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The New Heritage Doll Company’s Vice-President of Production, Emily Harris, had to decide which of two proposals

she should appro e for the company’s upcoming capital !udgeting meetings" The first pro#ect in ol ed e$panding an e$isting %&atch &y Doll Clothing' line, which had a pro en record of success in the past" The second pro#ect introduced a new initiati e called %Design (our )wn Doll', which used a we!-!ased software ena!ling users to customi*e a doll’s features to the customers’ specifications" To help Emily reach her decision, + will calculate the Net Present Value ,NPV- of !oth pro#ects to find out which pro#ect is more profita!le" +n the financial analysis of !oth pro#ects Emily was gi en the following assumptions. /" )perating pro#ections were used to de elop cash flow forecasts and then to calculate Net Present Value, +nternal 0ates of 0eturn, pay!ac1 period and other in estment metrics" The cash flows e$cluded all financing charges and non-cash items ,i"e" depreciation-, and were calculated on an after-corporate-ta$ !asis" The New Heritage’s corporate ta$ rate was 234 5" Discount rate was set at 6"24 - for medium-ris1 pro#ect 7" NPV calculations included a terminal alue computed as the alue of a perpetuity growing at constant rate" + computed 8ree Cash 8lows ,8C8- to find out the actual amount of cash from operations that the company could use in de eloping its new pro#ects" + calculated the terminal alue for 5353 as pro#ected 8C8 in the first year !eyond the pro#ection hori*on di ided !y discount rate of 6"24 less the perpetuity growth rate, which in this case was 74" 9ccording to my calculations the &&D&’s terminal alue in 5353 is /:,72:,333 and D()D’s is 5;,26:,333" 2" + calculated the 8C8 using <or1ing Capital 9ssumptions gi en in the case. = Cash > 74 ? 0e enue = 9ccounts recei a!le > 0e enue $ Days @ales )utstanding A 7:B = +n entory Turno er > Production costs A Ending in entory

333 . could ha e a negati e impact on future !enefits of selected pro#ect" The company could also impro e cash flows through the introduction of customers’ loyalty reward programs. companies aim to increase cash flow from their e$isting operations !y collecting recei a!les as soon as possi!le and slowing down their paya!les without harming their relations with suppliers" New Heritage Company allows almost :3 days for recei a!les to !e collected and 73 days to pay its trade creditors" + would recommend that the management should thin1 of impro ing those results !y granting a discount to its customers for paying an in oice !efore the due date.. such as 8ace!oo1. referral systems and social media portals. !ringing more money to the company" The company should consider attracting new customers through its ad ertising strategies. which would allow customers to sa e additional money and the company would get its money faster" The NPV is a forecast./B/. therefore pro#ect num!er 5 should !e selected" To impro e the present alue for !oth pro#ects the management of the company should thin1 of how to impro e the pro#ects’ cash flows" Typically.= 9ccounts paya!le > .Total )perating E$penses C Depreciation. the NVP is not free from ris1s" The management should !e aware that ris1s such as increase in inflation. and %!uy one get one free' promotions. which could increase future sales.Ta!le 5-" +n !oth cases the NPV is greater than *ero !ut NPV of pro#ect 5 is greater than NPV of pro#ect /.and the NPV of the Design (our )wn Doll pro#ect is EF.333 . reward points. such as gi ing credit towards future purchase. the outcome is not gi en" Typically forecasts for shorter periods are more accurate" The forecast for New Heritage Company is !ased on a time period of /3 years" + would recommend reducing that time period to pro ide more accurate cash flow figures" 9s with all forecasts. and as with e ery forecast. which could !e a ery cost effecti e and efficient method" . and increased competition in the toys !usiness.Ta!le /.$ Days Paya!le )utstanding A 7:B Dased on the pro ided information the NPV of the &atch &y Doll Clothing pro#ect is E. change in interest rates..5B.

