THE SOLUTION:For this case study of Stryker Corporation, it can be seen that option three (to manufacture itsown PCs in its own facility near company headquarters) can be consider as the best alternative toadopt because of several reasons. At first, if the company adopting in-sourcing option, it able toexercise full control in their supply chain where it can help to increase the degree of quality alongwith the delivery of products in turn. Another reason is related to the transportation and able to reducethe cost of logistic as the facility will be located near to the company’s headquarter. Plus, themanufacturing cost along with in-housing manufacturing of PCBs will be tax deductible where enablethe company to make its tax obligation lower during the early years of manufacturing. Moreover, thedepreciation applied on capital and IT equipment with respect to the initial investment will also be taxdeductible. Besides that, if the company goes for option number three, then it will be able to achieveefficiency in terms of production that will increase the profitability of Stryker Corporation in turn.In short, the benefits that the company will get from this option is better control in quality,delivery and cost. In addition, it will help to maintain the business stability, supply PCBs to otherStryker business and able to implement cost shift and avoid tax. Instead of that, there is a few riskswhen the company implements the option three where need to carry the inventory, incur a largecapital outlay and sunk cost. Plus, the company has to increase the headcount, payroll and other
Show More1. (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infrastructure, R&D, maintenance, PP&E and depreciation) of Stryker; ●Bear the risk that the equipment may be outdated; (4) Compared with option #1: ●Benefit: no capital outlay; to…show more content…
●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.
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 facility’s 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:
Year 2010 2011 2012
Free Cash Flow