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STATEMENT OF THE PROBLEM Star River Electronics Ltd is a large manufacturer and supplier of CD-ROMS It was founded as a joint venture between New Era Partners and Starlight Electronics Ltd It has enjoyed a great deal of success in the past decade due in large part to their excellent reputation Star River does need to address several issues with the recent resignation of their former CEO Digital Video Disks are expected to cut into the CD-ROM market in the very near future and with only 5 of their sales coming from this area Star River needs capital expenditures to increase their capacity in this sector To finance this expenditure they can use either debt or equity Also a new packaging machine which would cut down on labor and overhead costs has been proposed and Star River needs to know whether to approve the purchase now or wait three years where new equipment would have to be purchased to handle the projected growth rates Finally a weighted average cost of capital needs to be estimated for the firm which will help to answer this question of whether to wait or buy this equipment at the present time RELEVENT FACTS AND ASSUMPTIONS DVDs have 14 more storage capacity than CD-ROMs 1999 CD-ROMs accounted for 93 of sales oEstimated to decrease to 41 2001 DVDs accounted for less than 5 of sales oEstimated to increase to 59 The new DVD manufacturing equipment will cost SGD546 million oThe new equipment costs will be paid throughout the next two years oThe new equipment will be depreciated over seven years oAssume that funding for the new equipment will be through debt Interest expense is weighted for short-term debt and long-term debt 653 The new packaging machine will cost SGD182 million oDepreciated over 10 years SGD182000 per year oInitial year maintenance costs for machines lifetime SGD3640 oPrice of new machine and maintenance costs increases by 5 per year oSave SGD286878
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