How would you describe HPL and its position within the private label personal care industry?
HPL can be described as a company that was established in the year 1992 and is designed to manufacture the personal care items, which are then sold in the label of the brand by some other companies. These care products include items such as shampoo, soaps, shaving, mouthwash, sunscreen and cream. The retail partners of the company are drug stores, supermarkets and some other mass merchants.
The HPL Company is characterized by the wholesale growth that is very stable and over the time, it has become successful as the result of efficient manufacture of its goods. The company also has very good customer service and an appropriate management of expenses. The HPL Company is very efficient in the label of the private industry. An estimation by Hansson indicated that the company had a greater than 29% the share of $2.39 billion in terms of the sales of the wholesale from its manufactures. That explains how the HPL plays an important role in the market.
Using assumptions made by Executive VP of Manufacturing, Robert Gates, estimate the project’s FCFs. Are Gates’ projections realistic? If not, what changes might you incorporate?
The calculations are given by the formula below
FCF = Free Cash Flow =( Operation CF - Capital expenditure )= EBIT (1-Tax Rate) +( Depreciation & Amortization) –( Change in Net Working Capital) –( Capital Expenditure)
This is not in any way realistic. This is because of the following two reasons:
The duration of the contract made between the HPL and its customers is only three years, and when the contract expires the customer may not be in a position to renew it. However the estimation of the finances only last for a period of 10 years. That is to say that the FCFs assumption is not considered realistic. The generation of the revenue will be very low. This will imply that the FCF will also be very low.
After the team had taken the project, they made an acknowledgment. The company needs to do much toleration in term of the risk than it used to do in the past. However, most of the HPL estimations of the statement of finance are mostly in term of the data of the previous years of the company, this risk is considered to be stable in some lower lever. This is to say that the estimation of the HPL Company is of less accuracy.
Using CFO Sheila Dowling’s projected WACC schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?
The discount rate that has been chosen is 9.38%. With a very high amount in terms of the leverage, there would be a very significant increase in the debt cost. This is to say that the debt cost would be considered unstable at the level of 7.75%.
Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment? You may use sensitivity analysis, break-even analysis or scenario analysis to help you make the decision.
The net profit value of the project is $21099.34. The recommendation is that the Tucker Hansson should go ahead with its investment plans. This is because the net profit value is found to be a positive value,
