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

2. What are the cash flows associated with the semiautomated machines?

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 Francesca Cerini recommend to her board of directors? 

The managing director of this 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. The case may be used for the following:

Introduce students to mechanics of DCF analysis of go/no-go capital-investment decisions.

• Consider the principle of incremental analysis as the foundation for identifying relevant cash flows for a project.
• Explore the classic tradeoffs in capital-for-labor investment.
• Review the analytical adjustments that are required to compare projects of unequal lives.