Stryker PCB

In-sourcing Analysis
Angela Marie K 225246
Sharwin Navaratnam 234514
Devi Tri K 228744
Rafidha Amira M 225008
Option #3 Calculation
 Option #3
• Manufacture own PCB by building new
plant/facility
• Require large capital
• Start-up expenses are listed on next slide
• If go on with this project, transition from outsource
to insource will take place (buy + produce in-
house), and completely finish by end of 2005
• Offer better A/P payment terms (120 days instead
of 30 days)
 INITIAL OUTLAY
• Site prep. & construction 3,030,000
• Furnishing & non-manuf. equip 126,000
• Comm & IT infrastructure 210,000
• Equipment 2,643,258

6,009,258

We exclude Architecture & Engineering because at the

footnote it is categorized as expense
 2003 2004 2005 2006 2007 2008 2009

Archi & eng

exp 278,000
PCB
transition
10,237,918 3,799,665
purchases

Manuf. cost
1,712,087 7,847,541 9,553,863 10,498,507 11,706,178 13,650,762

Depreciation
50,500 590,608 590,608 590,608 478,608 478,608 478,608

Total
expenses 328,500 12,540,613 12,237,814 10,144,471 10,977,115 12,184,786 14,129,370

Tax (36%) 118,260 4,514,620 4,405,613 3,652,009 3,951,761 4,386,523 5,086,573

After Tax
(36%) 210,240 8,025,993 7,832,201 6,492,462 7,025,354 7,798,263 9,042,797

Depreciation
(add back) 50,500 590,608 590,608 590,608 478,608 478,608 478,608

Change in A.
Payable - - 9,952 281,952 232,137 204,827 345,475

CASH FLOW (159,740) (7,435,384) (7,231,641) (5,619,901) (6,314,608) (7,114,828) (8,218,714)

 CF for NPV Calculation
• NPV = (IO) + CF
2003 2004 2005 2006 2007 2008 2009

(IO) CF CF CF CF CF CF
+any SV
CF
(159,740) (7,435,384) (7,231,641) (5,619,901) (6,314,608) (7,114,828) (8,218,714)

(6,009,258) 835,292

(7,383,421)
(6,168,998)
CF without the project
 2003 2004 2005 2006 2007 2008 2009

PCB purchase
10,237,918 10,237,918 11,773,605 14,363,798 16,518,368 20,152,409

Tax (36%)
3,685,650 3,685,650 4,238,498 5,170,967 5,946,612 7,254,867

After tax PCB

purchase 6,552,268 6,552,268 7,535,107 9,192,831 10,571,756 12,897,542

A. Payable -
Change - 126,221 212,892 177,088 298,688
Less:
Salvage
         
value A. 1,656,362
Payable

Cash flows (6,552,268) (6,552,268) (7,408,886) (8,979,939) (10,394,668) (14,255,216)

 Incremental CF
• Incremental CF = CF with project – CF without project
• So, subtract each year’s CF
• Excl. sunk cost; incl. opportunity cost (value of land, but not
mentioned)

• 2003 : (6,168,998)
• 2004 : (883,117)
• 2005: (679,373)
• 2006: 1,788,985
• 2007: 2,665,330
• 2008: 3,279,840
• 2009: 6,871,794
 NPV
• Using 15% discount rate
• (6,168,998)+ 883,117
1.15 + + +…
• NPV = $148,905
 IRR
• Is interest rate that makes NPV equal to
zero.
Rate NPV
14 % 480,127
IRR 0
16 % (113,813)

IRR = 14% +

IRR = 15.627%
 Payback period
Year Cash inflow Cummulative cash
in.
0 (2003) (6,168,998)
1 (510,567) (6,679,565)
2 (679,373) (7,358,938)
3 1,788,985 (5,569,953)
4 2,665,330 (2,904,623)
5 3,279,840 375,216
6 6,871,794 7,247,011

We can payback at year 6, so we stop at year 5

= 6 + 0.843 = 6.843 years

 Which option is best?
• Option #3
• Even though start-up costs are high, it
guarantees control of quality and delivery
consistency
• Not threatened by weak financial of current
suppliers (as in Option #1)
• Not threatened by bargaining power of supplier
(as in Option #2)
• Can utilize just-in-time supply method
• Better credit terms