The results of the sensitivity analysis suggest that the investment decision is highly sensitive to changes in the FCFs. This highlights the importance of accurately estimating the FCFs to make informed investment decisions. Changes in the discount rate also have a significant impact on the investment decision. A higher WACC would increase the cost of capital and lower the NPV, making the investment less attractive.
Recommendations
Discussion of the strengths and weaknesses of the investment proposal
The investment proposal to expand production capacity at Hansson Private Label has several strengths and weaknesses. The strengths of the proposal include the growing demand for private-label products, HBL’s established reputation in the industry, and the potential for increased profitability and market share. The weaknesses of the proposal include the significant upfront cost, the high level of competition in the industry, and the risks associated with an uncertain economic environment.
Recommendation on whether HBL should pursue the investment
Based on our analysis, we recommend that Hansson Private Label should pursue the investment. The NPV of the project is positive, which indicates that the investment is expected to generate returns that exceed the cost of capital. However, we recommend that HBL should closely monitor the project’s performance and adjust the investment plan if necessary.