SYNDICATE GROUP 4

29320071 - Putra Gusrianto

29320115 - Anggia Saniagati
29320130 - Rahajeng Puput Aryani
29320149 - Fadhila Nurfida Hanif

Fonderia di
Torino S.P.A
Case Solution
Gear Presentation PAGE 01
FONDERIA DI TORINO S.P.A.
The Company Products

• Specialized in the production of • Rankshafts

precision metal castings for use in • Transmissions
automotive, aerospace, and
• Brake calipers
construction equipment
• Axles,
• Located in Milan, Italy, had been
founded in 1912 naval engineer, to • Wheels
produce castings for the • Various steering-assembly parts
armaments industry.
• In the 1920s and 1930s, the
company expanded its customer
base into the automotive industry

Gear Presentation PAGE 02

 About the case

Fonderia di Torino S.P.A specializes in the production of precision metal casting. The managing director
is considering the purchase a Vulcan Mold-Maker automated machine to replace its six semi
automated stamping machines. Similar molding-machine proposals had been rejected by the board of
directors for economic reasons on three previous occasions, most recently in 1999. The managing
director was seeking a careful estimate of the project’s costs and benefits and, ultimately, a
recommendation of whether to proceed with the investment.

Risk-Free Rate (Rf) 5.30% We 67.00%

Equity Risk Premium (Rm - Rf) 6.00% Wd 33.00%
Return on Market (Rm) 11.30% Cost of Debt Rd 3.88%
Beta (b) 1.25 Cost of Equity (Re) 12.80%

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 The economic
benefits of acquiring
the Vulcan Mold-
Maker machine

Gear Presentation PAGE 04

 WACC
WE

Risk-Free Rate (Rf) 5.30% We 67.00%

Equity Risk Premium (Rm - Rf) 6.00% Wd 33.00%
Return on Market (Rm) 11.30% Cost of Debt Rd 3.88%
Beta (b) 1.25 Cost of Equity (Re) 12.80%
Cost of Equity (Re) 12.800% Tax (t) 38%
WACC 9.8551% 67%
Before-tax cost of debt 6.80%
After tax cost of debt 3.88%
Re 12.8% 9.8% 3.9% Rd

It is known in the article that the rate of return on capital 33%

deployed was 14% but this rate had not been reviewed since
1984. So by recalculating WACC with the latest data it was
found that The Fonderia in Turin weighted average cost of
capital (WACC)/discount rate is 9.86%
WD

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 Expense of current machines (annual) € 351,410

Workers cost
295,546
Maintenance workers cost
39,564
Electrical cost
12,300

Expense Maintenance supplies

4,000

Comparison
Expense of proposed machines (annual) € 119,320

Worker cost
38,170
Maintenance
59,500
Cost saving
5,200
Power cost
26,850

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 New machine cost € 1,010,000
Total € 1,010,000
Old machine (after 3 year) € 415,807

Depreciation for 3 years € 130,682

Initial Book value € 285,125

Investment
Offer price € 130,000
Book value € 285,125

Calculation Proceeds from sale of present

machine
€ (155,125)

Tax on sale of present machine € (66,704)

Total after-tax proceeds € 196,704

Initial investment € 813,296

Gear Presentation PAGE 07

 Operating Cash Flow for proposed machine
and current machine
PROPOSED MACHINE
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
(-)Expense € 119,319.60 € 119,319.60 € 119,319.60 € 119,319.60 € 119,319.60 € 119,319.60 € 119,319.60 € 119,319.60
EBDIT € (119,319.60) € (119,319.60) € (119,319.60) € (119,319.60) € (119,319.60) € (119,319.60) € (119,319.60) € (119,319.60)
(-)Depreciation € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00
EBIT € (245,569.60) € (245,569.60) € (245,569.60) € (245,569.60) € (245,569.60) € (245,569.60) € (245,569.60) € (245,569.60)
(-)Taxes € (105,594.93) € (105,594.93) € (105,594.93) € (105,594.93) € (105,594.93) € (105,594.93) € (105,594.93) € (105,594.93)
Net Operating profit After Tax (EBITx(1-T) € (139,974.67) € (139,974.67) € (139,974.67) € (139,974.67) € (139,974.67) € (139,974.67) € (139,974.67) € (139,974.67)
(+)Depreciation € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00 € 126,250.00
Proposed Machine Operating Cash Flow € (13,724.67) € (13,724.67) € (13,724.67) € (13,724.67) € (13,724.67) € (13,724.67) € (13,724.67) € (13,724.67)

