# Fonderia di Torino S.P.A. Case Study

Essay by manhattanproUniversity, Bachelor'sA+, May 2006

Fonderia di Torino S.p.A.

1. Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value(NPV) warrant the investment in the machine?

Initial Case Outlay

Price of new machine (1,010,000)

Current after-tax market value of old machine [130,000+{(415,807-130,682)

-130,000}*0.43]= 196,704

Net outlay for new machine -1,010,000+196,704 = -813,296

Appropriate discount rate

Rs = Rf+B(Rm-Rf)

=5.3%+1.25*6%

=12.8%

Rb = 6.8%*(1-0.43)

= 3.88%

R(wacc) = (33%)*(3.88%)+(67%)*(12.8%)

= 9.86%

Net Present Value

Since we are not provided with the information or evidence about cash inflow needed to calculate the Net Present Value, we assumed three different scenarios to cover all possible outcomes.

Replace with New(automated) Machine

Initial Cash Outlay (813,296)

Operating Cash Flow

(OCF) {Sales-(2*2*11.36*8*210+59,500+26,850-5,200)}*

(1-0.43)+(1,010,000/8*0.43)

NPV_new -813,296+OCF_new*PVIFA(9.86%,8years)

*NPV_new equation tells us that when sales is 328,338.07,

NPV is zero. 328,338.07 is our "magic number" to find out the NPV of replacing the old machine with the new one.

If Sales > 328,338.07 then NPV>0

If Sales < 328,338.07 then NPV

Keep Old(semi-automated) Machine

Opportunity cost (196,704)

Operating Cash Flow

(OCF) {Sales-(24*7.33*8*210+2*3*7.85*8*210+4,000+12,300)}*

(1-0.43)+(47,520*0.43)

NPV_old -196,704+OCF_old*PVIFA(9.86%,6years)

*NPV_new equation tells us that when sales is 435,036.67, NPV is zero. 435,036.67 is our "magic number" to find out the NPV of keep using the old machine.

If Sales > 434,036.67 then NPV>0

If Sales < 434,036.67 then NPV

We can summarize our calculations as follows:

Sales < 328338.07 328338.07< Sales < 434036.67 Sales > 434036.67

NPV of New - + +

NPV of Old - - +

By looking at the above diagram we can conclude that when sales is between 328,338.07 and 434,036.67, Fonderia di Torino S.p. A should definitely replace the old machine with the new...