AuroraTextileCase

MaxKolb
TanyaPrendergast
ElliTilley
AustinKlueh
 AuroraTextileCompany

INTRODUCTION

ThisreportisintendedtodiscussthefinancialstandingoftheAuroraTextileCompany

andtoanalyzetheattractivenessofareplacementinvestmentinoneofthecompanysplants.

Basicfinancialtechniquessuchasnetpresentvalue,internalrateofreturn,anddiscountedcash

flowswillbeusedwhenanalyzingtheinformationprovidedbyAurora.

BACKGROUNDOFTHEFIRM

AuroraTextileCompanywasestablishedintheearly1900sintheNewEnglandarea.

Thecompanymanufacturesyarninawidevarietyofthreadcountsformultipleeverydayuses.

Aurorasmainmarketsarehosiery,knittedouterwear,woven,andindustrialandspecialtyyarns.

ThetextilemillindustryhasrecentlyencountereddramaticchangesduetoU.S.tradepolicies,

foreign competition, and changes in consumer preferences and fads. This combination of

constraintshasmadeAurorasperformancerapidlydeclineoverthelastfouryearsandcaused

Auroratoclosefourofthecompanysproductionfacilities. Auroraiscertaintheseconditions

inthemarketwillcontinueandisnowfacedwiththetaskoffindingnewwaystocompetein

nicheyarnmarketsthatcangeneratehigherreturnsforthecompany.

STATEMENT OF SITUATION
 Due to globalization, the U.S. textile industry began facing many problems, such as

government trade policies, cheaper production cost and fads. The industry which began in New

England attempted to adjust to problems from these changes. By migrating south, the industry

managed to take advantage of cheaper production cost. However, the continued search for

cheaper cost of production led to much of the textile industry moving to Asia. Another issue is,

companies like Aurora are liable for customer returns and must compensate retailers up to five

times the revenue received for their apparel. Aurora had failed to respond quickly to the

deteriorating business environment and thus suffered 4 years of consecutive losses. Along with

150 plants, 4 inefficient manufacturing operations were closed and 200,000 jobs lost. The

company cut SG&A spending by $3.9 million which allowed it to continue operations. To

remain competitive Aurora needs to modernize production.

CONSTRAINTS ON SOLUTION

In previous years, the firm has seen drastic changes due to globalization. There are four

major concerns with U.S. globalization according to the textile industry. The four changes are as

followed: U.S. Government trade policies, cheaper production costs overseas, customer

preferences, and textile fads. The world Trade Organization (WTO) is banning tariffs and quotas

in international markets. The actions developed by the WTO is to further open up international

trade in competing nations. However, the United States use trade restrictions as a political tool

to protect domestic industries. Competition from foreign nations will increase with the banning

of tariffs and trade quotas. Foreign firms have the processing power to produce goods at a

cheaper price. Domestic textile firms should increase technologically advancements to compete

with lower production costs and increase customer preferences for demands.
ORGANIZATIONAL STRENGTHS

Strength

Aurora Textile has an established brand name since early 1900s. The established brand

name developed the domestic textile industry. Aurora Textile incurs 90% of revenue from the

domestic market. Yarn, hosiery, and Knitted-outwear combined total for 78% of sales revenue.

The domestic textile industry is Aurora Textiles greatest strength for selling goods. Aurora

Textile has the ability to compete with international competitors with the addition of updated

machinery.

Weaknesses

Globalization has led to an increasing amount of international competition. The World

Trade Organization is promoting open markets with a spoken recommendation of lifting trade

quotas in international markets. International factories are forcing Aurora Textile to sale at lower

price due to cheaper manufacturing overseas. Financially, Aurora is losing opportunities in the

domestic market. Internally, the domestic markets are shifting trends with customer preferences

and textile fads. Aurora is struggling to keeping up with the conditions of the textile industry.

Opportunities

An opportunity for Aurora Textile is to update machinery to remain competitive. The

Zinser 351 can help create niche market to increase domestic competitiveness. Additions to any

remaining facilities will be difficult. Aurora Textile has four remaining facilities operating.

Increasing production will need new operation systems in each plant. The principle system in
which Aurora Textile operates under needs new consideration. Aurora needs to focus more on

cheaper productions with updated machinery to remain competitive.

Threats

The domestic textile industry is threatened by cheap production internationally,

government trade policies, consumer preferences, and fads. International markets are lowering

prices of domestic goods due to cheap production operations. Additionally, consumers are

preferring flexible manufacturing for custom designs. Aurora Textile is constrained to the textile

market. Changes in operations need to directly compete with international firms. Working

domestically will change as international firms will interject larger quantities of products into the

United States.

POSSIBLE SOLUTIONS

Aurora Textile Company is faced with deciding whether to keep the existing ring-

spinning machine or purchase the Zinser 351 to save the decline sales and increase

competitiveness. In deciding whether to keep the existing machine or purchase the Zinser,

calculating the NPV of both machine is important. The existing ring-spinning machine has a

company book value of $2 million, and if replaced and sold for use in Mexico is valued at

$500,000. The existing ring-spinning machine would be fully depreciated in 4 years, but with

proper upkeep could last 10 more years.

The projected net sales for year 1 is $27,414,652 and by year 10 would be $35,274,119.

The weekly production is currently 500,000 pounds and at year 10 will reach full capacity of

600,000 pounds per week. The weekly production is calculated using the recent production level
at year 0 and multiply by the 2% in volume shown in Exhibit 1. The material and conversion

cost per pound will increase at a rate of 1%. SG&A is 7% of the net sales for each year. As

shown in Exhibit 1, the projected free cash flows at year 10 for the keeping the existing machine

is $1,556,066. Although, the machine could continue to operate for 10 more years, the quality of

yarn produce would remain unchanged and the shareholders value of Aurora holdings would

continue to fall due to poor performance.

The Zinser is used by many yarn producers in the U.S., and is known as a reliable

machine that reduces cotton inventory from the average 30 days to 20 days for most producers.

The Zinser sales volume would decrease by 5% below the recent market value. The machine

would cost $8.25 million and a one-time training cost of $50,000, making the total investment

$8.3 million. The Zinser is expected to fully depreciate in 10 years, with a book value of zero,

but if sold on the open market would have a value of $100,000.

As shown in Exhibit 2, in the first year the calculated net sales is $29,194,976 with the

assumption that sales will grow by 2% in volume and 1% in price, with a total of $37,564,842 at

year 10. Using the same assumptions shown in Exhibit 3 as the existing machine, the projected

free cash flows for purchasing the Zinser is $4,401,458. As shown in Exhibit 4, the calculated

year-end NPV of the investment is $7,157,312 and IRR of 28%, much higher than the 10%

hurdle rate. The Zinser would allow the company to be competitive, produce higher quality

yarn, and reduce the companys inventory from 30 days to 20 days.