FACULTY OF ECONOMICS AND MUAMALAT

MFA 3033

CORPORATE FINANCIAL MANAGEMENT

SEMESTER I 2022/2023

GROUP AND INDIVIDUAL ASSIGNMENT:

CASE ANALYSIS
GROUP NAME: INCREDIBLE
NAME MATRIC NUMBER LECTURE GROUP
NUR AFIQAH BINTI MOHAMAD 1210798 KMB1
NAZRI

NURUL NAJWA BINTI MOHD TAJUL 1210810 KMB1

ARUS

LIDYA HANI BINTI LOKMAN HAKIM 1210816 KMB1

LOKE

NURIN FARHANAH BINTI MOHAMED 1210818 KMB1

KHARI

NUR ALYA NADHIRAH BINTI AZRIM 1210832 KMB1

AKHTAR
 RUBRIC FOR ASSESSMENT OF INDIVIDUAL WORK (CLO2)
NUMERICAL (PLO7)

4 (Capstone) 3 (Milestones) 2 (Milestones) 1 (Benchmark)

Level of Assessment SCORE
A- Proficient/Excellent B- Very Good C- Average/Fai D - Poor

Interpretation: Provides accurate explanations of Provides accurate Provides somewhat accurate Attempts to explain information
information presented in explanations of information explanations of information presented presented in mathematical forms,
Ability to explain information mathematical forms and makes presented in mathematical in mathematical forms, but but draws incorrect conclusions
presented in mathematical appropriate inference. For example, forms. For instance, occasionally makes minor errors about what the information means.
forms (e.g., equations, explains data shown in a graph and accurately explains the related to computations or units. For For example, explain data shown in
graphs, diagrams, tables, makes predictions for what the data trend data shown in a instance, accurately explains data in a graph, but will misinterpret the
words) suggest about future events. graph. a graph, but miscalculates slope of trend, perhaps by confusing
the trend line. positive and negative trends.

Representation: Skillfully converts relevant Competently converts Completes conversion of information Completes conversion of
information into an insightful relevant information into an but resulting mathematical portrayal information but resulting
Ability to convert relevant mathematical portrayal in a way appropriate and desired is only partially appropriate or mathematical portrayal is
information into various that contributes to a further or mathematical portrayal. accurate. inappropriate or inaccurate
mathematical forms (e.g., deeper understanding.
equations, graphs, diagrams,
tables, words)

Calculation Calculations attempted are Calculations attempted are Calculations attempted are either Calculations are attempted but are
essentially all successful and essentially all successful unsuccessful or represent only a both unsuccessful and are not
sufficiently comprehensive to solve and sufficiently portion of the calculations required to comprehensive
the problem. Calculations are also comprehensive to solve the comprehensively solve the problem
presented elegantly (clearly, problem.
concisely, etc.)

Application / Analysis Uses the quantitative analysis of Uses the quantitative Uses the quantitative analysis of data Uses the quantitative analysis of
data as the basis for deep and analysis of data as the as the basis for workmanlike (without data as the basis for tentative,
Ability to make judgments thoughtful judgments, drawing basis for competent inspiration or nuance, ordinary) basic judgments, although is
and draw appropriate insightful, judgments, drawing judgments, drawing plausible hesitant or uncertain about drawing
conclusions based on the reasonable and conclusions from this work. conclusions from this work.
quantitative analysis of data, appropriately qualified
while recognizing the limits of conclusions from this work
this analysis

Explicitly describes assumptions

Assumptions:
and provides compelling rationale Explicitly describes
for why each assumption is assumptions and provides
Ability to make and evaluate
appropriate. Shows awareness that compelling rationale for Explicitly describes assumptions Attempts to describe assumption
important assumptions in
confidence in final conclusions is why assumptions are
estimation, modeling, and
limited by the accuracy of the appropriate.
data analysis
assumptions
TOTAL
 RUBRIC FOR ASSESSMENT OF GROUP WORK (CLO3)
LEADERSHIP, AUTONOMY, RESPONSIBILITY (PLO8)

