3. Cerini need to find out the calculation of WACC
(Weight Average Cost of Capital), because it will be
compared with the new project’s fund should be
spent.
D E
WACC kd (1 t )* ke *
(D E) (D E)
kd 6.8% 0.068
wd 33% 0.33
we 67% 0.67
Kd = return on debt Tax rate = t = 43%
Ke = return on equity
Wd = weight of debt
Cost of debt kd (1 t )
We = weight of equity 0.068(1 0.43)
3.876%
Cost of equity
kj kRF j (km kRF )
kj 0.053 1.25(0.06)
kj 0.128 12.8%
D E KRF = risk free return (the rate of return on Euro-denominated
WACC kd (1 t ) * ke *
(D E) (D E) bonds issued by E.U. governments was 5.3 percent.
WACC 0.03876*(0.33) 0.128*0.67 KM – KRF = Market risk premium (Assumed that the equity risk
premium would be 6 percent)
WACC 0.0986 9.86% βj = the company’s beta (1.25)
4. THE CapEx
Next, after getting WACC, we should
compared the difference cash flow
between old ‘n new machine
Capital expenditure = Additional cash
needed to acquire the new machine.
Capital expenditure = Cost of acquisition
of the new machine-Resale value of the
old machine - savings in tax.
Savings in tax = Capital loss x Tax rate
Capital loss = Resale value-book value
Book value = €415,000-€130,682 =€284,318.
Capital loss = 130,000-284,318 =154,318
Capital expenditure = 1,010,000-130,000-(0.43x 154,318)
Capital expenditure = €813,643
The cost of capital of making a new machine
(Vulcan Mold-Maker) which can be counted :
WACC x €813,643 = 9.86 % x € 813,643
= € 80.225,2
5. THE COMPARISON
OLD MACHINES VULCAN MOLD-MAKER
OPERATORS OPERATORS
x € 7.33 x 8 hr x 2 shift x 210 days x € 11.36 x 8 hr x 2 shift x 210 days
= € 295,545.60 /YEAR = € 38,169.60 / YEAR
MAINTENANCE CONTRACT
WORKERS MAINTENANCE
x € 7.85 x 8 hr x 2 shift x 210 days
= € 39,564.00 / YEAR € 59,500.00 / YEAR
MAINTENANCE
ELECTRICAL POWERS
SUPPLIES
€ 4,000.00 / YEAR € 26,850.00 / YEAR
SAVE OF AUTOMATIC
ELECTRICAL POWERS
MACHINE
€ 12,300.00 / YEAR € 5,200.00 / YEAR
TOTAL € 351,409.60 / YEAR TOTAL € 119,319.60 / YEAR
DIFFERENCE € 232,090.00
6. OLD MACHINES VULCAN MOLD-MAKER
Depreciation (D1) = € 47,520.00 Depreciation (D2) = € 1.01 million / 8 year
= € 126,250.00
DIFFERENCE € 78,730.00
THE CASH FLOW DIFFERENCE
Semi-automatic (Old Machines) Vulcan Difference
Sales S S
Cost C1 C2 € 232,090 .00
Depreciation D1 D2 € 78,730.00
EBIT (S-C1-D1) (S-C2-D2)
Net Income (S-C1-D1)-((S-C1-D1)*T) (S-C2-D2)-((S-C2-D2)*T)
Cash flow (S-C1)(1-T)+(D1xT) (S-C2)(1-T)+(D2xT) (C1-C2)(1-T)+(D1-D2)T
T 43%
(C1-C2)(1-T)+(D1-D2)T = [€ 232090][1-0.43]+[ € 78730][0.43]
= € 166145.2
From the difference cash flow between semi-automatic and
Vulcan we can see that the Fonderia may cover the cost of
capital of making a new machine (Vulcan Mold-Maker)
Because the cash flow still bigger than the cost of capital,
Fonderia can build the Vulcan Mold-Maker. Because there
are some profit as big as € 85.920 (€ 166145.2-€ 80.225,2)
7. THE SAVING
Cost of
capital Present Value
1 9.86 166145.2 151,234
2 10.1558 166145.2 136,922
3 10.460474 166145.2 123,273
4 10.77428822 166145.2 110,340
5 11.09751687 166145.2 98,167
6 11.43044237 166145.2 86,789
6 11.77335564 252500 129,489 Principal
Present value of investment 836,213
We can see that the present value of investment is € 836,213 ,
minus the total investment is € 813.643, we still profit € 22.570
8. ANOTHER SAVING
WACC WACC after Cost of Cash flow new
Year Inflation Investment Profit
(%) inflation Capital machine (savings)
1 9.86 0% 9.86 813,643 80225.1998 166145.2 85,920.0002
2 9.86 3% 10.1558 813,643 82631.95579 166145.2 83,513.24421
3 10.1558 3% 10.460474 813,643 85110.91447 166145.2 81,034.28553
10.46047
4 4 3% 10.77428822 813,643 87664.2419 166145.2 78,480.9581
10.77428
5 822 3% 11.09751687 813,643 90294.16916 166145.2 75,851.03084
11.09751
6 687 3% 11.43044237 813,643 93002.99423 166145.2 73,142.20577
We can see from the table, that after inflation of 3%
every year, we could saving in total of
€ 477,941.72
9. Conclusion?
Francesca Cerini is still having
profit from the calculation above,
and the new machine is having a
positive cashflow compared to the
old machine.
Recommendation
?
Francesca Cerini should proceed
with buying the new machine to
replace the old machine, because
beside is increase the production
capacity, is also generate positive
cashflow from operation saving in
the long run.
