New Heritage Doll Company: Capital Budgeting

Exhibit 1
Selected Operating Projections for Match My Doll Clothing Line Expansion
2010
Revenue

2011
4,500

Revenue Growth
Production Costs
Fixed Production Expense (excl depreciation)

575

Variable Production Costs

2,035

Depreciation
Total Production Costs

152
0

2,762

Selling, General & Administrative

1,250

1,155

Total Operating Expenses

1,250

3,917

(1,250)

583

Operating Profit
Working Capital Assumptions:
Minimum Cash Balance as % of Sales

3.0%

Days Sales Outstanding

59.2x

Inventory Turnover (prod. cost/ending inv.)

7.7x

Days Payable Outstanding (based on tot. op. exp.)

Capital Expenditures

NET WORKING CAPITAL:

MINIMUM CASH BALANCE
RECEIVABLES
INVENTORY
PAYABLES
TOTAL NET WORKING CAPITAL
CHANGE IN NET WORKING CAPITAL
FREE CASH FLOW:
EBIT
TAX @ 40%
Earning After Tax
DEPRECIATION
CHANGE IN NWC
CAPITAL EXPENDITURE
Tax Benefit
FREE CASH FLOW
Terminal Value
Cash Flow After terminal value
CUMULATIVE FREE CASH FLOW

30.8x
1,470

952

2010

2011

800.00
(800.00)

135.00
76.05
359.66
127.35
443.37
356.63

(1250.00)
(1250.00)
0.00
(800.00)
(1470.00)
(3520.00)
(3520.00)
18956.34

582.80
(233.12)
349.68
152.20
356.63
(952.20)
500.00
406.31
406.31

DISCOUNT RATE

8.40%

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN

$7,783
3.2
27%

PAYBACK PERIOD

5.84 Years

NPV VS DISCOUNT RATE

Rate

NPV
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%

7282
6507
5800
5155
4565
4026
3531
3078
2662
2280
1928
1604
1306
1030
776
540
322
120
-67
-241
-402
-553
-693

Cash Flow vs TIME

Years
Net Cash Flow
2010
(3520.00)
2011
(3113.69)
2012
(2705.94)
2013
(1867.95)
2014
(1258.74)
2015
(601.34)
2016
108.69
2017
875.43
2018
1703.47

8000
7000
6000
5000
4000
3000
2000
1000
0
-10009%

10%

11%

-2000

4000.00
3000.00
2000.00
1000.00
0.00
2010
(1000.00)
(2000.00)
(3000.00)
(4000.00)

2011

12

(3000.00)
(4000.00)

2019
2020

2597.76
3563.58

Without Terninal Value

TOTAL NET WORKING CAPITAL
CHANGE IN NET WORKING CAPITAL

800.00
(800.00)

FREE CASH FLOW

443.37
356.63

-3520 406.31369

DISCOUNT RATE (K-WACC)

9%

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN
PAYBACK PERIOD

1155.272052887
1.3282022878
15%
8.8162894047

Rate

NPV
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

$2,327
$1,998
$1,695
$1,415
$1,155
$915
$692
$485
$292
$113
-$54
-$210
-$355
-$491
-$619
-$738
-$850
-$955
-$1,054
-$1,147

SEE Q1 AT ROW 50 BELOW

2012

2013

2014

2015

2016

2017

6,860

8,409

9,082

9,808

10,593

11,440

52.4%

22.6%

8.0%

8.0%

8.0%

8.0%

575

587

598

610

622

635

3,404

4,291

4,669

5,078

5,521

6,000

152

152

152

164

178

192

4,131

5,029

5,419

5,853

6,321

6,827

1,735

2,102

2,270

2,452

2,648

2,860

5,866

7,132

7,690

8,305

8,969

9,687

994

1,277

1,392

1,503

1,623

1,753

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

8.3x

12.7x

12.7x

12.7x

12.7x

12.7x

30.9x

31.0x

31.0x

31.0x

31.0x

31.0x

152

152

334

361

389

421

2012

2013

2014

2015

2016

2017

205.80
115.94
500.12
189.84
632.02
(188.65)

