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Sohail Raza1

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  qwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmrtyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwert yuiopasdfghjklzxcvbnmqwertyuiopas     Expansion and Risk at Hansson Private Label, Inc     Analysis     10/25/2014 Sohail bilawal raza 1335175  Expansion and Risk at Hansson Private Label, Inc.: Evaluating Investment in the Goliath Facility Company´s Business Operations, Strategy and Past Performance HPL HPL is a manufacturer of personal care products for retail partners. Its strategy has always been to focus on efficiency, cost control and customer relation to guarantee solid revenue grows until 2007. Expansions have always been carefully analyzed and the Company never worked below 60% capacity utilization. HPL has been able to grow its revenues to $ 681 million in 2007 accounting for 28% of national consumption but the Company is working close to maximum capacity. On the other way, its  performance on units sold is growing only at 1% per year and, since capacity utilization averages 90%, there is no room for further increase in revenues if not through expansion to a new facility. Opportunity The opportunity has its risks. An initial investment of USD 45 million will be necessary and the Client, who is already HPL biggest one, only commits to a 3 year term contract. In addition, the necessary investment would double HPL debit and significantly increase its financial leverage. Consequently, any financial distress form the client would seriously  jeopardize HPL´s financial stability. Project Forecasts Cash Flow Using the WACC of 9.38% associated to a Company with similar leverage, the NPV of the  project is estimated in $ 11.373 million. O the same way, the associated Internal Rate of Return is 12.94%. NPV Sensitivity to Price Variations A sensitive analysis to changes in prices was performed to assess the projects sensibility to price fluctuations. At an initial selling price of $ 1.90 per unit, the projected cash flow would be the following: Current 2009 2010 2011 2012 2013Net Operating Profit After Tax    $2.854 $4.161 $4.987 $6.064 $6.973Plus: Depreciation $4.000 $4.000 $4.000 $4.000 $4.000Less: Change in working capital ($12.848) ($1.469) ($1.438) ($1.525) ($1.547)Total future cash flows ($45.000) ($5.994) $6.693 $7.549 $8.539 $9.427 2014 2015 2016 2017 2018Net Operating Profit After Tax $8.150 $8.442 $8.737 $9.035 $9.336Plus: Depreciation $4.000 $4.000 $4.000 $4.000 $4.000Less: Change in working capital ($1.639) ($422) ($430) ($438) ($446)Total future cash flows $10.511 $12.020 $12.307 $12.597 $12.889   It is worth notice that final WC in 2018 has been added to Future Value of OCF. Based on the new OCF, NPV would increase to $ 40.120 (253% variation) and new IRR would  be 21.05% (63% variation). At an initial selling price of $ 2.00 per unit, the projected cash flow has shown even higher sensitivity with a $ 62.234 NPV (447% variation) and 26.69% IRR (106% variation). The sensitivity analysis has shown that the project is highly sensitive to price changes. Since  price is exogenous to HPL, it represents higher risk to the project success. Analysis Using the full project cycle as a basis for analysis has resulted in positive NPV and IRR above the applied discount rate. But the analysis does not factor a possible reduction of capacity utilization should the Client not extend the contract or HPL find alternative ways to keep  production levels. In addition, Payback period on all scenarios occur after 2011, year that the Contract will expire. That is an additional risk since should HPL need to terminate the project, salvage value most likely would not be sufficient to cover initial investment and incurred expenses. Since better quality products have already increased its acceptance in the market, a possible strategy would be to continue production after 2011 with a proprietary low-cost/good quality  product to be distributed on other retailers. Also, it would be possible to offer production capability to high price brand owners to a lower production cost since the new plant would be already partly amortized. I.e., the better strategy to deal with risks inherent to the contract is diversification of brands. To illustrate the issue on capacity utilization, a sensitivity analysis projecting maximum capacity at 75% by 2012 has resulted in a $ 584 thousand NPV and 9.59% IRR. Based on that is safe to state that keeping production levels above the 75% mark is key to the project success. At $1.90 Current 2009 2010 2011 2012 2013Net Operating Income Before Tax    $10.512 $13.296 $15.298 $17.741 $19.929Net Operating Income $6.307 $7.977 $9.179 $10.645 $11.957Future Value of OCF ($45.000) ($3.970) $10.359 $11.585 $12.959 $14.244Present Value of OCF ($45.000) ($3.630) $8.658 $8.853 $9.054 $9.098 At $1.90 2014 2015 2016 2017 2018Net Operating Income Before Tax $22.586 $23.253 $23.928 $24.612 $25.304Net Operating Income $13.551 $13.952 $14.357 $14.767 $15.182Future Value of OCF $15.740 $17.485 $17.881 $18.283 $43.310Present Value of OCF $9.192 $9.335 $8.728 $8.159 $17.671 At $2.00 2009 2010 2011 2012 2013Net Operating Income Before Tax $14.939 $18.188 $20.672 $23.614 $26.319Net Operating Income $8.964 $10.913 $12.403 $14.169 $15.791Future Value of OCF ($45.000) ($2.413) $13.179 $14.690 $16.359 $17.949Present Value of OCF ($45.000) ($2.206) $11.015 $11.226 $11.429 $11.465 At $2.00 2014 2015 2016 2017 2018Net Operating Income Before Tax $29.511 $30.316 $31.133 $31.961 $32.800Net Operating Income $17.706 $18.190 $18.680 $19.177 $19.680Future Value of OCF $19.762 $21.689 $22.169 $22.656 $49.633Present Value of OCF $11.541 $11.580 $10.821 $10.111 $20.251
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