Fonderia Di Torino S.p.

Tracye D. Taylor
California State University, Bakersfield
May 20, 2013
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Fonderia Di Torino
Case Analysis

Introduction. Fonderia di Torino is located in Milan, Italy and was founded in 1912 by Benito
Cerini. The company was originally created for the purpose of producing castings for the
armaments industry; but expanded into the automotive industry in the 1920’s and 1930’s. As of
2000 the company specialized in the production of precision metal casting for use in the
automotive, aerospace, and construction equipment. Francesca Cerini assumed executive
responsibility for the company upon the death of her father. In November of 2000 she
considered the purchase of a Vulcan Mold-Maker automated molding machine which would
replace an existing older machine and was to be used to prepare the sand molds into which
molten iron was poured to obtain castings.
Economic Benefits. The economic benefits of acquiring the Vulcan Mold-Maker machine
include the following:
 Initial outlay. The initial outlay for the machine is as follows:
- Purchase of the Vulcan Mold Maker €850,000
- Plant Modifications (approx.) €155,000
- Additional allotments* *shipping, installation, and testing
- Overall Initial Outlay €1.01 million.
The cost of the Vulcan Mold-Maker could be offset by €130,000 if Cerini decides to sell the
six old semi-automated stamping machines.

 WACC. The Weighted Average Cost of Capital (WACC) for Fonderia Di Torino is 9.86%.
This percentage was calculated by multiplying the cost of the company’s capital by its value
and then adding the two.
- The market value of the company’s capital was 33% debt.
- The cost of debt given was 6.8%, (the interest rate of the loans from Banco Nazionale di
Milano).
- The market value of the company’s equity was 67%.
- The cost of equity used was 12.8%. The cost was determined by multiplying the
company’s beta (how much a company's share price moves against the market as a
whole.) of 1.25 by the equity risk premium of 6% and adding it to the risk free return of
5.3%.
- The corporate tax rate for Fonderia di Torino is 43%.

 NPV. Utilizing the WACC computed above, a review of the annual cash flows for the new
project shows a positive net present value (NPV). In addition, the internal rate of return
(IRR) is calculated to be 12.34% which is greater than the calculated WACC of 9.86%. An
analysis of the payback period for this project shows payback in 4.91 years which aligns with
the company policy of a payback within 5 years.
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 Sensitivity Analysis. As mentioned above, Fonderia’s WACC is 9.86% and the project’s
IRR is 12.34%. A NPV profile was put together and it confirmed that the Vulcan Mold
Maker is profitable at discount rates up to 12.34%. This allows for fluctuation in the WACC
of almost 3% for any changes in the cost of debt or equity that may cause the WACC to
increase (reduce profit).

Uncertainties / Qualitative Considerations

 Inflation. If the expected inflation rate of 3% were applied to the operating costs for the
eight-year life of the new machine, the NPV of the cash flows almost doubles, the IRR
increases by more than 2% and the payback period is reduced to 4.69 years. All of these
factors make the purchase of the Vulcan Mold-Maker more favorable.

 Workforce considerations.
- Union issues. The purchase of the new machine would create a potential reduction in the
workforce by 24 operators and 3 maintenance workers. Due to union agreements, Cerini
is unsure if the collective bargaining agreement will allow for such layoffs. If Francesca
Cerini is forced by the union to hire the unused workers at their current rate of pay
(€7.33/hour for machine workers and €7.85/hour for the maintenance workers), then new
machine will cost more to operate than current machines. The company and the labor
union will have to come to an agreement on the reduction of the employees without
putting a financial strain on the company. If the company could negotiate a buyout that
does not exceed €144,000 or €5,760 per employee (higher would cause a negative NPV)
they could then proceed with the project.
- Medical Claims. Purchasing the Vulcan-Mold Maker will decrease medical claims. The
demand on employees for constant heavy lifting has caused back injury medical claims to
double since 1998. The Vulcan Mold Maker purchase will cause the heavy lifting
requirement to decrease or disappear altogether. The decrease in medical claims will
subsequently cause a savings in insurance costs.

 Economic downturn. Economic news suggests that Europe is trending toward an economic
slowdown. Changes in demand will affect company sales. Fonderia manufactures products
for top line vehicles (BMW, Ferrari, Peugeot), thus it would seem that sales would not be
affected by an economic downturn. However, a potential downturn should always be taken
into consideration when contemplating new purchases.

Conclusion. The positive NPV presented by the cash flows and other considerations such as the
potential cost savings in administrative, training, medical, insurance, and training costs; lower
rejection rate and reduction in scrap rates; improved labor efficiency, and lower medical claims
are all factors that indicate that Francesca Cerini should proceed with purchase of the Vulcan
Mold-Maker. However, the profitability of this purchase also relies heavily on labor union
negotiations. If Cerini cannot successfully negotiate with the union, then the new machine should
not be purchased until favorable labor negotiations can be reached. If she is able to negotiate
the release of the 25 workers that are allocated for the current process but will not be needed with
the purchase of the new machine, then Fonderia Di Torino should proceed with this project.