252.26
142.11
396.01
229.97
560.41
71.61

272.45
153.48
426.72
247.97
604.68
(44.27)

294.24
165.76
460.86
267.81
653.04
(48.37)

317.78
179.02
497.72
289.24
705.29
(52.24)

343.20
193.34
537.54
312.38
761.71
(56.42)

994.00
(397.60)
596.40
152.20
(188.65)
(152.20)

1277.30
(510.92)
766.38
152.20
71.61
(152.20)

1391.80
(556.72)
835.08
152.20
(44.27)
(333.80)

1503.10
(601.24)
901.86
164.40
(48.37)
(360.50)

1623.46
(649.38)
974.08
177.50
(52.24)
(389.30)

1753.27
(701.31)
1051.96
191.70
(56.42)
(420.50)

407.75

837.99

609.21

657.39

710.03

766.74

407.75

837.99

609.21

657.39

710.03

766.74

NPV

0
09%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

25%

26%

Net Cash Flow

2011

2012

2013

2014

2015

2016

2017

2018

27%

632.02
(188.65)

407.7463

560.41
71.61

604.68
(44.27)

653.04
(48.37)

705.29
(52.24)

761.71
(56.42)

837.9897787911 609.21417 657.39172 710.03107 766.74011

$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
-$5005%
-$1,000
-$1,500

6%

7%

8%

9%

10%

11%

12%

13%

14

W 50 BELOW

2018

2019

2020

12,355

13,344

14,411

8.0%

8.0%

8.0%

648

660

674

6,519

7,079

7,685

207

224

242

7,373

7,963

8,600

3,089

3,336

3,603

10,462

11,299

12,203

1,893

2,045

2,209

3.0%

3.0%

3.0%

59.2x

59.2x

59.2x

12.7x

12.7x

12.7x

31.0x

31.0x

31.0x

454

491

530

2018

2019

2020

370.66
208.81
580.56
337.37
822.65
(60.94)

400.31
225.51
626.99
364.36
888.46
(65.81)

432.34
243.56
677.16
393.51
959.54
(71.08)

1893.30
(757.32)
1135.98
207.10
(60.94)
(454.10)

2045.00
(818.00)
1227.00
223.60
(65.81)
(490.50)

2208.50
(883.40)
1325.10
241.50
(71.08)
(529.70)

828.04

894.29

828.04

894.29

965.82
15392.76
16358.58

NPV

23%

24%

25%

26%

27%

28%

29%

30%

31%

Net Cash Flow

2017

2018

2019

2020

822.65
(60.94)

888.46
(65.81)

0.00
888.46

828.0394002341 894.29067 1854.2813808

NPV

NPV

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

NPV

24%

New Heritage Doll Company: Capital Budgeting

Exhibit 2
Selected Operating Projections for Design Your Own Doll
2010
Revenue
Revenue Growth
Production Costs
Fixed Production Expense (excl depreciation)
Variable Production Costs
Development Costs
Depreciation
Total Production Costs
Selling, General & Administrative

1,201

Total Operating Expenses

1,201

Operating Profit

(1,201)

Working Capital Assumptions:

Minimum Cash Balance as % of Sales
Days Sales Outstanding
Inventory Turnover (prod. cost/ending inv.)
Days Payable Outstanding (based on tot. op. exp.)
Capital Expenditures

4,610
2010

NET WORKING CAPITAL:

MINIMUM CASH REQUIRED
RECEIVABLES
INVENTORY
PAYABLES
TOTAL NET WORKING CAPITAL
CHANGE IN NET WORKING CAPITAL
FREE CASH FLOW:
EBIT
TAX @ 40%
Earning After Tax
DEPRECIATION
CHANGE IN NWC
Tax Benefit
CAPITAL EXPENDITURE
CASH FLOW
TERMINAL VALUE
Cash Flow After TV
CUMULATIVE FREE CASH FLOW

