Case #5:

Aurora Textile Company

Group #2:
Yashna Shetty
Yashodhara Jaswal

Executive Summary
Aurora Textile Company was a yarn manufacturer established in the
1900s. They sold their products in domestic and international markets,
but 90% of the revenues came from the domestic textile market. The
finished goods were cotton and synthetic/cotton blend yarns that were
sold to apparel and industrial goods manufacturers.

Aurora serviced four major customer segments:

Sales

9%
13%
43%

35%

Hosiery
Knitted
Woven
Industrial & Spe

In 2003, Micheal Pogonowski, the chief financial officer of Aurora

proposed the idea of installing a new ring spinning machine- Zinser
351. This machine would produce a finer quality of yarn that could be
used for higher quality and higher margin products. This yarn would be
sold at a 10% higher selling price. Zinser would provide greater
reliability and operating efficiency. The sale volume would reduce by
5%.

Textile-Mill Industry
The U.S. textile industry was in a tough condition. Manufacturers were moving
production to Asia and other overseas countries owing to the lower manufacturing costs.
Aurora did not want to do the same. Consumer preferences were shaping the market, with
manufactures moving from mass manufacturing to flexible manufacturing.

Status quo
The CFO of the Aurora, Micheal had to make a strategic decision to either run the Hunter
Plant as is or introduce the new machine. The management believed that with good
maintenance and up keep, the machine could be used for another 10 years, despite it
being fully depreciated on the books in the next four years.
Keeping the existing set up, the NPV was calculated as seen below.

Purchase
Zinser 351
On the
other
hand, the
company
had the
option of
installing
Zinser a
new ringspinning machine. This newer technology was able to produce a higher quality yarn that
could be used for better quality and more expensive products. This finer yarn would cater
to the niche market, which meant an increase of 10% in the price of the yarn sold. Also,

Zinser meant greater efficiency, which would substantially reduce operating costs, with
reduced power consumption and lower maintenance requirements.
If the company installs Zinser, we see that the NPV is $40,909, with a substantially
higher IRR of ~90% compared to the hurdle rate (10%).

Conclusion
From our
calculations we
find that Aurora is
better off
purchasing Zinser
351. This move
would help the
company stay
with the current
demand of fine
quality yarn. It
will also help
them improve
their revenues in a
declining textile
industry.

Appendix:

Assumptions
Annual growth volume
Annual inflation
Depreciation
Price per unit (Existing)

2%
1%
8.05M Straight line
$1.0235/pound

Price per unit (Zinser)

Revenue
Tax Rate
SG&A
Marketing Research
Engineering tests
Conversion Cost
Savings with Zinzer

$1.12585/pound
Volume x price
36%
7% of revenues
$15,000
$5,000
$0.43/lb
$0.03/lb

Training Cost

$50,000 one time