Aurora Textile Company

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Analysis: Aurora Textile Company is a yarn manufacturer that produces cotton and synthetic/cotton blend yarns. The firm has been in operations since the early 1900s to service both the domestic and the international textile industry. Aurora has four major customer segments, hosiery, knitted outerwear, wovens, and industrial and specialty products. Over the past few years, the United States textile-mill industry has experienced economic challenges because of globalization. The search for cheaper production costs had begun to move the textile-mill industry to Asia. As more apparel makers relocated their production facilities to Asia, the yarn makers followed suit. In addition, consumer preferences and fads affected the market. Furthermore, information technology also had a downside for yarn producers because of the liability associated with customer returns. For instance, a dress shirt that was sold at JCPenney for $25 might include $5 of Aurora yarn. If the yarn was defective and the defect could be traced backed to Aurora, the company would be required to reimburse JCPenney for the full retail price of $25, five times the amount of revenue received by Aurora for the garment. Due to these challenges, Aurora’s sales have been steadily declining. In 2000, the company closed half its manufacturing facilities. Aurora currently has four plants remaining in operation. The Hunter plant is seeking installation of a new ring-spinning machine, the Zinser 351. This machine would yield higher quality yarn, allowing for sales in a niche market that would increase the selling price of yarn by 10%. Additionally, operating costs would be reduced through greater production efficiency. However, sales volume would decrease by 5%, and the cost of customer returns would be higher even though the return rate would be lower. The following is an analysis of cash flows showing whether

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