Fonderia Di Torino S.P.A.
Finance Case Study: Fonderia di Torino S.p.A.
Case Overview:
Company considering purchase of Vulcan Mold-Maker automated molding machine. Machine prepares sand molds into molten iron using iron castings, automates manual intensive process.
Questions:
1. Assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value (NPV) warrant the investment in the machine? Assume that with ordinary maintenance, the semi-automated equipment could be operated for two more years beyond its depreciable life.
Given:
Total Cost New Machine = 1,010, 000 Euros Depreciated over 8 yrs; replace after 8yrs.
Offer for (6) Old Machines = 130,000 E each After-Tax Market Value for Old Machine.
Original Cost of Old Machines = 415, 807 E Cumulative Depreciation = 130,682 E
Tax Rate of Company (t) = 43%
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 Euros
Given:
Beta Coeffecient (B) = 1.25 Market Value of Company’s Capital = 33% Debt
Assumed Equity Risk Premium = 6% Market Value of Company’s Capital = 67% Equity
Risk Free Rate of Return (Rf)= 5.3%
Before Tax Cost of Debt (Rd) = 6.8%
Appropriate Discount Rate:
Using CAPM:
Rs = Rf+B(Rm-Rf)
Rs =5.3%+1.25*6%
Rs =12.8%
After-Tax Cost of Debt = Rd (1- t):
Rb = 6.8%*(1-0.43)
Rb = 3.88%
Compute WACC:
R(wacc) = (%Debt)*(Rb)+(%Eqty)*(Rs)
R(wacc) = (33%)*(3.88%)+(67%)*(12.8%)
R(wacc) = 9.86%
Net Present Value:
Since we are not provided with the information or evidence about cash inflow needed to calculate the Net Present Value, we assumed three different scenarios to cover all possible outcomes.
Replace with New(automated) Machine
Initial Cash Outlay(813,296)
Case Overview:
Company considering purchase of Vulcan Mold-Maker automated molding machine. Machine prepares sand molds into molten iron using iron castings, automates manual intensive process.
Questions:
1. Assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value (NPV) warrant the investment in the machine? Assume that with ordinary maintenance, the semi-automated equipment could be operated for two more years beyond its depreciable life.
Given:
Total Cost New Machine = 1,010, 000 Euros Depreciated over 8 yrs; replace after 8yrs.
Offer for (6) Old Machines = 130,000 E each After-Tax Market Value for Old Machine.
Original Cost of Old Machines = 415, 807 E Cumulative Depreciation = 130,682 E
Tax Rate of Company (t) = 43%
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 Euros
Given:
Beta Coeffecient (B) = 1.25 Market Value of Company’s Capital = 33% Debt
Assumed Equity Risk Premium = 6% Market Value of Company’s Capital = 67% Equity
Risk Free Rate of Return (Rf)= 5.3%
Before Tax Cost of Debt (Rd) = 6.8%
Appropriate Discount Rate:
Using CAPM:
Rs = Rf+B(Rm-Rf)
Rs =5.3%+1.25*6%
Rs =12.8%
After-Tax Cost of Debt = Rd (1- t):
Rb = 6.8%*(1-0.43)
Rb = 3.88%
Compute WACC:
R(wacc) = (%Debt)*(Rb)+(%Eqty)*(Rs)
R(wacc) = (33%)*(3.88%)+(67%)*(12.8%)
R(wacc) = 9.86%
Net Present Value:
Since we are not provided with the information or evidence about cash inflow needed to calculate the Net Present Value, we assumed three different scenarios to cover all possible outcomes.
Replace with New(automated) Machine
Initial Cash Outlay(813,296)