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Fonderia Di Torino’s Case

By Syndicate 5:
29116364 - Yunia Apriliani Kartika
29116377 - Fithri Hidayani Megantari
29116418 - I Nyoman Sujana Giri
29116483 - Bayu Rifqi Aulia Rachman
In November 2000, Francesca Cerini, managing director
Overview of Fonderia di Torino S.p.A.,1 was considering the
purchase of a Vulcan Mold-Maker automated molding
machine.
Fonderia di Torino is a company that specialized in the
production of precision metal castings for use in
automotive, aerospace, and construction equipment.
In case about replacing the old machines, similar
molding-machine proposals had been rejected by the
board of directors for economic reasons on three
previous occasions, most recently in 1999.
This time, Cerini was given the size of the proposed
expenditure of about (euros) €1 million, Cerini was
seeking a careful estimate of the project’s costs and
benefits and, ultimately, a recommendation of whether
to proceed with the investment.
Things that
we got from
the case
Given :
Cost of semi auto machine Cost of vulcan machine

rd (interest rates of Original cost of six automated Cost of proposed Vulcan


T= 43% debt) 6.80% machines € 415,807 Mold machine € 850,000

wd (weight of RF (Risk Free Return of


debt( 33% EU bonds) 5.30% cumulative depreciation € 130,682 installation of vulcan € 155,000

we (weight of rm-RF (Equity Risk


equity) 67% Premium) 6% avg depre./year € 47,520 shipping cost € 5,000

total cost of Vulcan


β 1.25 inflation 3% buying offer for six machine € 130,000 machine € 1,010,000

depreciation year 6 depreciation year 8

depreciation/year € 126,250
Given :(Cont’)
Annual Labor Cost (in Euros)
Vulcano Mold Maker
Semi-Auto Operation Machines Maintenance
Operation

Operators 1 12 3
Hours 8 8 8
Shifts 2 2 1

Pay/hour € 11,36 € 7,33 € 7,85


Days/Year 210 210 210

€ 38.169,60 € 295.545,60 € 39.564,00


Finding Cash Flows
Operating Cash Flow
Proposed
Old Semi auto
Expenses (Vulcan)
€ €
Worker 295.545,60 38.169,60 Terminal Cash Flow
€ €
Maintenance 43.564,00 59.500,00
€ €
Electric 12.300,00 26.850,00
€ € Original Cost € 1.010.000,00
Saving - (5.200,00)
€ €
Depreciation 47.520,00 126.250,00
€ €
Total 398.929,60 245.569,60 Depreciation € 1.010.000,00
€ €
Tax (43%) 171.539,73 105.594,93
€ €
After Taxes Expenses 227.389,87 139.974,67
Book Value €-
Incremental Operating Cash €
Flow 87.415,20
*The depreciation is not cash,
must be add back to get
operating cash flow

Operating Cash Flow 166.145,20
Finding WACC
Component
Debt Wd 33%
Equity We 67%
Interest Rate Kd 6,8%
Risk Free Rf 5,3%
Beta β 1,25
Risk Premium Rm 6%
Tax 43%
After Tax (1-T) 57%
Ke = Rf + (β*Rm) 12,80%
WACC = Wd*Kd(1-T) + We*Ke 9,86%

This shows every € that Fonderia’s own


consist of 33% debt with the expense after
tax about 57%, and 67% equity with the
expense in the amount of 12.8%. The
average from the whole €, the WACC is
about 9.87%.
Finding Initial Investment
Initial Investment
Tax Calculation for Selling Old Asset Installed Cost of New Asset

Asset sellling price


€ 130.000,00 Cost of New Asset € 850.000,00
Original cost € 415.807,00 Installation Costs (+)

Accumulated Depreciation (-) € 130.682,00 Electrical € 155.000,00

Book Value € 285.125,00 Shipping € 5.000,00


Difference Sales & Book Price € (155.125,00) Total Installed Cost € 1.010.000,00

Tax (43%) € (66.703,75) After Tax Proceeds from Old Asset Sales
Proceeds from Sales of Present Machine (-) € 130.000,00

Tax on Sale Present Machine (-) € (66.703,75)

Total After-tax Proceeds-present € 196.703,75


Change in Net Working Capital (+) 0

Total Initial Investment € 813.296,25


Finding Discounted Annual Cash Flow
WACC 9,86%
Year
Estimate Of Incremental CF NPV
0 1 2 3 4 5 6 7 8

