Vent Consulting

Expansion and Risk at Hansson Private Label, Inc.

Evaluating Investment in the Goliath Facility HBS#4021

Vent Consulting takes pleasure in presenting our Hanson Private Label’s (HPL) capital expansion executive summary. We carefully reviewed all applicable case materials and believe we have quantified your primary risks, benefits, and most attractive course of action.

1) HPL has performed exceptionally well since inception in 1992. Financial statements show that operating revenues have increased from $503.4M in 2003 to $680.7M in 2007. During this time, gross operating profit increased by $24.3M. This illustrates that the company is not sacrificing profits for top level growth. Capital replenishment matches or
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Additionally, the calculated profitability index of 1.11 suggests the project should be pursued. Note that the discounted payback period is just under 7 years, 4 years beyond the contractual commitment under consideration with HPL’s largest retail customer.

3) Sensitivity analysis reveals interesting factors, however. Note in the additional tabs:

• Ramping up capacity utilization to 85% in 3 years instead of the projected 5 years yields a full 2% IRR increase.

• If aggressive marketing can capture secondary demand from competitors and increase capacity utilization from 85% to 95% in years 4 through 10, IRR is increased to 14.8%.

• The project is very sensitive to unit selling price. If expected annual growth in sales price rises from 2% to just 3.5%, IRR rises a full 6.7% to 17.8%.

• The project is also very sensitive to commodity costs. A small .5% increase in expected inflation from 1.0% to 1.5% annual raw material costs reduce baseline IRR calculations to 9.5%, making the project unattractive compared to the 9.38% discount rate.

• Improved capital planning yields expected improved project returns. The last tab illustrates a potential improvement of 2.5% IRR.

Given this information, Vent Consulting has identified 3 courses of action (COA): 1) Accept the capital expansion proposal as written by Mr. Gates 2) Accept the retailer ‘s 3–year contract, but reduce capital risk by

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