Auora Textile Company Case Study
Auora Textile Company Case Study
Industry
Cheaper production costs
Industry shift
Consumer preferences
Increased IT liability
Auora Overview
Established in early 1900s
Hosiery
Knitted Outerwear
Wovens
Industry Specialty Products
90% revenue in U.S. market
Ratio Graphs
Alternatives
Problem: Should Aurora Textile Company install the Zinser 351 to replace its older-generation machine?
The Zinser 351
Advantages:
Produce a finer-quality yarn
Increase efficiency
Greater reliability
Disadvantages:
Lower sales volume
Higher cost of customer returns
Alternatives Comparison
Existing Spinning Machine
Book Value: $2 million
Salvage Value: $500,000
No market value in 4 years (fully depreciated)
Estimated 10 years of operation left
Zinser 351
Capitalized cost: $8.25 million
Estimated future values: (fully depreciated for 10 years) Book Value: $0
Expected Salvage Value: $100,000
Capital Budget
Assumptions
Hurdle rate – 10%
Tax rate – 36%
Sales growth – 2%
Price inflation – 1%
SG&A expenses – 7% of revenues
Hunter produces 18.75% of total volume
Results for Current Machine
NPV* = $18.2 Million
*Assuming Aurora can continue operations for 10 years
Capital Budget – Zinser 351
Assumptions
Sales growth –
-5% in first year, 2% thereafter
Increase in cost of customer returns – $0.007/lb.
Power and maintenance savings – $0.03/lb.
Net investment – $7.8 million
Results for Zinser 351
NPV* = $22.5 million
*Assuming Aurora can continue operations for 10 years
IRR = 58%
Payback Period = 2 years
Industry
Cheaper production costs
Industry shift
Consumer preferences
Increased IT liability
Auora Overview
Established in early 1900s
Hosiery
Knitted Outerwear
Wovens
Industry Specialty Products
90% revenue in U.S. market
Ratio Graphs
Alternatives
Problem: Should Aurora Textile Company install the Zinser 351 to replace its older-generation machine?
The Zinser 351
Advantages:
Produce a finer-quality yarn
Increase efficiency
Greater reliability
Disadvantages:
Lower sales volume
Higher cost of customer returns
Alternatives Comparison
Existing Spinning Machine
Book Value: $2 million
Salvage Value: $500,000
No market value in 4 years (fully depreciated)
Estimated 10 years of operation left
Zinser 351
Capitalized cost: $8.25 million
Estimated future values: (fully depreciated for 10 years) Book Value: $0
Expected Salvage Value: $100,000
Capital Budget
Assumptions
Hurdle rate – 10%
Tax rate – 36%
Sales growth – 2%
Price inflation – 1%
SG&A expenses – 7% of revenues
Hunter produces 18.75% of total volume
Results for Current Machine
NPV* = $18.2 Million
*Assuming Aurora can continue operations for 10 years
Capital Budget – Zinser 351
Assumptions
Sales growth –
-5% in first year, 2% thereafter
Increase in cost of customer returns – $0.007/lb.
Power and maintenance savings – $0.03/lb.
Net investment – $7.8 million
Results for Zinser 351
NPV* = $22.5 million
*Assuming Aurora can continue operations for 10 years
IRR = 58%
Payback Period = 2 years