Stryke Pcb
2. Analysis of NPV, IRR, and Payback Period
To calculate this project’s NPV we had to find the respective cash flows in each year from the initial investment to the end of the five year forecast provided in Exhibit 2 at the end of the case. The initial investment for the building and all the equipment would take place in 2003 and production would begin in 2004. Therefore, our “Year 0” was 2003 and we calculated cash flows from operations from 2004 to 2009.
To begin analyzing the case we started with cash outflows from investment. The text stated that there would be a $3,030,000 building, architectural and engineering fees of $278,000, furnishings of $126,000 and IT infrastructure of $210,000. There would also be manufacturing equipment that would cost $2,643,258. The total proposed investment was $6,287,258 after purchasing equipment and getting the building ready.
There weren’t any revenue figures provided, just cost savings by way of decreasing purchases from suppliers. Therefore, using the “Annual Data” table at the bottom of Exhibit 2, we took those cost savings from decrease purchases and subtracted out the manufacturing costs that Stryker would have due to producing the PCBs in-house. The difference between the decreased purchases and the costs incurred from manufacturing represented excess cash flow freed up from insourcing the product.
The difference between decreased purchases and manufacturing costs were actually negative in 2004 and 2005 and were not recognized as positive cash flows until 2006 when decrease in purchased from suppliers exceeded Stryker’s manufacturing costs for the PCBs. Those costs savings would ultimately increase net income and would increase the tax liability for Stryker Corporation. Therefore, we taxed those positive cash flows at the tax rate of 36%. Depreciation expense and the positive change in Accounts Payable were added back to each respective year to give us our final cash flows from operations for years 2004 through 2009.
To calculate this project’s NPV we had to find the respective cash flows in each year from the initial investment to the end of the five year forecast provided in Exhibit 2 at the end of the case. The initial investment for the building and all the equipment would take place in 2003 and production would begin in 2004. Therefore, our “Year 0” was 2003 and we calculated cash flows from operations from 2004 to 2009.
To begin analyzing the case we started with cash outflows from investment. The text stated that there would be a $3,030,000 building, architectural and engineering fees of $278,000, furnishings of $126,000 and IT infrastructure of $210,000. There would also be manufacturing equipment that would cost $2,643,258. The total proposed investment was $6,287,258 after purchasing equipment and getting the building ready.
There weren’t any revenue figures provided, just cost savings by way of decreasing purchases from suppliers. Therefore, using the “Annual Data” table at the bottom of Exhibit 2, we took those cost savings from decrease purchases and subtracted out the manufacturing costs that Stryker would have due to producing the PCBs in-house. The difference between the decreased purchases and the costs incurred from manufacturing represented excess cash flow freed up from insourcing the product.
The difference between decreased purchases and manufacturing costs were actually negative in 2004 and 2005 and were not recognized as positive cash flows until 2006 when decrease in purchased from suppliers exceeded Stryker’s manufacturing costs for the PCBs. Those costs savings would ultimately increase net income and would increase the tax liability for Stryker Corporation. Therefore, we taxed those positive cash flows at the tax rate of 36%. Depreciation expense and the positive change in Accounts Payable were added back to each respective year to give us our final cash flows from operations for years 2004 through 2009.