&atch &y Doll Clothing Gine E$pansion and Design (our )wn Doll" 9 systematic process will !e used to determine which proposal to recommend" Criteria +nclude.Gast. I Threat. <ea1ness. + would recommend for the management to monitor the costs to increase profits" Howe er.@trength.analysis was used to aid the decision process" @ee Ta!les / I 5 for @<)T analysis" . the company should in est a portion of the profits to generate additional money and e$pand the !usiness through creation of new products and pro#ects" ) er iew Two !usiness proposals from the Production di ision of the New Heritage Doll Company are !eing considered for su!mission to the capital !udgeting committee" )nly one proposal will !e su!mitted" The proposals are. /" Comparison of the !usiness cases 5" NPV analysis 7" +00 and pay!ac1 period analysis 2" 9nalysis of additional information B" 0ecommendation Comparison of the Dusiness Cases &ost Compelling Dusiness Case &atch &y Doll Clothing Gine E$pansion &atch &y Doll Clothing Gine E$pansion is the the most compelling opportunity" This initial recommendation is !ased solely on a Hualitati e comparison of the cases and the financial e$hi!its pro ided !y the !rand managers" 9 @<)T . the management should weigh the !enefits of reducing costs to a oid an ad erse effect of diminished profits" +f additional cash inflows are achie ed. )pportunity.

Denefits of the &atch &y Doll Clothing Gine E$pansion. ? @uccess of the original line of !usiness ? Jtili*ation of the !usinesses e$isting strengths ? Gong term a!ility for the product to stay up to date and dri e !usiness Concerns for the Design (our )wn Doll. ? Pro#ected to !e as profita!le as the e$isting line" ? )pportunities e$ist for off-pea1 discounts in the supply chain and manufacturing ? 0eduction of seasonality in sales and earnings ) er iew Dusiness Case 5 C Design (our )wn Doll The proposal for the Design (our )wn Doll is to create a new line of !usiness of %one-of-a-1ind' dolls for e$isting loyal customers’ collections" &ar1et research with focus groups indicates that girls want dolls li1e themsel es" The new !usiness would ena!le customers to. ? Participate in the e$perience of creating the doll ? Ko to a we!site and customi*e the doll’s physical attri!utes. !ased on the success and popularity of the e$isting product line. to include products for all four seasons" The current product includes a doll and two sets of matching warm weather clothing for child and doll" @ee Ta!le / for @<)T analysis" Denefits of the e$panded !usiness line include. such as hair and eye color . ? High ris1 associated with de eloping a proprietary software system ? Comple$ity of manufacturing ? High !rea1-e en sales olume ) er iew Dusiness Case / C &atch &y Doll Clothing Gine E$pansion The proposal for the &atch &y Doll Clothing Gine E$pansion is to e$pand the line.

designing a doll.as descri!ed in the operating pro#ection 7" Design (our )wn Doll .Dase scenario.? @elect accessories and clothing ? )nce the customer has completed the design.Dase scenario.L9dditional Ga!or scenarioL9dditional Ga!or scenario . an additional E27B. the doll is manufactured and shipped to the customer" 9 !enefit of the new !usiness line is premium pricing" The intent of the !usiness is to create a new mar1et segment around design a doll . is a concern" The !rand manager’s decision appears to !e !ased on the assumption that internal resources will !e allocated at no additional cost to support the pro#ect" Howe er. or did you mean Design (our )wn Doll-" @ee Ta!le 5 for @<)T analysis" )ne of the main draw!ac1s of Design (our )wn Doll is the higher costs associated with the customi*ation process. which outweigh its !enefits" +n sum. the &atch &y Doll E$pansion appears to !e the more attracti e pro#ect" ) er iew 8inancial 9nalysis Three scenarios were analy*ed in order to financial outcomes" iew a range of possi!le /" &atch &y Doll Clothing Gine E$pansion . these resources must !e factored into a scenario in case the assumption is false" To account for these additional la!or costs.NPV @cenarios . !ased on our initial e aluation.as descri!ed in the operating pro#ection 5" Design (our )wn Doll . as well as ongoing la!or costs. o er the course of the pro#ect.This scenario is included !ecause the !rand manager’s decision to e$clude some initial la!or costs. to account for cost of li ing and salary increases" NPV 9nalysis Ta!le 7 .333 is added to year 53/3" This cost will grow at B4 per year.

