Hansson Private Label

Hansson Private Label is considering an expansion through a three-year contract

with its largest retail customer. It would call for a $50 million-dollar investment to

expand its production capability. The expansion is not without risk as it will double the

debt that Hansson will owe. Hansson has four plants that are already operating at 90%

capacity. So, if he wants to make this agreement with the customer, he will not have the

capability at his existing locations.

There are things that need to be considered. The market has personal care

products have been stable and have had modest sales growth over the years. But there is

an intense competition for shelf space with approximately 80,000 new products being

launched every year. Hansson has estimated that his company has a little more than 28%

share of the total sales. The risk that is foreseeable is with the increasing competition, if

Hansson agrees to the three-year contract, there is the potential that he will no longer

have the market share that he currently has estimated to have.

As the four plants are already nearly at their limit for production, a new plant

would be required. This will change the financial structure of the company, as they have

been maintaining a modest debt. With the investment expansion, the company would

have to incur a high level of debt. The investment would close off all other investment

opportunities. If the project falls through or the customer does not continue after the three

years, there could be serious financial implications.

To determine if the expansion project should be undertaken, the following capital

budget techniques were implemented: Net Present Value (NPV), Profitability Index (PI),

Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR) and Payback
Discount Factor. The NPV was calculated (Figure 1). The NPV is the difference of the

present value of cash inflows and the present value of cash outflows over a period of

time. NPV is important in capital budgeting and investment planning to determine if there

is profitability in the potential investment. In this case, the NPV is positive, which means

that is will be an added value to the company and the expansion should be undertaken.

Figure 1: NPV value

The Internal Rate of Return was calculated. As an addition measure on whether to

accept the project or to reject it, we needed for the IRR (Figure 2) to be greater than the

WACC, which we said was 9.50%. The IRR was calculated to be 12.71%, which is

indeed greater than the required rate of return.

Figure 2: IRR Value

 The Profitability Index was calculated. The Profitability Index is an index of the

relationship between the costs and benefits of the proposed investment expansion. The PI

was determined to be 1.49 which is greater than one. A PI of greater than one is a

measure of the investments present value. If the value would have been lower than one, it

would be an indication that the investments present value is less than the initial

investment and would be a sign not to accept the project. This tells us that the net present

value will be positive so, this is another indication that the project should be accepted.

Based on the Capital Budgeting Analysis, it would be my recommendation to accept the

expansion.

With regards to how Hansson is doing in comparison to the competition, Hansson

is doing well. The EBITDA and the EBIT are all well above the average for the

competition. The EBITDA will be in 2009 at 17% and will increase steadily to 21% by

2018. The current average is 14.6%. The EBIT will be in 2009 at 12% and will steadily

increase to 18%. This is on par with the current average which is 11.6%. In looking at the

revenue value for the competition, here it seems that Hansson is currently behind

Cathleen Sinclair and Skin Care Enterprises. Hansson will be receiving more in revenue

with the future 10-year income than they had with historical data. Hansson was at $680.7

in 2007. In 2009, Hansson is expecting $84,960. This will put them ahead of the industry

and the industry average. With regards to net income, in 2007, Hansson is also making

more than Cathleen Sinclair and General Health & Beauty with $38.5. With the

investment expansion, Hansson will be leading their competition. In 2009, Hansson will

be at $14,152 and increase steady over the next 10-year period to $29,656.