78057287 assignment 8 w8 hand in final project

8/10/2019 78057287 Assignment 8 W8 Hand in Final Project

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Expansion and Risk at Hansson Private Label, Inc

Analysis

10/25/2014

Sohail bilawal raza 1335175


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Expansion and Risk at Hansson Private Label, Inc.: Evaluating Investment in the Goliath

Facility

Companys Business Operations, Strategy and Past Performance

HPL

HPL is a manufacturer of personal care products for retail partners. Its strategy has always been

to focus on efficiency, cost control and customer relation to guarantee solid revenue grows until

2007. Expansions have always been carefully analyzed and the Company never worked below

60% capacity utilization.

HPL has been able to grow its revenues to $ 681 million in 2007 accounting for 28% of national

consumption but the Company is working close to maximum capacity. On the other way, its

performance on units sold is growing only at 1% per year and, since capacity utilization

averages 90%, there is no room for further increase in revenues if not through expansion to a

new facility.

Opportunity

The opportunity has its risks. An initial investment of USD 45 million will be necessary and the

Client, who is already HPL biggest one, only commits to a 3 year term contract.

In addition, the necessary investment would double HPL debit and significantly increase its

financial leverage. Consequently, any financial distress form the client would seriously

jeopardize HPLs financial stability.

Project Forecasts

Cash Flow

Using the WACC of 9.38% associated to a Company with similar leverage, the NPV of the

project is estimated in $ 11.373 million. O the same way, the associated Internal Rate of Return

is 12.94%.

NPV Sensitivity to Price Variations

A sensitive analysis to changes in prices was performed to assess the projects sensibility to price

fluctuations.

At an initial selling price of $ 1.90 per unit, the projected cash flow would be the following:

Current 2009 2010 2011 2012 2013

Net Operating Profit After Tax $2.854 $4.161 $4.987 $6.064 $6.973

Plus: Depreciation $4.000 $4.000 $4.000 $4.000 $4.000

Less: Change in working capital ($12.848) ($1.469) ($1.438) ($1.525) ($1.547)

Total future cash flows ($45.000) ($5.994) $6.693 $7.549 $8.539 $9.427

2014 2015 2016 2017 2018

Net Operating Profit After Tax $8.150 $8.442 $8.737 $9.035 $9.336

Plus: Depreciation $4.000 $4.000 $4.000 $4.000 $4.000

Less: Change in working capital ($1.639) ($422) ($430) ($438) ($446)

Total future cash flows $10.511 $12.020 $12.307 $12.597 $12.889


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It is worth notice that final WC in 2018 has been added to Future Value of OCF.

Based on the new OCF, NPV would increase to $ 40.120 (253% variation) and new IRR would

be 21.05% (63% variation).

At an initial selling price of $ 2.00 per unit, the projected cash flow has shown even higher

sensitivity with a $ 62.234 NPV (447% variation) and 26.69% IRR (106% variation).

The sensitivity analysis has shown that the project is highly sensitive to price changes. Since

price is exogenous to HPL, it represents higher risk to the project success.

Analysis

Using the full project cycle as a basis for analysis has resulted in positive NPV and IRR above

the applied discount rate. But the analysis does not factor a possible reduction of capacity

utilization should the Client not extend the contract or HPL find alternative ways to keep

production levels.

In addition, Payback period on all scenarios occur after 2011, year that the Contract will expire.

That is an additional risk since should HPL need to terminate the project, salvage value most

likely would not be sufficient to cover initial investment and incurred expenses.

Since better quality products have already increased its acceptance in the market, a possible

strategy would be to continue production after 2011 with a proprietary low-cost/good quality

product to be distributed on other retailers. Also, it would be possible to offer production

capability to high price brand owners to a lower production cost since the new plant would be

already partly amortized. I.e., the better strategy to deal with risks inherent to the contract is

diversification of brands.

To illustrate the issue on capacity utilization, a sensitivity analysis projecting maximum

capacity at 75% by 2012 has resulted in a $ 584 thousand NPV and 9.59% IRR. Based on that is

safe to state that keeping production levels above the 75% mark is key to the project success.

At $1.90 Current 2009 2010 2011 2012 2013

Net Operating Income Before Tax $10.512 $13.296 $15.298 $17.741 $19.929

Net Operating Income $6.307 $7.977 $9.179 $10.645 $11.957

Future Value of OCF ($45.000) ($3.970) $10.359 $11.585 $12.959 $14.244

Present Value of OCF ($45.000) ($3.630) $8.658 $8.853 $9.054 $9.098

At $1.90 2014 2015 2016 2017 2018


Net Operating Income $13.551 $13.952 $14.357 $14.767 $15.182Future Value of OCF $15.740 $17.485 $17.881 $18.283 $43.310

Present Value of OCF $9.192 $9.335 $8.728 $8.159 $17.671

At $2.00 2009 2010 2011 2012 2013Net Operating Income Before Tax $14.939 $18.188 $20.672 $23.614 $26.319


Future Value of OCF ($45.000) ($2.413) $13.179 $14.690 $16.359 $17.949

Present Value of OCF ($45.000) ($2.206) $11.015 $11.226 $11.429 $11.465

At $2.00 2014 2015 2016 2017 2018



Future Value of OCF $19.762 $21.689 $22.169 $22.656 $49.633

Present Value of OCF $11.541 $11.580 $10.821 $10.111 $20.251

78057287 assignment 8 w8 hand in final project

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