Stryker Corporation Case Study Essay

678 Words Oct 11th, 2012 3 Pages
Stryker Corporation Case Study
Justin Noakes

Executive Summary

In 2003, the Stryker Corporation is contemplating a change in their sourcing strategy for printed circuit boards (PCBs), which are used in many of their instruments. Recently, Stryker's suppliers of PCBs have become less reliable. They want to eliminate this problem by building a PCB production facility and produce the boards in house. In other words, they want to in-source the production of PCBs. This would give the company a great control over the quality of their boards. This proposal will require a total capital outlay of $6,287,258. This includes $3,030,000 for building construction, $278,000 for architectural and engineering fees, $336,000 for furnishings
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In order to calculate this project's NPV, I had to first calculate the cash flows resulting from this investment from the years 2003 until 2009. The total capital outlay of $6,287,258 would occur in 2003, and first PCB production would begin in Q3 2004. This means that depreciation calculations would not begin until Q3 2004. Since there are no revenues resulting from this investment, the increase in cash flow is a result of the decrease in purchases from suppliers less the increase in manufacturing costs. When looking at the data provided in Exhibit 2, it isn't until 2006 that this investment provides a positive change in cash flow from operations. Before this point, the increase in manufacturing costs outweighs the reduction in supplier costs. After finding the cash that was freed up in years 2004 to 2009, I applied the 36% tax rate, then added back in depreciation and the change in accounts payable for each year. This gave me the change in cash flow from operations resulting from the investment. After finding each year's change in cash flow, I discounted them back to 2003 at a rate of 15%. This gave me a NPV of -$880,727.81. I also calculated an IRR of 12.01%, and a Payback Period of 4.24 years. From these calculations, this investment is not a good financial move for the company. Even though it seems like the best choice given their circumstances with suppliers, they would be better off financially to continue to buy their PCBs from suppliers. I feel

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