1. What is Star Rivers weighted-average cost of capital (WACC)? What methods did you use to estimate WACC? What are the key assumptions that especially influence WACC? Please provide detailed the calculation for WACC.

2. Estimate the free cash flow for the two alternatives, "invest now" and "wait". Provide the detailed estimation.

Hint: The investment cycle of the invest now alternative is 10 years, while the investment cycle of the wait alternative is 13 years. But, in reality, the two alternatives have equal livesinfinity. The memorandum in case Exhibit 4 states that with proper maintenance the machinery will operate indefinitely, and that this is the last packaging equipment we will ever have to purchase. After year 13, the cash flows of the two alternatives are identical. On the principle of focusing on just the incremental cash flows, it makes sense to cut the forecast at the end of year 13 and compare the discounted cash flows of the two alternatives over that period.

3. Calculate the NPV for both alternatives, which alternatively is beneficial to the company?

tar River Electronics Ltd On July 5, 2001, her first day as CEO of Star River Electronics Ltd., Adeline Koh con fronted a host of management problems. One week earlier, Star River's president and had suddenly resigned to accept a CEO position with another firm. Koh had been appointed to fill the position starting immediately. Several items in her in-box that first day were financial in nature, either requiring a financial decision or with outcomes that would have major financial implications for the firm. That evening, Koh asked to meet with her assistant, Andy Chin, to begin addressing the most prominent issues Star River Electronics and the Optical-Disc- Manufacturing Industry Star River Electronics had been founded as a joint venture between Starlight Elec tronics Ltd., United Kingdom, and an Asian venture-capital firm, New Era Partne Based in Singapore, Star River had a single business mission: to manufacture CD ROMs as a supplier to major software companies. In no time, Star River gained fame in the industry for producing high-quality discs The popularity of optical and multimedia products created rapid growth for CD ROM manufacturers in the mid-1990s. Accordingly, small manufacturers proliferated, creating an oversupply that pushed prices down by as much as 40%. Consolidation followed as less efficient producers began to feel the pinch Star River Electronics survived the shakeout, thanks to its sterling reputation. While other CD-ROM manufacturers floundered, volume sales at the company had grown at a robust rate in the past two years. Unit prices, however, had declined because of price competition and the growing popularity of substitute storage devices, particu- larly digital video discs (DVDs). The latter had l4 times more storage capacity and threatened to displace CD-ROMs. Although CD-ROM disc drives composed 93% of This case is derived from materials originally prepared by Robert F. Bruner, Dean and Charles C. Abbott Professor of Business Administration, Robert Conroy, Paul M. HammakerResearch Professor of Busi Administration, and Kenneth Eades, Professor of Business Administration. The firms and individuals in the case are fictitious. The financial support of the Batten Institute is gratefully acknowledged. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2001 by the University of Virginia Darden School Foundation, Charlottesville, VA All rights reserved. To order copies, send an e-mail to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet or transmitted in any form or by any means electronic, mechanical, photocopying, re without the ission of the Darden School Foundation. Rev. 12/05 365