I have finance work needs to be done

New England held 52% of the cotton manufacturing economic scale, Massachusetts held 30% and Rhode Island held 18% during 1884 and over 800,000 bales of cotton were manufactured domestically and exported to New England during this era. New England relied on U.S cotton manufacturing for 80% of its domestic cotton manufacturing needs. Aurora Textile Company was established in 1884, at the beginning of the Civil War and utilized slave labor through means of servitude contracts and indentures contracts, which indebted African males and females up to 99 years and African children up to 21 years of labor in exchange for wages and property.The low cost of slave labor built Aurora Textile Company’s capital structure and resource allocation opportunities. Low wage cost made the American Textile Industry international primary supplier of cotton up until 1994.

In 1994 foreign countries utilized low wage costs and marketed their services at an American discounted rate. Foreign companies offered lower costs for their services because the American dollar was strong, foreign companies benefited from the currency rate and remained profitable in their respective company. The American strong dollar arises the opportunity for international manufacturers to enter the textile industry and as a result, Aurora Textile Company choose to close four of their factories due to loss of market share.

Fast forward to 2017, economic indicators that are contributing to the current Textile mills industry

Aurora Corporate Strategy

CFO Michael Pogonowski directed the attention of the board members to the Industrial Revenue Segment. This segment generated 9% of total Net Sales. Companies who were in demand of Aurora Textile Company services produced medical supplies, protective clothing, industrial adhesives, rubber, vinyl-coating fabrics. The Industrial Segment also produced the highest margins of return. With the higher margin of return in the Industrial Segment, Michael Pogonowski recommended the purchase of an up-to-date Ring-Spinning machine to supply demand with a higher quality yarn at a 10% price increase. The opportunity cost was to pay 8.25 million dollars for a single Ring-Spinning Machine with up-to-date technology to supply the Industrial Segment demand with a higher quality yarn.

Analysis of Corporate Strategy

Michael Pogonowski corporate strategy was an attempt to improve quality of the yarn, but he must have not calculated the effects of the 10% price forecast to all revenue segments. Michael Pogonowski focused on the wrong Revenue Segment and ignored the positive effects of decreasing the current high customer return rate.

The focus should have been on producing a better quality yarn for the Hosiery Segment which generated 43% of Aurora Textile Company revenue and the Knitted Outerwear market which generated 35% of Aurora Textile Company revenue. Increasing the quality of yarn for both segments would allow net sales growth to generate, putting Aurora into a stable scenario potentially remaining in a stable operating condition.

Analysis of Aurora Textile Company Financial Performance

Financial Performance Problems:

Financial performance is weak due to corporate strategy, resource allocation and capital budgeting. Aurora Textile Company is in a recession. The poor financial performance is due to poor product quality, high account receivable balance and high expenses. Looking at the Consolidated Income Statement produced by Aurora Textile Company the company recorded a declining Net Sales margin, and a declining Operating Profit margin, and an incorrect asset cash and cash equivalent balance.

Net Sales declined in 2000 by 6.5%, even though total Cotton pounds shipped increased by 2,800lbs. In 2001, Net Sales declined once again and by 20% and total Cotton pounds shipped declined by 38,577lbs. In 2002, Net Sales declined by 19% and total Cotton pounds shipped declined by 7,777lbs. In conclusion, the increase of total Cotton pounds shipped in the year 2000 accounted for the loyal customer from the year of 1999 and in years 2001 and 2002 Aurora lost loyal

Customers and causing a recession.

Expenses are also a prime reason why Aurora Textile Company does not have a positive sales growth trend or a positive operating profit trend. Conversion Costs account for 34% to 41% of Net Sales , with this expense trending upwards every year.

SG&A Expense account for 6% to 7% of the gross margin. The Conversion cost and SG&A Expenses also contributed to the recession.

Solutions that lead Aurora Textile Company out of a recession:

In order to compensate for the loss of loyal customers due to low product quality, and get Aurora Textile Company out of a recession, the company will have to lower their Account Receivables by 100%. Lowering their account receivables will decrease the sales decline for Years 2001 and 2002. Sales decline would reduce to 16% in year 2001 and sales decline would reduce to 15% in year 2002. As a trickling effect of higher Net Sales and a less negative Sales Growth Rate, Operating Profit from years 1999 through 2002 would be positive. An increase Net Sales will result in a positive Operating Profit Margin for Aurora Textile Company and the downward trend towards a more drastic recession will be no more.

In addition, the controllable factors will need to be assessed and a decrease in these expenses will also generate a better sales growth, and operating profit. The goal is to come out of a recession.

Controllable factors: Average Selling Price

Conversion Costs

SG&A Expenses

Other Interest Expense

Asset Impairment

The controllable factors are the reasons why the company has no sales growth or operating profit and are also the reasons why shareholders value has decreased from 30 dollars to 12 dollars per share.

To increase Sales and create a sales growth margin and create operating profit, at which percent does each controllable factor need to decrease by to pull the Aurora Textile Company out of their recession?

Conversion cost includes customer return rate at 7.5%, if the customer return rate decrease would that have a major effect on sales growth and operating profit? If it does, then the quality of the yarn is why there is not sales growth or operating profit.