M E 5.:"3.24 M /2"564 M /3"2B4 M /4 M /..med.Discount 0ate M Corporate Discount 0ates .4 .".:63" Comparing the !aseline &atch &y Doll Clothing Gine E$pansion to the Design (our )wn Doll L9dditional Ga!or shows that &atch &y Doll Clothing Gine has appro$imately E5"5B million more alue than Design &y )wn Doll" +00 9nalysis Ta!le 2 C +00 @ensiti ity 9nalysis M M +00 M 0e enue Change M &atch &y Doll Clothing Gine M Design (our )wn Doll .7F/"B6 M Design (our )wn Doll .M 6"24 .!aseline.M Design (our )wn Doll .9ssumptionComparing only the !aseline scenarios for the declared and assumed le els of ris1.low.4 M /3"324 M 34 M /:".M 74 M /6"524 M /2":64 M /3"6:4 M 54 M /. when the additional cost of la!or is factored into the comparison.. the Design (our )wn Doll proposal shows the highest NPV" Howe er.M M .7/F"F7 M E 63F"76 M E 7FF":6 M ? &atch &y Doll Clothing Gine > &oderate 0is1 .Daseline.:B7"6F M E 5.L9dditional Ga!or.".Ladditional la!or.Daseline.67:".M E /.0is1.high.6"BF M E 5.Declared? Design (our )wn Doll > High 0is1 .M E 7.M &atch &y Doll Clothing Gine .24 M /7"2:4 M F":54 M .F.526"F/ M E 5.3 M E 7. the NPV of Design (our )wn Doll L9dditional Ga!or is reduced to E7FF.M F"34 . M Design (our )wn Doll ."524 M /7"6.

9ssumption? Net <or1ing Capital ratios not modified .9ssumption? Capital e$penditures are constant .9ssumption? @K9 costs are constant ."264 M -:4 M /7":74 M /3"F34 M .4 M ."374 M ? The model reflects a change in re enue from L74 to -:4" 0e enue and aria!le costs ary with respect to nominal a erage KDP" . ? &atch &y Doll Clothing Gine E$pansion .!aseline.64 M -74 M /B"5/4 M /5"/F4 M 6"7B4 M -24 M /2":F4 M //".> 6"27 years ? Design (our )wn Doll .-/4 M /:"574 M /7"324 M F"534 M -54 M /B"..54 M /5":54 M 6".!aseline. the &atch &y Doll Clothing Gine E$pansion outperforms the other two scenarios" @ee Kraph 5 for a graphical comparison of the +00" 0egarding the sensiti ity analysis.DeclaredThe +00 for the &atch &y Doll Clothing Gine E$pansion e$ceeds that of Daseline Design (our )wn Doll and Design (our )wn Doll L9dditional Ga!or" +n a down economy with a pro#ected reduction in re enues of :4."F/4 M -B4 M /2"/:4 M //"774 M .> /3"3F years ? Design (our )wn Doll L9dditional Ga!or > /3"7/ years . the +00 for Design (our )wn Doll L9dditional Ga!or falls !elow the high-ris1 discount rate of F"34 at re enues of -54" @ee Kraphs 7 for a graphical iew of the sensiti ity analysis" Pay!ac1 Period 9nalysis Pay!ac1 period for each of the three scenarios.9ssumption? +00 of NPV is not used !ecause sensiti ity is included in the discount rate .

!aseline.!aseline2" +00 for Design (our )wn Doll .O +00 Design (our )wn Doll L9dditional Ga!or .Kreater !y E5"5B million7" +00 for &atch &y Doll Clothing Gine E$pansion O +00 for Design (our )wn Doll .is o er-stated since it omits la!or costs" 5" NPV for &atch &y Doll Clothing Gine E$pansion O NPV for Design (our )wn Doll L9dditional Ga!or . similar to the additional la!or costs in Design (our )wn DollN :" <hat le el of ris1 is Design (our )wn DollN .!aseline." +s a change in re enue !etween L74 I -:4 alidN 6" 0e enue and aria!le costs are ad#usted down proportionately with KDP" +s this alidN F" +s historical data for in entory turno er ratios. Days @ales )utstanding and Days Paya!le )utstandingN B" 9re there hidden la!or costs not !eing considered in the &atch &y Doll Clothing Gine E$pansion. Days sales outstanding and days paya!le outstanding a aila!le" 0ecommendation 0ecommendation &atch &y Doll Clothing Gine E$pansion /" NPV for Design (our )wn Doll .9dditional +nformation 0eHuired /" <hat has !een the historical impact of KDP on company re enue as well as on the pre ious &atch &y Doll Clothing GineN 5" <hat is the impact of re enue change on fi$ed e$penses and @K9N 7" <hat changes would !e e$pected in capital e$penditures during periods of changeN 2" Does the firm ha e historical data for in entory turno er ratios.

