FACULDADE DE ECONOMIA DA UNIVERSIDADE NOVA DE LISBOA

Fonderia di Torino Spa

Corporate Finance Course by Professor Qinglei Dai

4/26/2009

[Master in Finance]

João Sabino 213

Leonardo Carvalho 304

Luis Portugal 217

Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine.

What is the initial outlay?

In order to calculate the initial outlay of a Vulcan Mold-Maker machine we need to have the cost of buying a new machine but we also need to calculate the current after-tax market value of the six old machines and by subtracting the costs on the revenues we get the net outlay for the new machine which is the initial outlay. The cost of buying a new machine is given in the case and is €1,010,000. Now, to calculate the current after-tax value of the six old machines we need to use the following formula: Now we just need to plug in the values which are given in the text namely the sale price which is €130,000, the accumulated depreciation which equals €130,682, the original cost of the six machines which is €415,807 and, finally, the tax rate which is 43%. This is a pretty straight forward calculation and it gives us an after-tax market value of the six old machines of €196,703.75. In order to get the initial outlay we just subtract the cost of the new machine to this value which gives us an outflow of €813,296.25.

What are the benefits over time?

By acquiring the Vulcan Mold-Maker machine Fonderia di Torino S.p.A will be able to replace labor intensive required semi-automated machines with automated machines, thus 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 €296,940 (24*7.33*8*210+3*7.85*8*210-2*11.36*8*210=296,940) and additional €5,200 will be saved as a result from improved labor efficiency.

Moreover, the new machine has a higher output capacity which means that if there is growth in the future this excess of capacity will allow for the company to expand its production. Although at present there is no need for space, with the old machines, raw materials and in-process inventories had to be staged near each machine in order to smooth the workflow. With the Vulcan Mold-Maker, almost half of the space will be freed for other purposes. In reality, with the new machine Fonderia di Torino will only need about 15% of the foundry floor's space while the old machines occupied 30%.
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What is an appropriate discount rate?

In order to calculate the appropriate discount rate which we were to use in our analysis we decided to use the WACC discount rate. In order to calculate this discount rate we must first have the discount rate on equity and the discount rate on debt. The discount rate on debt is given in the case as the interest rate on the loans from Banco Nazionale di Milano which is 6.8%. Now for the discount rate on equity is calculated using the following formula:. All these values are provided in the ...

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