Criteria Unacceptable Acceptable performance Successful performance Distinguished performance SCORE

performance 2 3 4
1
Responsibility Has poor attendance, Demonstrate average Demonstrates adequate attendance, Demonstrates perfect attendance,
consistently tardy, and attendance, occasionally arrives on time, and adequate always on time or early and exceptional
rarely participate in arrives late, and minimally participation participation
group discussion participate
Respect Is not respectful of Demonstrates developing Demonstrates ability to respectfully Demonstrate sensitivity, honesty, ethical
others or differences understanding of respect in an interact with all students and peers. consideration and respect for the culture,
educational environment Accepts feedback and follows language, gender, socio-economic
directions. status, and exceptionalities
Reliability Frequently skips Occasionally skips Work is submitted on time. Students Quality work is submitted and or
assignments or misses assignments or misses can be relied on to follow through provided on time. Keeps accurate
paperwork deadlines paperwork deadlines with tasks records of field experience requirements
Professionalisation & Demeanour Does not engage with Listens to ideas. Demonstrates Receptive to varying ideas, relates Receptive to varying ideas, relates well
other members or listen emerging understanding of well to others and demonstrates to others and demonstrates respect for
carefully to varying creating positive professional respect for differences differences. Is ethical and maintains
ideas. relationships confidentiality at all times.
Collaboration Does not offer ideas, Shares some responsibility for Shares responsibility for the creation Equitably collaborates on projects,
ask questions, or completing tasks. Offers ideas and application of ideas, activities, planning, discussion, and meetings.
participate in or asks questions sporadically. and projects. Demonstrates ability to work with peers
discussions and/or and lecturer(s)
meetings.
Contributions Does not offer ideas, Seldom contributes valuable Often contributes valuable ideas Contributes meaningfully to discussions,
ask questions, or ideas during discussions and in during discussions and in meetings. searches for answers, encourages and
participate in meetings. Emerging as a team Is a positive team player. supports others. Demonstrates ability to
discussions and/or player. work with peers and lecturer(s)
meetings
Openness Appears uninterested Limited demonstration of Demonstrates interest, passion, and Openly contributes to the classroom
and does not interest, passion, and curiosity. curiosity. Asks questions and seeks learning environment as a result of their
demonstrate or share Is sometime defensive about information related to instruction and interest, passion, and curiosity.
curiosity and passion. Is feedback and suggestions. classroom practice. Willingly
defensive about incorporates suggestions and
feedback and responds appropriately to feedback.
suggestions.
Leadership Facilitates the work and Little to no use of Some use leadership Adequate use of leadership Effective use of leadership strategies.
advancement of the team through leadership strategies. strategies. strategies.
the use of leadership strategies and
principles.
Examples: Takes and delegates
responsibility; demonstrates
situational awareness; provides
direction and support as needed;
fosters inclusivity; recognizes others’
achievements and growth.
Total
 TABLE OF CONTENTS

RUBRIC FOR ASSESSMENT OF INDIVIDUAL WORK (CLO2) NUMERICAL (PLO7) .......................................2

RUBRIC FOR ASSESSMENT OF GROUP WORK (CLO3) LEADERSHIP, AUTONOMY,
RESPONSIBILITY (PLO8) ....................................................................................................................3
INTRODUCTION ...................................................................................................................................5
QUESTION 1: FINANCIAL RATIO .....................................................................................................6
QUESTION 2: FACTORS ....................................................................................................................13
QUESTION 3: CASH FLOW ...............................................................................................................16
QUESTION 4: MEMO ..........................................................................................................................18
CONCLUSION......................................................................................................................................19
APPENDIX............................................................................................................................................20
INTRODUCTION

Aurora Textiles is one of the yarn manufacturer companies in the United States that was
established in the early 1900s. It services both the domestic and the international textile
industry under four major segments which are hosiery, knitted outwear, woven and industrial
and specialty products. In January 2003, Aurora Textile had a dilemma on whether to deploy a
new ring-spinning machine, the Zinser or keep using the existing spinning equipment. This
issue has developed as a result of the ongoing decline in Aurora sales as well as the effects of
globalisation on the U.S. textile sector. Therefore, the Zinser's existence would assist Aurora
in lowering operational costs through decreased power usage and maintenance expenditures.
Choosing the concluding phrase is challenging, though. Aurora Textile's chief financial officer,
Michael Pogonowski, said that the choice to invest in the new technology was made more
difficult by Aurora's poor financial performance as well as the challenging conditions facing
the U.S. textile sector. The business had lost money continuously for the previous four years
because it had not reacted swiftly to the weakening economic climate. On the other hand, while
the Zinser has certain benefits, there are some drawbacks as well. Compared to the existing
market, sales volume would be 5% lower, and customer return costs would be greater with the
deployment of the Zinser. It is difficult to decide under these conditions. Therefore, we will
analyse in this report if it is worthwhile to invest in the Zinser or the opposite through some
calculation such as the relevant cash flow, the net present value for the project and the cost per
pound for customer returns.
QUESTION 1: FINANCIAL RATIO

