Aurora Textile Company

Financial Ratios Analysis (19992002)

1999 2000
Sales growth 6.56%
Raw materials/sales 54.01% 53.29%
Conversion cost/sales 33.94% 36.65%
Gross Margin/sales 12.05% 10.06%
SGA/sales 5.94% 6.19%
Interest Expense 2.76% 2.95%
Operating Profit/sales -0.08% -1.79%
NI/sales -1.82% -2.71%

Days sales outstanding 25.7 18.5

Days inventory 95.6 98.8
Asset turnover 1.37 1.39

Return on assets 2.5% 3.8%

Return on equity 6.2% 9.5%

Note: Although the sale growth increased through the four years except 2001.consequintly, the gr
12.05% to 13.97% at the end of the year 2002. On the other hand, the net profit was negatives va
years. From this analysis it can be conclude that the company's financial performance was
tile Company
nalysis (19992002)

2001 2002
20.38% 19.38%
53.86% 44.05%
37.07% 41.97%
9.07% 13.97%
6.36% 6.99%
2.80% 2.33%
-3.41% 0.30%
-6.07% -4.76%

40.7 64.5
116 186.9
1.28 1.08

7.8% 5.2%
20.4% 14.8%

our years except 2001.consequintly, the gross profit increased from

other hand, the net profit was negatives value. through out the four
the company's financial performance was tremendously bad.
 1999 2000 2001
Pounds shipped (000's) 187,673 190,473 151,893
Average selling price / lb 1.3103 1.2064 1.2045
Conversion Cost / lb 0.4447 0.4421 0.4465
Average Raw Material Cost / lb 0.7077 0.6429 0.6487

Net Sales $245,908 $229,787 $182,955

Raw Material Cost 132,812 122,461 98,536
Cost of Conversion 83,454 84,212 67,822
Gross Margin 29,641 23,114 16,597
SG&A Expenses 14,603 14,218 11,635
Depreciation & Amortization 15,241 13,005 11,196
Operating Profit (203) (4,109) (6,234)
Interest Expense 6,777 6,773 5,130
Other Income (Expense) 1,143 (1,232)
Asset Impairments* 4,758
Earnings Before Income Tax Provision (6,980) (9,739) (17,354)
Income Tax Provision (Benefit) @ 36% tax (2,513) (3,506) (6,247)
Net Earnings ($4,467) ($6,233) ($11,106)
 2002
144,116
1.0235
0.4296
0.4509

$147,503
64,982
61,912
20,609
10,305
9,859
445
3,440
(409)
7,564
(10,968)
(3,949)
($7,020)
 Aurora Textile
Status Quo Cash Fl

2002 2003 2004 2005

Year 0 1 2 3

Sales volumes 26,000 26,520 27,050 27,591

Avarage Salling Price 1.02 1.03 1.04 1.05
Net sales $26,611 $27,415 $28,243 $29,096
New ARMC 0.45 0.45 0.46 0.46
Cost of materials 11,723 12,077 12,442 12,818
Conversion costs 11,518 11,865 12,224
SG&A 1,919 1,977 2,037
Depreciation 500 500 500
Operating margin 1,400 1,458 1,517
Tax@36% 504 525 546
NOPAT 896 933 971
+ Depreciation 500 500 500
Inventory 963.53 992.67 1022.65 1053.53
Change in inventory -964 -29.13 -29.98 -30.88
Salvage value
Free cash flows ($964) $1,367 $1,403 $1,440

Note: Inventory= Cost of Material/365x30=964

Hurdle Rate/WACC
NPV of the Machine
Aurora Textile Company
Status Quo Cash Flows ($000)

2006 2007 2008 2009 2010

4 5 6 7 8

28,143 28,706 29,280 29,866 30,463

1.07 1.08 1.09 1.10 1.11
$29,974 $30,879 $31,812 $32,773 $33,762
0.46 0.47 0.47 0.48 0.48
13,205 13,604 14,015 14,438 14,874
12,593 12,973 13,365 13,769 14,185
2,098 2,162 2,227 2,294 2,363
500 0 0 0 0
1,578 2,141 2,205 2,272 2,340
568 771 794 818 842
1,010 1,370 1,411 1,454 1,498
500 0 0 0 0
1085.35 1118.12 1151.89 1186.68 1222.52
-31.82 -32.78 -33.77 -34.79 -35.84

$1,478 $1,337 $1,378 $1,419 $1,462

= 10%
= $9,239.74
2011 2012
9 10 Pounds shipped (000's)
Average selling price / lb
31,072 31,200 Conversion Cost / lb
1.12 1.13 Average Raw Material Cost / lb
$34,782 $35,274
0.49 0.49 Net Sales
15,323 15,540 Raw Material Cost
14,613 14,820 Cost of Conversion
2,435 2,469 Gross Margin
0 0 SG&A Expenses
2,411 2,445 Depreciation & Amortization
868 880 Operating Profit
1,543 1,565 Interest Expense
0 0 Other Income (Expense)
1259.44 1277.25 Asset Impairments*
-36.92 1259.00 Earnings Before Income Tax Provision
0 Income Tax Provision (Benefit) @ 36%
$1,506 $2,824 Net Earnings
 2002
26,000 2% Inflation Rate
1.0235 1% Sales Growth
0.4296 1%
0.4509 1%

