Hansson Private Label Expansion

This report provides a comprehensive financial analysis of Hansson Private Label, Inc.'s proposed $50 million expansion. The analysis includes an evaluation of market opportunities and risks, a cost of capital analysis using the CAPM model, and detailed cash flow projections. Sensitivity analysis examines the impact of key variables like selling price, material costs, and capacity utilization on the project's Net Present Value (NPV) and Internal Rate of Return (IRR). Scenario analysis explores various combinations of these variables to provide a more robust assessment of the investment's potential outcomes. The report concludes with recommendations based on the findings, suggesting the project's acceptance due to a positive NPV and IRR exceeding the Weighted Average Cost of Capital (WACC). However, it also highlights the importance of risk mitigation strategies, such as maintaining strong customer relationships and diversifying the product portfolio, to ensure the project's success.

Running head: EVALUATING AN INVESTMENT IN EXPANSION
Hansson private label, inc.
Evaluating an Investment in Expansion
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EVALUATING AN INVESTMENT IN EXPANSION 1
1. Introduction
In this present paper, we will analyze the Hansson private limited which is a manufacturing
company. The paper analyzes the market and risk for the private label brands, free cash flow
analysis, the cost of capital analysis, cash flow analysis. The sensitive and scenario analysis is
done and on the basis of the analysis, recommendations have been made.
The Hansson private label manufactures different types of personal care products such as
sunscreen, shampoo, soap and others. It is one of the major national manufacturers, and now the
owner of the company wants to increase the share of the company which is a very critical
situation for the company. The expansion needs $50 Million, and it doubles the debts of the
company. The analysis helps to analyze the justification of return on investment to cover the risk
and investment of funds. The sensitive analysis helps to analyze the key drivers of the projects,
and scenario analysis is used to find the comprehensive perspective.
2. HPL & its position
 Opportunities in the existing market
The market is increasing with the stable rate in the last four years. The private label
products are increasing due to acceptance by the consumers, and the growth of the private
label products is less than five percent which means there is a potential growth of the
industry. A large number of sales of the company is derived through mass merchants who
are approximately 40% of the total sales. The company is launching 80,000 products
yearly which create an intense competition among the shelf space. The collaboration of

EVALUATING AN INVESTMENT IN EXPANSION 2
the consumers with the company would remove the concern about the next three years
and the intense competition for the shelf space shows that the consumers want to increase
the share of the company (Tuškej et al., 2013).
 Underlying risk
This is the first time for the company to invest a huge amount of $50 Million, so the
business risk of the company increases. The debt increases in the capital structure which
significantly increases the annual fixed cost of the company and leads to financial distress
by increasing the cost or decrease in the sales volume. The current debt-equity ratio of the
industry is 32.9%, and the company's debt-equity ratio is 9.7% whereas the current ratio
of the company is 2.85 which indicate that the liquidity of the company is good. Both the
ratios indicate that the company is able to raise the debt and expand the shares of the
company. The change in consumer taste and preference is another risk and the payback
period for the company is 7 years which is a concern for the company whether the
consumers will continue the relationship after three years. There is a risk of lowering the
utilization capacity of the resources due to constraints in the sales. The success of an
investment is very important because the company's financial position is depending on it
and the owner personal wealth is also invested, so there is also a personal risk in the
investment.

EVALUATING AN INVESTMENT IN EXPANSION 3
3. Evaluation of the project
 Cost of capital analysis
The Dowling fund analysis sets a firm foundation. It includes the calculation of industry’s
average asset beta which is an unleveraged beta of the industry and it represents the
business risk of the industry. Then, with the use of asset beta the cost of equity is
calculated according to the different debt-equity ratios. The cost of capital is calculated
using CAPM equation in which cost of debt for all the firms is 7.75% with the debt-
equity ratio is less than 25% after the discussion between Dowling and bankers. The
results of WACC analysis is directly applied generally (Magni et al., 2015). However, it
might be possible that Dowling has taken risk-free rate and market premium so the will
be further discussed in the sensitivity analysis.
 Cash flow analysis
The initial cash is $10,000 for facility expansion, $20,000 for manufacturing
equipment’s, and $15,000 for packaging equipment’s, total is $45,000. The increase in
working capital is $12,817 which will be treated as a cash outflow in 2009. According to
the depreciation schedule, the depreciation is $4,000. It is assumed, that the project will
be over in ten years. The book value of facility expansion is considered as salvage value
which is $5,000; it is assumed. The recovered net working capital will be $8,285.30. This
amount will be equal to the balance of the account receivable and account payable. For
the cash flow analysis please refers to Appendix.

EVALUATING AN INVESTMENT IN EXPANSION 4
 Estimation of NPV and IRR results
The formula for calculating NPV is inflow minus outflow. The NPV of the project is
using a discount rate of 9.38% $14,076, and the Internal rate of return is 14.02%.
4. Sensitive and Scenario Analysis
 Sensitive Analysis
The sensitive analysis id calculated on three key variables, namely, capacity utilization,
direct material cost per unit and, selling price per unit. The huge amount of values is
tested under the sensitivity analysis, and the steps are chosen according to the empirical
simulation. The analysis is shown in the Sensitive analysis table. Please refer to the
Appendix 2.
The NPV and IRR of the projects are very sensitive towards selling price and material
cost per unit (Bierman et al., 2012). The decrease of selling price per unit by 0.5% leads
to reduce the NPV by 62%, which is still positive but the investment becomes less
attractive whereas the increase in 0.5% selling price per unit leads to increase NPV by
63%. The decrease in material cost per unit by 0.5% leads to reduce NPV by 34%.
After looking at the treasury rate of US 10 years, we take S&P 500's rate of return on a
market portfolio, 8.55%. The risk-free rate varies using a step of 0.05% to analyze the
impact of WACC and NPV. It is analyzed that the lower risk-free rate leads to lower NPV
of a then project which is theoretical in nature. On the other hand no matter what WACC