New Cash Flow € € € € € € € € €


(813.296,00) (13.724,67) (13.724,67) (13.724,67) (13.724,67) (13.724,67) (13.724,67) (13.724,67) (13.724,67)

Old 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)

Incremental Cash Flow € € € € € € € € €


(813.296,00) 166.145,20 166.145,20 166.145,20 166.145,20 166.145,20 166.145,20 186.578,80 186.578,80

Cash Flow for 8 years Machines Year


Replacement 0 1 2 3 4 5 6 7 8
€ € € € € € € € €
Cumulative Incremental CF
(813.296,00) (647.150,80) (481.005,60) (314.860,40) (148.715,20) 17.430,00 183.575,20 370.154,00 556.732,80
€ € € € € € € € €
Present Value
(813.296,00) 151.240,34 137.672,60 125.322,01 114.079,40 103.845,36 94.529,41 96.632,07 87.963,22

NPV (8Years)
97.988,41
IRR 13,01%
4,104908237 4 Years
1,258898843 1 Month
Payback Period
7,766965281 7 days
4 Years 1 Month 7 Days
Profitability Index 1,12
Feasibility Study
Year
Cash Flow for 8 years Machines
Replacement 0 1 2 3 4 5 6 7 8
Cumulative Incremental CF € (813.296,00) € (647.150,80) € (481.005,60) € (314.860,40) € (148.715,20) € 17.430,00 € 183.575,20 € 370.154,00 € 556.732,80
Present Value € (813.296,00) € 151.240,34 € 137.672,60 € 125.322,01 € 114.079,40 € 103.845,36 € 94.529,41 € 96.632,07 € 87.963,22
NPV (8Years) € 97.988,41
IRR 13,01%
4,104908237 4 Years
1,258898843 1 Month
Payback Period
7,766965281 7 days
4 Years 1 Month 7 Days
Profitability Index 1,12
The effect on conversion the entire
of machine’s operator to janitor
Convert Operator to Janitor
Operating Cash Flow
Expenses Existing Proposed
The investment will need reduction on the number of Worker € 295.545,60 € 38.169,60
machine’s operator. Since the company will face the resistant Maintenance € 43.564,00 €

59.500,00

from the employee union if they suddenly lay off the workers, Additional Janitor 22 wokers 152.644,80
Electric € 12.300,00 € 26.850,00
the company needs to convert the operator to the possible €
position (janitor). This conversion will not affect initial Saving € - (5.200,00)

investment and terminal cash flow but will affect the operating Depreciation € 47.520,00 126.250,00
cash flow since it will increase the labor cost for Janitor. €
Total € 398.929,60 398.214,40

Initial Investment € 813.296,25 Tax (43%) € 171.539,73 171.232,19

Terminal Cash Flow € - After Taxes Expenses € 227.389,87 226.982,21


Lay off 24operators 22 to the Janitor Incremental Operating Cash Flow 407,66
*The depreciation is not cash, must
€ 4,13 be add back to get operating cash
Pay per Hour flow
Worker Hour 8 Operating Cash Flow € 79.137,66
Working day per year 210
Feasibility Study WACC 9,86%
Year
0 1 2 3 4 5 6 7 8
Incremental CF € (813.296,25) € 79.137,66 € 79.137,66 € 79.137,66 € 79.137,66 € 79.137,66 € 79.137,66 € 79.137,66 € 79.137,66

Cumulative Incremental CF € (813.296,25) € (734.158,59) € (655.020,92) € (575.883,26) € (496.745,59) € (417.607,93) € (338.470,27) € (259.332,60) € (180.194,94)

Present Value € (813.296,25) € 72.038,24 € 65.575,70 € 59.692,92 € 54.337,87 € 49.463,23 € 45.025,90 € 40.986,63 € 37.309,73

NPV (8Years) € (388.866,04)

*If the company converts the entire unused operator machine to Janator, the NPV of this project will be less than zero so become not attractive to conducted.