$26,611
11,723
11,170
3,718
10,305 7% of sales
9,859
(16,446)
3,440
(409)
7,564
(27,859)
(10,029)
($17,830)
 Aurora Textil
Cash flow for N

2002 2003 2004 2005

Year 0 1 2 3

Sales volumes 24,700 25,194 25,698 26,212

Avarage Salling Price 1.13 1.14 1.15 1.16
Net sales $27,808 $28,648 $29,513 $30,405
New ARMC 0.45 0.45 0.46 0.46
Cost of materials 11,137 11,474 11,820 12,177
Conversion costs 7,984 10,374 10,687 11,010
SG&A 2,005 2,066 2,128
Depreciation 825 825 825
Operating margin 3,970 4,115 4,264
Tax@36% 1,429 1,482 1,535
NOPAT 2,541 2,634 2,729
+ Depreciation 825 825 825
Inventory 610.26 628.69 647.68 667.24
Change in inventory 610 -18.43 -18.99 -19.56
Net sale of old machine 1,040
Zinser investment 8,250
After-tax training cost 32
Salvage value
Free cash flows -7,852 $3,348 $3,440 $3,535

Note: Inventory= Cost of Material/365x20=964

Note: only 1st Year sales volume will dicrease by 5 % but afterthat it will increase at 2%

Hurdle Rate/WACC
NPV of the Machine
 Aurora Textile Company
Cash flow for New Machine

2006 2007 2008 2009 2010

4 5 6 7 8

26,736 27,271 27,816 28,373 28,940

1.17 1.18 1.20 1.21 1.22
$31,323 $32,269 $33,244 $34,247 $35,282
0.46 0.47 0.47 0.48 0.48
12,545 12,924 13,314 13,716 14,130
11,342 11,685 12,038 12,401 12,776
2,193 2,259 2,327 2,397 2,470
825 825 825 825 825
4,419 4,577 4,740 4,908 5,081
1,591 1,648 1,706 1,767 1,829
2,828 2,929 3,033 3,141 3,252
825 825 825 825 825
687.39 708.14 729.53 751.56 774.26
-20.15 -20.76 -21.39 -22.03 -22.70

$3,633 $3,733 $3,837 $3,944 $4,054

ease at 2%

le Rate/WACC = 10%
of the Machine = $15,330.98
2011 2012
9 10 Pounds shipped (000's)
Average selling price / lb
29,519 30,109 Conversion Cost / lb
1.23 1.24 Average Raw Material Cost / lb
$36,347 $37,445
0.49 0.49 Net Sales
14,557 14,997 Raw Material Cost
13,162 13,559 Cost of Conversion
2,544 2,621 Gross Margin
825 825 SG&A Expenses
5,259 5,443 Depreciation & Amortization
1,893 1,960 Operating Profit
3,366 3,484 Interest Expense
825 825 Other Income (Expense)
797.64 821.73 Asset Impairments*
-23.38 798.00 Earnings Before Income Tax Provision
Income Tax Provision (Benefit) @ 36%
Net Earnings

64
$4,167 $5,171
 2002
26,000 2% Inflation Rate
1.0235 10% Sales Growth
0.4077
0.4509 1%

$26,611
11,723
10,600
4,287
10,305 7% of sales
9,859
(15,877)
3,440
(409)
7,564
(27,290)
(9,824)
($17,465)
 Aurora Textile Company
Investment Outlay and Terminal-Value Calculations

Sale of Existing Ring-Spinning Machine

Book value $2,000,000
Current Market value 500,000
Loss 1,500,000
Tax savings (36%) 540,000
Net proceeds for 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

Sale of the Zinser at the End of Year 10

Book value $0
Market value 100,000
Gain 100,000
Tax on gain @36% 36,000
Net proceeds $64,000
 Aurora Textile Company
Incremental Cash Flows and NPV Sensitivity of Zinser Machine

Year 0 1 2 3
Existing spinning machine ($964) $1,367 $1,403 $1,440
New Zinser ($7,852) $3,348 $3,440 $3,535
Incremental cash flows ($6,888) $1,981 $2,037 $2,095

Net present Value = ($6,888) $1,801 $1,683 $1,574

($5,087) ($3,404) ($1,830)

Hurdle Rate/WACC = 10%

NPV of the Machine = $7,056

Project Life 0 1 2 3
NPV (salvage effect ignored) ($5,088) ($3,405) ($1,831)
NPV (zero salvage, 36% tax benefit on reported loss) ($2,658) ($1,441) ($269)
NPV (salvage = 25% book value, 36% tax benefit on reported
($1,578)loss) ($569) $425
a Textile Company
Sensitivity of Zinser Machine Investment ($000)

4 5 6 7 8 9 10
$1,478 $1,337 $1,378 $1,419 $1,462 $1,506 $2,824
$3,633 $3,733 $3,837 $3,944 $4,054 $4,168 $5,170
$2,155 $2,396 $2,459 $2,525 $2,592 $2,662 $2,346

$1,472 $1,488 $1,388 $1,296 $1,209 $1,129 $904

($358) $1,130 $2,518 $3,814 $5,023 $6,152 $7,056

4 5 6 7 8 9 10
($359) $1,128 $2,517 $3,812 $5,021 $6,150 $7,054
$858 $2,050 $3,187 $4,269 $5,299 $6,276 $7,054
$1,399 $2,460 $3,485 $4,473 $5,422 $6,332 $7,054
Satus quo
New Machi
NM-SQ=IC

Note: NPV-Present Value from last year 10