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Aurora Textile Company Case

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Aurora Textile Company Case
Abstract
In January 2003, Michael Pogonowski, the chief financial officer of Aurora Textile Company, was questioning whether the company should install a new ring-spinning machine, the Zinser 351, in the Hunter production facility. This new machine has ability to produce a finer-quality yarn that would be used for higher-quality and higher-margin products. In deciding whether or not to invest this new machine, NPV and the payback period are critical factors. Firstly, we need to forecast the cash flows that the Zinser 351 will generate in the future. After calculation, the ten-year NPV will be $3, 172,582. Secondly, we use the payback period to analyze the acceptance of this project. Based on this analysis, Aurora Textile Company should invest this new machine because of the positive NPV and relatively small payback period, which we will analyze in the following discussion.

Analysis In this analysis, we determined that NPV is the critical factor determining whether the company should invest or reject that new project. Secondly, we established that the payback period is another contributing force in our decision. The payback period tells us whether we can earn some money in the set period of time but this model has a few drawbacks, such as ignoring timing of cash flows and the positive cash flow after the payback period. In both calculations, NPV and payback period, we forecasted future cash flows.

Cash flow from investing in the Zinser:
Net sales: Year 1 sales ($26.611 million) equals price per pound ($1.02/lb.) times capacity per week (500,000 lb./week) times 52 weeks in a year. Subsequent years’ forecasts are grown by management’s guidance for growth (2%) and the inflation rate of 1%.
Materials cost and conversion cost: Materials cost equals the materials cost per pound ($0.45/lb.) times the volume for the year....

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