Corporate Finance Analysis: Investment Decision and Performance

This report provides a corporate finance analysis focused on Aurora Textile Company's potential investment in a new Zinser machine. It assesses the incremental cash flow and employs capital budgeting techniques such as Net Present Value (NPV) and payback period to evaluate the investment's feasibility. The analysis considers various scenarios, including different salvage value treatments, and examines the impact on NPV. Additionally, the report analyzes the company's financial performance from 1999 to 2002 using key financial ratios like Day's Sales Outstanding, Day's Inventory, Asset Turnover, Return on Assets, and Return on Equity, providing insights into the company's financial health and the potential benefits of the investment. Desklib offers a range of solved assignments and past papers to aid students in their studies.

Running head: CORPORATE FINANCE ANALYSIS
Corporate Finance Analysis
University Name
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Authors’ Note

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CORPORATE FINANCE ANALYSIS
Table of Contents
Identified issue...........................................................................................................................2
Financial Analysis......................................................................................................................3
References..................................................................................................................................7

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Introduction and Recommendation
The chief financial officer of the company Aurora Textile Company has the intention to
question whether the business concern has the need to install a new machine that is Zinser in
the production facility. The case outlines the fact that this new machine has the potential to
manufacture a superior quality yarn that can be essentially utilized for high quality as well as
high margin products for the company.
The purpose of the current study at hand is to critically analyse incremental stream of cash
that in turn can assist in identification of cash flow pertinent to capital-investment decision.
In addition to this, the current study has the intention to construct side by side discounted
flow of cash evaluation for undertaking decisions of replacement, adaptation of NPV decision
rule for a dying else wise troubled industry, analysis of impact of financial distress on
enumeration of NPV. Analysis of outcome helps in analysis of significance of sensitivity
analysis to a specific capital investment decision.
Problem Formulation
The main challenge for the business concern Aurora Textile Company include financial
performance of the firm. During the period 1999 to 2002, overall financial performance of the
business concern was very unattractive as well as disheartening. Essentially, this can be
attributed to risks of business that stemmed from stiff competition that characterizes the
segment in which Aurora functions. Considering the year 1999 as a base period, it can be
mentioned that different dimensions of profitability have necessarily worsened. In essence,
on a cumulative yearly basis, overall net sales has decreased by approximately 15%, whilst
profit margins and return on assets (ROA) remained in the negative. Whilst costs of raw

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materials as a specific percentage of overall sales have been decreasing, overall conversion
costs is increasing and exerting influence on bottom line.
Information Evidence as well as Assumptions
The quality of evidences can be considered to be fitting for carrying out the analysis. Overall
evidence quality is considered good and suitable for a reasonable valuation. The company
Aurora Textile Company presents financial information that are necessarily founded on
historical data along with market comparables and these facilitate valuation approximations
for sensible decision-making. In particular, the most significant supposition is that
comparables founded upon type variables of the flow of cash (that is to say, EBITDA as wll
as cash flow) can be regarded to superior in the process of investment decisions and capital
budgeting decisions of the firm Aurora Textile Company.
Financial Analysis
The chief financial officer of the firm Aurora Textile Company enquired regarding whether
the business concern needs to install the novel spinning machine in the Hunter Production
facility. In essence, this novel machine has the capability to manufacture a finer-quality yarn
that can be utilized for advanced quality as well as advanced margin product (Jordan 2014).
For the purpose of analysing whether to make investments in this specific machine, the
capital budgeting techniques such as NPV as well as payback period can be regarded to be an
important factor. Initially, the NPV factor for the period of 10 years is recorded to be $7056.
There is stream of cash for existing spinning machines and flow of cash for New Zinser. The
incremental flow of cash is mentioned for investment in incremental flow of cash. For the
period of 10 years, the incremental flows of cash are mentioned herein and are recorded for

