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Overview of the Problem:

The main problem that the Mr. Michael Pogonowski who is the chief financial officer of Aurora

Textile Company is facing is regarding the capital budgeting decision. This capital budgeting

design is about whether to purchase new spinning, the Zinser !" or not. The dilemma that Mr.

Pogonowski is facing that he thinks that it is in the best interest of the company to upgrade these

machine because the price of these machine has been increasing !# annually and if they delay

they will ha$e to incur more cost while other members think that it would be cost effecti$e to

continue without upgrading any of the machines and postpone replacement indefinitely and

continue with proper maintenance of the current machines.

Recommendations:

Most companies in %& textile industry are experiencing hea$y loses due the turbulent market

conditions. 'ence it would be not wise to further in$est more money in this industry in

pre$ailing market conditions. 'owe$er when market conditions are stabled in order to be

successful and to compete with other companies in this industry they need to be inno$ati$e and

up to date with technological ad$ancements and they cannot afford to fall behind. (urthermore

the industry in which aurora belongs is mo$ing towards higher )uality products and Zinser

machine will help Aurora to produce high )uality product which will gi$e them ad$antage o$er

other competitors.

*f the Zinser pro+ect is accepted by the management the plant which will be affected by this

decision is the hunter plant which means that the current machine in hunter plant will be replaced

by the inser machines. Therefore in order to find out which decision is in the fa$or of

shareholders interest we compared the cash flows of 'unter plant with and without the new

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machine. The -P of hunter plant is "./01 million with new machines and "2.0"3 million

without them and also incremental cash flows are 1.34 million. (urthermore *55 of this pro+ect

is "3 # which is higher than "2# hurdle rate. *n the light of all these financial analysis

mentioned abo$e Aurora should accept this pro+ect.

Apart from this we also see that cotton prices are falling which could be beneficial for Aurora

Textile Company 6ut the company also needs to de$elop strategies which will impro$e their

profit margin and reduce operating cost and also they need to appropriately manage their

in$entory and account recei$ables. These changes will help Aurora to mo$e in the right direction.