Vulcan Mold-Maker Machine
Autor: Joshua • December 29, 2018 • 857 Words (4 Pages) • 556 Views
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- What uncertainties or qualitative considerations might influence your recommendation? How, if at all, would an inflation rate of 3 percent (or higher) affect the attractiveness of the Vulcan MoldMaker? Please estimate the impact on NPV from a change in any of these elements. NPV and EAA proved that the company should invest in the new machine. However, there are still some uncertainties that might affect the attractiveness of the new machine.
One of the notable advantages of buying the new machine is the improvement in quality and decrease in the rejection rate of the products. It can also increase the capacity to produce, making the company more efficient by increasing the level of production. Also, the new machine does not need too much space, hence the area saved can be used for other purposes.
Purchasing the new molding machine will decrease medical claims. Employees experience back injuries due to lifting of heavy objects, which resulted to expenses for the company due to their medical claims. These claims doubled since 1998 due to the mix of casting products that shifted toward heavy items. If the new molding machine is purchased, the demand to lift heavy objects will decrease, which will result to the decrease in medical claims leading to savings in insurance costs.
Currently, the company needs to regularly have their workers trained in order to attain the consistency in the mold quality of the old molding machine due to its semi-automated process. But for the new molding machine, which is fully automated, regular trainings will not be a requirement. This may result again, to savings for the company. Also, upgrading to a fully automated machine will lessen the possibility of human error during the process that will result to lower rejection rate, lower volume of scraps and wastes produced while maintaining and even improving product quality.
With Inflation
Assume Inflation Rate
3%
Real Cost of Capital = (1 + Nominal Cost of Capital)/(1 + Inflation Rate) -1
WACC Nominal
9.86%
WACC Real
6.7%
Nominal Cash Flow
(813,296)
171,130
176,263
181,551
186,998
192,608
198,386
229,468
236,352
Discounted Factor
1.00
0.91
0.83
0.75
0.69
0.63
0.57
0.52
0.47
PV
(813,296)
155,778
146,057
136,943
128,397
120,385
112,873
118,845
111,429
NPV at WACC Nominal
217,411
NPV at WACC Nominal
217,411
Real Cash Flow
(813,296)
166,145
166,145
166,145
166,145
166,145
166,145
186,579
186,579
Discounted Factor
1.00
0.94
0.88
0.82
0.77
0.72
0.68
0.64
0.60
PV
(813,296)
155,778
146,057
136,943
128,397
120,385
112,873
118,845
111,429
NPV at WACC Real
217,411
NPV at WACC Real
217,411
Inflation rate does not effect NPC because NPV is always calculated using real rate or nominal rate “Consistently”
- Should Francesca Cerini proceed with the project?
Francesca Cerini should proceed with the new project generates more value to the company than the old one. Moreover, replacing the semi-automated machine with the Vulcan Mold-Maker offers strategic benefits in the long run as previously discussed. Buying new machine will improvement of production quality and decrease human error in production. Using new machine more efficiency and increase the capacity of production. So our conclusion is Francesca Cerini doing this project.
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