Net Present Value


NPV (8Years) € 97.988,41

Since NPV>0, Accept the project

Payback Period
Year 0 1 2 3 4 5 6 7 8
€ € € € € € € € €
Incremental CF
(813.296,00) 166.145,20 166.145,20 166.145,20 166.145,20 166.145,20 166.145,20 186.578,80 186.578,80
€ € € € € € € € €
Cumulative Incremental CF
(813.296,00) (647.150,80) (481.005,60) (314.860,40) (148.715,20) 17.430,00 183.575,20 370.154,00 556.732,80
Payback period for this investment is about 5 years
Company policy = 5 years
Since the payback period not violates the company policy we should accept the project
Feasibility Study (cont)
Payback Period
Year 0 1 2 3 4 5 6 7 8

Incremental CF € 166.145,20 € 166.145,20 € 166.145,20 € 166.145,20 € 166.145,20 € 166.145,20 € 186.578,80 € 186.578,80
(813.296,00)
€ € € € €
Cumulative Incremental CF € 17.430,00 € 183.575,20 € 370.154,00 € 556.732,80
(813.296,00) (647.150,80) (481.005,60) (314.860,40) (148.715,20)
Payback period for this investment is about 5 years
Company policy = 5 years
Since the payback period not violates the company policy we should accept the project

Internal Rate of Return (IRR)

IRR 13,01%

WACC 9,86%

IRR > WACC so accept the project

so, Francesca Cerini should proceed with the project


Effect on Inflation
Finding The Increasing Cost & WACC
Effect on Inflation Rate Cost Labor Electric Maintenance
Assumed that the inflation rate will increase: €
1) Labor Cost Base Existing Machine 295.545,60 € 12.300,00 € 43.564,00

2) Electric Cost
Existing Machine with Inflation 3% 103% 304.411,97 € 12.669,00 € 44.870,92
3) Maintenance Cost
BaseNew Proposed Machine € 38.169,60 € 26.850,00 € 59.500,00
New Proposed Machine with Inflation 3% 103% € 39.314,69 € 27.655,50 € 61.285,00

WACC
The WACC value needs to be adjusted with inflation rate :
WACC Real = ((1+WACC Nominal)/(1+i))-1 6,66%
Finding the New Operating Cash Flow with
Inflation Effect
Inflation 3%
Base Effect Inflation
Operating Cash Flow Incremental Operating Cash Flow € 87.415,20 € 91.295,02
Existing machine Proposed Machine *The depreciation is not cash, must be add back
Expenses Base Effect Inflation Base Effect Inflation to get operating cash flow

Operating Cash Flow € 166.145,20 170.025,02
Worker € 295.545,60 € 304.411,97 € 38.169,60 € 39.314,69
Maintenance € 43.564,00 € 44.870,92 € 59.500,00 € 61.285,00
Electric € 12.300,00 € 12.669,00 € 26.850,00 € 27.655,50

Saving € - € - € (5.200,00) € (5.200,00)

Depreciation € 47.520,00 € 47.520,00 € 126.250,00 € 126.250,00

Total € 398.929,60 € 409.471,89 € 245.569,60 € 249.305,19

Tax (43%) € 171.539,73 € 176.072,91 € 105.594,93 € 107.201,23

After Taxes Expenses € 227.389,87 € 233.398,98 € 139.974,67 € 142.103,96


Feasibility Study with Inflation Effect
WACC 6,66%
Year
Cash Flow for 8 years Machines
Replacement with Inflation 3% 0 1 2 3 4 5 6 7 8

Cumulative Incremental CF € (647.945,61) € (478.860,65) € (305.929,09) € (129.035,53) € 51.938,88 € 237.116,59 € 447.057,27 € 661.457,23
(813.296,00)

Present Value € 155.032,34 € 148.641,18 € 142.536,30 € 136.703,72 € 131.130,16 € 125.803,05 € 133.726,10 € 128.044,62
(813.296,00)
NPV (8Years) € 288.321,47
IRR 14,72%
4,28699572 4 Years
3,443948641 3 Month
Payback Period
73,31845924 80 Days
4 Years 5 Months 20 Days
Profitability Index 1,35

Inflation rate will affect the real WACC value. Higher inflation
rate will drive the Real WACC to a lower value, which will
drive the NPV to a higher number. This - in turn - will make the
investment to be more attractive since it provides a higher
NPV.
Conclusion
Conclusion
Based on the quantitative calculations in measuring investment
we found out that replacing the machines would be the best
choice. Based on the three measures in assessing an
investment; the NPV, IRR and payback period – all produced are
satisfying results. The NPV was positive, and the IRR are above
the WACC rate, although still below the outdated hurdle rate.
The payback period also make it inside the 5-year limit policy.