1. (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●Bear the risk that the equipment may be outdated;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 ...view middle of the document...
In 2004, Stryker expensed architecture and engineering fee in addition to variable and fixed costs.
●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 2,239,348 4,968,446 4,720,003