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Fonderia di Torino, a company whose customers were original-equipment manufacturers (OEMs), mainly in Europe, has been trying to make improvement of its product line. ...
Fonderia di Torino:
• The company’s beta = 1. ... 3% (rf)
• Equity risk premium = 6% (Rm – rf)
• Current bond yields impounded an expected inflation rate of 3%
• Corporate tax rate is 43%
The Vulcan Mold-Maker (new machine):
• One machine would replace six semiautomated stamping machines
• Machine’s cost = €850,000
• Estimate for modifications to plant, including wiring for machine’s power supply = €155,000
• Estimated Total Cost including shipping, installation, and testing (expected) = €1. ... 85 an hour
• Maintenance = €4,000 a year
• Power cost = €12,300 a year
ANALYSYS OF CASE
Is this project worth taking? ...
The second spreadsheet we will calculate each year’s NPV for both the old project and new project and we also end up with the same conclusion, Net Present Value of the project, € 192,344. ... Calculating the project’s return is higher or lower than the opportunity cost of capital will ensure us that purchasing the new machine (see sample picture below) is a good investment for the company because its rate of return is higher than the opportunity cost of capital.
The project’s IRR is found by obtaining the discount rate of the project which NPV equals zero. ... According to the case’s article, the current bond yields impounded an expected inflation rate of 3% for the foreseeable future. ... The project’s NPV will decrease. ... In addition, the inventory number, which is always the biggest problem for companies when the economy is not good, will not affect the company’s balance sheet because the product’s unit cost will decrease and the inventory number will not increase even though the output capacity is higher then before. ...
Conclusion
The new company, Fonderia di Torino S.p.
Approximate Word count = 2330
Approximate Pages = 9.3
(250 words per page double spaced)
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