How has Aurora Textile performed over the past four years? Be prepared to provide
financial ratios that present a clear picture of Aurora’s financial condition.

This section will explain Aurora's performance during the previous four years using a
few financial parameters, specifically the liquidity, leverage, efficiency, and profitability ratios.
By carefully examining both historical and current financial statements, investors and analysts
use ratio analysis to assess a company's financial health. Comparative data may show how a
business is doing through time and be used to predict how it will likely do in the future. This
information can be used to assess how a company compares to others in its industry and to
benchmark its financial performance against industry averages. The financial statements of a
company contain all the information needed to calculate the ratios, making it simple for
investors to apply this method.

First and foremost, liquidity ratios are an essential sign of a firm's financial health since
they assess how well a company can satisfy its short-term obligations. Under the category of
liquidity, there are three different types of ratios: current ratio, quick ratio, and cash ratio.

Year Formula Calculation ($) Current Ratio

1999 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 56,018 2.40
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 23,306

2000 52,247 2.88

18,139

2001 54,608 2.92

18,685

2002 63,697 3.16

20,151

The utilisation of a company's current assets, such as cash, cash equivalents, accounts
receivable, and inventories, to pay off current liabilities, such as accounts payable, is gauged
by its current ratio. The table shows that Aurora's current ratio is gradually rising. High current
ratios aren't always a good thing, though, as a good current ratio in most businesses is only
between 1.5 and 2. If a company's current ratio is excessively high, it can mean that its short-
term borrowing capacity or current assets are not being utilised effectively. This demonstrates
that Aurora did not effectively manage its assets and liabilities.
 Year Formula Calculation ($) Quick Ratio
1999 (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠) (56,018 − 34,778) 0.91
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 23,306

2000 (52,247 − 33,155) 1.05

18,139

2001 (54,608 − 31,313) 1.25

18,685

2002 (63,697 − 33,278) 1.51

20,151

The quick ratio then evaluates the ability of a company's more liquid assets, such as
cash, cash equivalents, and accounts receivable, to pay for immediate obligations. Inventory is
not included in current assets in this ratio. A higher quick ratio is preferable in general. This is
due to the fact that the numerator of the formula, which represents the most liquid current
assets, will be greater than the denominator, which represents the company's current
obligations. A corporation can be more liquid and generate cash rapidly in an emergency if its
quick ratio is higher. Because of this, Aurora's fast ratio calculation demonstrates that it is able
to quickly liquidate assets to satisfy short-term commitments or even for emergencies as the
ratio gradually rises over time.

Year Formula Calculation ($) Cash Ratio

1999 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 1,144 0.05
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 23,306

2000 5,508 0.30

18,139

2001 2,192 0.12

18,685

2002 1,973 0.10

20,151

Now for the cash ratio. It gauges a company's capacity to settle short-term liabilities
with cash and cash equivalents. This ratio demonstrates how soon a business can pay off current
debts. The fact that Aurora's cash ratio increased between 1999 and 2000 indicates that it has
enough cash on hand to cover its current obligations. However, after 2001, the cash level started
to decline steadily until 2002, indicating that Aurora does not have enough cash on hand to
cover its obligations and is therefore likely to run into financial trouble. The inability of Aurora
to pay off short-term debt also implies that they do not have enough cash on hand.

Leverage ratios, which are covered in the second part, are frequently used to fund
business activities. Leverage ratios quantify a company's level of debt. The debt ratio and the
debt to equity ratio are the two types of ratios that fall under leverage.

