Aurora

Aurora Textile:

A. It seems that Aurora has not been performing very well over the past 4 years. Aurora’s net earnings have been negative the past 4 years. Total shareholder equity has also been steadily decreasing over the past for years. Using the CGS/Sales ratio you can see that around 90% of sales are used to cover the CGS. Net sales have been decreasing the past four years. Using the SG&A/Sales ratio we can see the Aurora has been hovering around 6-7% for the past four years. Thus it seems they are controlling their overhead costs; SG&A expense has decreased the past 4 years.

B. The factors affecting the textile-mill industry are globalization, trade policies, and customer preferences/fads. The state of the industry in the USA has not been very good the past four years. Since 1999, 150 textile plants had been closed in the United States, and 200,000 industry jobs had been lost. I would use a higher WACC to discount projects to incorporate the inherent risk in the industry. I would invest in this industry because of what Bill Miller states (Take heart in pessimistic markets), “Our research efforts are usually directed at precisely the area of the market the news media tells you has the least promising outlook.”

C. Excel: The relevant cash flows are the $500,000 redemption value of the old machine, reimbursement costs, liability multiplier, the cost of the Zinster, the installation cost, depreciation, redemption value of the Zinster, training cost, and reduction of maintenance costs.