Fonderia di Torino S.P.A. Case Study
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 calculate the Net Present Value, we assumed three different scenarios to cover all possible outcomes.
Replace with New(automated) Machine
Initial Cash 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 sales is 328,338.07, NPV is zero. 328,338.07 is our "magic 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 < 328,338.07 then NPV
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 keep using the old machine.
If Sales > 434,036.67 then NPV>0
If Sales < 434,036.67 then NPV
We can summarize our calculations as follows:
Sales < 328338.07 328338.07< Sales < 434036.67 Sales > 434036.67
NPV of New - + +
NPV of Old - - +
By looking at the above diagram we can conclude that when sales is between 328,338.07 and 434,036.67, Fonderia
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 calculate the Net Present Value, we assumed three different scenarios to cover all possible outcomes.
Replace with New(automated) Machine
Initial Cash 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 sales is 328,338.07, NPV is zero. 328,338.07 is our "magic 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 < 328,338.07 then NPV
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 keep using the old machine.
If Sales > 434,036.67 then NPV>0
If Sales < 434,036.67 then NPV
We can summarize our calculations as follows:
Sales < 328338.07 328338.07< Sales < 434036.67 Sales > 434036.67
NPV of New - + +
NPV of Old - - +
By looking at the above diagram we can conclude that when sales is between 328,338.07 and 434,036.67, Fonderia