HPL

  |   HPL

HPL

For business report address following questions HPL is a company that manufactures health products, such as vitamin supplements, fish & nutritional oils, general wellbeing and energy etc. The firm, whose sales had grown steadily over the years, generated $681 million in revenue in 2015. Now it is 2016. A few weeks ago, Chemist Warehouse, HPL’s largest retail customer told HPL that it wants to significantly increase HPL’s share of their private label manufacturing. Given that HPL has already been operating near full capacity, it would need to expand to accommodate this important customer without “cannibalizing” a significant portion of HPL’s existing business. However, Chemist Warehouse would commit to only a three-year contract, and it expects a go/no-go commitment from HPL within 30 days. Roberts Gates, the managing director of HPL, worries the risk while is equally invigorated by the prospects of rapid growth and significant value creation. For a private company, this would be a significant investment as the company has not initiated a project of this magnitude for more than a decade and the expansion is not without significant risk. Roberts wonders whether the return on the investment would be large enough to justify the effort and risk, he also wonders about the best means of evaluating the potential investment. Roberts’ financial team has completed their fact-gathering and provided a multifaceted analysis of the proposed project based on historical averages, which Roberts now holds in his hands. It is time for Roberts come to do a final analysis on his own and make a decision. The investment proposal and the other financial assumptions are in Roberts’ hands, and they are presented in the appendix. Roberts sits in his office and he knows that he is in for a long night even days ahead. He normally left detailed financial analyses to his financial team, however, this time he tries to pick up the financial section of his financial team’s assumption, and will begin working on his own analysis. He also finds out that some of the numbers are missing from the information he got. And based on his studies at the Corporate Finance course in university, he is planning to estimate NPV and IRR. And he also plans to generate sensitivity analyses to see how changes in key project variables – especially capacity utilization, selling price per unit, and the direct material cost per unit; or scenario analysis as well. Meanwhile he finds out that the financial team did not mention about inflation, so he is conflicted about how to treat inflation in his analysis. Requirements You are required to write a report to the Board of Directors, addressing the issues confronted to Roberts Gates, recommending as to whether it should be accepted or rejected. However, you should not be misled into thinking that complex computations are at the center of project investment in the practical world of business. So your job here is trying to understand the stories behind these computations and numbers with critical thinking and interpretation. Understand the stories behind these computations and numbers with critical thinking and interpretation around following points 1) Determine the cash flows from this expansion project. 2) The possible evaluation rules for this project, such as NPV or IRR or some other evaluation rules. 3) Any other consideration you think that might contribute to Roberts’ decision. (For example, critically analyze the financial assumptions underlying financial projections etc) Show required computations clearly.



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