Year Formula Calculation ($) Debt Ratio

1999 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 106,863 0.60
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 178,965

2000 99,211 0.60

164,890

2001 88,461 0.62

143,023

2002 88,448 0.65

135,991

The debt ratio calculates how much debt a business has in relation to its total assets.
According to the estimate, Aurora's debt ratio is steadily increasing, which is bad. Debt ratios
of 0.4 or less are preferred from a pure risk standpoint, however Aurora has a debt ratio larger
than that, making Aurora highly leveraged. It denotes a significant debt load. This indicates
greater risk and can deter investment.

Year Formula Calculation ($) Debt To Equity

Ratio
1999 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 106,863 1.48
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 72,102

2000 99,211 1.51

65,679

2001 88,461 1.62

54,563

2002 88,448 1.86

47,543

The debt-to-equity ratio, on the other hand, compares a company's debt obligations to
shareholders' equity. Investors should be aware of this ratio because, in the event that a firm
files for bankruptcy, financial obligations sometimes take precedence. Similar to the debt ratio,
Aurora's debt-to-equity ratio is getting worse with each passing year. This ratio shows how
indebted the company is, and lenders and investors view this position as dangerous because it
implies that the company is funding a sizable portion of its future growth through borrowing.
Additionally, it shows that the company's balance sheet has greater debt.

Efficiency ratios are in the third section. It demonstrates how successfully a business
leverages working capital to drive sales. Asset turnover ratio, inventory turnover ratio, and days
sales in inventory ratio are the three types of ratios that fall under the efficiency category.

Year Formula Calculation ($) Asset Turnover

Ratio
1999 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 245,908 1.37
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 178,965

2000 229,787 1.34

171,927.5

2001 182,955 1.19

153956.5

2002 147,503 1.06

139,507

The asset turnover ratio calculates the amount of net sales generated by typical assets.
According to the calculations, Aurora's asset turnover ratio gradually decreased from 1999 to
2002. The fact that this ratio is still higher than 1 indicates that Aurora is still able to make
enough money to support itself. But if the ratio keeps falling, Aurora may run into issues like
having too much money invested in fixed assets or needing to launch new items to boost sales.

Year Formula Calculation ($) Inventory

Turnover Ratio
1999 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 (132,812 + 83,454) 6.22
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 34,778

2000 (122,461 + 84,212) 6.08

33,966.5

2001 (98,536 + 67,822) 5.16

32,234

2002 (64,982 + 61,912) 3.93

32,295.5
 Inventory turnover is a crucial ratio that gauges how frequently inventory is used and
replaced for operations for businesses in the manufacturing and production sectors with large
inventory levels. According to the calculation, Aurora's inventory turnover ratio is declining
year over year. A low inventory turnover ratio could indicate weak sales or overstocking (also
known as surplus inventory).

Year Formula Calculation ($) Days Sales in

Inventory Ratio
1999 365 𝑑𝑎𝑦𝑠 365 2.04
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 178,965

2000 365 2.12

171,927.5

2001 365 2.37

153956.5

2002 365 2.62

139,507

The day sales to inventory ratio determines how long a company keeps inventories
before turning them into completed goods or selling them to customers. According to the data,
Aurora takes an increasing number of days to turn its stocks into finished goods or to sell them
to customers. The number of days that increase for each year is not particularly alarming, but
it progressively reveals Aurora's poor inventory management.

Profitability ratios, which quantify how a corporation earns profits utilising available
resources over a specific time period, are covered in the last part. Results with higher ratios are
frequently more favourable, but when compared to results of other companies, the company's
past performance, or the industry average, these ratios offer considerably more information.
Under the heading of profitability, there are four different sorts of ratios: gross margin,
operating margin, return on assets, and return on equity.
 Year Formula Calculation ($) Gross Margin
1999 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 29,641 0.12
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 245,908

2000 23,114 0.10

229,787

2001 16,597 0.09

182,955

2002 20,609 0.14

147,503

The gross margin ratio shows what portion of each dollar in revenue is kept as gross
profit by the business. The gross margin ratio for Aurora decreased somewhat between 1999
and 2001 before rising once more by 2002. The proportion is 12% from a dollar in the year
1999, 2% less in the following year to become 10% from a dollar, and 1% less in the following
year to become 9% from a dollar in the year 2001. Gross margin is extremely minimal at this
point. Thankfully, it rises once more in 2002, this time by 5%, resulting in a dollar increase of
14%. This margin is considered average.

