MM 5007 – FINANCIAL MANAGEMENT

Fonderia Di Torino S.P.A

GROUP ASSIGNMENT - CASE ANALYSIS

By Syndicate 6:

29120275 Hisyam Binekas

29120052 Safaat Aufahasan Adzka
29120295 Ayustina Giusti

MASTER OF BUSINESS ADMINISTRATION

SCHOOL OF BUSINESS AND MANAGEMENT
INSTITUT TEKNOLOGI BANDUNG
2021
1. Case Background

The managing director of Fonderia at Torino S.p. A, Francesca Cerini, will decide to purchase a
Vulcan Mold-Maker automated molding machine or stick with the old machine. These
considerations are supported by several advantages regarding the new machine with improved
quality and several additional capacity additions for expansion. However, there is the experience
of being rejected by other molding machine proposals by the board of directors for economic
reasons that made Cerini have to do more in-depth estimates to convince the board of directors
that his consideration can be accepted.

In this report, we analyze all alternatives that Cerini can take as a final decision. The alternatives
are buying a new machine without janitors, buying a new machine with all of the laborers being
a janitor, or sticking with the old machine. Processes we do to analyze are looking for the
Weighted Average Cost of Capital (WACC) to test the feasibility of investing in the company,
Cash Flow Simulation analysis to see which cash flow is the best among alternatives,
Profitability to see the benefits among alternatives, and Qualitative Analysis.

2. Case Analysis

According to the information from the case, we decide to compare two alternatives quantitatively
out of three. Is it better to buy the new machine with or without reassigning the workers and use
it for the next 8 years (as the qualitatively compared alternatives), or to use the old six semi-
automated for the next 6 years. To do the qualitative comparison of the two conditions, several
judgments are used.

a. Weighted Average Cost of Capital (WACC)

To count the WACC, there is several information in the case that we can use. The table
below shows the data used for counting the WACC and also the result of WACC.

Table 1
WACC Analysis

Percentage of Debt and Equity

Equity 67%
Debt 33%
 Tax Rate 43%
Debt Rate 6.80%
Cost of Debt 3.88%

Rate of Government Bond 5.30%

Beta 1.25
Equity Risk Premium 6%
Cost of Equity 12.80%

WACC 9.86%
Source: Syndicate 6 Analysis

From table 1, we see that the cost of debt reaching 3,88% and the cost of equity was
12,8%. Then, the 9.86% rate will be used to see if the alternatives are beneficial for the
company or not. If the company’s WACC is lower, the market value was higher. We see
that 9,86% is still good because the percentage was still below 10%.

b. Cash Flow Simulation

For this point, we try to use every detailed information from the case to simulate the cash
flow. Of course it is not the accurate cash flow, but this simulation can help us to
compare all of the options. We only include the comparing results for the cash flow
simulation exercise. If it is needed to see the detail of the cash flow simulation, it can be
found in the excel file we attach.

Table 2
Cash Flow Simulation Summary

Year
Alternatives
0 1 2 3 4 5 6 7 8
New
Machine (736,206.25
166,145.20 170,546.33 175,079.49 179,748.65 184,557.88 189,511.39 194,613.51 199,868.69
without )

Janitor
NwoJ (736,206.25 (570,061.05 (399,514.72 (224,435.23
(44,686.58) 139,871.31 329,382.70 523,996.21 723,864.90
Cumulative ) ) ) )

New
(736,206.25
Machine )
48,628.53 49,504.16 50,406.06 51,335.01 52,291.83 53,277.36 54,292.46 55,338.01
with Janitor
NwJ (736,206.25 (687,577.72 (638,073.56 (587,667.51 (536,332.50 (484,040.66 (430,763.30 (376,470.84 (321,132.84
Cumulative ) ) ) ) ) ) ) ) )

Source: Syndicate 6 Analysis

For the cash flow simulation, we use several assumptions. For the sales, we choose to
adapt the 10% growth because the company’s beta is on 1,25. We analyze that if the
company’s beta reached that number/point then the market value was 8-15%, so we
choose the not-so-really midpoint because of the statement “grew slow but steadily”.
Thereafter, we also consider and count the 3% of inflation in the labor cost.

c. Profitability Index

The third analysis that we do is the profitability index. The profitability index analysis is
to find that the exercise is a good investment or not.

Table 3
Profitability Index

Profitability Internal Rate of Equivalent

Alternatives Rate NPV
Index Return Annuity

New Machine
9.86% €230,034.25 1.31 17.64% €42,891.32
without Janitor

New Machine
9.86% -€460,446.30 0.37 -11.04% -€85,853.09
with Janitor

Source: Syndicate 6 Analysis

The table 3 shows us that investing in the new machine will be beneficial for the
company, as long as they should not have to reassign the 24 operators of the old
machines as the janitor.

The profitability index results show that new machine without janitor is a good
investment. It is because the index is above 1.00 which is a good investment. Otherwise,
new machine with janitor alternative profitability index can’t reach 1.00, so that is not-so-
good investment.
 Using the old machines will still be more profitable instead of reassigning the old
machines operators. Less efficiency of the labor should be avoided if the company wants
to buy the new machine.

d. Qualitative Analysis

In analyzing this case, we cannot set aside the qualitative information that will help us to
conclude a better decision. There are several conditions that follow any alternative we
choose. If we decide to buy the new machine without reassigning the operator of the old
machine, there will be a hard refusal from the labor union. It might be easier if the
company could reassign the operator, but the position available is just for janitor and
there will be pay cut. That option also makes the investment not beneficial anymore. The
company can also consider using the old machines, but the health issue will be the
problem.

3. Conclusion and Recommendation

We conclude that the best option for the company is to invest in the new machine without
reassigning the operator of the old machines, because it will be not beneficial for the company
if they have to reassign all of the old machines' operators. Still using the old machines for the
next 6 years could be a better option than if the company has to reassign the operators. But, in
the matter of worker health, it is better to change the machine as fast as they can.