Topics: Net present value, Internal rate of return, Investment Pages: 3 (694 words) Published: February 6, 2011



SBF16020 Advance Corporate Finance


Hansson Private Label Inc

Prepared for:
Mr. Harry Abrikian

Prepared By:

Hansson Private Label Inc.

TO: Mr. Harry Abrikian
FROM: Analyst #03053351
Date:January 18, 2011
SUBJECT: Investment Decision – Goliath Facility

I am pleased to inform you that I have completed the assigned task of evaluating the capital investment options and determining the best course of action with regard to the investment of $170 million to expand the manufacturing capacity of Hansson’s privately owned company, Hansson Private Label (HPL). Based on my analysis, I do not recommend that the company invest in the project named Goliath Facility.

In my analysis, I utilized some of the more popular valuation techniques to guide my decision: (i) Payback Method (ii) Discounted Payback Method (iii) Net Present Value (NPV), (iv) Internal Rate of Return (IRR) and (v) Profitability Index.

Results of Analyses

I outline below the various techniques of assessment, the results and the rationale for accepting or rejecting the investment.

1.Payback Method – The investment is outside of the realm of the Company’s required payback period for the project. The Goliath Facility investment failed to meet the company’s criteria; as it yields a payback period of 7.48 years. While the payback technique gives an indication of the time frame for recovery of capital outlay, It is also of note that this method does not account for inflation.

2.Discounted Payback Method – Based on this technique, the Goliath project would yield a payback period beyond 10 years.

3.Net Present Value – The NPV calculated for the Goliath project was a negative $26.2million dollar. This result indicates that the project is not expected to increase the asset base of HPL. Although the NPV method is biased in favor of large...
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