Fonderia di torino case analysis

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  • 1. FONDERIA di TORINO
  • 2. CASE OVERVIEW
  • 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 EWACC kd (1 t )* ke * (D E) (D E)kd 6.8% 0.068wd 33% 0.33we 67% 0.67Kd = return on debt Tax rate = t = 43%Ke = return on equityWd = 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 valueBook value = €415,000-€130,682 =€284,318.Capital loss = 130,000-284,318 =154,318Capital 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 / YEARTOTAL € 351,409.60 / YEAR TOTAL € 119,319.60 / YEAR DIFFERENCE € 232,090.00
  • 6. OLD MACHINES VULCAN MOLD-MAKERDepreciation (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 DifferenceSales S SCost C1 C2 € 232,090 .00Depreciation D1 D2 € 78,730.00EBIT (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)TT 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 836,213We 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 havingprofit from the calculation above, and the new machine is having apositive 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.