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New Heritage Doll Company Wk 4 is the second of two weeks on CAPITAL BUDGETING. Study the Wk 3 Solutions Template before proceeding into Wk 4.

Learning Objectives You will learn the three steps in capital budgeting: basics accomplished in Wk3 1 Identify relevant incremental cash flows 2 Calculate cost of capital (k-wacc) to use as the discount rate 3 Calculate the metrics of capital budgeting: Net Present Value, Profitability Index, Internal Rate of Return, and Payback Period. Then, you will apply the metrics and information in the case study to make a recommendation about which of the two projects to accept. focus of Wk4 The essence of the capital budgeting process is to make sure, before an investment is made, that its prospective rate of return is high enough to justify the investment. Reading

Cohen finance book chapter 4 is a review of Time Value of Money, which you covered in a previous cou Review it as necessary, but defer the review until you look at the TVM applications in chapter 5 beginnin You need to know TVM to understand the capital budgeting metrics of NPV, PI, and IRR. Make sure you have that context in mind before reviewing the TVM chapter 4 (only if you need to).

Read the Heritage Doll Company case again, focussing first on the two case exhibits, shown in the Q1 an Perform the numerical analysis as requested in Q1 and Q2. Then, with the decision metrics in hand, prepare to make the recommendation as requested in the Q3 t

the facts and opinions in the case IN ADDITION to the decision metrics. Read Cohen finance book chapter 5 selectively. Focus on:

See the FLOW DIAGRAM in GREEN depicting the CAPITAL BUDGETING template. See the IS/BS Model in GREEN depicting the connection between PPE (BS) and operating

Review the Wk 3 focussed reading as necessary. Read pps 69-75 on weighted average cost of capital to answer Q1. Read bottom p 67 to 69 on Net Working Capital to answer Q2. Read pps 78-82 on NPV, PI, IRR, PP to answer Q3.

Study the Generic Capital Budgeting Template, p 65-69, and the worked out example on p

Realize that both the Generic Capital Budgeting Template and the Heritage case exhibits a they are both constructed to calculate FREE CASH FLOW=EBIT-TAX+DEPR Questions

See tabs for Q1, Q2, Q3 THESE QUESTIONS MUST BE ANSWERED USING EXCEL. MAKING CALCULATIONS OUTSIDE THE SPREADSHEET AND ENTERING THE RESULTS IS NOT U

.

you covered in a previous course. PI. e a recommendation nvestment is made. tal to answer Q2. Profitability Index. PV. . and IRR. tween PPE (BS) and operating expense (IS). ING THE RESULTS IS NOT USING EXCEL. shown in the Q1 and Q2 tabs. plications in chapter 5 beginning on p 79. d the worked out example on p 82. Make sure you se exhibits. capital to answer Q1.ue. dation as requested in the Q3 tab. nd the Heritage case exhibits are very similar CASH FLOW=EBIT-TAX+DEPREC+/-CHANGE NWC+/-CAPEX. by considering UDGETING template. and in the case exhibits.

cost/ending inv.305 1.409 22.404 152 4.4% 2013 8.500 2012 6.0% 2015 9.503 2011 4.917 583 575 3.270 7. op.7x 31.029 2.860 52.7x 31.866 994 587 4.9x 152 3.762 1. General & Administrative Total Operating Expenses Operating Profit Working Capital Assumptions: Minimum Cash Balance as % of Sales Days Sales Outstanding Inventory Turnover (prod.0% 59.808 8.0x 334 3.250) 575 2.2x 12.470 3.102 7.131 1.853 2.2x 7.082 8.250 1.) Capital Expenditures 1.) Days Payable Outstanding (based on tot.452 8.132 1.277 598 4.419 2.8x 952 3.250 (1.0% 59.New Heritage Doll Company: Capital Budgeting Selected Operating Projections for Match My Doll Clothing Line Expansion Exhibit 1 2010 Revenue Revenue Growth Production Costs Fixed Production Expense (excl depreciation) Variable Production Costs Depreciation Total Production Costs Selling.7x 31.0% 59.291 152 5.3x 30.0% 59.7x 30.2x 12.669 152 5.6% 2014 9.0% 59.155 3.2x 12.392 610 5.035 152 2. exp.0% NET WORKING CAPITAL: RECEIVABLES INVENTORY PAYABLES TOTAL NET WORKING CAPITAL CHANGE IN NET WORKING CAPITAL FREE CASH FLOW: EBIT TAX DEPRECIATION CHANGE IN NWC CAPITAL EXPENDITURE FREE CASH FLOW CUMULATIVE FREE CASH FLOW DISCOUNT RATE (K-WACC) NET PRESENT VALUE PROFITABILITY INDEX INTERNAL RATE OF RETURN PAYBACK PERIOD .735 5.690 1.078 164 5.0x 152 3.2x 8.0x 361 0 1.

YEAR 0. Row labels are entered above as a guide. You must enter the data and/or formulas to make the calculations. You must enter the data and/or formulas to make the calculations. Hint: FREE CASH FLOW=EBIT-TAX+DEPREC+/-CHANGE NWC+/-CAPEX. HINT: Follow the approach used in Q2 of the Wk3 assignment. NPV PI IRR PP 3 4 5 6 . 2 ENTER ANY SALVAGE VALUE AT THE END OF THE PROJECT IN THE CAPEX ROW (37) Free Cash Flow. Row labels are entered above as a guide. Your challenge is to complete the spreadsheet by entering new rows to calculate: 1 Net working capital.Q1 The input data are provided in rows 4-23 above. YEAR 2011 IS THE FIRST YEAR OF OPERATIONS. YEAR 2010 IS THE BASE YEAR.