0.00

(1201.00)
(1201.00)

(4610.00)
(5811.00)
(5811.00)
25530.54

DISCOUNT RATE

9%

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN

8187.48
2.41
20%

PAYBACK PERIOD

8.49

NPV VS DISCOUNT RATE

Rate
NPV
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%

21%
22%

23%
24%

25%
26%

27%
28%

29%
30%

31%
Cash Flow vs TIME
Years
Net Cash Flow
2010
2011
2012
2013
2014
2015
2016

8187
7050
6015
5072
4214
3430
2715
2061
1463
915
413
48
471
859
1217
1546
1849
2129
2387
2625
2845
3049
3237

5811
6766
5727
5273
5930
4740
3480

10000
8000
6000
4000
2000
0
9%

10%

11%

12%

13%

2000
4000

4000

2000

0
2010
2000

2011

2012

2017
2018
2019
2020

0
2010
2145
730
770
2360

2011

2000

4000

6000

Without Terninal Value

8000

TOTAL NET WORKING CAPITAL

CHANGE IN NWC
FREE CASH FLOW

-5811

DISCOUNT RATE (K-WACC)

0.09

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN
PAYBACK PERIOD

NPV VS DISCOUNT RATE

Rate
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

-754.4894272428
0.8701618607
7%
8.4866508811

$1,025
$520
$58
-$366
-$754
-$1,112
-$1,441
-$1,743
-$2,022
-$2,280
-$2,518
-$2,738
-$2,941
-$3,130
-$3,304
-$3,467
-$3,617
-$3,757
-$3,888
-$4,009

2012

NPV VS DISCOUNT RATE

Rate
NPV Project 1
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

1025
520
58
-366
-754
-1112
-1441
-1743
-2022
-2280
-2518
-2738
-2941
-3130
-3304
-3467
-3617
-3757
-3888
-4009

SEE Q2 AT ROW 50 BELOW

2011

2012

2013

2014

2015

2016

2017

6,000

14,360

20,222

21,435

22,721

24,084

139.3%

40.8%

6.0%

6.0%

6.0%

1,650

1,683

1,717

1,751

1,786

1,822

2,250

7,651

11,427

12,182

12,983

13,833

310

310

310

436

462

490

435

4,210

9,644

13,454

14,369

15,231

16,145

1,240

2,922

4,044

4,287

4,544

4,817

435

5,450

12,566

17,498

18,656

19,775

20,962

(435)

550

1,794

2,724

2,779

2,946

3,123

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

12.2x

12.3x

12.6x

12.7x

12.7x

12.7x

33.7x

33.8x

33.9x

33.9x

33.9x

33.9x

310

310

2,192

826

875

928

2011

2012

2013

2014

2015

2016

2017

1000.00
(1000.00)

180.00
101.40
345.62
161.86
465.17
534.83

430.80
242.69
785.96
371.77
1087.68
(622.51)

606.65
341.75
1065.21
515.55
1498.06
(410.38)

643.04
362.26
1129.61
549.66
1585.25
(87.19)

681.63
383.99
1197.41
582.65
1680.38
(95.12)

722.53
407.03
1269.25
617.61
1781.20
(100.82)

(1000.00)
480.40
0.00
(954.60)

550.30
(220.12)
330.18
309.70
534.83
174.00
(309.70)
1039.01

1794.30
(717.72)
1076.58
309.70
(622.51)

2723.70
(1089.48)
1634.22
309.70
(410.38)

2779.20
(1111.68)
1667.52
436.20
(87.19)

2945.80
(1178.32)
1767.48
462.40
(95.12)

3122.60
(1249.04)
1873.56
490.10
(100.82)

(309.70)
454.07

(2191.50)
(657.96)

(825.70)
1190.83

(875.30)
1259.46

(927.80)
1335.04

(954.60)

1039.01

454.07

(657.96)

1190.83

1259.46

1335.04

435

(435.00)
(435.00)

