Aurora

Case Summary The CFO of Aurora Textile Company was questioning whether the company should replace the current spinning machine at the Hunter production facility with a new ring-spinning machine, the Zinser 351. Because of the poor health of both the textile industry and Aurora Textile, the management team had become engaged in a debate as to whether the company should return excess cash to shareholders or invest in the machine. Aurora’s recent financial performance had been lackluster as well. The case presents enough information for a side-by-side projection of cash flows for the existing spinning machine, which depreciates in four years, and the new Zinser machine which has a 10-year depreciable life. The main driver of the cash flows and the NPV is the improvement in margins due to Aurora’s ability to charge higher prices in a higher quality market. However, this benefit is offset, to some extent, by various factors you need to figure out. Your Analysis Has To Clearly Answer the Following Questions: 1. Calculate the Following Financial Ratios for the years 1999 through 2002. • SGA/ Sales, EBIT/Sales, NI/Sales, Return on Asset, and Return on Equity • Based on the ratios calculated, how has Aurora Textile performed in those years? 2. What are the relevant cash flows for the Zinser investment? Using a 10% WACC and assuming a 36% tax rate, what do you get as the NPV of the project? 3. What are the value drivers in your analysis? What do you estimate as the cost per pound for customer returns under the Zinser alternatives? (For a replacement decision, it is found useful to prepare two sets of cash flows and two NPVs—one for the status quo and one for the new machine.) 4. Summarize your analysis stating your recommendation about investing in the new Zinser machine. Your analysis HAS TO explain why it is better to invest in Zinser or to pay a dividend to shareholders. Please clearly state and explain the primary reasons that justify the recommended course of action. DO NOT combine everything into an essay. Keep the questions separate and answer what each question is asking for SEPARATELY!!! In addition to answering the questions on a Microsoft Word document, also submit an analysis using a Microsoft Excel spreadsheet. MOST IMPORTANTLY, you HAVE to mention the following corporate finance concepts and show proper quantitative numbers behind these concepts:  Interest Tax Shield  Weighted Average Cost Of Capital  Return of Capital  Net Present Value  Present Value  Future Value  Payout Policy  Dividend Capture Theory  Dividend Signaling Hypothesis