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

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

Final Project by Rodrigo Montechiari

Company´s Business Operations, Strategy and Past Performance

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.

The Business Opportunity

Facing four years of low growth rates and fierce competition, HPL has the opportunity to expand its production and increase its margins by signing a 3 years term contract with its biggest Client on the personal care products line.

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 HPL´s financial stability.

Project Forecasts

A NPV analysis based on HPL´s Manufacturing Manager and CFO has been performed

Cash Flow

The following projected cash flow has been assembled based on the available information.

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:

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