State the business case for option #3, the PCB In-sourcing proposal. What is the benefit? What is the risk? How do you compare this proposal to option #1 and #2? (2 points) Option #3 is the project for Stryker to manufacture its own PCBs in its own facility. Benefits:
This option allows Stryker to control over the products’ quality and delivery in highest degree. The company can supervise every process of the production line to get every product qualified. Due to the reason that PCBs is a useful electronic component for many divisions under Stryker, the in-sourcing of this component can expand the supplying for other Stryker business. Building its own facility to produce PCBs means that Stryker has no dependence on other manufacturers any more, in this way the transaction costs can be deducted and the outflow from Stryker will be decreased as well. Risks:
This proposal may generate a large quantity of cost, which includes the construction fee, equipment outlay and increasing employee wages. There is a risk that the sales may not cover the costs. Since Stryker will have a large input into the project, it will lead to a high exit barrier if facing an excessive market competition. The option might generate imbalance between supply and demand that can only be undertaken by the company itself. When manufacturing PCBs in its own facility, it might face a problem that adequate components cannot be produced on time. If this situation happens, Stryker has to find other manufacturers again, which will increase unexpected cost and will result in the risk that the instruments may not be made without delay. On the other hand, if the sales of instruments goes wrong, PCBs will be overproduced. Stryker has to find new buyers for it, otherwise it will lead to overstock. Option 1 is still the basic sourcing policy added by safe stock and dual sourcing.
Option 2 is to build partnership with a single supplier. Option 3 is an independent project that differs from option 1 and 2. It no longer use out sourcing strategies to rely on other manufacturers. When we compare Option 3 with Option 1 and Option 2, Option 3 provides the guarantee of quality and delivery of PCBs, manufactures PCBs for other Stryker’s business, and reduces the transaction cost. However, Option 3 has some risks comparing with Option 1 and 2. Option 3 might generate high capital outlay, exit barrier, imbalance of supply and demand. Use the projections provided in the case to compute the incremental cash flows for the PCB project. Provide a reasonable estimate for cash flows after 2009 as well. (3 points) Assumptions for question2-5:
Expenses including Architectural and Engineering Fees, Furnishing and non-manufacturing equipment, communication equipment and IT infrastructure are paid at the end of the year. Consider Decrease in purchases from contract manufacturers as revenue. Consider PCB Purchases assuming transition to in-sourcing and Materials together as COGS. Consider Variable costs, Fixed costs and Opportunity Costs together as SG&A. All capital expenditures are depreciated use straight-line method. Since the construction of the new building used 30000 square feet of space, which can also be used as a parking lot, the Opportunity Cost of the construction is $32400 a year. Each parking lot covers an area of 377-538 square feet. For a 30000 square feet space, at least 30000/377=79.58 cars could park here. If 60 cars park here every day, assuming that parking one day is for $15, the revenue for each year will be 60*15*360=32400. And this value increased by inflation rate. No inventory left in the end of year. As a result, the change of A/P new vs. old is considered to be the incremental NWC. Since the manufacturing volumes in 2009 represented 100%, the manufacture volumes remain the same after 2009. Assume the inflation rate is 3%；assume that after 2009 every account increases at a rate of 3% excluding the depreciation account. Assume Discount rate as 15% to calculate NPV
Incremental cash flows for PCBs project
Year 2003 2004 2005 2006 2007 2008 2009
FCF -3,644,000 -7,683,899 -3,284,645 1,282,980 2,684,841 3,311,797 4,096,835 Estimate for cash flow after 2009
Estimated year 2010 2011 2012 2013 2014 2015
FCF 4,280,239 4,687,404 4,484,445 4,957,477 5,098,620 4,907,997 What is the NPV of the PCB In-sourcing project? (2 points)
What is the IRR of the PCB In-sourcing project? (2 points)
Based on your analysis, would you recommend that Stryker Instruments to fund this project? (1 point) Because NPV(2003-2015)= 558,176>0, IRR(2003-2015)= 15.89%>15%, we recommend that Stryker Instruments should fund this project.