Case: Fonderia del Piedmont S.p.A.

Assignment Questions:

1. Assess the economic benefits of acquiring the Thor MM-9 machine? What is the initial outlay? What are the benefits over time? What is the appropriate discount rate? Does the net present value (NPV) warrant the investment in the machine?
2. What uncertainties or qualitative considerations might influence your recommendations (e.g. inflation, discount rate, inability to lay off existing workers, a reduction in the daily operating hours due to economic slowdown)? Please estimate the impact on NPV from a change in any one of those elements.
3. Should Martina Bellucci proceed with the project?

Source: Harvard Business Publishing

Additional materials:

None.

Further guidance:

You can assume that the semiautomated equipment could be operated for two more years beyond the end of its depreciable life thanks to ordinary maintenance. Thus the lives of both the semiautomated and Thor MM-9 alternatives will be eight years.

Further Further guidance:

1. The case requires the calculation of WACC; given it is something we have not covered yet; here is the calc:

What is the appropriate discount rate?

Given inputs: Cost of debt = 2.6%, rf=1.7%, Beta=1.25, Market risk premium=5.0%

Cost of equity = rf + (Beta x Market Risk Premium = 1.7% + 1.25 x 5.0% = 7.95% or 8%

D/V=0.33, E/V=0.67, Cost of debt=2.6%, rf=1.7%, Beta=1.25, Market risk premium=5.0%

WACC = 0.67 x 7.95% + 0.33 x 2.6% x (1 - 0.43) = 5.8%

2. Regarding sensitivity analysis, I think its enough to have each scenario on a standalone basis, and not to combine them in overlapping scenarios. However, if there is a key point of the argument you are making that calculating overlapping scenarios supports, then it would be beneficial to do so.

3. Regarding calculating labor costs and relevant key inputs (shifts, etc). I would make the following comments.

1. all the info that is required is provided in the case, and
2. when we are dealing with any case, this one being no exception, make sure you read the footnotes (they often contain pertinent information).
3. There is some language in the case that may need some clarification, the 3^rd paragraph under the heading The Thor MM-9 Machine refers to the equivalent of two maintenance workers required to maintain the old machines. This maintenance labour cost is not per shift (if we think about it, maintenance would be happening when the machines are not actively running anyways), so this does not mean the equivalent of four (two times two) maintenance workers are required to maintain the machine, it does mean the equivalent of two maintenance workers are required to maintain the old machines.

4. To assist with this assignment, I have provided the following