Managing Director of the specialty foundry must decide whether to approve major investments to automate the production process of its plant. Case is sufficient information to create a cash flow forecasts of production costs in addition to these investments. Discounted cash flow (DCF) analysis shows that this investment is attractive, but that the benefits depend on important assumptions about the operation of the plant capacity, the ability of the manager to lay off workers, despite the objections of the union, and the hurdle rate. If goals are: (1) to introduce students to the mechanics of DCF analysis of Go / No-solutions of investments, (2) we consider the principle of additional analysis as the basis for determining the underlying cash flows of the project (3) to study the classic trade-off in the capital in exchange for labor investments, and (4) to consider analytical adjustments necessary when comparing projects of unequal life.
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by Robert F. Bruner Source: Darden School of Business 4 pages. Publication Date: 08 Oct 2001. Prod. #: UV0092-PDF-ENG
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