Use the CapExp spreadsheet to input formulas to compute the annual free cash flows so that you can find the NPVs using a 10.1% WACC. Compare the NPV's by finding the difference in NPV values to determine which is the better deal for the company.

Exhibit TN2 Analysis of the Packaging Machine Investment 2017 2018 2019 2020 2021 2022 2023 2024 2025 2020 2025 2 3 4 5 6 7 8 10 11 12 13 2015 2016 Inflation Rate = 1.50% Years from Now 0 1 Iftar River Waite Three years to Purchase the Machine Maintenance Labor Overtime Depreciation Total Cort Tx@345 After-tax Cost - Depreciation - Cap. Expenditure Annual Free Casa Flow NPV@WACC = Iftar River Purchases the New Machine Now Maiat Labor Depreciation Total Cort Txx @ 245 After-tax Cost - Depresiztion - Cap. Expend Tax Shield on Writeoff of Old Annual Free Cash Flow NPV@ WACC = Advantage of Waiting NPV (Wait) - NPV (Now) = This talle tells you to Buy Now or to wait to make the Packaging Frucase. Tetepret your decision in a memo to Adelise Kols cops Esmoad Lim... You are Andy Chin 0 0 0 0 0 0 0 0 0 0 0 0 FCF (Wit) - FCF Now NPV Gain from Waiting MEMORANDUM TO: Adeline Koh, President and CEO, Star River Electronics FROM: Esmond Lim, Plant Manager DATE: June 30, 2015 SUBJECT: New Packaging Equipment Although our packaging equipment is adequate at current production levels, it is terribly inefficient. The new machinery on the market can give us significant labor savings as well as increased flexibility with respect to the type of packaging used. I recommend that we go with the new technology. Should we decide to do so, the new machine can be acquired immediately. The considerations relevant to the decision are included in this memo. Our current packaging equipment was purchased five years ago as used equipment in a liquidation sale of a small company. Although the equipment was inexpensive, it is slow, requires constant monitoring, and is frequently shut down for repairs. Since the packaging equipment is significantly slower than our production equipment, we rou- tinely have to use overtime labor to allow packaging to catch up with production. When the packager is down for repairs, the problem is exacerbated and we may spend several two-shift days catching up with production. I cannot say that we have missed any deadlines because of packaging problems, but it is a constant concern around here and things would run a lot smoother with more reliable equipment. In fiscal 2016, we will pay about SGD15,470 per year for maintenance costs. The operator is paid SGD63,700 per year for his regular time, but he has been averaging SGD81,900 per year because of the overtime he has been working. The equipment is on the tax and reporting books at SGD218,400 and will be fully deprecated in three years (we are currently using the straight-line depreciation method for both tax and reporting purposes and will continue to do so). Because of changes in pack- aging technology, the equipment has no market value other than its worth as scrap metal. But its scrap value is about equal to the cost of having it removed. In short, we believe the equipment has no salvage value at all. The new packager offers many advantages over the current equipment. It is faster, more reliable, more flexible with respect to the types of packaging it can perform, and will provide enough capacity to cover all our packaging needs in the foreseeable future. With suitable maintenance, we believe the packager will operate indefinitely. Thus, for the purposes of our analysis, we can assume that this will be the last packaging equipment we will ever have to purchase. Because of the anticipated growth at Star River, the current equipment will not be able to handle our packaging needs by the end of fiscal 2018. Thus, if we do not buy new packaging equipment by this year's end, we will have to buy it after three years anyway. Since the speed, capacity, and reliability of the new equipment will eliminate the need for overtime labor, we feel strongly that we should buy now rather than wait another three years. The new equipment is priced at SGD1.82 million, which we would depreciate over 10 years at SGD182,000 per year. It comes with a lifetime factory maintenance contract that covers all routine maintenance and repairs at a price of SGD3,640 for the initial year. The contract stipulates that the price after the first year will be increased by the same percentage as the price increase of the new equipment. Thus if the manufacturer continues to increase the price of new packaging equipment at 5% per annum as it has in the past, the maintenance costs of the new equipment will rise by 5% also. We believe that this sort of regular maintenance should insure that the new equipment will keep operating in the foreseeable future without the need for a major overhaul. Star River's labor and maintenance costs will continue to rise due to inflation at approximately 1.5% per year over the long term. Because the manufacturer of the packaging equipment has been increasing its prices at about 5% per year, we can expect to save SGD286,878 in