Case Solution for Aurora Textile Company

Complete Case details are given below :

Case Name :      Aurora Textile Company
Authors :           Kenneth Eades, Lucas Doe
Source :             Darden School of Business
Case ID :           UV0741
Discipline :        Finance
Case Length :    14 pages
Solution Sample availability : YES
Plagiarism : NO (100% Original work)
Description for case is given below :
This case asks the student to decide whether Aurora Textile Company can create value by upgrading its spinning machine to produce higher-quality yarn that sells for a higher margin. Cost information allows the student to produce cash-flow projections for both the existing spinning machine and the new machine. The cash flows have many different cost components, including depreciation, the number of days of cotton inventory, and the liability costs associated with returns from retailers. The cost of capital is specified in order to simplify the analysis. The analysis has added complexity, however, owing to the troubled financial condition of both the company and the U.S. textile industry, which is in decline as manufacturers migrate to Asia to benefit from lower manufacturing costs. This begs the question whether management should invest in a declining business or harvest the company by paying out all profits as a dividend to the owners. The case is suitable for students just beginning to learn finance principles, but is also rich enough to use with experienced students and executives. The primary learning points are as follows: ? The basics of incremental-cash-flow analysis: identifying the cash flows relevant to a capital-investment decision ? The construction of a side-by-side discounted-cash-flow analysis for a replacement decision ? How to adapt the NPV decision rule to a troubled or dying industry ? The effect of financial distress on the NPV calculation ? The importance of sensitivity analysis to a capital-investment decision.
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