B" +00 of the Design (our )wn Doll . &atch &y Doll Clothing Gine E$pansion @trengths ? Current popularity and cele!rity trends allow for premium pricing maintenance" ? Dusiness model le erages the firm’s e$isting operational and sales strengths" ? 0is1 is compara!le to that of e$isting !usiness line" M <ea1nesses ? No mar1et research conducted" ? @ales pro#ection !ased on e$isting line" ? &ust 1eep pace with current trends to maintain premium pricingQ small window of opportunity .@<)T.due to fic1le nature-" ? @upply chain and manufacturing utili*ation challenges with e erchanging line" M )pportunities ? E$pand the mar1et to all four seasonsQ ? reduce the seasonality in sales and earnings" ? Ge erage the popularity with cele!rity trendQ opportunity window is now" ? &aintain premium prices" ? Ta1e ad antage of off-pea1 discounts from suppliers and manufacturers" M Threats ? )ther igorous entrants or competitors into mar1et segment" ? Presumption of discounts offered !y suppliers and manufacturers" ? Continued willingness for children to dress li1e their dolls .!oth scenariosF" @<)T analysis suggests that &atch &y Doll Clothing Gine E$pansion is more compelling" /3" Ta!les and Charts T9DGE / .!aseline.is more sensiti e to re enue changes than the +00 of &atch &y Doll Clothing Gine E$pansion :" +00 of the Design (our )wn Doll L9dditional Ga!or is more sensiti e to re enue changes than the +00 of the Design (our )wn Doll .children mature at different ages !etween ages 7 and /5 years.and trends among children change o er time" M ." +00 of Design (our )wn Doll L9dditional Ga!or drops !elow the high-ris1 discount rate of F4 if re enues drop !y 54 6" Pay!ac1 period for &atch &y Doll Clothing Gine E$pansion P Design (our )wn Doll .!aseline.

Design (our )wn Doll @trengths ? Niche mar1et" ? Ge erage e$isting loyal customer !ase" ? Conducted mar1et research" ? Create a uniHue e$perience" M <ea1nesses ? &ar1et research !ased on a focus group.@ensiti ity 9nalysis on +00 Ta!le B C Dest Case A <orst Case +00 @cenarios M Dest Case @cenario .L74 re enue.-:4 re enueM &atch &y Doll Clothing Gine E$pansion M +00 > /6"524Pay!ac1 period > .@<)T."374 .whole new infrastructure-" ? Gonger production time" M )pportunities ? Customers ready to pay premium prices" ? Creates a new mar1et segment of customi*ed %one-of-a-1ind' doll" ? Possi!ility of licensing proprietary software or other +ntellectual Property" M Threats ? @upply chain and manufacturing disruptions" ? Jntested elements into the manufacturing process" ? Completely dependent upon a near-flawless operation" ? High ris1 of damaging relationships with its !est customers" ? Jn1nown num!er of aria!les to perform Huality control" M Kraph / .M <orst Case @cenario . !ut may not !e representati e of the niche mar1et" ? High costs with speciali*ed manufacturing.lower than F4 discount rate-Pay!ac1 period > /3"26 yrs M 0eferences .+00 Comparison Kraph 7 .additional la!or cost.Ta!le 5 .NPV @cenario Comparison Kraph 5 ."6 yrs M +00 > /7":74Pay!ac1 period > /3"35 yrs M Design (our )wn Doll M +00 > /2":4Pay!ac1 period > /3"3/ yrs M Not 9pplica!le M Design (our own Doll . high-s1illed la!or. and purchasing and maintaining speciali*ed machines" ? Completely dependent on the niche mar1et" ? No prior 1nowledge or e$perience with proprietary design software .M Not 9pplica!le M +00 > .