favor of buying the new machinery which are: the old machinery is semi-automated and has lower cost involved as compared to the new machine alongside 26 labors working on operating it but at the same time the older machine is not providing any further growth to the company, limiting the company’s profit to a stagnant level, which is why it would be a better option for the company to choose the new machine over the old
The new machine is quite significant for the company, because it has positive NPV and it gives more than 30% of the production,but there are some issues in the execution of the new machine’s usage,such as:..........................
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