Fonderia Di Torino Spa
...t €1,010,000 Yearly depreciation (8yrs) 126,250 Labor 38,170 Contract maintenance 59,500 Power costs 26,850 Compared to the costs of the old machine: Original cost €415,807 Yearly depreciation (6yrs) 47,520 Labor 295,546 Maintenance Labor 39,564 Maintenance supplies 4,000 Electrical power 12,300 The change in operating cash flows that will result from purchasing the new machine can be calculated with the formula (R - O - D) (1-t) + D, where R is revenue, O is operating costs and D is depreciation. Operating costs for the old machine and the new machine are €351,409.60 and €124,519.60, respectively. Therefore the savings in operating costs when accepting the new machine is €232,090, including the €5,200 labor savings in other areas of the foundry. Changes in depreciation netted €78,730 for the first six years (new machine depreciation – old machine depreciation), and will equal only the depreciation of the new machine in years 7 and 8. There will be no expected marginal change in revenue for the first 6 years of use, yet during the 7 and 8th year as floor space is freed up and product quality is improved the firm expects that revenues will increase faster compared to costs. In this case I used conservative marginal revenue of 1% to estimate the cash flow for the final year. The firm has a stated hurdle rate of 14%. In addition the total cost of the new machine is expected to be €1.01 million. The sale of the old machine would result in the following cash flow: Original Cost €415807 -Cumulative Depr. 130682 = Book value 285125 -Sale offer 130000 Loss on sale 155125 Tax Savings 66703.75 As a result of the sale of the old machine, the net investment costs would be €813,296 (total cost of new machine-tax savings-sale of old machine). Year 1 2 3 4 5 6 7 8 Cost Savings 232,090 232,090 232,090 232,090 232,090 232,090 5,200 2,805,200 - Depreciation 78,730 78,730 78,730 78,730 78,730 78,730 126,250 126,250 EBIT 153,360 153,360 153,360 153,360 153,360 153,360 (121,050) 2,678,950 - Taxes 65,945 65,945 65,945 65,945 65,945 65,945 0 1,151,949 Net Income 87,415 87,415 87,415 87,415 87,415 87,415 (121,050) 1,527,002 +Depreciation 78,730 78,730 78,730 78,730 78,730 78,730 126,250 126,250 OCF 166,145 166,145 166,145 166,145 166,145 166,145 5,200 1,653,288 Given the expected cash flows the calculated net present values are in the table below. Given that possibility that inflati...
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