List of Case Questions: Case #5: Fonderia Di Torino S.P.A Questions For Case Preparation

LIST OF CASE QUESTIONS
Case #5: Fonderia Di Torino S.P.A
Questions for Case Preparation
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?
Answer:
a. Net Initial Investment
Benefit Calculation Of Acquiring Vulcan - Mold Maker Machine

Description Cost (₤)
Initial Investment New Machine 1.010.000
Book Value of Old Machine
Originally Cost 415.807
Cummulative Depreciation 130.682
Book Value (Original - Depreciation 285.125
Selling Old Equipment 130.000
Capital Loss (selling Equipment - Book Value) 155.125
Saving Tax (43%) 66.704
Net Initial Investment (cost new machine-selling old-saving tax) 813.296
b. Benefit Over Time

Comparison New & Old Machine
No Description New Machine Old Machine
1 pers onel x ₤11.36 x 2 s hi ft x 8 Hrs x 210 da ys 12 pers onel x ₤7.33 x 2 s hi ft x 8 Hrs x 210 da ys
1 Opearator Wage per Year
38.170 295.546
2 Maintenace Cost 59.500 79.128
3 Maintenance Supply 0 4.000
4 Electrical power 26.850 12.300
5 Saving Automatic Machine -5.200 0
Total Operating Cost/year 119.320 390.974
Benefit Overtime 271.654
c. Discount rate using WACC (Weighted Average Cost of Capital)
Rf = Risk Free rate = 5.3 %
B = Beta = 1.25
Rp = Risk Premium= 6%
 Discount Rate/Cost Of Equity = r = Rf+B(Rp) = 5.3%+1.25*6% = 12.8%
d. NPV (Net Present Value)
WACC
Kd = Interest Rate = 6.8%
Ke = Discount Rate = 12.8%
t = tax rate = 43%
Wd = Weight of Debt = 33%
We = Weght of Equity = 67%
D E
WACC=(kd ( 1−t ) x )+( Ke x )
D+ E D+ E
¿( kd ( 1−t ) x Wd )+(Kc x We)
¿ 6.8 % ( 1−43 % ) x 33 %+12.8 % x 67 %
¿ 9.86 %
Depreciation Cost
Old Machine = 47,520
New Machine = ( 1,010,000 / 8 year) = 126,250
Difference = 78,730
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Cash Flow Difference
Cash Flow Difference

Old Machine Symbol New Machine Symbol Difference
Sales (S) 0 S1 0 S2
Cost ( C) 390.974 C1 119.320 C2 271.654
Depreciation 47.520 D1 126.250 D2 -78.730
Tax 43%
Cash Flow = (C1-C2)x(1-T) + (D2-D1) x T 188.696
Assumption:
This NPV calculation without using inflation rate 3%
Depreciation cost of old machine will be zero in year 7 & 8

Year 0 1 2 3 4 5 6 7 8
Initial Investment -813.296
Operating Cost Diff 271.654
Depreciation Diff 78.730 78.730 78.730 78.730 78.730 78.730 126.250 126.250
Cash Flow diff 188.696 188.696 188.696 188.696 188.696 188.696 209.130 209.130
WACC without inflation 9,86% 9,86% 9,86% 9,86% 9,86% 9,86% 9,86% 9,86%
PV -813.296 171.761 156.345 142.313 129.540 117.914 107.331 108.278 98.560
NPV 218.746
Base on NPV value 218,746 tells us that new machine investment will create
benefit to company
2. What uncertainties or qualitative considerations might influence your

recommendation? How, if at all, would an inflation rate of 3 percent (or higher)
affect the attractiveness of the Vulcan Mold-Maker? Please estimate the impact on
NPV from a change in any of these elements.
Answer:
a. Uncertainties consideration might influence the decision to buy new machine:

1. Negotiation result with employee unions about laying off 24 operators
of old machine. Reassigning the workers to other jobs might be easier,
but the only positions needing to be filled were those of janitors, who
were paid €4.13 an hour. The extent of any labor savings would depend
on negotiations with the union
2. Expecting inflation year on year is 3%
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3. the Vulcan Mold-Maker would result in even higher levels of product
quality and lower scrap rates than the company was now boasting. In
light of the ever-increasing competition, this outcome might prove to
be of enormous, but currently unquantifiable, competitive importance.
4. The latest economic news suggested that the economies of Europe
were headed for a slowdown
b. Effect of 3% inflation peryear to NPV calculation

Year 0 1 2 3 4 5 6 7 8
Initial Investment -813.296
Operating Cost Diff 271.654
Depreciation Diff 78.730 78.730 78.730 78.730 78.730 78.730 126.250 126.250
Cash Flow diff 188.696 188.696 188.696 188.696 188.696 188.696 209.130 209.130
WACC with 3% inflation 9,86% 10,16% 10,46% 10,77% 11,10% 11,43% 11,77% 12,13%
PV -813.296 171.761 155.507 140.005 125.316 111.492 98.569 95.951 83.704
NPV 169.009
NPV still positif value
3. Should Francesca Cerini proceed with the project? In your preparation to discuss
this case, please assume that the semi automated equipment could be operated
for two more years beyond the end of its depreciable life thanks to ordinary
maintenance. Thus, the lives of both the semi automated and Vulcan mold-Maker
alternatives will be eight years.
Yes, we recommend Cerini to purchase new machine base on NPV result that we
calculated.
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List of Case Questions: Case #5: Fonderia Di Torino S.P.A Questions For Case Preparation

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LIST OF CASE QUESTIONS

Case #5: Fonderia Di Torino S.P.A

Questions for Case Preparation

a. Net Initial Investment

Benefit Calculation Of Acquiring Vulcan - Mold Maker Machine

b. Benefit Over Time

Rf = Risk Free rate = 5.3 %

 Discount Rate/Cost Of Equity = r = Rf+B(Rp) = 5.3%+1.25*6% = 12.8%

d. NPV (Net Present Value)

Kd = Interest Rate = 6.8%

Ke = Discount Rate = 12.8%

t = tax rate = 43%

Wd = Weight of Debt = 33%

We = Weght of Equity = 67%

¿( kd ( 1−t ) x Wd )+(Kc x We)

¿ 6.8 % ( 1−43 % ) x 33 %+12.8 % x 67 %

Old Machine = 47,520

New Machine = ( 1,010,000 / 8 year) = 126,250

Cash Flow Difference

This NPV calculation without using inflation rate 3%

Depreciation cost of old machine will be zero in year 7 & 8

2. What uncertainties or qualitative considerations might influence your

a. Uncertainties consideration might influence the decision to buy new machine:

b. Effect of 3% inflation peryear to NPV calculation

NPV still positif value

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