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 and IT infrastructure, and $2,643,258 for equipment. Once this facility was up and running, Stryker would transition out of buying from suppliers into complete in house production. There will be savings from not having to pay suppliers, and an increase in manufacturing cost. In the long run, the savings will be greater than the increase in manufacturing costs. In order to figure out if this proposal makes financial sense, I calculated the Net Present Value, Internal Rate of Return, and the Payback Period for the years 2003 through 2009.
From a business point of view, I think the proposal makes sense, and is a logical solution to their problem. If their suppliers are giving them a lower quality product, that would most likely hurt their profits in the end. Having complete control over the production of the PCBs would eliminate this problem. The money Stryker would save from not having to pay suppliers for the PCBs might also allow them to price their instruments lower than competitors, giving them a competitive advantage in the market. In today's highly competitive markets, any advantage you can obtain over the competition should be exploited. Before looking over the calculations of NPV, IRR, and Payback...