Fonderia di Torino S.P.A. Case Study

Fonderia di Torino S.p.A.

1. Please assess the economic benefits of acquiring the Vul pot M out of date-Maker mould. What is the initial cost? What are the benefits over time? What is an appropriate discount evaluate? Does the net present value(NPV) warrant the investment in the forge?

Initial Case Outlay

Price of impertinently 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 enumerate the Net Present Value, we assumed three different scenarios to covering fire all possible outcomes.

Replace with New(automated) Machine

Initial interchange 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 gross sales is 328,338.07, NPV is zero. 328,338.07 is our john 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

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 storage area using the old machine.

If Sales > 434,036.



67 then NPV>0

If Sales

We can summarize our calculations as follows:

        Sales 434036.67

NPV of New         -         +         +

NPV of Old         -         -         +

By looking for 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 automated machine.

However, in the other two scenarios, we have to photograph one more factor into consideration which is the EAA assuming that...

I am not sure the 5,200 production saving figure is obtained? both explanation would be appreciated. Thank you.

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