Year Formula Calculation ($) Operating Margin

1999 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 −203 -8.26
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 245,908

2000 −4,109 -0.02

229,787

2001 −6,234 -0.03

182,955

2002 445 3.02

147,503

When operational expenses and cost of goods sold are taken into account, the operating
margin shows how much profit a business makes from net sales. First off, in 1999, Aurora was
already in a precarious condition because its operating margin was negative. This indicates that
Aurora may have excessive manufacturing costs or excessive overhead expenditures. This
scenario persisted through 2001, but it began to gradually deteriorate. Eventually, in 2002,
Aurora effectively achieved a positive margin of 3.02 percent.
 Year Formula Calculation ($) Return on Assets
1999 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 −4,467 -0.02
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 178,965

2000 −6,233 -0.04

164,890

2001 −11,106 -0.08

143,023

2002 −7,020 -0.05

135,991

The return on assets ratio is then used by businesses to calculate how much profit they
make from all of their resources, including current and noncurrent assets. As the negative
figure changes from -0.02 in 1999 to -0.08 in 2001, Aurora's return on assets increasingly
gets worse. A low return on assets indicates that a company is either losing money or not
reaping the intended rewards. However, it turns to a positive value of -0.05 in the year 2002.
Even though it has a negative value, Aurora has made some progress.

Year Formula Calculation ($) Return on Equity

1999 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 −4,467 -0.06
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 72,102

2000 −6,233 -0.09

65,679

2001 −11,106 -0.20

54,563

2002 −7,020 -0.15

47,543

How much money a company makes off of its shareholders' equity is determined by its
return on equity. The situation with Aurora's return on equity and return on assets is the same.
The value is negative over the course of the four years, and 2001 is the worst of them all. When
a corporation experiences a loss and doesn't generate any net income, there is a negative return
on equity. Declining return on equity is another sign of risk for the organisation. An
improvement occurred in 2002, moving from -0.20 changes to -0.15.
QUESTION 2: FACTORS

List the factors affecting the textile industry. What do you think is the state of the industry
in the United States? How should you incorporate the state of the textile industry into your
analysis? Why should anyone invest money in the industry?

List the factors affecting the textile industry.

The US textile mill industry as a whole experienced dramatic change as a result of
globalization, US government trade policies, lower production costs overseas, and customer
preferences and fads. Aurora suffered greatly when the industry's search for lower production
costs shifted to Asia, despite the fact that the company's manufacturing base remained in the
United States. Furthermore, apparel and yarn manufacturers began to shift production overseas,
followed by aggressive exports from foreign textile manufacturers.

Customer preferences also influenced the industry's transition from mass production to
a more customized manufacturing market. This modification enabled most communications
and must be completed in a shorter time frame. Due to liability issues with customer returns,
information technology also contributed to Aurora's disadvantage. For example, if something
was sold for $30 at a retail store plus a $5 Aurora yarn return fee, the company would have to
reimburse the full retail price. The new free-trade policy implemented through the North
American Free Trade Agreement (NAFTA) and the Caribbean Basin Initiative (CBI) would
also have an impact This exacerbated the problem by encouraging more international trade,
lowering US market prices while competing against cheaper labour, lower environmental
standards, and government-subsidized operations.

What do you think is the state of the industry in the United States?
The industry is deteriorating and has suffered a string of losses as a result of the current
business environment. Between 1999 and 2000, 150 textile plants were closed in the United
States, resulting in the loss of 200,000 industry jobs. Despite cutting a significant amount of
SG&A spending to keep operations running, other financial environments arose and are
expected to arise for Aurora.

Most research analysts still predicted that the textile industry would grow at a 2%
annual rate, with prices and costs rising at a 1% annual rate. However, even with a possible
growth rate, the numbers don't look too good based on financial analysis, and the difficult
financial environment was expected to continue. In this case, if investors continue to believe
in the industry's potential growth, it will be in the four-segmented market of hosiery, knitted
outerwear, woven, and industrial and specialty products.

