Case

Evaluating an investment in expansion and providing a recommendation to Hansson Private Label, Inc.

Tucker Hansson, the owner of Hansson Private Label, is struggling in whether to execute the $50 million investment proposed by his manufacturing team. Under this situation, the subject of this report is to evaluate the potential investment of expanding production capacity at Hansson Private Label (HBL) and make a recommendation to Tucker Hansson. In this report, I will specifically focus on analyses of the project’s free cash flows (FCFs), weighted average cost of capital (WACC) and net present value (NPV). With a sensitivity analysis, it can help us to observe how change in some key project variables would make the project stronger and weaker. This report can provide efficient information for Hansson to evaluate the potential value of this investment and help him to make a final decision.

HPL and private label personal care industry

HPL is a midsize manufacturer of private label personal care products that sold under the brand label of its retail customers which included supermarkets, drug stores and mass merchants. The great achievement of HPL in personal care products market depends on its focusing on manufacturing efficiency, expense management and customer service to guarantee stable sales growth. As a conservative businessman, Hansson has always been careful about capacity expansion and he never allows capacity utilization to be below 60%.

HPL has a significant share of private label personal care market. The growth of sales of company’s products has remained stable and generated $681 million in revenue in 2007 accounting for more than 28% share of U.S domestic consumption. However, the competition of this kind of products is fierce and the current capacity of HPL is getting close to full. In addition, over the past four years, the unit volumes had increased only by 1% per year, and there is no more room for further growth in revenues if the company...