the purchase price by buying now rather than waiting three years. The marginal tax rate for this investment would be 24.5%. Exhibit TN2 Analysis of the Packaging Machine Investment 2017 2018 2019 2020 2021 2022 2023 2024 2025 2020 2025 2 3 4 5 6 7 8 10 11 12 13 2015 2016 Inflation Rate = 1.50% Years from Now 0 1 Iftar River Waite Three years to Purchase the Machine Maintenance Labor Overtime Depreciation Total Cort Tx@345 After-tax Cost - Depreciation - Cap. Expenditure Annual Free Casa Flow NPV@WACC = Iftar River Purchases the New Machine Now Maiat Labor Depreciation Total Cort Txx @ 245 After-tax Cost - Depresiztion - Cap. Expend Tax Shield on Writeoff of Old Annual Free Cash Flow NPV@ WACC = Advantage of Waiting NPV (Wait) - NPV (Now) = This talle tells you to Buy Now or to wait to make the Packaging Frucase. Tetepret your decision in a memo to Adelise Kols cops Esmoad Lim... You are Andy Chin 0 0 0 0 0 0 0 0 0 0 0 0 FCF (Wit) - FCF Now NPV Gain from Waiting MEMORANDUM TO: Adeline Koh, President and CEO, Star River Electronics FROM: Esmond Lim, Plant Manager DATE: June 30, 2015 SUBJECT: New Packaging Equipment Although our packaging equipment is adequate at current production levels, it is terribly inefficient. The new machinery on the market can give us significant labor savings as well as increased flexibility with respect to the type of packaging used. I recommend that we go with the new technology. Should we decide to do so, the new machine can be acquired immediately. The considerations relevant to the decision are included in this memo. Our current packaging equipment was purchased five years ago as used equipment in a liquidation sale of a small company. Although the equipment was inexpensive, it is slow, requires constant monitoring, and is frequently shut down for repairs. Since the packaging equipment is significantly slower than our production equipment, we rou- tinely have to use overtime labor to allow packaging to catch up with production. When the packager is down for repairs, the problem is exacerbated and we may spend several two-shift days catching up with production. I cannot say that we have missed any deadlines because of packaging problems, but it is a constant concern around here and things would run a lot smoother with more reliable equipment. In fiscal 2016, we will pay about SGD15,470 per year for maintenance costs. The operator is paid SGD63,700 per year for his regular time, but he has been averaging SGD81,900 per year because of the overtime he has been working. The equipment is on the tax and reporting books at SGD218,400 and will be fully deprecated in three years (we are currently using the straight-line depreciation method for both tax and reporting purposes and will continue to do so). Because of changes in pack- aging technology, the equipment has no market value other than its worth as scrap metal. But its scrap value is about equal to the cost of having it removed. In short, we believe the equipment has no salvage value at all. The new packager offers many advantages over the current equipment. It is faster, more reliable, more flexible with respect to the types of packaging it can perform, and will provide enough capacity to cover all our packaging needs in the foreseeable future. With suitable maintenance, we believe the packager will operate indefinitely. Thus, for the purposes of our analysis, we can assume that this will be the last packaging equipment we will ever have to purchase. Because of the anticipated growth at Star River, the current equipment will not be able to handle our packaging needs by the end of fiscal 2018. Thus, if we do not buy new packaging equipment by this year's end, we will have to buy it after three years anyway. Since the speed, capacity, and reliability of the new equipment will eliminate the need for overtime labor, we feel strongly that we should buy now rather than wait another three years. The new equipment is priced at SGD1.82 million, which we would depreciate over 10 years at SGD182,000 per year. It comes with a lifetime factory maintenance contract that covers all routine maintenance and repairs at a price of SGD3,640 for the initial year. The contract stipulates that the price after the first year will be increased by the same percentage as the price increase of the new equipment. Thus if the manufacturer continues to increase the price of new packaging equipment at 5% per annum as it has in the past, the maintenance costs of the new equipment will rise by 5% also. We believe that this sort of regular maintenance should insure that the new equipment will keep operating in the foreseeable future without the need for a major overhaul. Star River's labor and maintenance costs will continue to rise due to inflation at approximately 1.5% per year over the long term. Because the manufacturer of the packaging equipment has been increasing its prices at about 5% per year, we can expect to save SGD286,878 in the purchase price by buying now rather than waiting three years. The marginal tax rate for this investment would be 24.5%