How should you incorporate the state of the textile industry into your analysis?
By producing heavy yarns, the hosiery market, which accounted for 43% of Aurora's
revenue, had attractive margins with some of the most profitable hosiery companies in the
world. In the United States, cotton yarns were used to make white athletic socks, and nearly
half of the population owned socks made with Aurora yarns. Not only Aurora, but the entire
textile industry, defended the hosiery market against global competition. Due to the high cost
of transportation, the bulkiness of the products and heavy yarns successfully discouraged
foreign producers. Furthermore, this type of production was highly automated, resulting in
lower labour costs in the United States. Especially when compared to other Asian
manufacturers. Knitted outerwear, which had a 35% sales revenue, is another investment
possibility in the different segmented market.

Why should anyone invest money in the industry?

Investment can be a valuable asset because it not only provides a consistent source of
capital for businesses, but it can also help them overcome financial obstacles, reduce repayment
pressure, and gain valuable skills. The most common reason for investors to invest in the
industry is to made profit from their investments. Aurora was the largest producer of all cotton
yarns for white athletic socks in the United States. Second, as a market leader, Aurora has
higher margins than competitors because it has been able to command high margins while
maintaining relationships with some of the world's largest and most profitable hosiery
industries. As a result, investors will believe that the Aurora textile industry is the best in the
United States. Furthermore, visionary leadership and effective management are two reasons
why people invest in the industry. This is because people will choose to invest in a business if
they have faith in the management team's business ability or passion. Effective managers
ensure that ideas are spread throughout the organisation and that plans are carried out properly.
This was demonstrated when the Aurora textile industry reduced its SG&A spending by $3.9
million. These actions allowed the company to continue operations during a difficult financial
period.
 However, due to constant price pressures on outerwear yarns, having a high percentage
revenue does not necessarily imply that it will be a positive long-term investment idea. On the
other hand, Woven accounts for only 13% of Aurora's sales, and production is mostly foreign,
with the majority of weavers continuing to buy domestically due to supply risks. If it expands
in the future, this could be a great opportunity for growth. Although industrial and specialty
products account for only 9% of revenue, they have the most appealing and highest growth
margin. This market segment does not do a lot of business, but it does make medical supplies
and protective clothing.
QUESTION 3: CASH FLOW

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 for the project?
If Aurora keeps operating the existing ring-spinning machine, we had calculated cash
flows for the machine in Exhibit 1. The explanations for each of the items listed are as follows.
The first item is net sales. The sales for the first year of investment are $26.611, which is the
price per pound ($1.0235) multiplied by capacity per week or 500,000 lb/week times 52 weeks
a year. Following the subsequent years, it was projected that sales for the textile industry would
expand at a 2% annual rate with a 1% inflation rate.

Next, the materials cost, conversion cost, and selling and administrative expenses.
Materials cost equals the material cost per pound ($0.4509) times the sales volume per year.
While conversion cost equals $0.43 per pound times sales volume. Both conversion and
material costs will remain unchanged but will rise by 1%. For selling and general administrative
expenses, based on the Case given, SG&A was expected to remain at 7% of sales. As the net
sales of the old machine continue to increase the expenses for SG&A also increased.

Moving on to the next item is depreciation. The old machine was depreciated using the
straight-line method. The book value of the machine is $2 million with a depreciable of 4 years.
The depreciation needs to be deducted before calculating the operating margin with 36% tax
rate then it will be added back to the cash flow. After that, the listed item in the cash flow is
inventory. Inventory is COGS divided by the number of calendar days (360) times the number
of days in inventory (30). The cash flow will show a change in inventory level each year until
year 10. Next, the Case given specifies a 10% of the cost of capital.

Based on the old machine’s cash flow that we have calculated, the NPV for the machine
using a 10% WACC and a 36% tax rate is $8,252,160. The positive NPV indicates that the
value of the company will increase by $8,252,160. While IRR for the old machine is 143.93%.

In addition, Aurora firm has got a chance to invest in a new machine which called
Zinser. In order to calculate the cash flow for Zinser that could refer from Exhibit 2, a lot of
components need to be considered. One of the components is net sales. To get net sales of
$27808 in year 0, the price per pound from the existing machine ($1.0235) should be multiplied
by 10% since it mentioned the use of Zinser would increase the selling price of yarn by 10%
and it will get $1.1259. After that, it will be multiplied by the time capacity per week of 500000
and also by 52 weeks in a year. For the subsequent year, forecasts are based on analyst belief
that claimed the U.S. textile industry would grow by 2% and the inflation rate by 1% for the
foreseeable future.

