Essay about Hpl - Goliath Case Analysis

593 Words Feb 28th, 2011 3 Pages
memorandum to: Tucker Hansson, chief executive officer from: date: September 29, 2009

Mr. Hansson,

After reviewing the Goliath proposal and accompanying financial statements, it is our recommendation that HPL pursue the $170 million expansion of manufacturing capacity. Although the project involves some risks and opportunity costs, our analysis suggests that the project has a very high positive NPV that more than outweighs any such concerns. In addition to increasing market share and reducing costs, the Goliath project will have a positive effect on employee morale and productivity. The
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* The expansion may never payback if our customer chooses not to renew the contract * Expansion will require taking additional debt. This may increase HPL’s cost of capital if interest is not paid regularly. * If HPL increases output and then loses it’s largest customer after three years, it will not have enough demand to justify the increased levels of output.

III. Business & Financial Risks * At the end of the three year contract, the loss of HPL’s largest customer could cause the company to go into bankruptcy * There is risk associated with our largest customer, as they could go out of business even during the contract term. * Potential cost overruns of expansion could delay realizing sales, profits, etc. * Increased fixed costs from the expansion increases operating leverage; during periods of growth, this can be very profitable for the company; however, in poor economic times, the company may suffer financially due to excess capacity, decreased demand, and reduced profits, if any * Increased borrowing increases financial leverage which could put the company in financial distress if it borrows an excessive amount of money; at some point, the cheaper cost of debt becomes more risky as the chance of default increases if the debt amounts cannot be paid with existing cash flows. IV. Recommendations * HPL should perform a due diligence review of the largest customer’s financials to assess the

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