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1. (1) Option #3 was for Stryker Instruments to manufacture its own PCBs in its own facility near
company headquarters. (2)Benefits for option 3: Better control the quality, delivery and cost;
Maintain the business stability; Supply PCBs to other Stryker businesses; Be able to implement
cost shift and avoid tax; (3) Risks for option 3: Carry the inventory; Incur large capital outlay and
sunk cost; Increase headcount, payroll and other expenditures (materials, infrastructure, R&D,
maintenance, PP&E and depreciation) of Stryker; Bear the risk that the equipment may be outdated;
(4) Compared with option #1: Benefit: no capital outlay; to some extent can protect future against
disruptions with lower cost; flexibility; Risk: instability in quality, cost, delivery and responsiveness;
Compared with option #2: Benefit: can improve quality of the supplies by increasing business with
the supplier; Risk: the possibility of bankruptcy and weak financial performance of supplier; the sole
equipment, communication equipment and IT infrastructure and capital equipment) in year 2003,
before the implementation of the project. Revenue: We use the projected PCBs purchases as the
revenue, because we can cut the amount of purchases by implementing insourcing production.
COGS: before year 2006, COGS contains the purchases of PCBs and raw materials. After that
COGS solely consist of the cost of raw materials. SGA: SGA of each year consists of variable costs
and fixed costs with one exception. In 2004, Stryker expensed architecture and engineering fee in
addition to variable and fixed costs. Tax: tax rate is 36% Depreciation: All the capital expenditures
mentioned above will be depreciated over their respective lifetime. Capital expenditures: Whenever
the capital expenditures wear out, there will be a new purchase (year 2006, 2009 and 2012 for IT
equipment and other furnishings, year 2010 for capital equipment). We consider the Change in A/P,
new vs. old as our incremental NWC. Thus the change of incremental NWC should be calculated
using the numbers from Change in A/P, new vs. old. Based on the above discussion, we arrive at the
following conclusions of FCF. Chart 1 Year 2003 2004 2005 2006 2007 2008 2009
Free Cash Flow -6,009,258 -683,048 -301,383 1,830,909 3,083,640 3,698,149 4,462,449 (2)
We notice that manufacture volumes contemplated for 2009 represented 100% of the facilitys rated
capacity, so we assume the real revenue and COGS after 2009 will remain at the same level. Based
on the historical data of the U.S inflation rate before 2003, we assume expected inflation rate after
2003 remains at 2%. For every account except for Less Depreciation in Incremental FCF
Forecast, it will grow at 2% annually. In year 2012, there will be an expected purchase for IT
equipment and other furnishings. In year 2010, Stryker will expect an expense on capital equipment.
Based on the above discussion, we have the following results: Chart 2 Year 2010 2011 2012 Free
Cash Flow 2,239,348 4,968,446 4,720,003 3. Using the FCF calculated in question 2, we come to the
NPV of the project till 2009 with Excel function. The company generally used the hurdle rate of 15%
for net present value calculations. Chart 3 Year 2003 2004 2005 2006 2007 2008 2009 FCF
-6,009,258 -683,048 -301,383 1,830,909 3,083,640 3,698,149 4,462,449 Discount Rate 15%
NPV(2003-2009) -96,294 4. Using the FCF calculated in question 2, we come to the IRR of the
1,830,909 3,083,640 3,698,149 4,462,449 IRR (2003-2009) 14.64% 5. Yes, we recommend Stryker to
implement this project for the following reasons. According to Chart 3 and Chart 4, the NPV till
2009 is slightly negative compared to scale of the project and IRR is a little smaller than the hurdle-
rate. However, the FCF through 2003 to 2009 is increasing and the projected FCFs through 2010 to
2012 are a steady stream of positive value, as shown in the following chart. (We assume that Stryker
will have a stable performance beyond year 2009). Chart 5 Year 2003 2004 2005 2006 2007 2008
2009 2010 2011 2012 FCF -6,009,258 -683,048 -301,383 1,830,909 3,083,640 3,698,149 4,462,449
2,239,348 4,968,446 4,720,003 Discount Rate 15% NPV(2003-2012) 3,711,473 IRR (2003-2012)
24.21% Using the data from Chart 5, we derived an apparently positive NPV of the project (2003-
2012) and a much bigger IRR compared with hurdle rate, which means the project is profitable. In