Assume that you are finance director at Straightline Medical. Straightline’s director of operations is considering purchasing a Fanuq Robodrill and robotic operator for integration into our assembly lines. This will be used in medical machining, which is CNC machining related to surgical implants, orthotic devices and medical instruments, which we manufacture. Because these new medical devices are developed quickly and refined through many iterations, efficient small-batch machining is almost exclusively outsourced, currently. The director of operations believes that the incorporation of this technology ‘in-house’ will make Straightline substantially more competitive, by reducing production costs – raising the profit margin on our devices. Nevertheless, as finance director, you are aware that the market for both debt and equity instruments may not be favorable if the firm should need substantial external financing, as it seeks to acquire the drill and robotic operator. With this in mind, you intend to analyze features of debt and equity instruments as these will impact the firm’s financing decision as the firm moves forward with adoption of this costly technology, and present your evaluation of financial risks to a group of directors including the firm’s director of operations. You plan to outline the consequences that technology acquisition could have, in the event that inflation drives interest rates up over the period in which the firm will be obtaining needed financing, and in the event that revenues fluctuate or fall below expectations. While you understand that the project will not be considered unless it yields positive net present value to the firm, you are concerned about meeting repayment obligations, and you are concerned that the cost of financing may exceed original estimates. Given that the degree of external financing needed is substantial, you feel that management should be aware of these possibilities. Assume that you are addressing a group of directors including the firm’s director of operations. Speaking as the finance director of Straightline Medical, plan to evaluate alternative methods of financing, including debt and equity instruments, on the purchase of a Robodrill in conjunction with a Robotic operator for expansion of production of components of the rotary drives within a variety of our medical devices and machines. Also, plan to provide a recommendation for the best financial tool to facilitate adoption of this technology: A. While minimizing the impact of this major technology acquisition financing decisions on other areas of operations, through the diversion of existing resources, and considering variability in revenues. B. In light of effect of inflation on financing costs when choosing among financing strategies (stocks, bonds or loans), as you believe it will affect this decision.
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