Aurora Textile

1.0 Executive Summary

Aurora is a yarn producer based in the United States. It services both the domestic and international market. It produces hosiery, knitted outwear, wovens and industrial and specialty products.

The hosiery market which accounts for 35% of revenue, provides the largest amount of revenue to the company. This is due to the protection it gets from overseas competition due to the high transportation costs associated in transporting the hosiery yarn. Due to the free trade agreement that the United States (US) has with the Asian countries, the other segments of Aurora are exposed to competition pressure. This had led the managers to shut down four production facilities in order to cut down cost as sales volume have decreased by 6.6%, 20.4% and 19.4% from 2000, 2001 and 2002 respectively.

Aurora is looking to invest in a newer more efficient and finer quality yarn machine. The analysis carried out in this report outlines the cost benefit to the company for replacing the old ring-spinning machine with a new one, the Zinser 351.

Replacing the old machine with the Zinser will command higher margin products which will be sold to a niche market. A 10% increase in selling price of the yarn will be also be derived from the finer quality yarn. It will also provide an increase in efficiency along with greater reliability in production. The efficiency will reduce operating costs and lower power consumption as well as reduce maintenance expenses. However, sales will be 5% lower and the cost of consumer returns will be higher and it will cost $8.25million to purchase and install.

The Net Present Value (NPV) analysis showed that purchasing the Zinser 351 had an NPV of $13.6million, while continuing to use the existing machine had NPV of $2.5million. The outcome of the analysis shows that replacing the old machine will be a better investment decision for Aurora. This is because it will increase the value of the firm by $11million.

Sensitivity analysis...