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    Fonderia Case Assignment - Syndicate 6 - FIXED

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    Ayustina Giusti
    The managing director of Fonderia at Torino S.p. A is deciding whether to purchase a new automated molding machine or continue using their old machine. The report analyzes these alternatives through a weighted average cost of capital calculation, cash flow simulation, and profitability index. Based on the quantitative and qualitative analysis, the best option is determined to be purchasing the new machine without reassigning workers from the old machine, as reassigning them would negatively impact profitability and labor relations. Continuing with the old machine is also considered, but worker health issues remain a concern.

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    Fonderia Case Assignment - Syndicate 6 - FIXED

    Uploaded by

    Ayustina Giusti
    98 views5 pages
    The managing director of Fonderia at Torino S.p. A is deciding whether to purchase a new automated molding machine or continue using their old machine. The report analyzes these alternatives through a weighted average cost of capital calculation, cash flow simulation, and profitability index. Based on the quantitative and qualitative analysis, the best option is determined to be purchasing the new machine without reassigning workers from the old machine, as reassigning them would negatively impact profitability and labor relations. Continuing with the old machine is also considered, but worker health issues remain a concern.

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    Fonderia Case Assignment - Syndicate 6_FIXED

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    The managing director of Fonderia at Torino S.p. A is deciding whether to purchase a new automated molding machine or continue using their old machine. The report analyzes these alternatives through a weighted average cost of capital calculation, cash flow simulation, and profitability index. Based on the quantitative and qualitative analysis, the best option is determined to be purchasing the new machine without reassigning workers from the old machine, as reassigning them would negatively impact profitability and labor relations. Continuing with the old machine is also considered, but worker health issues remain a concern.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    98 views5 pages

    Fonderia Case Assignment - Syndicate 6 - FIXED

    Uploaded by

    Ayustina Giusti
    The managing director of Fonderia at Torino S.p. A is deciding whether to purchase a new automated molding machine or continue using their old machine. The report analyzes these alternatives through a weighted average cost of capital calculation, cash flow simulation, and profitability index. Based on the quantitative and qualitative analysis, the best option is determined to be purchasing the new machine without reassigning workers from the old machine, as reassigning them would negatively impact profitability and labor relations. Continuing with the old machine is also considered, but worker health issues remain a concern.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 5

    MM 5007 – FINANCIAL MANAGEMENT

    Fonderia Di Torino S.P.A

    GROUP ASSIGNMENT - CASE ANALYSIS

    By Syndicate 6:

    29120275 Hisyam Binekas


    29120052 Safaat Aufahasan Adzka
    29120295 Ayustina Giusti

    MASTER OF BUSINESS ADMINISTRATION


    SCHOOL OF BUSINESS AND MANAGEMENT
    INSTITUT TEKNOLOGI BANDUNG
    2021
    1. Case Background

    The managing director of Fonderia at Torino S.p. A, Francesca Cerini, will decide to purchase a
    Vulcan Mold-Maker automated molding machine or stick with the old machine. These
    considerations are supported by several advantages regarding the new machine with improved
    quality and several additional capacity additions for expansion. However, there is the experience
    of being rejected by other molding machine proposals by the board of directors for economic
    reasons that made Cerini have to do more in-depth estimates to convince the board of directors
    that his consideration can be accepted.

    In this report, we analyze all alternatives that Cerini can take as a final decision. The alternatives
    are buying a new machine without janitors, buying a new machine with all of the laborers being
    a janitor, or sticking with the old machine. Processes we do to analyze are looking for the
    Weighted Average Cost of Capital (WACC) to test the feasibility of investing in the company,
    Cash Flow Simulation analysis to see which cash flow is the best among alternatives,
    Profitability to see the benefits among alternatives, and Qualitative Analysis.

    2. Case Analysis

    According to the information from the case, we decide to compare two alternatives quantitatively
    out of three. Is it better to buy the new machine with or without reassigning the workers and use
    it for the next 8 years (as the qualitatively compared alternatives), or to use the old six semi-
    automated for the next 6 years. To do the qualitative comparison of the two conditions, several
    judgments are used.

    a. Weighted Average Cost of Capital (WACC)

    To count the WACC, there is several information in the case that we can use. The table
    below shows the data used for counting the WACC and also the result of WACC.

