Horniman

Case Guidance: Aurora Textile

The report

• You will present your work in the form of a comprehensive report to be submitted to the Board of directors

• The assignment is due at the beginning of class on the date indicated in the course outline

• The assignment must be computer printed (typed) and the text may be no longer than six single-spaced pages. This page limit does not include the executive summary, the tables and exhibits. There is no limit on tables and exhibits, but be reasonable.

• Only one copy of the report is to be submitted per group

The Analysis

1. How has Aurora Textile performed over the past four years? Provide financial ratios that present a clear picture of Aurora’s financial condition.

2. List the factors affecting the textile industry. What do you think is the state of the industry in the United States? How should you incorporate the state of the textile industry into your analysis? Why should anyone invest money in the industry?

3. What are the relevant cash flows for the Zinser investment? Using a 10% discount rate (WACC) and assuming a 36% tax rate, what do you get as the NPV for the project? What are the value drivers in your analysis? What do you estimate as the cost per pound for customer returns under the Zinser alternative? (Hint: for a replacement decision, analysts often find it helpful to prepare two sets of cash flows and two NPVs—one for the status quo and one for the new machine.)

4. State your recommendation about investing in the new Zinser machine. Explain why it is better to invest in the Zinser or to pay a dividend to the shareholders. Be sure to explain the primary reasons that justify your recommended course of action.

The Marks

85% of the marks are allocated to the technical aspects of the case: your analysis, your presentation of the issues and your conclusions/recommendations. 8% is allocated to the executive summary and 7% to the overall presentation and...