Star River Electronics Limited Harvard Case Solution & Analysis

Star River Electronics Limited Case Solution


The case illustrates the situation of purchasing new equipment for increasing the sales as well as profits for the company and to attract investors to take decisions in order to retain these benefits for long-term. However, with the appointment of Adeline Koh as thenew CEO, it was analyzed that various financial problems were raised while reviewing the historical financial statements of Star River. With detailed evaluation, old machines for the packaging and equipment were not for future considerations because they were valued under scrape or in another case, had no value at all. The machines also increased the cost of labor with overworking hours as well as maintenance cost forthe use of machine. Sudden cost hindered the future success of the company.In order to save the cost, new equipment would decrease the labor working hours as well as incur less maintenance cost over the use of 10 years of the machine's life. Thus, there were two options that could be implemented to start the new era, first option is to immediately purchase the machine in order to save the additional cost of 286,878 as compared to the purchase after 3 years, which would increase the cost of machine by 5% as well as increase the maintenance cost by the same level and to adjust the inflation rate of 1.5% over the operational activities. The other important factor to include would be the level of debt required for the new machines to achieve the desired results. So it is concluded that the CEO would implement both the analyses in order to know which case would provide better results along with to save the additional cost associated with the machine and also whether the company would be able to pay a certain amount of debt over the particular period or not. Therefore, for the final results, the company would project its results through analyzing the financial impact of the new machine and generate the desire level of debt for implementing the process.

Financial Analysis

For conducting the desire results, it is determined that various analyses have been taken to calculate the net outcome for identifying the value of the firm with the new machine at maturity, also analyze the cost of a machine under two scenarios.

Therefore, the projection of income statement with and without the new machine is conducted to properly evaluate the results, the same process is implemented in the case of a balance sheet in order to identify the expected debt and equity amount in the predicted years. The cost of capital is also calculated to determine the level of cost contribution by equity and debt over the particular period, also known as the discount rate of the cash flows.

The final process includes the calculated cash flows of both the cases, which shows what would be the price of Star River at the end of maturity, what cash flows would be generated over its useful life and how much the payback would be recovered over the selected period.

Projected Income Statement

From the following analysis, it is identified that if the machine would be purchased today, then the results will reflect a different outcome as compared to the historical one.This is because in addition to the new machine, the sales would increase by 15% according to the estimation of the company's management.

The maintenance would also increase by the same rate. However, the depreciation of the machine would be incurred over the useful life of 10 years under the straight line method. This change in the income statement would increase the annual earnings of the company and attract the investors to retain their investments in order to receive higher dividends in future.   ......................

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