NPV of Fonderia di Torino S.P.A.

May 12th, 2015
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1. Please 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?

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Fonderia di Torino S.P.A. Case StudyFonderia di Torino S.p.A.1. Please 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?Initial Case OutlayPrice of new machine (1,010,000)Current after-tax market value of old machine [130,000+{(415,807-130,682)-130,000}*0.43]= 196,704Net outlay for new machine -1,010,000+196,704 = -813,296Appropriate discount rateRs = 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 ValueSince 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) MachineInitial Cash Outlay (813,296)Operating Cash Flow(OCF) {Sales-(2*2*11.36*8*210+59,500+26,850-5,200)}*(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 new one.If Sales > 328,338.07 then NPV>0If Sales < 328,338.07 then NPVKeep Old(semi-automated) MachineOpportunity cost (196,704)Operating Cash Flow(OCF) {Sales-(24*7.33*8*210+2*3*7.85*8*210+4,000+12,300)}*(1-0.43)+(4

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