CASE $19$ 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 EUR $2$ million, $1_{?}$ 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.

This record had won the company coveted quality awards from BMW$,$ Ferrari, and Peugeot, and had resulted in strategic alliances with those

firms: Fonderia del Piemonte and the OEMs exchanged technical personnel and design tasks; in addition, the OEMs shared confidential market$-$

demand information with Fonderia del Piemonte, which increased the precision of the latter's production scheduling. In certain instances, the

OEMs had provided cheap loans to Fonderia del Piemonte to support capital expansion. Finally, the company received relatively long$-$ Page $254$

term supply contracts from the OEMs and had a preferential position for bidding on new contracts.

Fonderia del Piemonte, located in Turin, Italy, had been founded in $1912$ by Bellucci's great$-$great$-$grandfather, Benito Bellucci, a naval

engineer, to produce castings for the armaments industry. In the $1920$s and $1930$s$,$ the company expanded its customer base into the automotive

industry. Although the company barely avoided financial collapse in the late $1940$s$,$ Benito Bellucci predicted a postwar demand for precision

metal casting and positioned the company to meet it$.$ From that time, Fonderia del Piemonte grew slowly but steadily; its sales for calendar$-$year

$2015$ were expected to be EUR$1\mathrm{.}3$ billion. It was listed for trading on the Milan stock exchange in $1991,$ but the Bellucci family owned $55\%$ of the

common shares of stock outstanding. The company's beta was estimated at $1\mathrm{.}25\mathrm{.}2$ The Thor MM$-9$ Machine

Sand molds used to make castings were currently prepared in a semiautomated process at Fonderia del Piemonte. Workers stamped impressions in

a mixture of sand and adhesive under heat and high pressure. The process was relatively labor intensive, required training and retraining to obtain

consistency in mold quality, and demanded some heavy lifting from workers. Indeed, medical claims for back injuries in the molding shop had

doubled since $2012$ as the mix of Fonderia del Piemonte's casting products shifted toward heavy items. Items averaged $25kg$ in $2015.$

The new molding machine would replace six semiautomated stamping machines that together had originally cost EUR$423,000.$ Cumulative

depreciation of EUR$169,200$ had already been charged against the original cost and six years of depreciation charges remained over the total

useful life of $10$ years. Fonderia del Piemonte's management believed that those semiautomated machines would need to be replaced after six

years. Bellucci had recently received an offer of EUR$130,000$ for the six machines.

The current six machines required $12$ workers per shift $\frac{3}{?}(24$ in total$)$ at EUR$14\mathrm{.}66$ per worker per hour, plus the equivalent of two

maintenance workers, each of whom was paid EUR$15\mathrm{.}70$ an hour, plus maintenance supplies of EUR$6,000$ a year. Bellucci assumed

that the semiautomated machines, if kept, would continue to consume electrical power at the rate of EUR$15,300$ a year.

The Review the information presented in Case $19$ Fonderia del Piemonte S$.$p$.$A $($Bruner$,$ R$.,$ Eades, K$.$M$.,$ and Schill M$.$J$.$ Case Studies in Finance$)$

Prepare a $1-2$ pages report that discusses the estimation of project cost, benefits, and recommendation to proceed with investment based off the information provided within the case study.

Given the facts presented is this an investment worth making? Why or why not?