Stryker Pcb

1. Stating the PCB In-Sourcing Proposal:

• A building in Michigan will need to be constructed to help the company start the in-sourcing process of PCBs.

• This option promises the highest degree of control over quality and delivery, but whether this option is practically worth investing should base n the evaluations of capital budgeting.

• It would be necessary to estimate the net present value (NPV), internal rate of return (IRR), and payback period of the cash flow (outflow) associated with this option. If NPV is a positive number it means the option is potentially of profit. For IRR, the higher the number is the better; however, it has to at least equal the hurdle rate of 15% to be considered as investment worthy.

• Some initial investment costs that I suppose to have happened at the end of 2003 are:

o Building’s site preparation, construction and improvements cost $3,030,000

o Architecture and engineering fees of $278,000

o Furnishings and non-manufacturing equipment cost $126,000

o Communication equipment and IT infrastructure cost $210,000

o Total budget for 70 separate categories of equipment: $2,643,258

• The building will be ready for manufacturing equipment by April 1st, 2004.

• Q3 of 2004 is when production can begin.

• The tax rate is at 36% and the hurdle rate is at 15% for NPVs.

2. Calculating incremental cash flow (outflow), NPV, IRR, and payback period for option #3 based on the given projections in Exhibit 2:

• To get the incremental cash flow I looked at the difference between using the original out-sourcing method and transitioning to the in-sourcing and eventually using entirely in-sourcing.

• I assumed that the operational revenues are staying the same for any of the proposed option, therefore, the numbers that need to be considered in the cash flow calculation will fall on the expense difference between option 1 (original way) and option 3 (the PCB project). I also took into account the total manufacturing expenses.

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