Submitted by: Submitted by flowergirldress
Views: 633
Words: 828
Pages: 4
Category: Business and Industry
Date Submitted: 12/05/2011 12:26 PM
Case 20
Aurora Textile Company
Finance 433
Professor Mehmet Akbulut
December 8, 2011
Group 5
Anhtruc Nguyen
Adam Pistorino
Jeanny Permata
Hiu Yu
Eric Loh
Executive Summary
Aurora Textile Company was established in the early 1990s. Its core business is to produce cotton and synthetic or cotton blends yarn sold mainly to the U.S. retail markets. Its current revenue is composed of 43% hosiery, 35 % knitted wear, 13% woven, and 9% industrial and specialty products sales. As of 2003, the company had four plants and two types of production processes: Hunter with ring-spinning machine, Rome, Barton and Butler with rotor-spinning machine.
In January 2003, the company under chief financial officer, Michael Pogonowski, was faced with a decision whether to invest in a new ring-spinning machine, Zinser 351, or to keep the current machine at its Hunter plant. The new machine will be able to produce higher quality yarn which will increase the price of the yarn for about 10%. It also will be more efficient because it will reduce the operation costs by lowering the power consumption and maintenance. In the other hand, the cost of installed machine will be expensive, with the total of $8.25 million; the sales volume will drop by 5%, and the cost of customer returns will increase. Furthermore, the company is struggling financially and there is an intense competition in the U.S. textile industry.
In our valuation for Aurora Textile Company, we used 10% WACC and 36% tax rate, and came up with positive net present value for both the existing machine and the new machine.
NPV of old machine = $46,136,838
NPV of Zinser 351 = $117,268,243
Based on our NPV calculation, we believed that investing in the new machine will be the best choice for the company. This is because it gives higher positive NPV which shows that the company is earning more from this new investment than retaining its old machine.
We also believe that the company should not pay dividend...