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# Fonderia di Torino S.p.A. 1. Please assess the economic benefits of acquiring th e Vulcan Mold-Maker machine.

What is the initial outlay? What are the benefits o ver 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 nee ded to calculate the Net Present Value, we assumed three different scenarios to cover all possible outcomes. Replace with New(automated) Machine Initial Cash Ou tlay(813,296) Operating Cash Flow (OCF)Sales-(2*2*11.36*8*210+59,500+26,850-5,20 0)* (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 ne w one. If Sales > 328,338.07 then NPV>0 If Sales < 328,338.07 then NPV<0 Keep Ol d(semi-automated) Machine Opportunity cost(196,704) Operating Cash Flow (OCF)Sal es-(24*7.33*8*210+2*3*7.85*8*210+4,000+12,300)* (1-0.43)+(47,520*0.43) NPV_old-1 96,704+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 o f keep using the old machine. If Sales > 434,036.67 then NPV>0

If Sales < 434,036.67 then NPV<0 We can summarize our calculations as follows: S ales < 328338.07328338.07< Sales < 434036.67Sales > 434036.67 NPV of New-++ NPV of Old--+ By looking at the above diagram we can conclude that when sales is bet ween 328,338.07 and 434,036.67, Fonderia di Torino S.p.A should definitely repla ce the old machine with the new automated machine. However, in the other two sce narios, we have to take one more factor into consideration which is the EAA assu ming that sales are equal for both cases, in order to make the decision whether to invest in the new machine or not. *For the sake of simplicity we put sales as zero Replace with New(automated) Machine Initial Cash Outlay(813,296) OCF0-(2*2 *11.36*8*210+59,500+26,850-5,200)* (1-0.43)+(1,010,000/8*0.43)=-35,481.34 Raw NP V(1,003,555) EAA(187,153) Keep Old(semi-automated) Machine Opportunity cost(196, 704) OCF0-(24*7.33*8*210+2*3*7.85*8*210+4000+12300)* (1-0.43)+(47,520*0.43)=-265 ,520.35 Raw NPV(1,357,874) EAA(310,500) Keep using the old machine incurs higher cost(higher EAA) than replacing it with the new one. Therefore assuming sales a re equal for both cases, when sales is smaller than 328338.07 and greater than 4 34036.67, Fonderia di Torino S.p.A should definitely replace the old machine wit h the new automated machine. Benefit over time The three scenarios illustrated a bove clearly shows that the investment in the new machine creates greater value to the company, unless there should be some unexpected turnout in sales. By acqu iring the Vulcan Mold-Maker machine Fonderia di Torino S.p.A will be able to rep lace labor intensive required semi-automated machines with automated machines, t hus reducing medical claims. The company will also benefit from higher levels of product quality and lower scrap rates. Labor costs will be reduced by almost 29 8,334.4 euros (24*7.33*8*210 + 2*3*7.85*8*210- 2*2*11.36*8*210=298,334.4) and ad ditional 5,200 euros will be saved as a result from improved labor efficiency. 2 .What uncertainties or qualitative considerations might influence our recommenda tion? How, 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. NPV and EAA proved that the company should i nvest in the new machine. However, there are still some uncertainties that might affect the attractiveness of the new machine. Federia Torino S.p.A still has to decide whether the tough collectivebargaining agreement the company has with th e employees' union would allow the company to lay off the 24 operators of the se mi-automated machines. Reassigning the workers to other jobs might be easier, bu t the only positions needing to be filled are those of janitors, who are paid 4. 13 euros an hour. The extent of any labor savings would depend on negotiations w ith the union. If the workers are reassigned as janitors, NPV will decrease due to increase in labor costs. Secondly, the company is still unsure when added cap acity of the new machine would be needed. The old machines currently operate at only 90 percent of capacity. The projection as to how much capacity of the new m achine will be utilized, will have a considerable influence on the outcome of th e NPV. Lastly, the latest economic news suggests that the economies of Europe ar e headed for a slowdown which will also have a strong impact on the outcome of t he NPV. How about the inflation rate of 3 percent (or higher)? Will that affect the attractiveness of the Vulcan Mold-Maker? The answer is no. Inflation rate do es not affect NPV since NPV is always calculated using real rate or nominal rate

"consistently." 3. Should Francesca Cerini proceed with the project? Francesca C erini 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, replacin g the semi-automated machine with the Vulcan Mold-Maker offers strategic benefit s in the long run as previously discussed.