CURRENT MACHINE
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
(-)Expense € 351,409.60 € 351,409.60 € 351,409.60 € 351,409.60 € 351,409.60 € 351,409.60 € 351,409.60 € 351,409.60
EBDIT € (351,409.60) € (351,409.60) € (351,409.60) € (351,409.60) € (351,409.60) € (351,409.60) € (351,409.60) € (351,409.60)
(-)Depreciation € 47,520.00 € 47,520.00 € 47,520.00 € 47,520.00 € 47,520.00 € 47,520.00 € - € -
EBIT € (398,929.60) € (398,929.60) € (398,929.60) € (398,929.60) € (398,929.60) € (398,929.60) € (351,409.60) € (351,409.60)
(-)Taxes € (171,539.73) € (171,539.73) € (171,539.73) € (171,539.73) € (171,539.73) € (171,539.73) € (151,106.13) € (151,106.13)
Net Operating profit After Tax (EBITx(1-T) € (227,389.87) € (227,389.87) € (227,389.87) € (227,389.87) € (227,389.87) € (227,389.87) € (200,303.47) € (200,303.47)
(+)Depreciation € 47,520.00 € 47,520.00 € 47,520.00 € 47,520.00 € 47,520.00 € 47,520.00 € - € -
Current Machine Operating Cash Flow € (179,869.87) € (179,869.87) € (179,869.87) € (179,869.87) € (179,869.87) € (179,869.87) € (200,303.47) € (200,303.47)

Gear Presentation PAGE 08

 Current Machine Incremental
Proposed Machine Operating
Years Operating Cash Operating Cash
Cash Flow
Flow Flow
1 € (13,724.67) € (179,869.87) € 166,145.20
2 € (13,724.67) € (179,869.87) € 166,145.20
3 € (13,724.67) € (179,869.87) € 166,145.20

Net Present Value (NPV) 4 € (13,724.67) € (179,869.87) € 166,145.20

and the Internal Rate of 5 € (13,724.67) € (179,869.87) € 166,145.20

Return (IRR) 6 € (13,724.67) € (179,869.87) € 166,145.20

related to the proposed 7 € (13,724.67) € (200,303.47) € 186,578.80
new machine. 8 € (13,724.67) € (200,303.47) € 186,578.80

Total PV Cashflow € 911,284.41

NPV € 97,988.16
IRR 13.01%
Payback 4.18 years

Gear Presentation PAGE 09

 Discussion
Based on the NPV of the proposed machine, the project should be accepted
NPV € 97,988.16 because the NPV value is large from €0 in addition the payback period also
meets the company policy where it sought payback of an entire investment
IRR 13.01%
within five years. However for IRR, since the Cerini family had sought to earn
Payback Period 4.18 years a rate of return on its equity investment of about 18%, the IRR of project
below that number.

IRR 18%
If the company insists the IRR must be 18%, then we try to calculate that the
Years 8 incremental cash flow should be €199,456. This would be difficult to achieve
Incremental CF €199,456 with this machine project even if labor costs were reduced.

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 Qualitative
considerations and
impact of inflation
rate of 3%

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 For
• Release of floor • Problems with
space for other uses union because we
• High product faced with reducing
quality and low employee
Qualitative factors scrap rates
• High theoretical
• High operating
leverage and risk
output (increase cost of
debt)

Against
Gear Presentation PAGE 012
 Vulcan Mold-Maker
(proposed machine)
Creates value (positive NPV)
Gains in efficiency
Lower unit costs
+ Less human error
Less exposure to labor unrest
Bigger in capacity
Costs and benefits Higher fixed costs
Higher operating leverage and
risk
− Greater technological risk
Higher exit costs
Dependence on skilled workers
Problem with labour union
Gear Presentation
Semiautomated Machines
(current machine)
Lower exit costs
Lower technological risk
Bigger exploitable labor pool
(semiskilled)
Lower operating leverage and
risk
Higher variable costs
Greater exposure to labor
unrest
Greater exposure to human
error
PAGE 013
 Operating Cash Flow for proposed machine and current machine
with 3% inflation rate
PROPOSED MACHINE
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Labor cost € (38,170) € (39,315) € (40,494) € (41,709) € (42,960) € (44,249) € (45,576) € (46,944)
Contract maintenance € (59,500) € (61,285) € (63,124) € (65,017) € (66,968) € (68,977) € (71,046) € (73,177)
Power cost € (26,850) € (27,656) € (28,485) € (29,340) € (30,220) € (31,127) € (32,060) € (33,022)
Saving from labor efficiency € 5,200 € 5,356 € 5,517 € 5,682 € 5,853 € 6,028 € 6,209 € 6,395
EBDIT € (119,320) € (122,899) € (126,586) € (130,384) € (134,295) € (138,324) € (142,474) € (146,748)
(-)Depreciation € 126,250 € 126,250 € 126,250 € 126,250 € 126,250 € 126,250 € 126,250 € 126,250
EBIT € (245,570) € (249,149) € (252,836) € (256,634) € (260,545) € (264,574) € (268,724) € (272,998)
(-)Taxes € (105,595) € (107,134) € (108,720) € (110,353) € (112,034) € (113,767) € (115,551) € (117,389)
Net Operating profit Arter Tax (EBITx(1-T) € (139,975) € (142,015) € (144,117) € (146,281) € (148,511) € (150,807) € (153,173) € (155,609)
(+)Depreciation € 126,250 € 126,250 € 126,250 € 126,250 € 126,250 € 126,250 € 126,250 € 126,250
Operating Cash Flow € (13,725) € (15,765) € (17,867) € (20,031) € (22,261) € (24,557) € (26,923) € (29,359)

