Aurora Textile Company

Case Analysis: Aurora Textile Company
Student’s Name
Institutional Affiliation
Case Analysis: Aurora Textile Company
Overview
The case requires one to look into the ongoing practices in Aurora Textile Company in order to provide solutions for the company to create value by improving its spinning machine to the Zinser 351. That would enhance increased quality of its yarn that will eventually be sold for increased margins. Therefore, there is a need to acquire the cash flow projections with regards to the existing machine and compare them to the new machines. Most importantly, it is vital to obtain the cash flow components that will be affected by depreciation, periods of cotton inventory as well as the liability costs linked to the revenues. There is also a need for analysis of extra complexities due to the financial problem with the company along with the entire textile industry across the United States. That is owing to the fact that manufacturers are shifting to Asian markets in attempts to gain competitive advantage in production costs. There is a need to determine the net price value (NPV) of the machine for a certain period. Moreover, the payback period can be used in order to determine whether to accept it. That way, the case analysis should answer the biggest question of the company, which is if the management should invest in the new machine.
Problems
The company has realized that it is making low profit margins since it is using an outdated machine for its spinning practices. Moreover, the management is faced with a dilemma whether to invest in the new Zinser 351 machine, which it predicts will increase the margin. The Zinser 351 machine will give a chance for high quality products as well and an increase of 10% in sales. However, there will be 5% decrease in the volumes from raised returns. Most importantly, problems have entangled the textile industry with the need to lower production costs. That has caused many producers to move to Asian industry. There are also changes in consumer preferences where consumers are moving to the suppliers that provide high-quality yarn that experience minimized faults. Most importantly, Aurora Textile Industry is experiencing the complexity of industrial shift from the practices of mass production towards markets that seem to experience flexible manufacturing as well as customized supplies. The company is also forced to compete with the imported yarns from other countries. Furthermore, the manufacturers across the United States are being forced to cut down on their costs and upgrade their facilities in order to be competitive. Therefore, there is a high need to carry out an analysis of the existing machine and the new one in order to reach a final decision whether to introduce the Zinser 351.
Analysis
Looking at the financial statements for Aurora Textile Industry, one can calculate the NPV for the existing machine. Adding the cash flows from its sources of cash for 10 years between 2003 and 2012, one can easily get the free cash flows that can be computed in order to give the gross present value. The free cash flows emerge from computation of sales, returns, and cost of materials, conve...