New Heritage Doll Company: Capital Budgeting

Teaching Note
TN Exhibit 1 NPV Analysis for Match My Doll Clothing Line Extension

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 4,500 6,860 8,409 9,082 9,808 10,593 11,440 12,355 13,344 14,411
Revenue Growth NA 52.4% 22.6% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Production Costs
Fixed Production Expense (excl depreciation) 575 575 587 598 610 622 635 648 660 674
Variable Production Costs 2,035 3,404 4,291 4,669 5,078 5,521 6,000 6,519 7,079 7,685
0.4522 0.4962 0.5103 0.5141 0.5178 0.5212 0.5245 0.5276 0.5305 0.5332
Depreciation 152 152 152 152 164 178 192 207 224 242
Total Production Costs 0 2,762 4,131 5,029 5,419 5,853 6,321 6,827 7,373 7,963 8,600
Selling, General & Administrative 1,250 1,155 1,735 2,102 2,270 2,452 2,648 2,860 3,089 3,336 3,603
Total Operating Expenses 1,250 3,917 5,866 7,132 7,690 8,305 8,969 9,687 10,462 11,299 12,203

Operating Profit (1,250) 583 994 1,277 1,392 1,503 1,623 1,753 1,893 2,045 2,209
Operating Profit/Sales 0.130 0.145 0.152 0.153 0.153 0.153 0.153 0.153 0.153 0.153
SG&A/Sales 0.257 0.253 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250

Working Capital Assumptions:

Minimum Cash Balance as % of Sales NA 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Days Sales Outstanding NA 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
Inventory Turnover (prod. cost/ending NA 7.7x 8.3x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
Days Payable Outstanding (based on tot 0.0x 30.8x 30.9x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x

Capital Expenditures 1,470 952 152 152 334 361 389 421 454 491 530
Growth in capex -35.2% -84.0% 0.0% 119.3% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
0.2116 0.022187 0.0181 0.036756 0.036756 0.036752 0.036757 0.036754 0.036759 0.036756
Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash 135 206 252 272 294 318 343 371 400 432
Accounts Receivable 729 1112 1363 1472 1590 1717 1855 2003 2163 2336
Inventory 360 500 396 427 461 498 538 581 627 677
Accounts Payable 317 484 593 640 692 747 807 871 941 1016
Net Working Capital 800 907 1334 1418 1531 1653 1786 1929 2083 2250 2429
DNWC 800 107 427 84 113 122 132 143 154 167 180
NWC/Sales 0.202 0.195 0.169 0.169 0.169 0.169 0.169 0.169 0.169 0.169
NPV Analysis
Free Cash Flows 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
EBIT(1-t) (750) 350 596 766 835 902 974 1,052 1,136 1,227 1,325
plus depreciation 0 152 152 152 152 164 178 192 207 224 242
less DNWC (800) (107) (427) (84) (113) (122) (132) (143) (154) (167) (180)
less capital expenditures (1,470) (952) (152) (152) (334) (361) (389) (421) (454) (491) (530)
Free Cash Flow (3,020) (557) 169 682 541 583 630 680 735 793 857
Terminal value 3.00% 16,345

Initial Outlays
Net working capital (800)
Net property, plant & equipmen (1470)

Discount factor 8.40% 1.0000 0.9225 0.8510 0.7851 0.7242 0.6681 0.6163 0.5686 0.5245 0.4839 0.4464
Present value (3,020) (514) 144 536 392 390 388 387 385 384 7679
Net Present Value $ 7,150
NPV without Terminal Value $ (146)

IRR Analysis
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash Flows (3,020) (557) 169 682 541 583 630 680 735 793 17,202
IRR 7.6%

Payback Analysis
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash flows (3,020) (557) 169 682 541 583 630 680 735 793 17,202
Cumulative cash flow (3,020) (3,577) (3,408) (2,726) (2,185) (1,602) (972) (291) 443
Payback period 7.40 years

5-year Cumulative EBITDA $ 6,522

Profitability Index
NPV/Initial Investment 1.35
New Heritage Doll Company: Capital Budgeting
Teaching Note
TN Exhibit 2 NPV Analyss for Design Your Own Doll

