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

Decent Essays
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
*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