NPV

000

000

000

000

000
0
9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

000

000

Net Cash Flow

0
2010

2011

2012

2013

2014

2015

2016

2017

25

0
2010

2011

2012

2013

2014

2015

2016

2017

1000 465.17046 1087.6819 1498.0582 1585.2526 1680.3774 1781.1977

-1000 534.82954 -622.5114 -410.3763 -87.1944 -95.12488 -100.8203
-954.6 1039.0095 454.06856 -657.9563 1190.8256 1259.4551 1335.0397

$2,000
$1,000
$0
5%
-$1,000
-$2,000
-$3,000
-$4,000
-$5,000

6%

7%

8%

9%

10%

NPV Project 2
2327
1998
1695
1415
1155
915
692
485
292
113
-54
-210
-355
-491
-619
-738
-850
-955
-1054
-1147

Sensitivity Analy
4000
3000
2000
1000
0
5%
-1000
-2000
-3000
-4000
-5000
-6000

6%

7%

8%

9%

10%

11%

12%

13%

2018

2019

2020

25,529

27,061

28,685

6.0%

6.0%

6.0%

1,858

1,895

1,933

14,736

15,694

16,712

520

551

584

17,113

18,140

19,229

5,106

5,412

5,737

22,219

23,553

24,966

3,310

3,509

3,719

3.0%

3.0%

3.0%

59.2x

59.2x

59.2x

12.7x

12.7x

12.7x

33.9x

33.9x

33.9x

983

1,043

1,105

2018

2019

2020

765.88
431.46
1345.39
654.66
1888.07
(106.87)

811.83
457.34
1426.12
693.95
2001.36
(113.29)

860.54
484.78
1511.70
735.58
2121.44
(120.09)

3310.10
(1324.04)
1986.06
519.50
(106.87)

3508.56
(1403.42)
2105.14
550.70
(113.29)

3719.00
(1487.60)
2231.40
583.80
(120.09)

(983.40)
1415.29

(1042.50)
1500.05

1415.29

1500.05

(1105.00)
1590.11
23170.24
24760.36

Rate

NPV

22%

23%

24%

25%

26%

27%

28%

29%

30%

31%

low

016

2017

2018

2019

2020

Net Cash Flow

NPV
9% 7282.0451
10% 6506.9878
11% 5800.219
12% 5154.9907
13% 4565.2826
14% 4025.7174
15% 3531.4869
16% 3078.2869
17% 2662.2608
18% 2279.9488
19% 1928.2441
20% 1604.3544
21% 1305.7667
22% 1030.218
23% 775.6679
24% 540.27496
25% 322.37594
26% 120.46696
27% -66.81301
28% -240.6968
29% -402.3022
30% -552.6434
31% -692.6419

016

2017

2018

2019

2020

Net Cash Flow

1888.0677 2001.3551
0
-106.87 -113.2873 2001.35508
1415.29 1500.0487 3591.46991

NPV

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

NP

sitivity Analysis (Without terminal value)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

Proje

Proje

8187.4783
7049.6486
6014.7169
5072.4319
4213.6505
3430.2094
2714.8117
2060.9283
1462.7114
914.91729
412.83995
-47.74874
-470.6511
-859.2897
-1216.748
-1545.809
-1848.98
-2128.533
-2386.516
-2624.787
-2845.028
-3048.764
-3237.377

Sens
10000

8000

6000

4000

2000

0
9%
-2000

-4000

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

23%

24%
NPV

24%

Project 1
Project 2

Sensitivity Chart

18%

19%

20%

21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

31%

Project 1
Project 2

29%

30%

31%

Q3a
Briefly present the business cases for each project. Which one is the most compelling and

Q3b
How do the capital budgeting metrics you calculated in Q1 and Q2 influence Emily's delibe
Which project creates more value for Heritage Doll Company?

Q3c
Does Emily need additional information to complete her analysis, and if so,
what questions should she put to the sponsors of each prioject.

Q3d
As Emily, using the information you have and your professional judgment, make the recom

e most compelling and why?

nfluence Emily's deliberations?

ment, make the recommendation and justify it.