Calculation:

If conversion costs in 1999 were decreased by 7.5%

(99) Conversion Cost: .4447 x .075 = .03352000

(00) Conversion Cost: .4421 x .075 = .033157500

(01) Conversion Cost: .4465 x .075 = .033487500

(02) Conversion Cost: .4296 x .075 = .032220000

Total: .132385000

CAPITAL BUDGET AND RESOURCE ALLOCATION

The capital budget and resource allocation strategy encompasses two dilemmas. Dilemma one: The Aurora Textile Company has a steady decline of sales and a decrease of shareholders value. Dilemma Two: CFO Michael Pgonowski invested in the Zinser compact spinning technology. The simplistic, but very complex question is asked, “Should Aurora Textile Company restructure the capital budget and reassess their assets to buy and instal the Zinser machine in The Hunter Plant to earn an increase in sales by 2%?

“We do not advise buying the Zinser until Aurora Textile Company is out of their recession” - Group 5

Changes to Net Sales if the Zinser was purchased for the Hosiery Market and Woven Market:

The company contemplates that it can invest in a new machine to change its fortunes and keep it in operation. The ensuing parts will look at the current company’s performance using financial analysis, as well as, the analysis of a capital budgeting under replacement decision using the WACC approach to determine the next cause of action.

Solution: 78% of income : for the year 1999-2002 (forecast the 10% for 2003) (calculate 78% of the net sales between 1999-2002)

1999: 245,908x.78= 191,808.24

2000: 179,233x.78= 179,233.86

2001: 182,955x.78= 142,704.90

2002: 147,503x.78= 115,052.34

2003: 115,052.34x(1+.10) = $241,609.91

If aurora textile company invested in the ring-spinning machine and provided the higher quality yarn in the hosiery and woven industry , with the forecasted 10% price increase the net sales has the potential to double net sales.

Income at 9% :

1999: 245,908x.09= 22,131.72

2000: 179,233x.09= 16,130.97

2001: 182,955x.09= 16, 465.95

2002: 147,503x.09= 13,275.27

2003: 147,503(1.10)= 16,2253.30

We need to calculate the NPV (remember cash flows are the net sales) the price for the new yarn will have a 10% price increase. Price will be 1.126. We need to make a projected Income Statement.

The opportunity and opportunity costs associated with the purchase of the Zinser machine will be reflected in the differential cash flows calculations. The decision to invest in the Zinser machine or the decision to maintain the current machine will be the opportunity , and the installation cost totaling $8.25 million and not supplying the new yarn to the Industrial Segment is the opportunity cost.

On the same note, the company must also consider the training cost associated with the new machine to allow the employees’ familiarization of its usage in an amount of $ 50,000 pretax but $32,000 after tax as demonstrated in Exhibit 3. If the management decides to invest in the Zinser Machine, costs will decrease by 5% in the first year of operation, but sales will also decrease with 10% in the same period. The cost of production material will remain the same as in the status quo. However, conversion costs will decrease owing to better quality which lowers customers’ returns, and the decrease in power consumption due to energy efficiency. The new machine will also lower the cost of holding inventory because the days in inventory will be lowered to 20 days. The rest of the assumptions other than the ones indicated above remain the same as with the status quo. If Aurora Textiles chooses to invest in the new machine Zinser, the NPV due to this decision is $ 15.5 as shown in NPV schedule titled exhibit 3. In budgeting decisions especially under replacement option, the investment that has the higher NPV is the ideal investment. My advice to Aurora textile is to invest in Zinser because it has a higher NPV of 15.5 exhibit 3 million compared to $ 9.2 exhibit 2 million under the old machine.

IF YOU FEEL THE NPV SHOULD START AFTER THE ABOVE PARAGRAPH PLEASE START HERE:

THINGS TO CONSIDER :

What is their PRODUCT?

Major Products : Cotton & Synthetic/Cotton Blend, Yarn

Textile Market Trend: New information technology has been adopted by most retailers that allows them to track which manufacturer a specific garment is associated with more easily, so that when they get a return due to quality they can charge that specific manufacturer for the garment. This affects yarn producers like Aurora because defective merchandise can be more easily traced back to them which has resulted in a lot more returns.

When a garment is defective the manufacturer is liable for full retail price. So for example, even though Aurora only receives 5$ for their yarn, if they traced a garment back to Aurora they would be liable for 25$ which is 5 times the amount of revenue they actually received.

COMPANY MANUFACTURING PROBLEM TWO: RETURN ON DEFECTED YARN ( 1.5%) (PG225)

THINGS TO CONSIDER:

COST//quality VS. SOLUTION

RESTRUCTURING THE CAPITAL BUDGET

COST OF MACHINE: 8.25 MILLION

SOLUTION ONE: FUND THE INSTALLATION WITH CASH FROM THE COMPANY

A) Where do they get the money from?

1) CASH, CURRENT SECURITIES, OPERATING INCOME, BOND, calculate AFN, NPV

SOLUTION TWO: DEBT FINANCE WACC

A) What is the interest rate average between years 1999 - 2003

IF THE MACHINE IS BOUGHT AND INSTALLED, THE YARN MANUFACTURED WILL BE SOLD TO A NICHE MARKET AT A 10% INCREASE in PRICE. Current price: 1.0235 x .10% x demand average. Should the current the customers receive the better quality yarn and decrease the return rate of 1.5% ( Current customers such as JCPennys & Nordstrom)

CALCULATIONS TO HELP US ASSESS THE SITUATION AND CHOOSE AN ALTERNATIVE

Days sales outstanding = Accounts receivable/ Average Sales Per Day(sales/365) States how well a company’s is managing their account receivables (est. 44days) If the account receivables were decreased (we need a specific calculation here ) the money could go to paying for the machine.