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
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*For the sake of simplicity we put sales as zero
Replace with New(automated) Machine
Initial Cash Outlay (813,296)
OCF {0-(2*2*11.36*8*210+59,500+26,850-5,200)}*
(1-0.43)+(1,010,000/8*0.43)=-35,481.34
Raw NPV (1,003,555)
EAA (187,153)
Keep Old(semi-automated) Machine
Opportunity cost (196,704)
OCF {0-(24*7.33*8*210+2*3*7.85*8*210+4000+12300)}*
(1-0.43)+(47,520*0.43)=-265,520.35
Raw NPV (1,357,874)
EAA (310,500)
Keep using the old machine incurs higher cost(higher EAA) than replacing it with the new one. Therefore assuming sales are equal for both cases, when sales is smaller than 328338.07 and greater than 434036.67, Fonderia di Torino S.p.A should definitely replace the old machine with the new automated machine.
Benefit over time
The three scenarios illustrated above clearly shows that the investment in the new machine creates greater value to the company, unless there should be some unexpected turnout in sales. By acquiring the Vulcan Mold-Maker machine Fonderia di Torino S.p.A will be able to replace labor intensive required semi-automated machines with automated machines, thus reducing medical claims. The company will also benefit from higher levels of product quality and lower scrap rates. Labor costs will be reduced by almost 298,334.4
In addition, since ACE is willing to invest in the necessary machine and guarantee at least 100 engines per month, working with ACE would reduce cost of labor to disassemble and repair damaged casting, and disruption cost as well as maintain quality and ensure number of machines required
When making a purchase to improve on many areas of operations there are always factors to take into consideration. There will be a great amount of capital expenditure for this equipment; however the potential for higher return on investment is remarkable. The initial cost of purchasing the MAGNETOM is approximately $ 1 million. There will be an additional cost of $500,000 to operate and maintain the machine. These costs will be reimbursed within the first eight months of extensive utilization if the all marketing for the machine is on point. Since we are currently paying a technician to operate our out of date machinery, there is no reason why this prediction cannot become reality. There will also be an offset of income inherited by the lack of errors made by the technicians after they have trained for the new machine . ("Magnetom espree -," 2013)
b. If we assume 2004 prices of 45.91 €/mtt. What does the new break-even level do to the utilization rate, given its new capacity level? What can you say about its effect upon Aget’s pricing?
In order to determine the attractiveness of the investment it is important to determine the financial impact that the new Vulcan mold-maker will have on the firm if it replaces their current machines. It will be necessary to take into consideration both quantitative and qualitative measures. This project should be considered an independent project that is accepted or rejected on its own merits. The project will be decided from a cost/benefit standpoint by looking at the project 's projected discounted cash flows, the calculated NPV of the project, the IRR and PI. Finally, the project 's other qualitative advantages and disadvantages must also be considered before the project is accepted or rejected.
The main difference between investing in the Zinser machine and maintaining the status quo is an initial investment of $8.25 million and the receipt of $608,000 in after-tax sales proceeds from selling the existing machine. Additionally, there is an initial $50,000 ($32,000 after-tax) cost for training employees, but this cost is only incurred once (see exhibit 3). In their first year using the Zinser machine there will be a 5% decrease in sales volume, but selling price will increase 10%. Material costs per pound will be the same as the status quo, but conversion costs will decrease to $0.4077 per pound per year due to lower power, maintenance and return costs. Days of inventory held will also drop to about 20 days. All other assumptions are the same as the status quo. In this scenario, the NPV of the Hunter Plant is about $15.87million if Aurora invests in the new Zisner machine (see exhibit 3).
According to our analysis, So , c) is a betterthe optimal choice whichchoice, which confirmed our aggressive machine buying strategy since Day 135. And on Day 149, and Day 170, we immediately bought machine for station 2 and 1 again when the stationsit becomes bottle neck or when lead time is more than 0.28 which caused revenue decreased to $1,200.
Q3. Do you agree with Mr. Clarkson’s estimation of the company loan requirements? How much will he need to finance the expected expansion in sales to $ 5.5 Mil. In 1996 and to take all trade discounts?
In January 2003, Michael Pogonowski, the chief financial officer of Aurora Textile Company, was questioning whether the company should install a new ring-spinning machine, the Zinser 351, in the Hunter production facility. This new machine has ability to produce a finer-quality yarn that would be used for higher-quality and higher-margin products. In deciding whether or not to invest this new machine, NPV and the payback period are critical factors. Firstly, we need to forecast the cash flows that the Zinser 351 will generate in the future. After calculation, the ten-year NPV will be $3, 172,582. Secondly, we use the payback period to analyze the acceptance of this project. Based on this analysis,
There are three potential sources (JabaKing, Merakuri and Pnutype) available to Platinum for the equipment that will replace the aging presses currently in use. Several key factors need to be considered when making this decision not least of which is the overall cost of acquiring the new equipment. To this end, a Total Cost Analysis (Exhibit A) evaluation of the suppliers has been employed to fully assess the available alternatives, and to make the subsequent recommendations on supplier to choice. Direction given by Jim Hicza, has made in clear that cost considerations will be a primary concern.
Given the insignificant initial investment of $7,500 to manufacture plastic rings, he should be concerned that this new innovation will increase profits short-term but eventually lead to a loss of 480% ($242.1 / $50.37) long-term after other competitors produce the part.
The actual production would begin in the third quarter of this year, therefore only half year’s depreciation should be counted on Equipment and IT communication in 2004 (According to Appendix A). The following years (2005-2008) incremental cash flows are computed by the same method. However as the IT equipment and furnishings would be depreciated on a straight line basis over 3 years, thus in year four (2007), there would be only half a year’s deprecation left and after that it will be used up. The last year’s net cash flow in 2009 should be included the extra terminal Value on that year, which includes 24 years’ residual value on building and one year and a half residual value on equipment totaled $2,990,412 with two assumptions of by using residual book values for the building and operating equipment and there will be no further NWS advantage after year 2009. Finally, by obtaining 6 years’ incremental cash-flows and discounting them back to time zero (with the estimate rate of return by 15%) lessing initial cost to get an appealing NPV of $1190528 (Luehrman, p. 3).
In our case the "Vesuvio Fonderia" has to choose one out of two mutually exclusive projects. Either the company invests in a new Bond-O-Matic molding machine which needs to be replaced after eight years or they keep on working with their six old semi-automated ones. Those machines would probably need to be replaced after six years.
The 3D Print Shop would connect communities of professionals and non-professionals, while offering services to keep every individual on track to
A company must whether make or buy a part. The company is capable of making it but needs the same machine used to make this part
As stated by Jim Wilkinson in his article, Make or Buy, we must also consider the opportunity costs of using our machinery, time and effort to manufacture the next best product. Will we need to purchase new equipment to keep up with increased demand? Can we continue to add value to the rest of our business? We must look at that as well.