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the 10 different years. The net present value or in other words expressed as (NPV) for the
incremental flows of cash for the new incremental flows of cash are calculated to be $7056.
The hurdle rate or else WACC are stated to be 10%. The following step involves carrying out
discounting of the flows of cash at the hurdle rate (specific rate that can be utilized for
discounting inflows of net inflow of cash) and in this case this rate is considered to be 10%.
There is a positive NPV recorded for the incremental flows of cash for investment on New
Zinser reflecting feasibility of the project (Jordan 2014).
The case therefore is said to utilize free flow of cash for enumeration of NPV for the period
of 10 years. In essentially, NPV calculated for forecasts for essentially the long term period
can be considered to be positive and therefore the new machine Zinser can be accepted and
installed. Furthermore, the after prediction of discounted free flow of cash, it is possible to
enumerate payback period (Titman et al. 2017).
The current study takes into account calculation of NPV (ignoring salvage effect, with zero
salvage and benefit of tax on loss incurred and salvage value equal to 25% of book value with
36% of benefit of tax on registered loss) (Jordan 2014). NPV recorded by ignoring the
salvage value is recorded to be $7054. Again, NPV value recorded with zero salvage with
benefit of tax of 36% on registered loss is also recorded to be $7054 at the closing period. In
addition to this, NPV with salvage value equal to 25% of book value as well as 36% of tax
advantage on registered loss is enumerated to be $7054. This shows that NPV in all the three
cases is recorded to be $7054 reflecting no effect of treatment of salvage on calculation of
NPV. In this regard, it can be hereby mentioned that net present value is necessarily an
approximation and it is mainly sensitive to alterations in approximations for future flows of
cash, specific salvage value as well as cost of capital (Asquith and Weiss 2016). However, in
this case, in all the three cases, the value of NPV is said to be same.

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In addition, financial statement analysis includes using key ration. Day’s sales outstanding
calculated to be 25.7 in 1999, 18.5% in 2000, 40.7% in 2001 and 64.5% in 2002. The day’s
sales outstanding are also known as average collection period else wise day’s sales in
receivables (Asquith and Weiss 2016). Essentially, this enumerates total number of days that
a business concern takes to acquire cash from particularly credit sales (Cheng et al. 2014). In
this regard, a low ratio can be considered to be desirable as it implies business concerns
essentially can collect cash from their clientele can utilize the same for diverse other
operations.
Again, day’s inventory is also seen to have augmented during the specified time period from
95.6 in 1999, 98.8 in 2000, and 116 in 2001and 186.9 in 2002. This ratio necessarily
measures the total number of days a business concern takes to sell out all the inventories.
Therefore, it makes sense to have low inventory outstanding and is said to be desirable than
other higher ratios (Asquith and Weiss 2016). Based on calculation of day’s inventory it can
be said that there is undesirable financial condition in terms of day’s conversion of inventory
into cash sooner. In essence, the higher ratio in this respect shows that inventory is not very
liquid (Atanasov and Black 2015).
Asset turnover indicates towards net sales as a specific percentage of particularly firm’s
assets to reflect the amount of sales generated from each dollar of assets of the company.
Asset turnover calculated for the firm first moves upward and thereafter gradually declines
during 2002. In this case, a higher ratio can be said to be better as this replicates that the
company is utilising all their assets effectively and most likely management or else
production concerns (García-Meca et al. 2015).
Return on Assets enumerates the degree of efficiency of a business concern to handle the
asset to generate profits during a specified period of time (Gullifer and Payne 2015). For the

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current case under consideration, return on assets is recoded to be -2.5% in 1999 that further
declined to -3.8% in 2000, -7.8% in 2001 and thereafter it increased to -5.2% in 2002. This
ratio enumerated the extent of efficiency of a business concern and the way it can handle the
assets to generate the profits during the specified period. In this case, higher ratio only
replicated favourable financial condition. However, in case of the firm, situation is said to
improve during 2002.
Return on equity is necessarily a profitability ratio that enumerates the capability of a
corporation to generate profits from particularly investments of shareholders in the business
(Gitman et al. 2015). In this case, higher ratios can be said to be better in comparison to low
ones. Return on equity is calculated to be -6.2% in 1999 that decreased to -9.5% in 2000.
This further declined to -20.4% in 2001 and this enhanced again to -14.8% in 2002.
Therefore, this augmentation in return in 2002 can be said to be favourable although the
negative numerals reflects poor circumstances.

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References
Asquith, P. and Weiss, L.A., 2016. Lessons in corporate finance: A case studies approach to
financial tools, financial policies, and valuation. John Wiley & Sons.
Atanasov, V. and Black, B., 2015. Shock-based causal inference in corporate finance
research. Critical Finance Review, forthcoming.
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to
finance. Strategic Management Journal, 35(1), pp.1-23.
García-Meca, E., García-Sánchez, I.M. and Martínez-Ferrero, J., 2015. Board diversity and
its effects on bank performance: An international analysis. Journal of Banking &
Finance, 53, pp.202-214.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury
Publishing.
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.
Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and
applications. Pearson.