000 192 6.521 178 6.685 242 8.0% 59.0% 59.969 1.336 11.0% 59.299 2.0% 660 7.411 8.0% 59.2x 12.648 8.0% 635 6.0% 648 6.344 8.687 1.045 2020 14.860 9.203 2.600 3.SEE Q1 AT ROW 50 BELOW 2016 10.7x 31.079 224 7.7x 31.2x 12.7x 31.0x 491 3.440 8.0% 674 7.089 10.373 3.893 2019 13.0x 389 3.603 12.827 2.0x 421 3.753 2018 12.593 8.0x 454 3.2x 12.7x 31.623 2017 11.321 2.355 8.0% 622 5.2x 12.462 1.0x 530 .963 3.0% 59.2x 12.209 3.519 207 7.7x 31.

o make the calculations. o make the calculations. .

222 40.New Heritage Doll Company: Capital Budgeting Selected Operating Projections for Design Your Own Doll Exhibit 2 2010 Revenue Revenue Growth Production Costs Fixed Production Expense (excl depreciation) Variable Production Costs Depreciation Total Production Costs Selling.610 0 3.) Capital Expenditures 4.182 436 14.651 310 9.369 4.454 4.192 3.2x 12.000 2013 14. exp.656 2.6x 33.7x 33.201 (1.650 2.2x 12.201 1.3% SEE Q2 AT ROW 50 BELOW 2014 20. op.9x 2.8% 1.450 550 1.287 18.498 2.240 5.3x 33.8x 310 1.922 12.794 2011 0 2012 6.0% 59.427 310 13.7x 310 3.683 7.201) 0 0 0 0 0 0 0 1.0% 59.0% 59. General & Administrative Total Operating Expenses Operating Profit Working Capital Assumptions: Minimum Cash Balance as % of Sales Days Sales Outstanding Inventory Turnover (prod. cost/ending inv.2x 33.360 139.0% 59.0% 1.566 1.644 2.717 11.) Days Payable Outstanding (based on tot.724 2015 21.435 6.210 1.9x 826 NET WORKING CAPITAL: RECEIVABLES INVENTORY PAYABLES TOTAL NET WORKING CAPITAL CHANGE IN NET WORKING CAPITAL FREE CASH FLOW: EBIT TAX DEPRECIATION CHANGE IN NWC CAPITAL EXPENDITURE FREE CASH FLOW CUMULATIVE FREE CASH FLOW DISCOUNT RATE (K-WACC) NET PRESENT VALUE PROFITABILITY INDEX INTERNAL RATE OF RETURN PAYBACK PERIOD .044 17.250 310 4.2x 12.751 12.779 3.2x 12.

YEAR 2010 IS THE BASE YEAR. Your challenge is to complete the spreadsheet by entering new rows to calculate: AFTER YOU COMPLETE Q1.Q2 The input data are provided in rows 4-23 above. Hint: FREE CASH FLOW=EBIT-TAX+DEPREC+/-CHANGE NWC+/-CAPEX. YEAR 2012 IS THE FIRST YEAR OF OPERATIONS. 3 NPV 4 PI 5 IRR 6 PP . Row labels are entered above as a guide. Row labels are entered above as a guide. YEAR 0. You must enter the data and/or formulas to make the calculations. You must enter the data and/or formulas to make the calculations. COPY ROWS 2 1 Net working capital. ENTER ANY SALVAGE VALUE AT THE END OF THE PROJECT IN THE CAPEX ROW (37) 2 Free Cash Flow. HINT: Follow the approach used in Q2 of the Wk3 assignment.

0% 59.0% 59.786 12.123 2018 25.106 22.113 5.7x 33.553 3.817 20.0% 59.2x 12.712 584 19.966 3.2x 12.7x 33.736 520 17.061 6.946 2017 24.0% 59.412 23.9x 1.775 2.145 4.529 6.219 3.509 2020 28.2x 12.140 5.9x 1.229 5.933 16.833 490 16.0% 1.685 6.858 14.310 2019 27.084 6.694 551 18.0% 1.7x 33.737 24.895 15.ROW 50 BELOW 2016 22.822 13.719 3.544 19.9x 928 3.7x 33.0% 1.9x 875 3.9x 983 3.983 462 15.0% 1.962 3.0% 1.043 3.0% 59.721 6.231 4.2x 12.105 .2x 12.7x 33.

ETE Q1. COPY ROWS 25-45 TO Q2. . make the calculations. make the calculations.

Which one is the most compelling and why? Q3b How do the capital budgeting metrics you calculated in Q1 and Q2 influence Emily's deliberations? Which project creates more value for Heritage Doll Company? Q3c Does Emily need additional information to complete her analysis. what questions should she put to the sponsors of each prioject. . and if so.Q3a Briefly present the business cases for each project.

Q3d As Emily. using the information you have and your professional judgment. make the recommendation and justify it. .

eliberations? .

ecommendation and justify it. .

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