Read the case Hansson Private Label
Case Overview: A manufacturer of private-label personal care products must decide whether to fund an unprecedented expansion of manufacturing capacity. The decision prompts fundamental financial analysis of the potential project, including development of cash flow projections and net present value calculations.
Complete the Financial Analysis Utilizing the format found in the Hanson Week Template provided by your instructor. Then answer the following questions based on completed template, by recalculating the sheet for each scenario.
Upon review of the financials and the new contract, Tucker Hanson was concerned about the viability of the project but was equally concerned that he would be losing a valued customer. He reviewed the proposed contract, and realized that the Hansson team had overestimated the working capital requirements, and underestimated the risk involved. He asked the team to look over all the details and contact suppliers to try to negotiate better pricing on raw materials. He also challenged his sales team to work with existing customers to try to add some additional business utilizing the excess capacity in the new equipment.
For the following scenarios, add a tab to the spreadsheet you are working on, and label Base Scenario, Scenario 1, Scenario 2, Scenario 3, etc…
Note: These are not mutually exclusive, meaning these build on each other. Once you complete Question 1, copy that sheet to answer Question 2. Question 2, is copied for Question 3, ect..
The team first discovered that the working capital requirement was based on higher receivables than the terms of the new contract. The working capital requirements in the startup costs were deemed to be 50% too high. What impact does this have on the project? Specifically, what are the new NPV and IRR calculations? Does this change the decision to add capacity? Describe in a paragraph.
The supply chain management team reviewed all the raw material costs and determined if they change packaging on another product they make, they will be able to save an additional 3% per unit on the cost of materials. This will also allow them to lock in 3 years of pricing on the raw materials, and will then have raw material costs rise by 1% per year. The change will require an additional $2,000,000 in startup costs. Does this save or cost the company? How much does this save the company? Create a copy of question 1 in a new tab and recalculate.
In talking with advisors about the project, the advisors suggest that due to uncertainty that Tucker should increase the discount rate by 2%. What impact does this have on the project? Copy question 2 to answer this question.
The sales team has been able to add a new product for an existing client to the mix. This contract will account for an additional 10% production on the line immediately. What impact does this have on the project? It is expected that revenue per unit and costs per unit will be the same as the current proposal. Copy question 3 to complete this answer. Describe what you changed in a paragraph.
Just as Tucker was about to make a decision, the employees heard rumors of the expansion and immediately demanded that their contract be re-negotiated. The employees backed up their threats with work stoppages and threatened a strike. This resulted in a 22.33% increase to the hourly labor forecast for the project. What does this do to the viability of the project? Do accept or reject the project given the new projection.
It has been revealed that Sears is the company seeking a new contract. How does this impact your recommendations