# 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<0 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

334.33*8*210+2*3*7. Therefore assuming sales are equal for both cases.67 NPV of New-++ NPV of Old--+ By looking at the above diagram we can conclude that when sales is between 328.555) EAA(187. Fonderia di Torino S. there are still some uncertainties that might affect the attractiveness of the new machine. in order to make the decision whether to invest in the new machine or not.2*2*11.850-5. The company will also benefit from higher levels of product quality and lower scrap rates. who are paid 4.003.67 then NPV<0 We can summarize our calculations as follows: Sales < 328338.67.036.85*8*210+4000+12300)* (1-0.What uncertainties or qualitative considerations might influence our recommendation? How.07328338.010.704) OCF0-(24*7.200)* (1-0. Inflation rate does not affect NPV since NPV is always calculated using real rate or nominal rate .481. will have a considerable influence on the outcome of the NPV.A still has to decide whether the tough collectivebargaining agreement the company has with the employees' union would allow the company to lay off the 24 operators of the semi-automated machines.338. Federia Torino S. Secondly.07 and 434. NPV will decrease due to increase in labor costs.36*8*210=298.If Sales < 434. However.036.p. *For the sake of simplicity we put sales as zero Replace with New(automated) Machine Initial Cash Outlay(813. The projection as to how much capacity of the new machine will be utilized. we have to take one more factor into consideration which is the EAA assuming that sales are equal for both cases.296) OCF0-(2*2*11.153) Keep Old(semi-automated) Machine Opportunity cost(196.200 euros will be saved as a result from improved labor efficiency.500+26.4) and additional 5.334.500) Keep using the old machine incurs higher cost(higher EAA) than replacing it with the new one. Benefit over time The three scenarios illustrated above clearly shows that the investment in the new machine creates greater value to the company.67Sales > 434036. in the other two scenarios.07< Sales < 434036.4 euros (24*7.p.36*8*210+59. If the workers are reassigned as janitors. NPV and EAA proved that the company should invest in the new machine.520*0. Lastly.520.874) EAA(310.43)+(1.p. the company is still unsure when added capacity of the new machine would be needed. the latest economic news suggests that the economies of Europe are headed for a slowdown which will also have a strong impact on the outcome of the NPV.34 Raw NPV(1.A should definitely replace the old machine with the new automated machine.357.33*8*210 + 2*3*7.43)=-35. How about the inflation rate of 3 percent (or higher)? Will that affect the attractiveness of the Vulcan Mold-Maker? The answer is no. Fonderia di Torino S. The extent of any labor savings would depend on negotiations with the union. 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. thus reducing medical claims.35 Raw NPV(1. unless there should be some unexpected turnout in sales. The old machines currently operate at only 90 percent of capacity.A should definitely replace the old machine with the new automated machine.43)=-265. 2.13 euros an hour. Reassigning the workers to other jobs might be easier.67.A will be able to replace labor intensive required semi-automated machines with automated machines.p. when sales is smaller than 328338.07 and greater than 434036.000/8*0.43)+(47. but the only positions needing to be filled are those of janitors. Labor costs will be reduced by almost 298. By acquiring the Vulcan Mold-Maker machine Fonderia di Torino S.85*8*210. However.

" 3. replacing the semi-automated machine with the Vulcan Mold-Maker offers strategic benefits in the long run as previously discussed. . Should Francesca Cerini proceed with the project? Francesca Cerini should proceed with the project since the figures above show that the new project generates more value to the company than the old one. Moreover."consistently.