Case analysis report
Fonderia di Torino S.p.A, founded in 1912 by Benito Cerini, was a manufacturing company who produced metal castings using semi-automated molding machines. The company’s main line of business was the production of precision metal castings for use in automotive, aerospace, and construction equipment. The company excelled at this and was awarded because of the quality of its products.
The mainly European customers of Fonderia di Torino were original-equipment manufacturers (OEM). The OEMs insisted on quality products. The OEMs gave preferential treatment to Fonderia di Torino. The confidential market-demand information that Fonderia di Torino received helped increase the precision of production scheduling and the company received relatively long-term supply contracts from the OEMs.
The company grew slowly but steadily since late 1940s, and its current sales is expected to be €280 million.
In November of 2000, Fonderia di Torino was faced with the decision of wheather purchasing an automated molding machine called the Vulcan Mold-Maker to replace the six machines currently in place.
The firm currently was using semi-automatic machines for the production of castings, which was with low productivity, and lack of consistency in quality. And those semi-automatic machine would need to be replaced after six years.
The new machine would prepare the sand molds into which molten iron was poured to obtain iron castings, which was with higher productivity, better quality and occupy less space. And the new machine have a life of eight years.
However, purchasing this machine had a lot of implications not only on the quality of Fonderia’s products but also on its labor force. The firm needed to consider all costs in deciding whether to keep the current machines or purchase the Vulcan Mold-Maker.
In order to decide whether to replace the old machine with the new one or not, we now focus on the Net Profit Values in these two different situations. We split it into 5 steps as follow,
a. Expenses paid to get the new machine
b. Operating Cash Flow Each Year
c. Sales of the new machine after 6 years(since it's life span is 8 years) d. The ATWACOC used to calculate DCF
e. DCF when repalcing
|Expenses paid to get the new | | | |machine: | | | |+ Cost of the new machine |1,010,000 | |- Sales of the old machine |-130,000 | |Capital loss |+ Sales price | 130,000.00 | | |-Book Value | 284,318.00 | |Tax Rate | 0.43 | |- Tax saving of the old machine | | -66,356.74 | |TOTAL | 813,643.26 | |Note: Tax saving of the old machine| | | |= (Sale price - Book value)* Tax | | | |Rate | | | |Operating Cash Flow Each Year: | | |
Here we assume that the working capital will not affect the operating cost when replacing the machine.
Then we list the sales and cost as well as depreciation of both the old and new machine. One thing we care about is the difference between their cash...