Aurora Textile Company Case
In January 2003, Michael Pogonowski, the chief financial officer of Aurora Textile Company, was questioning whether the company should install a new ring-spinning machine, the Zinser 351, in the Hunter production facility. This new machine has ability to produce a finer-quality yarn that would be used for higher-quality and higher-margin products. In deciding whether or not to invest this new machine, NPV and the payback period are critical factors. Firstly, we need to forecast the cash flows that the Zinser 351 will generate in the future. After calculation, the ten-year NPV will be $3, 172,582. Secondly, we use the payback period to analyze the acceptance of this project. Based on this analysis, …show more content…
We are able to report that our payback period, 5.69, is less than 7.87 and that we should accept to install Zinser 351. On the other hand, there are some issues of concern that we need to address if we use Zinser 351. First of all, the sale price will jump from $5 to $10 by using Zinser 351. This increase in price needs to be countered, so, we need to face the global competition from those foreign textile companies with lower costs. The sales with Zinser is larger than the sales without Zinser, whereas the COGS with Zinser is lower than without Zinser. Thus, our profit margin will be widened in order. Also, the customer’s preference has forced the industry to improve the quality and we believe Zinser 351 will produce that desired high quality product which will give us an edge against those competitors. Then, we have determined the company is better off using Zinser because the WTO lifted the ban on quotas in 2005 resulting in increased competition. With the increased competition we will see that the supply of textiles will increase and force downward pressure on prices. Only the companies with high quality products can survive in this intense competition. We believe Zinser makes the company more competitive than those rivals because of the high quality outputs.
Conclusion Based on the analysis above, Aurora Textile Company should accept Zinser 351 because of the