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Fonderia di Torino SpA 1 Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine What is the initial outlay What are the benefits over time What is an appropriate discount rate Does the net present valueNPV warrant the investment in the machine Initial Case Outlay Price of new machine 1010000 Current after-tax market value of old machine 130000415807-130682 -130000043 196704 Net outlay for new machine-1010000196704 -813296 Appropriate discount rate Rs RfBRm-Rf 531256 128 Rb 681-043 388 Rwacc 3338867128 986 Net Present Value Since we are not provided with the information or evidence about cash inflow needed to calculate the Net Present Value we assumed three different scenarios to cover all possible outcomes Replace with Newautomated Machine Initial Cash Outlay813296 Operating Cash Flow OCFSales-22113682105950026850-5200 1-04310100008043 NPVnew-813296OCFnewPVIFA9868years NPVnew equation tells us that when sales is 32833807 NPV is zero 32833807 is our magic number to find out the NPV of replacing the old machine with the new one If Sales gt 32833807 then NPVgt0 If Sales lt 32833807 then NPVlt0 Keep Oldsemi-automated Machine Opportunity cost196704 Operating Cash Flow OCFSales-247338210237858210400012300 1-04347520043 NPVold-196704OCFoldPVIFA9866years NPVnew equation tells us that when sales is 43503667 NPV is zero 43503667 is our magic number to find out the NPV of keep using the old machine If Sales gt 43403667 then NPVgt0 If Sales lt 43403667 then NPVlt0 We can summarize our calculations as follows Sales lt 3283380732833807lt Sales lt 43403667Sales gt 43403667 NPV of New- NPV of Old-- By looking at the above diagram we can conclude that when sales is between 32833807 and 43403667 Fonderia di Torino SpA should definitely replace the old machine with the new automated machine However in the other two scenarios we have to take one more factor into consideration which is the EAA assuming that sales are equal
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