Problem Definition: In order to ensure the continuation and financial stability of Star River Electronics Ltd. (“Star River”), chief executive officer Adeline Koh (“Koh”) must convince the Company’s banker, Mr. Tan, to grant an extension on the Company’s loan as the Company stands to improve its performance through DVD production (and possibly, the purchase of new packaging equipment).
Relevant Facts: Star River is recognized in the CD-ROM manufacturing industry for producing high-quality discs. A recent study, however, indicates digital video discs (“DVD”) will bypass CDs within six years. Koh would like to invest SGD54.6 million in DVD manufacturing equipment to build upon Star River’s sterling reputation. Furthermore, Koh must decide whether to invest SGD1.82 million in new packaging equipment immediately or three years from now. Despite increasing sales, however, Star River’s historical financial statements confirm increased days in receivables and decreased return on assets which are a poor indication of Star River’s future performance and limit its ability to gain further funding from stakeholders.
Analysis Summary: Judging by Exhibit 3, the Company stands to save on the new packaging machine’s amortization costs, maintenance costs, downtime and the purchase price, a collective savings of SGD388,793 within the first three years. Furthermore, the Company’s pro-forma financials (Exhibits 1 and 2) indicate the Company performs better with the combination of the DVD equipment and the new packaging machine than with the DVD equipment alone but the Company’s overall performance as compared to its single CD-ROM production days indicates a gradual decline in performance. As the Company’s debt increases, its operating margins and return on asset ...