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Stryker Corporation: Capital Budgeting Harvard Case Solution & Analysis
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Missions of CERs and the Capital Budgeting Process
The mission of CERs and capital budgeting is Standardization and formalization of the processes and activities of the capital budgeting. The CERs and capital budgeting process are implemented in order to implement or approve the formal and standard process of requesting capital expenditure and capital budgeting processes.
It is expected that it would support the cash flow targets and will help Stryker to maintain 20% growth forever. Attaining 20% growth in the past was the routine of Stryker and it has become a habit to attain this percentage of growth each year, therefore this slogan to attain 20% growth is not difficult to fulfill.
The Extent of Shape by Elements of Corporate Finance Theory
The CERs and Capital budgeting processes are significantly characterized by the elements of corporate finance theory. All CERs must provide the discounted cash flows and present value of inflows and outflows, payback and discounted payback period and internal rate of return before approval. Therefore calculating NPV, IRR and payback period is necessary before the submission of the CERs.
It is expected that these values will highlight the project’s anticipated and expected outgoing cash flows and earnings. It will also represent the effects of these cash inflows and outflows on the company and will explain the specific risks that could affect the ability of the project or capital expenditure request to deliver economic results.
In addition to this, it is necessary to incorporate or anticipate the financial analyses of “Best Case” and “Worst Case” scenarios for the mergers and acquisitions of CERs which would include income and cash flow figures. This shows the commitment of the Stryker to incorporate the element of the corporate finance theory regarding the approval of requests of capital expenditure.
The Extent they shaped by Stryker’s Particular Industry, History, and Culture
There are different factors, which are playing a major role in the formation of the capital expenditure requests and capital budgeting.First of all, the growth in the industry of medical and increase in the population of the aging baby gives Stryker a natural growth and is expected to attain further growth in future.
However, in order to continue to attain this growth on steady rate or increase in the percentage of rate, they would require designing a method to make the best financial decisions and with the help of these decisions, they would maintaing the company’s growth as they would be growing currently in case of CERs and capital budgeting.
The second factor to influence CERs and capital budgeting is History. Stryker’s business history shows that in the 1970s the newly appointed CEO of Stryker Company named John Brown took charge of the company and set ambitious and high growth targets that were expected to meet the innovative behavior and characteristic of John Brown and were expected to sustain their 20% forever growth’s slogan.
The trend of 20% growth is expected to continue over the following decades. In order to maintain 20% growth in the future, Stryker will need to review its strategies and plans of investment and capital expenditure regularly.
The third factor influencing the capital expenditure request and capital budgeting is culture. Stryker Company is very specific to propose many investment projects and getting them approved. They have been making these processes for decades and it has embedded in the culture of the Stryker to submit about 3000 requests regarding capital expenditure before approval.
By applying more specific and standardized processes, Strykeris able to cut down its number of requests to about 30 per year and expected to analyze each project or request under the same view as each project or request is now submitted under the same requirements.
Primary Strengths and Weaknesses of the Current System
Stryker is currently using such system for the approval of capital expenditure, which takes about 2 weeks for the revision of the activities and processes between the sponsor and responsible division. It is expected that it will take further one week from the individual of committee members for the purpose of revision before submission.
In addition to this, the committee members can demand or request additional information whenever they thought that additional information is also required. There are many advantages and disadvantage of such system. Stryker Corporation Capital Budgeting Case Solution
Advantages of Current System
There are different advantages of this system such asit gives better and efficient control. There is a greater number of management in bureaucratic structure with and strong boundary of each person of management. It is expected that orders, instructions and commands will be very clear and will communicate to all members of the management in an efficient way..................................
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Capital Budgeting Decisions : A Hypothetical Case Study
In today’s fast growing world, companies are faced with tough competitive and its survival depends on its long term planning. A firm is successful only if it invests wisely by taking informed decisions and earn profits. Capital budgeting decision are usually long term decisions, so a firm needs to be much more cautious while taking the final decision whether to go for a project or not. Here, we are going to discuss a case of hypothetical company in which we get to learn different aspects of Capital Budgeting Decisions.
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. Assignment 6.5 Mini-Case Study: Capital Budgeting with Fresnel...
