Case 19

Fonderia del Piemonte S.p.A.

Synopsis and Objectives

The managing director of a specialty foundry must decide whether to approve a major
investment to automate part of her plant’s production process. The case presents information
sufficient to build cash flow forecasts of production costs incremental to this investment.
Discounted cash flow (DCF) analysis reveals that this investment project is attractive but that the
benefits hinge on important assumptions about the plant’s business volume, the manager’s
ability to lay off workers over the objections of a labor union, and the hurdle rate.

Suggested Questions

1. What is the basic nature of the problem in this case?

2. What are the cash flows associated with the Thor MM-9 investment?

3. What discount rate did you use? What DCF did you get?

4. Are you uncertain about any of the assumptions? What does a sensitivity analysis of those
assumptions reveal?

5. Are there qualitative issues that we should address but which are not reflected in the DCF
analysis?

6. What should Martina Bellucci recommend to her board of directors?