Matsuya Matsuo is managing director of Bitsumishi Motors Inc. (BMI). In March 2023, Mr. Matsuo was considering purchase of the Kaizen Kata CC-2 (CC-2) automated molding machine. This machine would prepare the sand molds into which molten iron was poured to obtain iron castings. The CC-2 would replace an older machine and would offer improvements in quality and some additional capacity for expansion. Similar moldingmachine proposals had been rejected by the board of directors for economic reasons on three previous occasions, most recently in 2021. This time, given the size of the proposed expenditure of nearly JPY525 million,1 Matsuo was seeking a careful estimate of the projects costs and benefits and, ultimately, a recommendation of whether to proceed with the investment. The Company BMI specialized in the production of precision metal castings for use in automotive parts, particularly engines, mechanical parts, lights, and dashboard dials. 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 Japan. OEMs were becoming increasingly insistent about product quality. BMI and the OEMs exchanged technical personnel and design tasks; in addition, the OEMs shared confidential market-demand information with BMI, which increased the precision of the latters production scheduling. In certain instances, the OEMs had provided cheap loans to BMI to support capital expansion. Finally, the company received relatively long-term supply contracts from the OEMs and had a preferential position for bidding on new contracts. BMI, located in Tokyo, Japan, had been founded in 1945 by Matsuos great-greatgrandfather, Takehiko Matsuo, an engineer, to produce castings for the armaments industry. In the 1950s and 1960s, the company expanded its customer base into the automotive industry. Although the company barely avoided financial collapse in the late 1980s, Takehiko Matsuo predicted a post-recession demand for precision metal castings and positioned the company to meet it. From that time, BMI grew slowly but steadily; its sales for calendar-year 2022 were expected to be JPY9950 million. It was listed for trading on the Tokyo stock exchange in 2003, but the Matsuo family owned 68% of the common shares of stock outstanding. The companys beta was estimated at 1.25.2 1 JPY = Yen: CAD = Canadian dollars 2 The current yield on Yen-denominated bonds issued by the Japanese government was 1.2%. Matsuo assumed that the equity risk premium would be 2.9%. Also, he believed that current bond yields in Japan effectively impounded an expectation of no inflation over the next 10 years. The companys traditional hurdle rate of return on capital deployed was 14%, although this rate had not been reviewed since 2012. In addition, company policy sought payback of an entire investment within 6 years. In 2022, the market value of the companys capital was 32% debt and 68% equity. The prevailing borrowing rate BMI faced on its loans was 8.6%. The companys effective tax rate was about 26%, which reflected the combination of national and local corporate income-tax rates. Matsuo, aged 61, had assumed executive responsibility for the company 13 years earlier, upon the death of his father. He held a doctorate in metallurgy and was the patriarch of an extended family. Only a son and a niece worked at BMI, however. Over the years, the Matsuo family had sought to earn a rate of return on its equity investment of 10%this goal had been established by Roberto Matsuo and had never once been questioned by management. Matsuya Matsuo is unsure if the rate of return on equity is still valid or if a new rate of return on equity needs to be established and used in future decision-making. The CC-2 Machine Sand molds used to make castings were currently prepared in a semi-automated process at BMI. 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 and sprains in the molding shop had tripled since 2015 as the mix of BMIs casting products shifted toward heavy items. Items averaged 22 kg in 2022. The new molding machine would replace 4 semi-automated stamping machines that together had originally cost JPY300 million. Cumulative depreciation of JPY54.75 million had already been charged against the original cost and five years of depreciation charges remained over the total useful life of 10 years. BMIs management believed that those semiautomated machines would need to be replaced after 10 years. Matsuo had recently received an offer of JPY92 million for the four machines. The current four machines required 6 workers per shift (2 shifts per day) at JPY1800 per worker per hour, plus the equivalent of two maintenance workers, each of whom was paid JPY2000 an hour, plus maintenance supplies of JPY1.0 million a year. Matsuo assumed that the semiautomated machines, if kept, would continue to consume electrical power at the rate of JPY1.9 million a year. The CC-2 molding machine was produced by a Canadian company in Victoria, British Columbia. BMI had received a firm offering price of CAD1.2 million per unit from the Canadian firm. Since the prevailing exchange rate between the Yen and the Canadian dollar was 107.42 JPY per 1 CAD, the price in Yen was JPY128.9 million. The estimate for modifications to the plant, including wiring for the machines power supply, was JPY1.29 million. Allowing for JPY550,000 for shipping, installation, and testing, the total cost of the CC-2 machine was expected to be JPY130.7 million, all of which would be capitalized and depreciated for tax purposes over eight years. Matsuo assumed that, at a high and steady rate of machine utilization, the CC-2 would be worthless after the seventh year and need to be replaced. The new machine would require four skilled operators daily (two per shift), each receiving JPY1900 an hour (including benefits), and contract maintenance of JPY4.8 million a year, and would incur power costs of JPY2.0 million yearly. In addition, the automatic machine was expected to save at least JPY2.5 million yearly through improved labor efficiency in other areas of the foundry. With the current machines, more than 22% of the foundrys floor space was needed for the wide galleries the machines required; raw materials and in-process inventories had to be staged near each machine to smooth the workflow. With the automated machine, almost half of that space would be freed for other purposes although at present there was no need for new space. Certain aspects of the CC-2 purchase decision were difficult to quantify. First, Matsuo was unsure whether the tough collective-bargaining agreement his company had with the employees union would allow him to lay off operators of the semi-automated machines. Reassigning the workers to other jobs might be easier, but the only positions needing to be filled were unskilled jobs, which paid JPY1300 an hour. The extent of any labor savings would depend on negotiations with the union. Second, Matsuo believed that the CC-2 would result in even higher levels of product quality and lower scrap rates than the company was now boasting. Due to ever-increasing competition, this outcome might prove to be of enormous, but currently un-quantifiable, competitive importance. Finally, the CC-2 had a theoretical maximum capacity that was 30% higher than that of the four semi-automated machines; but those machines were operating at only 70% of capacity, and Matsuo was unsure when added capacity would be needed. There was plenty of uncertainty about the economic outlook in Japan, and the latest economic news suggested that the economy of Japan might be headed for a slowdown. Matsuya Matsuo has come to you, a professional Finance Consultant, for help. He needs to understand if BMI should purchase the CC-2 and the financial benefit that would result for the company. Matsuya would like to present his recommendation to the BMI Board of Directors at the end of the month. He also wants to know the potential financial impact of the items that are difficult to quantify on his purchase decision, and if his assumptions are reasonable. He would also like to know if there are any additional issues he needs to consider that are not reflected in the quantitative analysis.