Msdi Alcara de Henares

Case background:

John Verniero, the financial analyst at Merck & Co., Inc was trying to evaluate the proposal from MSDI for the purchase and installation of new automatic inspection equipment for the filling of glass ampoules with liquid pharmaceutical products. The new equipment can be procured from an Italian firm with a cost of around 61.525 million Pts. They are currently using a semiautomatic inspection machine to identify the contamination in the ampoules. The new machine, once installed is expected to bring various benefits in terms of cost saving and quality improvement. Various benefits are: reduction in workforce from currently 10 to 4, rejection rate of 11% would drop to 3%, elimination of human performance variability etc. These benefits would result in cost saving and quality improvement. The task at hand now is to see if the proposal is financially beneficial vis-a-vis the current equipment. Since the equipment is being bought in different currency they also need to see its impact in the dollar terms if there is any.

The Manufacturing Process of the company:

1. Ampules (small glass containers) are purchased from local suppliers

2. Ampules are then washed, filled, inspected and sealed

3. Washing and sterilization are subjected to stringent quality control guidelines

4. Ampules are filled with liquid pharmaceutical

5. The filled ampules are inspected at a station

6. Workers remove any contaminated ampules

7. Approved ampules are sealed

8. Ampules are packaged and shipped

Financial assumptions:

1. New equipment has a useful life of 10 year

2. Straight line depreciation would be used for tax and financial reporting

3. Book value and tax basis is Pts 1,605,000 with 3 years of straight line depreciation

4. Market value was est. Pts 950,000

5. Local tax rate was taken as 35%

6. Inflation Rate in Spain is 8%

7. Exchange rate of 127Pst = $1 USD

Methods followed during valuation:

I have used method A for the evaluation of the money...