Hansson Private Label, a manufacturer of private-label personal care products is challenged if it is to finance a first-time expansion of manufacturing operations. The decision leads to a financial analysis of the potential project with cash flow projections and net present value calculations. This case study allows students to compute net operating profit less taxes, cash investment, and ongoing capital expenditures. It also teaches students to discount values and gives students more than just a glimpse of the company's capital planning process.
Erik Stafford; Joel L. Heilprin; Jeffrey DeVolder
Harvard Business Review (4021-PDF-ENG)
June 04, 2009
Case questions answered:
Case study questions answered in the first solution:
- Do you recommend Hansson Private Label, Inc. to proceed with the investment? Why or why not?
- Estimate the project’s NPV. (Be sure to explain why you used the numbers you used as there are choices you will be making doing this. It is unlikely that the entire class will have identical spreadsheets, use identical numbers or come to identical conclusions, be sure to upload your spreadsheet to your post but answer the question in a way that it is not necessary to download your spreadsheet in order to understand your answer).
Case study question answered in the second and third solutions:
- If you were the Tucker Hansson, would you go ahead and expand the current capacity, base your answer in the context of the wider economic environment: apart from NPV and BCR calculations, also use exhibits 2 and 3 to substantiate your argument.
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Case answers for Hansson Private Label, Inc.: Evaluating An Expansion In Investment
This case solution includes an Excel file with calculations.
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Background – Hansson Private Label, Inc.
Hansson Private Label Company is the manufacturer of personal care products, which supplies the products to a number of its retail partners. The idea behind the incorporation of the company was initiated in 1992 and it experienced a great deal of growth since its establishment.
The company has always emphasized on its strategy, which was based on cost control, customer retention, long-term relationships with the customers and focus on efficiency. Hansson Private Label has generated solid revenue till the end of the year 2007 which has grown to a level of $681 million and this has secured a market share of 28% for the company within the national market.
Hansson Private Label Company is currently operating at its maximum capacity and there is no more room to accommodate the increased demand for production from its retailers. The capacity utilization of the company has reached a level of 90% and the sales growth rate has been low at 1% therefore if the management wants to expand its capacity now it needs to have expanded manufacturing facility.
However, the management of the company has determined a lucrative expansion opportunity after four consistent years of intense competition and low growth. One of the closest competitors has approached the management of Hansson Private Label Company for signing a 3 years contract for one of the personal care products line.
If the management of the company goes ahead with this deal then the profitability of the company would be increased significantly because the costs for the private label goods are 50% lower as compared to the costs of the branded products despite the fact that the selling prices are lower.
The management of Hansson Private Label Company needs to make now a decision on whether to fund the opportunity of the expansion of the manufacturing facility or not. In making this decision, the management will have to consider all the risks inherent in this project, perform the fundamental financial analysis of this project, which will include the computations of the cash flow projects, net present value, internal rate of return, and the payback period of this project.
This case facilitates the systematic consideration of the capital planning process of Hansson Private Label Company.
Exhibit 1: Working Capital Computations
Risks in the Expansion Opportunity
The expansion opportunity also had several risks for Hansson Private Label Company. First, this investment opportunity was the first most significant opportunity for such a size, which was being evaluated by the management. Secondly, if the management of the company invests in this project, then the level of debt would increase, and the financial distress costs faced by Hansson Private Label Company would increase significantly, thus making this investment a risky investment.
Because this investment would be financed through debt, which would double the burden on the company’s financial statements, the original debt amount was $ 49.8 million in 2007, which would increase to $107.6 million. This will lead to increased interest costs, debt-servicing costs, and it would add to the riskiness of the project through the strict compliance of covenants applicable to this debt, which might become important in the future strategic decisions of the company.
Other risks were also there related to these investments, which were the personal financial risk for Hansson’s massive investment in the company.
The choice of a suitable discount rate is also another issue in the valuation of this project. However, despite the above potential risks in the project, it seemed the right time for the management of the company to avail of the opportunity. If the management does not invest in this expansion project, then the company might end up losing its long term customers’ contracts and cannibalizing the sales of its products.
Overall, this is a…