After carefully taking into account the costs and benefits of purchasing a Vulcan Mold-Maker machine through cash flow analysis and net present value, replacing the semi-automated machine with the Vulcan Mold-Maker offers strategic benefits in the long run. I recommend investing in the new VMM equipment because it has a positive net present value with all breakdowns considered.
The cash flows of years 1-8 are summarized in table 1. Factoring in operating, maintenance and power cost, plus the benefits of a tax shield and increased labor efficiency, incremental cash outflows in years 1-8 will be 177,948 Euros for both machines. At a 9.855% discount rate, the net present value of buying the Vulcan Mold-Maker is negative 1,184,953.11 euros, but results in a positive incremental NPV of 907,198 in comparison of the two machines (Table 1).
Based on the cost comparison between the two machines, the VMM machine will generate less annual recurring cost compared to the old molding machine (Table 1). The improvement in the labor efficiency is the major contributor to the cost difference of the two molding machines (Tables 4-5). The 0% employee retention rate favors NPV the best, but even if Fonderia retains 100% retention at a lower wage rate, the company will still have a positive NPV (Table 5).
After estimating the incremental after-tax cash flows from investing in the project, NPV was then taken into consideration. The substantially higher NPV reflects the presence of net working capital during periods of inflation. If an inflation rate of 3% were applied to the operating costs for the eight-year life of the new machine, the purchase begins to look even more favorable as NPV of the cash flows (Tables 2-3). In this case the inflation causes an addition to the net working capital each year, and the additions are positive incremental cash outflows from a result of