EVALUATING AN INVESTMENT IN EXPANSION 5
we will take because all are giving positive NPV. For the sensitivity analysis of WACC
please refers Appendix 3.
 Scenario Analysis
The aim of analysis is present, alternative future developments of the project. The four
factors are required to move concurrently namely, utilization, price per unit, the cost of raw
material per unit and labor cost. The table shows the different assumptions under the scenarios.
Please refer to the Appendix 4.
The owner Tucker Hansson is conservative, and he can expand his business until he ensures
that the new facility would commence operations with at least 60% capacity utilization. So the
pessimistic situation for utilization is set as 60%, and it is regarded as the baseline which is used
to determine the optimistic, very pessimistic situations, and expected. The 40% capacity
utilization indicates the very pessimistic situation that the company does not find effective sales
to distribute the product. The raw material per unit and labor cost growth rate predicted by the
manufacturing team is set as expected situation. The sales are driven by the price increase and its
averaging 1.7% annually. Hence, the 1% step because the market is used for different scenarios
because the market is stable and the change in price and cost has not change affectedly in the
past few years. The table shows the NPVs under different scenarios. Please refer to the Appendix
5.
The summary of scenario Analysis please refers to the Appendix 6.
For the Break-even analysis please refers to the Appendix 7.

EVALUATING AN INVESTMENT IN EXPANSION 6
In the table, it is shown that the labor cost does not affect the NPV of the project because it is
the very pessimistic situation and the NPV remains positive. The utilization plays an important
role in calculating the NPV of the project since the utilization is the most vulnerable variable
because of its unpredictable nature and it is direct.ly affects the sales volume of the company. In
order to gain the profitability of an investment, the average capacity of utilization must be more
than 70.2%. Other three factors are related to the market conditions. The three factors do not
affect the company till the market situation is stable. The company should extend the three
contracts with its largest retail consumers, and other stable partnership should be built which
ensures the level of capacity utilization from 75% to 85%.
5. Recommendations
The NPV and IRR are the important tools for evaluating the project. The NPV helps to show the
direct value added to the firm and IRR shows the profitability of adding the project. After the
analysis, it is concluded that the company should accept the project because the NPV is $14,076
according to the assumptions. The IRR of the project is 14.02% which is more than the WACC
which is 9.38%. The company is currently operating full capacity so the capacity should be
increased with the growth of the company because the company does not have any backup plans.
However, the risk is situated with the returns. There are several recommendations for the
company to hedge the risk. The company should maintain the good consumer relationship which
is very necessary because if the valuable consumers terminate the contract, it will be the worst
situation for the company. The company should do extra efforts for maintaining the consumer
relationship and the preventions should be early to escape from the financial distress. On the
other hand, the portfolio can be diversified which will reduce the risk. The company should

EVALUATING AN INVESTMENT IN EXPANSION 7
constantly improve the quality of the product with well-designed packaging which helps to
maintain the brand image in the eyes of the consumers.

EVALUATING AN INVESTMENT IN EXPANSION 8
References
Tuškej, U., Golob, U., & Podnar, K. (2013). The role of consumer–brand identification in
building brand relationships. Journal of business research,66(1), 53-59.
Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of
investment projects. Routledge.
Magni, C. A. (2015). Investment, financing and the role of ROA and WACC in value
creation. European Journal of Operational Research, 244(3), 855-866.

EVALUATING AN INVESTMENT IN EXPANSION 9
6. Appendix
1. Calculation of the Cash flow from 2009 to 2018

EVALUATING AN INVESTMENT IN EXPANSION 10
2. Sensitive Analysis
Direct
material
Cost
growth
rate
NPV
variance
IRR Utilization NPV
variance
IR
R
Selling
price
per unit
Growth
rate
NPV
Variance
IRR
-1% 128.19% 18.77
%
0.715 -
103.89%
9.1
9%
-0.50% -
292.78%
-
6.64
%
-0.5% 97.35% 17.71
%
0.73 -77.92% 10.
43
%
0.00% -
237.18%
-
0.07
%
0.0% 65.72% 16.58 0.745 -51.94% 11. 0.50% - 4.53

EVALUATING AN INVESTMENT IN EXPANSION 11
% 65
%
180.14% %
0.5% 33.28% 15.36
%
0.76 -25.97% 12.
85
%
1.00% -
121.62%
8.20
%
1.5% -34.13% 12.56
%
0.79 25.97% 15.
18
%
1.50% -61.59% 11.3
0%
2.0% -69.14% 10.94
%
0.805 51.94% 16.
33
%
2.50% 63.18% 16.4
7%
2.5% -
105.05%
9.11% 0.82 77.92% 17.
46
%
3.00% 128.00% 18.7
0%
3.0% -
141.89%
7.02% 0.835 103.89% 18.
58
%
3.50% 194.50% 20.7
7%
3.5% -
179.67%
4.56% 0.85 129.86% 19.
69
%
4.00% 262.71% 22.7
1%
4.0% -
218.42%
1.56% 0.865 155.83% 20
.78
%
4.50% 332.69% 24.5
3%
4.5% - -2.36% 0.88 181.81% 21. 5.00% 404.48% 26.2