For the material cost, we just use the original cost, which is $0.4509, and multiplied
with sales volume for the year. Meanwhile, the conversion cost which equals $0.43, before
multiplied also with sales volume, will be less power and maintenance cost savings of $0.03
and should be added 0.0077 which represents a 10% ($ 0.0844 - $0.0768 = $ 0.0077) increase
in the cost of return which has shown in Exhibit 5. Moreover, for the subsequent year, inflation
of 1% also should be included. Furthermore, the selling and administrative expenses will
remain at 7% of the revenue.

Depreciation of Zinser will be computed using the straight-line method which the cost
of Zinser $8.25 million will be divided by 10-year life, making the depreciation expense to be
$825000. Additionally, before computing net operating profit after tax, the depreciation should
be deducted from the statement of cash flow in order to reduce the tax by 36% and after that,
depreciation should be added back into the cash flow. To calculate the inventory for the year,
material costs will be divided by the number of days in a year which is 365 days and multiplied
by 20 days, the number of days of inventory. Besides, in the cash flow, it will record the change
in the inventory level each year until year 10.

Furthermore, the net sale of the old machine will be $1.04 million as the market value
of the old machine, $500000 plus with the value of tax savings of $540000. The total cash
payment for the Zinser equals $8.25 million, which consists of the cost of the machine, $8.05
million, and an additional $200000 installation cost which represents a building -modification
cost of $115000, airflow-modification cost of $55000 and testing cost $30000.Then for the
training cost of $50000 as mentioned in the case study, it should also be calculated after tax
which will be $ 32000 and need to be recorded in year 0. Lastly, for salvage value, the market
value of $100000 should be less with the tax on the gain which is 36% multiplied by $100000,
thus the value of salvage after-tax will be $64000.

For Zinser’s cash flow, it indicated a net present value of $15331697, which means it
will increase the shareholders’ wealth by $15331697. In addition, IRR for Zinser also will be
44.07%. Thus, investing in Zinser is better than continuing to invest in the old machine as the
net present value of Zinser is much higher than the net present value of the old machine of
$7079537.
QUESTION 4: MEMO

Craft a memo to the board of directors stating your recommendation about investing in the
new Zinser machine. Part of your memo should explain why it is better to invest in the Zinser
or to pay a dividend to the shareholders. Be sure to explain the primary reasons that justify
your recommended course of action.

DATE: December 22, 2022

TO: Board of Directors
FROM: Lidya Loke
SUBJECT: The decision to invest in Zinser 351

I would like to inform everyone about the recommendation to replace the existing machine in
the Hunter production facility with a new ring-spinning machine, Zinser 351. Zinser would be
able to produce finer-quality yarn, which would be used for higher-quality and higher-margin
products, as well as provide increased efficiency and reliability. The Zinser's efficiency would
reduce operating costs by lowering power consumption and maintenance costs. Unlike existing
machines, its capacity can exceed 600,000 pounds per week.

Based on the cash flow of both options, whether to invest in Zinser or continue to use the
current machine, the option to invest in Zinser is more favourable as it would yield a higher
Net Present Value (NPV) than continuing to use the existing ring-spinning machine. The option
of choosing Zinser will generate a higher NPV of $15,331,700 as compared to the NPV of
keeping the existing machine, which is only $8,274,741. Aurora should opt for Zinser, as it is
more profitable and will increase value of the firm by $15,331,700. Taking all this into
perspective, the Aurora firm ought to invest in Zinser.

Therefore, with a higher NPV, an investment in Zinser would have a future cash stream that is
higher than the amount of money that was invested in the project. This investment would
increase the profit of the company as well as the dividend paid to shareholders.