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 0 6,000 14,360 20,222 21,435 22,721 24,084 25,529 27,061 28,685
Revenue Growth NA 139.3% 40.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Production Costs
Fixed Production Expense (excl depreciation) 0 1,650 1,683 1,717 1,751 1,786 1,822 1,858 1,895 1,933
Additional development costs (IT personnel) 435
Variable Production Costs 0 2,250 7,651 11,427 12,182 12,983 13,833 14,736 15,694 16,712
Depreciation 0 310 310 310 436 462 490 520 551 584
Total Production Costs 0 435 4,210 9,644 13,454 14,369 15,231 16,145 17,113 18,140 19,229
Selling, General & Administrative 1,201 0 1,240 2,922 4,044 4,287 4,544 4,817 5,106 5,412 5,737
Total Operating Expenses 1,201 435 5,450 12,566 17,498 18,656 19,775 20,962 22,219 23,553 24,966

Operating Profit (1,201) (435) 550 1,794 2,724 2,779 2,946 3,123 3,310 3,508 3,719
Operating Profit/Sales 0.092 0.125 0.135 0.130 0.130 0.130 0.130 0.130 0.130
SG&A/Sales 0.207 0.203 0.200 0.200 0.200 0.200 0.200 0.200 0.200

Working Capital Assumptions:

Minimum Cash Balance as % of Sales NA NA 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Days Sales Outstanding NA NA 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
Inventory Turnover (prod. cost/ending inv.) NA NA 12.2x 12.3x 12.6x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
Days Payable Outstanding (based on tot. op. exp.) NA NA 33.7x 33.8x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x

Capital Expenditures 4,610 0 310 310 2,192 826 875 928 983 1,043 1,105
Growth in capex 0% 608% -62% 6% 6% 6% 6% 6%
0.052 0.022 0.108 0.039 0.039 0.039 0.039 0.039 0.039
Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash 0 180 431 607 643 682 723 766 812 861
Accounts Receivable 973 2328 3278 3475 3683 3904 4139 4387 4650
Inventory 346 786 1065 1130 1197 1269 1345 1426 1512
Accounts Payable 474 1135 1598 1694 1796 1904 2018 2139 2267
Net Working Capital 1,000 1,024 2,410 3,352 3,553 3,766 3,992 4,232 4,486 4,755
DNWC 1,000 24 1,386 942 202 213 226 240 254 269
NWC/Sales 0.171 0.168 0.166 0.166 0.166 0.166 0.166 0.166 0.166
NPV Analysis
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Free Cash Flows
EBIT(1-t) (721) (261) 330 1,077 1,634 1,667 1,767 1,874 1,986 2,105 2,231
plus depreciation 0 310 310 310 436 462 490 520 551 584
less DNWC (1,000) (24) (1,386) (942) (202) (213) (226) (240) (254) (269)
less capital expenditures (4,610) 0 (310) (310) (2,192) (826) (875) (928) (983) (1,043) (1,105)
Free Cash Flow (5,331) (1,261) 306 (309) (1,190) 1,076 1,141 1,210 1,283 1,359 1,441
Terminal value 3.00% 24,737

Discount factor 9.00% 1.000 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 0.4604 0.4224
Present value (5,331) (1,157) 258 (239) (843) 700 681 662 644 626 11,058
Net Present Value $ 7,058
NPV without Terminal Value $ (3,391)

IRR Analysis
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash Flows (5,331) (1,261) 306 (309) (1,190) 1,076 1,141 1,210 1,283 1,359 26,178
IRR -0.5%

Payback Analysis
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cash flows (5,331) (1,261) 306 (309) (1,190) 1,076 1,141 1,210 1,283 1,359 26,178
Cumulative cash flow (5,331) (6,592) (6,286) (6,595) (7,784) (6,708) (5,566) (4,357) (3,074) (1,715) 24,464
Payback period >10 years

5-year Cumulative EBITDA $ 8,778

Profitability Index
NPV/Initial Investment 1.32
New Heritage Doll Company: Capital Budgeting
Teaching Note
TN Exhibit 3 NPV Sensitivity Analyses

NPV of Match My Doll Clothing Line Extension

NPV if
TV growth rate TV=BV of
Discount rate 0% 1% 2% 3% NWC + PPE
7.70% $ 5,289 $ 6,141 $ 7,292 $ 8,932 $ 3,011
8.40% $ 4,408 $ 5,075 $ 5,950 $ 7,150 $ 2,687
9.00% $ 3,766 $ 4,314 $ 5,019 $ 5,958 $ 2,425

NPV of Design Your Own Doll

NPV if
TV growth rate TV=BV of
Discount rate 0% 1% 2% 3% NWC + PPE
7.70% $ 5,830 $ 7,263 $ 9,198 $ 11,957 $ 3,567
8.40% $ 4,404 $ 5,526 $ 6,998 $ 9,016 $ 2,980
9.00% $ 3,372 $ 4,294 $ 5,479 $ 7,058 $ 2,507