Answer & explanation.
a. Year One Revenue $500,000 Cost of Goods Sold $150,000 Gross Profit $350,000 Design Costs $150,000 Production Costs $150,000 Selling and Adminstrative Expenses $75,000 Operating Income (EBIT) $25,000 Annual Depreciation on Equipment $65,000 Taxable Income $(40,000) Income Tax Expense $10,000 Net Income $(50,000)
Year Two Revenue $650,000 Cost of Goods Sold $195,000 Gross Profit $455,000 Production Costs $195,000 Selling and Adminstrative Expenses $93,000 Operating Income (EBIT) $167,000 Annual Depreciation on Equipment $65,000 Taxable Income $102,000 Income Tax Expense $25,500 Net Income $76,500
Year Three Revenue $850,000 Cost of Goods Sold $255,000 Gross Profit $595,000 Production Costs $255,000 Selling and Adminstrative Expenses $118,500 Operating Income (EBIT) $221,500 Annual Depreciation on Equipment $65,000 Taxable Income $156,500 Income Tax Expense $39,125 Net Income $182,375
Year Four Revenue $800,000 Cost of Goods Sold $240,000 Gross Profit $560,000 Production Costs $240,000 Selling and Adminstrative Expenses $112,000 Operating Income (EBIT) $208,000 Annual Depreciation on Equipment $65,000 Taxable Income $143,000 Income Tax Expense $35,750 Net Income $107,250
Year Five Revenue $250,000 Cost of Goods Sold $75,000 Gross Profit $175,000 Production Costs $75,000 Selling and Adminstrative Expenses $35,000 Operating Income (EBIT) $65,000 Annual Depreciation on Equipment $0 Taxable Income $65,000 Income Tax Expense $16,250 Net Income $48,750
b. Working capital Year One Current Assets $125,000 Current Liabilities $100,000 Working Capital $25,000 Year Two Current Assets $175,000 Current Liabilities $150,000 Working Capital $25,000 Year Three Current Assets $225,000 Current Liabilities $200,000 Working Capital $25,000 Year Four Current Assets $275,000 Current Liabilities $250,000 Working Capital $25,000 Year Five Current Assets $250,000 Current Liabilities $225,000 Working Capital $25,000
c. Free Cash Flow Year One Net Income $(50,000) Annual Depreciation on Equipment $65,000 Working Capital $25,000 Free Cash Flow $40,000
Year Two Net Income $75,000 Annual Depreciation on Equipment $65,000 Working Capital $20,000 Free Cash Flow $80,000
Year Three Net Income $125,000 Annual Depreciation on Equipment $65,000 Working Capital $15,000 Free Cash Flow $145,000
Year Four Net Income $100,000 Annual Depreciation on Equipment $65,000 Working Capital $10,000 Free Cash Flow $125,000
Year Five Net Income $50,000 Annual Depreciation on Equipment $65,000 After-Tax Salvage Value of Equipment Year 5 $95,000 Working Capital $5,000 Free Cash Flow $135,000
d. NPV, BCR and IRR
NPV $195,939.30 BCR 2.19 IRR 14.37%
e. Based on the analysis, this project should be pursued as it has a positive NPV, BCR and IRR. The NPV of $195,939.30 indicates the project will generate a return greater than the required 12% return. The BCR of 2.19 indicates the project will generate a return of $2.19 for every $1.00 invested. The IRR of 14.37% indicates that the project will generate a return greater than the required 12% return.
The project's financial analysis shows that it should be carried out. The project will produce a return bigger than the necessary 12%, according to the NPV, BCR, and IRR. The project will create a return larger than the needed 12%, as evidenced by the NPV of $195,939.30. In other words, if the proposal is approved, the business will make back more money than it first invested. According to the BCR of 2.19, the project will return $2.19 for every dollar invested. This indicates that there will be a profitable return on the project's investment. The project will produce a return more than the necessary 12%, as evidenced by the IRR of 14.37%. This indicates that the initiative will produce a greater return than what is necessary.
All of these signs suggest that the project should be continued. It will deliver a larger return than the required rate of return and produce a positive return on investment. This indicates that Fresnel Enterprises made a wise investment on the project. REFERENCES.
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice (16th ed.). Cengage Learning.
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