Abstract Hansson Private Label (HPL) is a manufacturer of personal care products. The company was purchased by Mr Hanson in 1992. The investment represented significant risk for Hanson because a significant portion of his wealth was tied up is a single investment. Over the past sixteen years Hanson has grown the company at a conservative but persistent fashion. He is now faced with an investment opportunity that promises swift growth but also accompanies significant amount of risk. The sales of the private labels are dependent on few larger customers and customer retention is very important to a company like HPL.
Recently HPL’s largest customer has approach the company for a large order. The company will need to invest in expanding its facilities in order to meet the order requirements. This is an excellent opportunity for HPL but the downside is that the customer would only commit to a three year contract and the company can bear significant losses if the customer refuses to buy the product after the contract expires. Therefore Hansson needs to accurately calculate the cash flows related to the investment and account for the risk inherent in the investment before he can make decision on the expansion project.
Excel Sheet Projections for Expansion Project Investment Appraisal for Expansion Project 2009-2018 Free Cash Flows, NPV, IRR, MIRR Calculation of Cost of Capital Riskfree Rate, Market Risk Premium, EquityBeta, Cost of Equity, Cost of Debt, WACC Sensitivity Analysis of Key Projections Decrease of 10% Current Increase of 10% Capacity Utlilization, Selling Price, WACC, Production Cost Page 1 HPL. tx. txt Questions Covered 1. There are two main parts to any valuation analysis: Projection of cash-flows and discounting them by the appropriate discount rate.
Your main objective is to analyze the appropriateness of both these parts. Are the cash-flow projections reasonable? Does the discount rate make sense? 2. Estimate appropriate incremental after-tax cash-flows. Make sure that you explain the appropriateness of your cash-flow projections. 3. What should the discount rate depend on? Discuss. 4. Finally, offer your conclusions including an analysis of strategic implications of the proposal. You are not expected to know as much as the insiders of the firm. They will certainly know more. But, do the best you can.
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