Stryker Case
Shweta Singh
Corporate Finance
Case 2 Stryker Corporation: In-sourcing PCBs
1. State the Business Case for #3
Option# 3 has several benefits that make it the most viable option of all. Here are the following benefits: * This option promises a higher degree of control over quality and delivery. These developments will help reduce the logistic losses. * The initial expenditure (manufacturing costs) will be tax deductible, enabling Stryker to lower its tax obligation in the initial years of in-house manufacturing. * The depreciation factor of initial investment will also be tax deductible. * Accounts payable span has increased from being 30 to 120 days due to new negotiations with suppliers. This means that Stryker will mostly make money of the customer before it has to pay back to its suppliers. * Having an in-house manufacturing unit will enable Stryker Corporation to change the amount of production quickly, efficiently and according to the changing demand to maximize the profitability. * A vertical integration of the company will lead to price reduction and attentive customer service. * With the insourcing unit put in place, Stryker will be fully equipped to meet its future growth needs. * The current PCBs suppliers are often not reliable as they operate on very scant profit margin and have chances of running into bankruptcy.
2. Compute Capital Budgeting Decision Criteria. Discuss what they mean
NPV: Cost of the current sourcing method has a NPV of $-32.67M over a period of 6 years(2004-2009). Cost of the In-house manufacturing method has a NPV of $-31.8M over a period of 6 years (2004-2009). This means taking this project has a positive NPV of $870,000. According to this analysis, manufacturing in-house will work out to be cheaper.
IRR: 37.9%, having such a high IRR signifies that there is good error margin in the cost of capital. In simple words, even if the cost
Corporate Finance
Case 2 Stryker Corporation: In-sourcing PCBs
1. State the Business Case for #3
Option# 3 has several benefits that make it the most viable option of all. Here are the following benefits: * This option promises a higher degree of control over quality and delivery. These developments will help reduce the logistic losses. * The initial expenditure (manufacturing costs) will be tax deductible, enabling Stryker to lower its tax obligation in the initial years of in-house manufacturing. * The depreciation factor of initial investment will also be tax deductible. * Accounts payable span has increased from being 30 to 120 days due to new negotiations with suppliers. This means that Stryker will mostly make money of the customer before it has to pay back to its suppliers. * Having an in-house manufacturing unit will enable Stryker Corporation to change the amount of production quickly, efficiently and according to the changing demand to maximize the profitability. * A vertical integration of the company will lead to price reduction and attentive customer service. * With the insourcing unit put in place, Stryker will be fully equipped to meet its future growth needs. * The current PCBs suppliers are often not reliable as they operate on very scant profit margin and have chances of running into bankruptcy.
2. Compute Capital Budgeting Decision Criteria. Discuss what they mean
NPV: Cost of the current sourcing method has a NPV of $-32.67M over a period of 6 years(2004-2009). Cost of the In-house manufacturing method has a NPV of $-31.8M over a period of 6 years (2004-2009). This means taking this project has a positive NPV of $870,000. According to this analysis, manufacturing in-house will work out to be cheaper.
IRR: 37.9%, having such a high IRR signifies that there is good error margin in the cost of capital. In simple words, even if the cost