The purpose of the case analysis is for teams to perform analysis of a real-world capital budgeting case. Many
of the examples in the textbook are simplified and may not be as relevant to you in a practical setting. Please
prepare a memo answering the case questions posted on Blackboard.
This is a capital budgeting case that involves a potential expansion opportunity at Hansson Private Label (HPL), a privately held midsize producer of private label personal care products. The company is considering a $57 million investment that would expand production capacity. Work in groups of your choice within your cohort (4-5 students) and submit one memo per group (approx. 2-3 pages for memo plus calculations in the appendices).
Submission Process:
List all team members’ names (alphabetically by last name) on page 1 of the memo (cover
sheet okay). Only one person in the group should submit the teams’ files on Blackboard by 8am on 11/5/22. Please format your deliverable as a PDF file formatted professionally as you would for your employer. Excel exhibits/calculations should be pasted into the appendix. The main calculations must be included in the pdf memo appendix. When grading it is easier for us to review memo and calculations in one pdf file. You can also upload your excel spreadsheets as a back-up but we do not plan to open each excel spreadsheet when grading.
Please address the following questions in your memo for the Hansson Private Label case:
Financial Statement Analysis: How would you describe HPL and its position within the
private label personal care industry? Perform financial statement analysis/ratio analysis and evaluate HPL’s historical financial performance (Exhibit 1). Consider the financial performance relative to peer public companies (Exhibit 6). You may want to evaluate profitability trends for Hansson and also compare metrics such as profitability and leverage/solvency relative to the publicly-traded peer companies.
Project Analysis:
o UsingExhibit5“ExcerptofFinancialAssumptionsinCapitalRequestForm,”and
the Assumptions tab in the student spreadsheet posted on Blackboard estimate the project Free Cash Flows. Once you finish calculating the project free cash flow take a step back and think about whether the projections are realistic. To evaluate this, your group might compare the projected EBITDA margins for the project to the company’s historical performance. At this step you are basically sanity checking a set of projections that someone else has provided.
o Utilizingthedataprovidedintheexhibits,determinewhethertheprojectisattractive in both strategic and economic terms. Calculate the NPV, IRR and payback period/break-even point given the supplied project forecasts. Perform basic sensitivity analysis on some of the key drivers of the cash flows. This can be as simple as modifying sales price per unit or some of the costs to see the potential impact to the NPV (what if… analysis). The idea behind the sensitivity analysis is to determine some of the important variables for execution of the project (the contract is only guaranteed for 3 years).
o MakearecommendationonwhetherHanssonshouldproceedwiththeinvestment. o Whatpracticalalternativesandoptionsareavailabletothecompany?Forexample,
what should Hansson do if he chooses to decline the project as proposed?
o Whataretherisksoftheinvestment?Whatmightbedonetomitigatetheserisks?
Please get creative here. For example, maybe you would like to recommend accepting the project but can suggest ways to move ahead with the project in a way that better mitigates risk. Think about the best way to execute the project and the important considerations.
Strategic Analysis: Do you believe that the expansion project will position HPL for any form of sustainable competitive advantage? Will it allow HPL to improve long-term profitability?
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MBV Financial Management (Abrams/Plotts) Hansson Private Label Case due 11/5/22 at 8am
Note: During class on November 5th your team may be called upon to answer the questions addressed in the memo. All team members need to be prepared. It is not acceptable to rely on one individual to answer questions about the analysis. (Every team member should understand the calculations).
Case “Hints”:
Your group must set up an NPV analysis of the project. Refer to the discussion of the Investment Proposal. I have also posted a spreadsheet on Blackboard with exhibits so you do not need to re-enter the key data from the case exhibits.
The Year 0 Initial Investment (Capex) will be $45 million (Facility Expansion, Manufacturing Equipment, and Packaging Equipment). Assumptions have been provided for depreciation and maintenance expenses.
The following is taken from page 3 of the case.
For purposes of calculating the 10-year project free cash flow (2009-2018) we have provided the line items. There are a few typos/discrepancies in the HBS case writers’ data. 1) For manufacturing overhead in 2009, the case shows $3,600, but it should be $3,920.
Operating Results:
Revenue
Less: Raw Material Costs
Less: Labor Expense
Less: Manufacturing Overhead
Less: Maintenance Expense
Less: Selling, General & Administrative Expense EBITDA
Less: Depreciation
EBIT
Less: Taxes
NOPAT
Un-Levered Free Cash Flow: NOPAT
Plus: Depreciation
Less: Change in Working Capital Un-Levered Free Cash Flow
The investment in working capital is not expected to occur up front at the time of the initial investment. It is assumed to take place throughout the first year and should be considered as part of the 2009 cash flows. You will notice that going from working capital of 0 in year 0 to 12.8 million in year 1, the first year of Un-Levered Free Cash Flow for the project will subtract a “use” of cash of
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MBV Financial Management (Abrams/Plotts) Hansson Private Label Case due 11/5/22 at 8am
12.8 million. As you can see from the assumptions tab, net working capital is calculated by taking current assets (accounts receivable and inventory) less current liabilities (accounts payable). The change in working capital is from one period to the next and shows the cash flow impact.
In each subsequent year 2010-2018 the amount subtracted will be much less since working capital will have already been established in the first year and you will just evaluate the change (increase) in net working capital. According to the footnote in the case on page 3, at least some portion of net working capital will be returned to investors at the end of the project in 2018. This is similar to what we discuss in class with a “recoupment of NWC.” However, the assumption in this case is that the return of working capital is equal to the balance of accounts receivable less accounts payable (at the end of 2018). According to the case assumptions, inventory is assumed to be worthless at the end of the project. You will see this as in the assumptions tab in 2018. Because the property, plant, and equipment are specialized and almost completely depreciated, it is also assumed to be worthless (no salvage value). You will need to discount the recoupment of the net working capital (source of cash) back to present along with the project cash flows.
Use a cost of capital (WACC)of 9.38%. This can be used as the discount rate for the NPV analysis (this was the cost of capital calculated in exhibit 7 for a 20% Debt/Value assumption).
Do your best to work through the case utilizing readings and other supporting materials, without seeking assistance or “hints” from the instructor(s). Case deliverables will be graded on effort, not on accuracy.
