Hansson Private Label, Inc: Evaluating an investment in expansion Submitted by : Fatima Naz Company Background: Hansson private limited

started in1992. Hansson purchased it at $42 million dollar. It was manufacturer of private label personal care product. It has considerable amount of 28% market share in its specific industry. The growth of HPL depends upon the growth of private label component within the industry. Private label with lower price and improving quality, offer an appealing alternative and substitute to more costly brand names. Hansson had expanded conservatively. Company had four plants all operating at more than 90 % of capacity. HPL manufacture personal care products like soap, shampoo, mouth wash, shaving cream etc. Financial performance HPLs historical financial performance has been steadily increasing for past five years. It has generated $681 million revenue in 2007. However due to high cost of goods sold company net income decreases this year. Companies total cash generated is in negative this is due to fact company had invested some of its cash into non-current assets as compare to previous years. Major Issues: One of the retail customer wanted to increase their share of private label manufacturing, due to this reason HPL have to invest 50$ million in order to accommodate their request, as most of the operating plant of HPL are already running at 90% of its capacity . However sooner or later HPL have to expand its business because companys future is in question by employees, they wanted to see change. Customer will only commit three year contracts, which is the main dilemma for Hansson, because at the end of contract fixed cost will increase if company unable to cater other retail customers. Need to determine return on investment to justify efforts and risk

 May risk future opportunities of rapid growth and significant value creation by locking in strong relationship with huge powerful retailer Need to maintain debt at modest level to contain risk of financial distress in the event the company loses a big customer Analysis and Recommendation: The WACC provided by Dowling is based on historical data since Hansson has never taken an investment of such magnitude the historical data may not accurately project the future risk brought by the investment. The choice of appropriate discount rate depends upon amount of debt Hansson choses to take in addition to its internal cash to finance the project. Historical data that are available to Hansson are especially unsuitable to forecast, plus lack of experience greatly undermines Hansson management ability to forecast future cash flows and discount rate. In conclusion, this project is likely to provide large future pay out. The CEO needs to proceed with caution due to limitation on estimated sources and techniques.