Aurora Textile

Case problem

Aurora Textile's CFO has to prove whether the company should install a new machine, the Zinser 351, in the Hunter production facility.

This new machine will allow Aurora to sell in a new niche market, which would command a 10% increase in the selling price.

However, things have been bad financially for Aurora, so he has to make sure the project is going to benefit the company.

The current machine can be kept in functions for ten years with the proper maintenance.

Background

In the last 4 years, Aurora sales has been reduced, and it has not been a profitable company. Plus, the thextile-mill industry in the US is having a hatd time due to the aggressive strategy of the foreign manufacturers.

The Zinser machine could make the Hunter facility to grow its production level to its whole capacity, and would make Aurora's able to sell to a new niche of market.

Problem analysis

In order to show if buying the machine is convenient, we should take into account the following facts:

* The total cost for the machine and its installation will be $8.25 million.

* Sales volume would be 5% lower than the current market.

* There will be an increase of 10% in the selling price.

* It has to be spent $50,000 for training (just once).

* It will be depreciated in straight line and it can be sell at the end of the ten years in $100,000.

* It is expected to reduce power and maintenance costs to a saving of $0.03/lb

* The cost of customer return will rise from $0.077/lb to $0.084/lb

* It is expect the industry will grow around 2%, with prices and costs increasing at a 1% inflation rate.

* SG&A Expenses wouldn't change (7%)

* The estimated hurdle rate is 10%, although the CFO thinks it could be better than that.

* The existing machine could be sold for about $500,000.

* Hunter's production could rise to 600,000 pounds for week with this machine.

* If the machine is not bought, it is expected to reach that production (600,000 pounds/week) at the end of ten years using the current machine.

All these facts will help us to project the future cash flows of the Hunter production facility, with and without the Zinser machine. Once