HANSSON PVT. LABEL INC. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

HANSSON PVT. LABEL INC. Case Study Solution

NPV of the Project

Net Present Value of a Project
		2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Sales Revenues		84,960	93,881	103,124	112,700	122,618	132,887	135,545	138,256	141,021	143,841
Less: COGS		69930.00	75957.21	83086.23	90105.68	97354.74	104841.71	106795.89	108800.60	110857.40	112967.93
Gross Profit		15,030	17,924	20,038	22,595	25,263	28,045	28,749	29,455	30,164	30,873
Less: SG&A		6593.98	7286.35	8003.78	8746.99	9516.72	10313.75	10520.02	10730.42	10945.03	11163.93
EBITDA		8,436	10,637	12,034	13,848	15,746	17,732	18,229	18,725	19,218	19,709
Less Depreciation		4,000	4,000	4,000	4,000	4,000	4,000	4,000	4,000	4,000	4,000
EBIT		4,436	6,637	8,034	9,848	11,746	13,732	14,229	14,725	15,218	15,709
Less: Taxes @ 40%		1774.41	2654.90	3213.78	3939.05	4698.58	5492.69	5691.60	5889.92	6087.40	6283.79
NOPAT		2,662	3,982	4,821	5,909	7,048	8,239	8,537	8,835	9,131	9,426
Less: CAPEX	($45,000)	0	0	0	0	0	0	0	0	0	0
Less: Changes in NWC		(942)	1,235	1,288	1,330	1,378	1,426	369	377	384	392
WC Recover											8,268
Add back Depreciation		4,000	4,000	4,000	4,000	4,000	4,000	4,000	4,000	4,000	4,000
Free Cash Flow	($45,000)	7,603	6,748	7,533	8,578	9,670	10,813	12,168	12,458	12,747	21,302
Discount Rate (WACC)	9.38%
Payback (Years)	6.45	($37,396.63)	($30,648.95)	($23,115.87)	($14,537.74)	($4,867.60)	$5,945.02	$18,113.11	$30,571.17	$43,317.81	$64,619.35
IRR	16.73%
Project NPV	$18,790.51

Illustration

The NPV of the project is calculated obtaining the free cash flow from operations available within the company. The free cash flow available is calculated by subtracting capital expenditure, changes in net working capital and adding back depreciation expense in net operating after tax of the company. The free cash flows available to the firm are discounted at a discount rate of 9.38 percent to obtain the present value of the project. Thus, from this present value the initial investment of the project is deducted to determine the net present value of the project.

Recommendation

Analyzing the cash flow related to the project and the risk associated with the project, it can be concluded that the company should undertake the expansion project which will increase the existing capacity of the company in the production of personal care product. The NPV of the product is also positive which provides an indication that the project is beneficial for the company and will provide positive cash flows in the future. Moreover, one of the retail client of the company also require increase in personal care product of Hansson Private Label Incorporation on their shelves which compels the company to expand their production capacity. Moreover, the large retailer intends to sign an agreement of purchasing more quantity from Hansson Private Label Incorporation which will boost the revenue of the company for the initial three years after investment in the project. Thus, the increase in the demand for private label product due to their acceptance among customers because of lower prices and superior quality in comparison with the national brands will enable the company to gain further future contract with the large retailers after increased reputation growth with the retailers. Hence, the company should take go ahead decision to incorporate the expansion project which will provide a long term benefit to the company because of boost in demand of the private label product which is evident from the acceptance of private label personal care product among the consumers............

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