Fonderia di Torino S.P.A. Case Study - 860 Words

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†¦show more content†¦*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 298,334.4Show MoreRelatedFonderia Di Torino S.P.A.1148 Words   |  5 PagesFinance Case Study: Fonderia di Torino S.p.A. Case Overview: Company considering purchase of Vulcan Mold-Maker automated molding machine. Machine prepares sand molds into molten iron using iron castings, automates manual intensive process. Questions: 1. 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