Hanson private label, inc.: evaluating an expansion in investment Case Solution
Background
Hanson Private Label Company is the manufacturer of the personal care products, which supplies the products to a number of its retail partners. The idea behind the incorporation of Hanson Private Label Inc. 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 the efficiency. The company has generated solid revenue till the end of the year 2007 which have grown to a level of $681 million and this have secured a market share of 28% for the company within the national market.
Hanson Private Label Company is currently operating at its maximum capacity and there is no more room to accommodate for the increased demand of production from its retailers. The capacity utilization of the company has reached to 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 Hanson Private Label Company has determined a lucrative expansion opportunity after four consistent years of intense competition and low growth. One of the closest competitors has approached to the management of Hanson Private Label Company for signing a 3 years contract for one of the personal care products line. If the management of Hanson Private Label Company goes ahead with this deal then the profitability of the company would be increased significantly because since the costs for the private label goods is 50% lower as compared to the costs of the branded products despite the facts that the selling prices are lower.
Problem Diagnosis
The management of Hanson Private Label Company needs to now make a decision of 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 Hanson Private Label Company.
Case Analysis
Risks in the Expansion Opportunity
The expansion opportunity also had a number of risks for Hanson Private Label Company. First, this investment opportunity was the first biggest opportunity for such as 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 Hanson 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 Hanson's huge investment in the company.
Hansson private label, inc. evaluating an expansion in investment Harvard Case Solution & Analysis
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 this opportunity because 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 own products. Overall, this is a lucrative opportunity for the management of the company. Although the risks are quite high, but if the management does not make this investment and expands its capacity, it will freeze, its sales growth and the company would reach its maturity stage. Furthermore, the worth of this project would be quantitatively determined in the next sub-section through the valuation of this project and its detailed financial analysis...............
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