Star River Electronics Ltd

Introduction and Recommendation
Star River is a CD-ROM manufacturer located in Singapore. Adeline Koh was appointed as CEO on July 5, 2001 following the unexpected resignation by her predecessor one week earlier.
The purposes of this paper are to 1) determine whether forecasted capital expenditures for DVD manufacturing should be covered through acquisition of additional debt or requested equity from New Era Partners, 2) determine if purchasing new packaging equipment should be executed immediately or postponed until 2004, 3) offer recommendations pertaining to operational and financial changes that may benefit Star River.
It is recommended that Star River request equity from New Era Partners to offset the SGM 54.6 million capital expenditures forecasted for DVD manufacturing equipment, postpone the purchase of new packaging equipment until 2004 and focus on reducing the significantly increased inventory levels.

Key Issues
A current financial analysis of Star River is necessary to determine an appropriate course going forward. Adeline Koh has inherited all the issues facing Star River and must prepare to take decisive action on several time-sensitive choices.
Determination of how to fund the anticipated SGM 54.6 million capital expenditure necessary to obtain DVD manufacturing equipment in order to remain competitive in an evolving industry.
Adeline Koh must also decide to purchase new more efficient packaging

Information, Evidence and Assumptions

Analysis

Recommendations
Star River should request equity from their owners, New Era Partners, to offset the SGM 54.6 million capital expenditures forecasted for DVD manufacturing equipment over the next two years. Financial forecasting and analysis suggests Star River will be unable to repay this amount in a reasonable time if financed through additional debt. Postponing the purchase of this equipment is not acceptable considering the industry forecasts for decreased CD-ROM and increased DVD demand. A two year forecast of ROE and ROA show an average of 17% and 4.1% respectively.
Star River should postpone the purchase of new packaging equipment until 2004. Analysis of free cash flows and net present values suggest a savings of almost 169,000 SGM by postponing this purchase. Considering this amount is trivial compared to the DVD equipment purchase, monitoring of the packaging department is recommended. If packaging begins to show trends of delaying order processing, acceleration of the purchase of new packaging equipment should considered.
Star River management should focus on inventory reduction and control. Inventory levels increased considerably from 1999 to 2000 and a continued upward trend is forecasted. Reducing inventory levels will free resources that can be better utilized elsewhere.

Alternative Perspective
Postponing the purchase of the DVD manufacturing equipment could be considered an alternative to acquiring the additional debt necessary or requesting equity from New Era Partners. While this approach seems risky considering the current industry forecasts, focusing on increasing current efficiencies rather than additional debt is an approach some may favor.
While postponing the purchase of new packaging equipment is correct from a financial-only perspective, other factors could be considered. It could be argued that the required overtime necessitated by the current equipment can affect employee efficiency, safety and retention. Consideration could be given to hiring an additional worker to offset the overtime workload. This would potentially offer reduced labor costs for the company immediately.