    Table 1
    WACC Analysis

    Percentage of Debt and Equity


    Equity 67%
    Debt 33%
    Tax Rate 43%
    Debt Rate 6.80%
    Cost of Debt 3.88%

    Rate of Government Bond 5.30%


    Beta 1.25
    Equity Risk Premium 6%
    Cost of Equity 12.80%

    WACC 9.86%
    Source: Syndicate 6 Analysis

    From table 1, we see that the cost of debt reaching 3,88% and the cost of equity was
    12,8%. Then, the 9.86% rate will be used to see if the alternatives are beneficial for the
    company or not. If the company’s WACC is lower, the market value was higher. We see
    that 9,86% is still good because the percentage was still below 10%.

    b. Cash Flow Simulation

    For this point, we try to use every detailed information from the case to simulate the cash
    flow. Of course it is not the accurate cash flow, but this simulation can help us to
    compare all of the options. We only include the comparing results for the cash flow
    simulation exercise. If it is needed to see the detail of the cash flow simulation, it can be
    found in the excel file we attach.

    Table 2
    Cash Flow Simulation Summary

    Year
    Alternatives
    0 1 2 3 4 5 6 7 8
    New
    Machine (736,206.25
    166,145.20 170,546.33 175,079.49 179,748.65 184,557.88 189,511.39 194,613.51 199,868.69
    without )

    Janitor
    NwoJ (736,206.25 (570,061.05 (399,514.72 (224,435.23
    (44,686.58) 139,871.31 329,382.70 523,996.21 723,864.90
    Cumulative ) ) ) )

    New
    (736,206.25
    Machine )
    48,628.53 49,504.16 50,406.06 51,335.01 52,291.83 53,277.36 54,292.46 55,338.01
    with Janitor
    NwJ (736,206.25 (687,577.72 (638,073.56 (587,667.51 (536,332.50 (484,040.66 (430,763.30 (376,470.84 (321,132.84
    Cumulative ) ) ) ) ) ) ) ) )

    Source: Syndicate 6 Analysis

    For the cash flow simulation, we use several assumptions. For the sales, we choose to
    adapt the 10% growth because the company’s beta is on 1,25. We analyze that if the
    company’s beta reached that number/point then the market value was 8-15%, so we
    choose the not-so-really midpoint because of the statement “grew slow but steadily”.
    Thereafter, we also consider and count the 3% of inflation in the labor cost.

    c. Profitability Index

    The third analysis that we do is the profitability index. The profitability index analysis is
    to find that the exercise is a good investment or not.

    Table 3
    Profitability Index

    Profitability Internal Rate of Equivalent


    Alternatives Rate NPV
    Index Return Annuity

    New Machine
    9.86% €230,034.25 1.31 17.64% €42,891.32
    without Janitor

    New Machine
    9.86% -€460,446.30 0.37 -11.04% -€85,853.09
    with Janitor

    Source: Syndicate 6 Analysis

    The table 3 shows us that investing in the new machine will be beneficial for the
    company, as long as they should not have to reassign the 24 operators of the old
    machines as the janitor.

    The profitability index results show that new machine without janitor is a good
    investment. It is because the index is above 1.00 which is a good investment. Otherwise,
    new machine with janitor alternative profitability index can’t reach 1.00, so that is not-so-
    good investment.
    Using the old machines will still be more profitable instead of reassigning the old
    machines operators. Less efficiency of the labor should be avoided if the company wants
    to buy the new machine.

    d. Qualitative Analysis

    In analyzing this case, we cannot set aside the qualitative information that will help us to
    conclude a better decision. There are several conditions that follow any alternative we
    choose. If we decide to buy the new machine without reassigning the operator of the old
    machine, there will be a hard refusal from the labor union. It might be easier if the
    company could reassign the operator, but the position available is just for janitor and
    there will be pay cut. That option also makes the investment not beneficial anymore. The
    company can also consider using the old machines, but the health issue will be the
    problem.

    3. Conclusion and Recommendation

    We conclude that the best option for the company is to invest in the new machine without
    reassigning the operator of the old machines, because it will be not beneficial for the company
    if they have to reassign all of the old machines' operators. Still using the old machines for the
    next 6 years could be a better option than if the company has to reassign the operators. But, in
    the matter of worker health, it is better to change the machine as fast as they can.

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