CURRENT MACHINE
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Operator Cost € (295,546) € (304,412) € (313,544) € (322,951) € (332,639) € (342,618) € (352,897) € (363,484)
Maintenance labor € (39,564) € (40,751) € (41,973) € (43,233) € (44,530) € (45,866) € (47,241) € (48,659)
Maintenance supplies € (4,000) € (4,120) € (4,244) € (4,371) € (4,502) € (4,637) € (4,776) € (4,919)
Electrical power € (12,300) € (12,669) € (13,049) € (13,049) € (13,844) € (14,259) € (14,687) € (15,127)
EBDIT € (351,410) € (361,952) € (372,810) € (383,603) € (395,515) € (407,380) € (419,601) € (432,189)
(-)Depreciation € 47,520 € 47,520 € 47,520 € 47,520 € 47,520 € 47,520 € - € -
EBIT € (398,930) € (409,472) € (420,330) € (431,123) € (443,035) € (454,900) € (419,601) € (432,189)
(-)Taxes € (171,540) € (176,073) € (180,742) € (185,383) € (190,505) € (195,607) € (180,429) € (185,841)
Net Operating profit Arter Tax (EBITx(1-T) € (227,390) € (233,399) € (239,588) € (245,740) € (252,530) € (259,293) € (239,173) € (246,348)
(+)Depreciation € 47,520 € 47,520 € 47,520 € 47,520 € 47,520 € 47,520 € - € -
Operating Cash Flow € (179,870) € (185,879) € (192,068) € (198,220) € (205,010) € (211,773) € (239,173) € (246,348)

Gear Presentation PAGE 014

 Current Machine Incremental Operating
Proposed Machine Operating
Years Cash Flow with 3% inflation rate Operating Cash Flow Cash Flow with 3%
with 3% inflation rate inflation rate
1 € (13,725) € (179,870) € 166,145
2 € (15,765) € (185,879) € 170,114
3 € (17,867) € (192,068) € 174,202

Net Present Value (NPV) 4 € (20,031) € (198,220) € 178,189

and the Internal Rate of 5

€ (22,261) € (205,010) € 182,749
Return (IRR) 6
related to the proposed 7
€
€
(24,557)
(26,923)
€
€
(211,773) €
(239,173) €
187,216
212,250
new machine with 3% 8 € (29,359) € (246,348) € 216,989
inflation rate.
Total PV Cashflow € 1,487,854
NPV € 165,622
IRR 14.96%

Gear Presentation PAGE 015

 Discussion

without inflation rate

NPV € 97,988.16
IRR 13.01%

Based on an inflation rate of 3%, the variable costs of the current machine
(semi-automatic) are getting bigger and worse than the proposed machine
(Vulcan Mold-Maker). The NPV in inflation conditions is also higher, so if an
estimate occurs, the purchase of a new machine adds to the attractiveness
of this condition.
with 3% inflation rate
NPV € 165,622
IRR 14.96%

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 Should Francesca
Cerini proceed with
the project?

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 1. Focus on cash flow, not profits because
profit can be managed later

2. Focus on the timing of cash inflows

and outflows (time value of money)

Evaluating 3. Consider discount rate as an opportunity

cost.
Capital 4. Net present value = value created by the
Projects project. NPV is the amount by which the
value of the firm will change if they
undertake the project.

Gear Presentation PAGE 018

 Recommendation

We recommend that the new machine (The Vulcan Mold-Maker Machine) proposal be approved by the board of
directors with:
• Very acceptable NPV and payback period.
• The incremental cash flows better with the project of new machine (The Vulcan Mold-Maker Machine) than didn’t
undertaken the project. The new machine will expand capacity of production, reduce variable costs and thus the
firm will operate more efficiently than before.
Then, for employee consideration, the company must be successful in negotiations with the union because this
success will increase the cost saving in the investment of the project.

Gear Presentation PAGE 019

THANK
YOU