Hansson Private Label

firing Consulting Expansion and Risk at Hansson Private Label, Inc. Evaluating Investment in the Goliath Facility HBS4021 send Consulting takes pastime in presenting our Hanson Private Labels (HPL) big(p) expanding upon executive summary. We care in effect(p)y reviewed all applicable case materials and believe we have quantified your capital risks, benefits, and most attractive course of action. 1) HPL has performed exceptionally well since inception in 1992. Financial statements show that operating revenues have increased from $503. 4M in 2003 to $680. 7M in 2007.During this time, down-to-earth operating profit increased by $24. 3M. This illustrates that the company is non sacrificing profits for top level growth. Capital replenishment matches or exceeds depreciation. send away income increased during the same time span by $9. 6M. The revenue gross margin has averaged 7. 8% growth and the gross margins have averaged 18. 6% everyplace the last five socio-economic classs, while net income has averaged 5. 3%. Dividends have been compensable to stockholders. Cash flow from operations has increased steadily. The cash from investing has fluctuated from a low of $5. M in 2006 to a high of $7. 8M in 2003, indicating an boilersuit conservative strategy of controlled expansion. HPL used more cash in finance in 2006 and 2007 than in previous years, which may contribute to future growth. To pay back the companys financial performance Total assets have expectant over the years to a high of $380. 8M in 2007 Long-term debt is at a five year low at $54. 8M Net operative capital is at a five year high of $102. 5M all four plants under HPL are operating at 90% mental object and a focus on conservative efficiency has led to impregnable financial performance.Comparatively speaking, HPLs 9. 26% EBITDA ratio is stronger than industry competition, another indicator of strong earnings and management. 2) Vent Consultings analytical summary is provided in Appendix 1. Note the calculated NPV of $4,971 and IRR of 11. 1% at pad NPV-BASLINE. disposed(p) an accepted discount rate of 9. 38%, both the haughty NPV and the positive 1. 7% IRR spread on this investing type project initially indicate a rewarding proposal. Additionally, the calculated profitability index of 1. 11 suggests the project should be pursued.Note that the discounted payback period is just under 7 years, 4 years beyond the contractual commitment under retainer with HPLs largest retail customer. 3) Sensitivity analysis reveals interesting factors, however. Note in the additional tabs Ramping up capacity recitation to 85% in 3 years instead of the projected 5 years yields a full 2% IRR increase. If aggressive marketing can capture secondary beg from competitors and increase capacity utilization from 85% to 95% in years 4 through 10, IRR is increased to 14. 8%. The project is very excellent to unit selling price.If expected annual growth in gross gross revenue price rises fro m 2% to just 3. 5%, IRR rises a full 6. 7% to 17. 8%. The project is also very sensitive to commodity costs. A small . 5% increase in expected inflation from 1. 0% to 1. 5% annual raw material costs reduce service line IRR calculations to 9. 5%, making the project unattractive compared to the 9. 38% discount rate. ameliorate capital planning yields expected improved project returns. The last tab illustrates a potential improvement of 2. 5% IRR. Given this information, Vent Consulting has identify 3 courses of action (COA) 1) Accept the capital expansion proposal as written by Mr.Gates 2) Accept the retailer s 3year contract, but reduce capital risk by reducing the shell of expansion, improving the use of working capital and sub-contracting production shortfalls to other producers. 3) maintain status quo and reject the retailer contract Despite the positive NPV, Vent Consulting recommends rejection of COA 1 due to the following uncontained risk factors Required capital expansion a nd associated financing does not match the proposed customer contract, adding uncontrolled capacity utilization risk.This risk is compounded by a lack of customer diversification. Difficult-to-predict sales price and raw material cost variables also add pregnant uncovered risk. Vent Consulting also recommends rejection of COA 3. This course of action would propagate HPLs growing cash cow business model, and sacrifice an ideal chance to improve company performance and steal market share in cooperation with one of the largest industry retailers. We strongly recommend COA 2, which apitalizes on market prospect while minimizing the significant risk of the original proposal. Specifically Reduce capital expansion to 40% of proposed project. Improve capital management Dedicate pristine capacity to key/primary retail customer(s) Sub-contract production shortfalls to other producers for lessor retailers/customers Vent Consulting is eager to provide additional recommendations on how this is would be best ended for a fee once weve completed another few Themes.