Thank you,
Lidya Loke
auroratextile@gmail.com
+1 434 2349
CONCLUSION

There are several things we can infer after all the computations and evaluation. First
and foremost, based on the financial ratio, it is clear that Aurora Textile has several
shortcomings, particularly in the way it manages its assets, liabilities, and inventory. Aurora
also owes quite a bit of money but do not have enough cash on hand or enough income to cover
it. Aurora also had some financial losses in 1999, but things have improved considerably since
then. Despite all of this, Aurora has the flexibility to quickly sell off assets and yet have enough
cash to get by. Next conclusion, the project's net present value, which was calculated, is
$15331697, which suggests that the increase in shareholder wealth will likewise be that
amount. Additionally, it is clear that investing in this project is worthwhile because it will yield
significantly more benefits, whether in terms of profit or production efficiency, when
comparing the calculation of the net present value of the investment in Zinser with the net
present value of the old machine, which is $7079537. Therefore, choosing to invest in Zinser
is best for the future success of Aurora Textile.
APPENDIX
EXHIBIT 1
AURORA TEXTILE COMPANY
STATUS QUO CASH FLOWS
($000)
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0 1 2 3 4 5 6 7 8 9 10
Sales volume 26000 26520 27050 27591 28143 28706 29280 29866 30463 31072 31200
Net Sales ($1.0235) 26611 27415 28243 29096 29974 30879 31812 32773 33762 34782 35274
(-) Cost of materials ($0.4509) 11723 12077 12442 12818 13205 13604 14015 14438 14874 15323 15540
(-) Conversion costs ($0.4296) 11518 11865 12224 12593 12973 13365 13769 14185 14613 14820
(-) Selling and administrative 1919 1977 2037 2098 2162 2227 2294 2363 2435 2469
(-) Depreciation ($2 million /4) 500 500 500 500 0 0 0 0 0 0
Operating Margin 1401 1458 1517 1578 2141 2205 2272 2341 2411 2445
(-) Tax 36% 504 525 546 568 771 794 818 843 868 880
Net Operating Profit After Tax 896 933 971 1010 1370 1411 1454 1498 1543 1565
(+) Depreciation 500 500 500 500 0 0 0 0 0 0
Change in Inventory -964 -29 -30 -31 -32 -33 -34 -35 -36 -37 1259

CASH FLOW -964 1367 1403 1440 1478 1337 1377 1419 1462 1506 2824

NPV 10% WACC $8274741

IRR 143.93%
 EXHIBIT 2
AURORA TEXTILE COMPANY
CASH FLOWS OF ZINSER MACHINE INVESTMENT
($000)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Year 0 1 2 3 4 5 6 7 8 9 10
Sales volume 24700 25194 25698 26212 26736 27271 27816 28373 28940 29519 30109
Net sales 27808 28648 29513 30405 31323 32269 33244 34247 35282 36347 37445
(-) Cost of materials 11137 11474 11820 12177 12545 12924 13314 13716 14130 14557 14997
(-) Conversion costs 7984 10374 10687 11010 11342 11685 12038 12401 12776 13162 13559
(-) SG&A 2005 2066 2128 2193 2259 2327 2397 2470 2544 2621
(-) Depreciation (8.25m/10) 825 825 825 825 825 825 825 825 825 825
Operating margin 3971 4115 4265 4418 4577 4740 4908 5081 5259 5443
(-) Tax (36%) 1429 1482 1535 1591 1648 1706 1767 1829 1893 1960
NOPAT 2541 2634 2729 2828 2929 3034 3141 3252 3366 3484
(+) Depreciation 825 825 825 825 825 825 825 825 825 825
Change in inventory -610 -18 -19 -20 -20 -21 -21 -22 -23 -23 798
Net sale of old machine 1040
Zinser investment -8,250
After-tax training cost -32
After-tax salvage value 64

Cash Flows -7852 3348 3440 3535 3633 3733 3837 3944 4054 4168 5,170

NPV 10% WACC $15331697

IRR 44.07%
 EXHIBIT 3
AURORA TEXTILE COMPANY
INVESTMENT OUTLAY AND TERMINAL-VALUE CALCULATIONS

Sale of Existing Ring-Spinning Machine

Book Value 2,000,000
Market Value 500,000
Loss -1,500,000
Tax savings 36% 540000

Net proceeds of existing machine 1,040,000

Purchase of the Zinser

Price of Zinser 8,050,000
Building modification 115,000
Airflow modification 55,000
Testing 30,000

Total Cost 8,250,000