Sunteți pe pagina 1din 19

FINANCE MANAGEMENT

CASE: THE INVESTMENT DETECTIVE & FONDERIA DI TORINO S.P.A

GM 8
Syndicate 10
Nadirah Syahnas - 29318442
Permata Aswadini - 29318337
Yunilson Mulyano - 29318476
Ulfa Rabbina - 29318439
Case 1: The Investment Detective

Suppose that we are new capital-budgeting analyst for a company considering investments in the eight
projects. The chief financial officer of our company has asked us to rank the projects and recommend the
“four best” that the company should accept.

Only the quantitative considerations are relevant. All the projects require the same initial investment,
$2,000,000. The firm‘s weighted average cost of capital has never been estimated. In the past, analysts have
simply assumed that 10% was an appropriate discount rate (although certain officers of the company have
recently asserted that the discount rate should be much higher).
1. Rank the project simply by inspecting the cash
flow

Project number 1 2 3 4 5 6 7 8
Sum of cash flow benefits
3,310 2,165 10,000 3,561 4,200 2,200 2,560 4,150
($)
Rank 5 8 1 4 2 7 6 3

The Investment Detective


2. Criteria to rank the project & the better
quantitative ranking method
In quantitative ranking method, we use Payback Period (PP), Net Present Value (NPV), and Internal Rate of Return (IRR).

● Payback Period (PP), is the amount of time which takes to recover the investment cost. Simply, PP is the length of time an
investment reaches a breakeven point. This method is quite simple to use and easy to understand. It also helps company to
make quick decisions, even with limited resources. However, PP has disadvantages, such as it ignores time value of money and
not all cash flows are covered.
● Net Present Value (NPV), is the difference between the present value of cash inflows and cash outflows, and it considers the
capital cost of the projects. If NPV is equal or greater than zero, company could accept the project, but if NPV is negative or
less than zero, it suggests that company should reject the project. Most of companies used this method for decision making in
choosing some projects in its business. However, it requires a guessing about future cash flows and estimating a cost of capital
of company. It is also not applicable when comparing projects that have differing investment amounts.
● Internal Rate of Return (IRR), is the discount rate that forces a project’s NPV to equal zero. If IRR is greater than WACC,
company could accept the project, then reject the project if IRR is less than WACC. The disadvantage of IRR is it does not
consider important factors, such as project duration, future costs, or the size of a project.

However, the NPV is the most method company used in real life for decision making, because it addresses directly to the
central goal of financial management, which is maximizing shareholder wealth.

The Investment Detective


3. The quantitative ranking & the difference with
simple inspection of the cash flows ranking
3. The quantitative rank and the difference with the
simple

All the projects have the same amount of instill cost, risk and capital cost. The different between each project is the cash flow and out flow. We used
three quantitative methods, which is PP, NPV, and IRR, with different ranking results. It is hard to find which one is the best, because each investor is
looking to have best benefit in short term, however not all the industry can gain the benefit in short term because some of industry gain the benefit
in long term. In this case, we may choose project 7 or project 8. We could also accept both projects because these two are mutually exclusive.
However, we prefer project 7 to be chosen rather than project 8, or other projects. As we can see, project 7 has the highest IRR than other projects
which could have best benefit in short term for the company. It has also good PP, which in second rank than the others, it means that it has short
period to cover the cost of project, and it still has positive NPV eventhough in forth rank compared with other projects. Those quantitative results
are different compared with the simple inspection cash flow method, it caused by the simple one is not considering the time value of money and
cost of capital. The Investment Detective
4. Kinds of real investment projects have similar
cash flows

The Investment Detective


Case 2: Fonderia Di Torino S.P.A
In November 2000, Francesca Cerini, managing director of Foderia Di Torino S.p.A., was
considering the purchase of a Vulcan Mold-Maker automated molding machine. This
machine would replace an older machine and would offer improvements in quality and
some additional capacity for expansion. Certain aspects of the new machine purchase
decision were difficult to quantify. First, Cerini was unsure whether she should cut off
the 24 labour from the semi automated machine or reassigning the workers to other
positions, which is the janitors. Second, Cerini believed that the new machine would
result in even higher levels of product quality and lower scrap rates than the company
was now boasting. Finally, Vulcan Mold-Maker had a theoretical maximum capacity that
was 30% higher than that of the six semi-automated machines, but those machines
were operating at only 90% of capacity, and she was unsure when added capacity would
be needed.
Initial Investment

Fonderia Di Torino S.P.A


Option 1 : Cut off all labor from automated machine

Annual Labor Cost Calculation

Fonderia Di Torino S.P.A


Option 1 : Cut off labor from automated machine

Operating Cash Flow - Vulcan Machine

Fonderia Di Torino S.P.A


Option 1 : Cut off labor from automated machine

Operating Cash Flow - Semi Automated Machine

Fonderia Di Torino S.P.A


Option 1 : Cut off labor from automated machine

Incremental Cash Flow

Fonderia Di Torino S.P.A


Option 1 : Cut off labor from automated machine

Calculating WACC

Fonderia Di Torino S.P.A


Option 2 : Shift labor from automated machine to janitors

Annual Labor Cost Calculation


Cerini was unsure whether she should cut off the 24 labour from the semi automated machine or
reassigning the workers to other positions, which is the janitors, cost $4.13 an hour.

Fonderia Di Torino S.P.A


Option 2 : Shift labor from automated machine to janitors

Operating Cash Flow - Vulcan Machine

Fonderia Di Torino S.P.A


Option 2 : Shift labor from automated machine to janitors

Operating Cash Flow - Semi Automated Machine

Fonderia Di Torino S.P.A


Option 2 : Shift labor from automated machine to janitors

Incremental Cash Flow

Fonderia Di Torino S.P.A


Option 2 : Shift labor from automated machine to janitors

Calculating WACC

Fonderia Di Torino S.P.A


Results

Based on previous calculation, we suggests that Cerini should take option 1, which is just cut off
labor from automated machine. Because it results positive value of NPV and IRR, which are
$204,566.59 and 15%, respectively. Compared with option 2, shift labor from automated machine to
janitors, it results negative value of NPV and IRR, which means this option would not generate
benefit for the company in the future. Despite the efficiency of Vulcan Machine in the human
requirement, shifting the automated machine labour into janitor would increase the labour cost.

Fonderia Di Torino S.P.A

S-ar putea să vă placă și