Fondaria Di Torino

Topics: Risk, Depreciation, 2006 albums Pages: 3 (624 words) Published: May 2, 2013
BMGT440 - Midterm Individual Case
Fonderia di Torino, S.p.A

Question 1

There are many benefits of acquiring the Vulcan Mold-Maker. In terms of purely economic benefits, this machine is less labor intensive, requiring only one worker per shift whereas the old machines required 12 workers per shift and 3 workers for maintenance. The new machine also provides a higher depreciation tax shield and cost savings in other areas of the foundry. Other benefits include improvements in quality, lower scrap rates, a 30-percent-higher capacity and the release of some of the foundry’s floor space for other purposes. We can assume two projects: keeping the old machines or buying the Vulcan Mold-Maker. To determine the NPV of the two projects we will need the WACC. -------------------------------------------------

WACC=ke(E/V)+kd(D/V)(1-T)
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With kd=6.8%, T=43%, E/V=67% and D/V=33%
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The cost of equity can be calculating using the CAPM:
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ke=risk free rate+(beta)(market risk premium)
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Where beta=1.25, risk free rate=5.3% and market risk premium=6%. -------------------------------------------------

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So the cost of equity is 12.8% and the WACC is 9.86%.

Keeping the old machines is associated with labor costs of 335,109.6€ (12*2*7.33*8*210+3*7.85*8*210), depreciation of 47,520€, power cost of 12,300€ and maintenance supplies of 4000€, which results in a cash outflow of 179,869.87€ every year. So the NPV of this alternative is -786,718.35€. Purchasing the new machine is associated with a cash outflow of...
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