New Heritage Doll Company: Capital Budgeting

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

2010 2011 2012 2013 2014 2015 2016 2017

Revenue 4,500 6,860 8,409 9,082 9,808 10,593 11,440
Revenue Growth 52.4% 22.6% 8.0% 8.0% 8.0% 8.0%
Production Costs
Fixed Production Expense (excl depreciation) 575 575 587 598 610 622 635
Variable Production Costs 2,035 3,404 4,291 4,669 5,078 5,521 6,000
Depreciation 152 152 152 152 164 178 192
Total Production Costs 0 2,762 4,131 5,029 5,419 5,853 6,321 6,827
Selling, General & Administrative 1,250 1,155 1,735 2,102 2,270 2,452 2,648 2,860
Total Operating Expenses 1,250 3,917 5,866 7,132 7,690 8,305 8,969 9,687

Operating Profit (1,250) 583 994 1,277 1,392 1,503 1,623 1,753

Working Capital Assumptions:

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

Capital Expenditures 1,470 952 152 152 334 361 389 421
 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

New Heritage Doll Company: Capital Budgeting
Exhibit 2 Selected Operating Projections for Design Your Own Doll

2010 2011 2012 2013 2014

Revenue 0 6,000 14,360 20,222
Revenue Growth 139.3% 40.8%
Production Costs
Fixed Production Expense (excl depreciation) 0 1,650 1,683 1,717
Variable Production Costs 0 2,250 7,651 11,427
Depreciation 0 310 310 310
Total Production Costs 0 4,210 9,644 13,454
Selling, General & Administrative 1,201 0 1,240 2,922 4,044
Total Operating Expenses 1,201 0 5,450 12,566 17,498

Operating Profit (1,201) (435) 550 1,794 2,724

Working Capital Assumptions:

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

Capital Expenditures 4,610 0 310 310 2,192

FINANCIAL CASH FLOW

2010 2011 2012 2013 2014
40% EBIT * (1-t) (721) (261) 330 1,077 1,634
+ DA 310 310 310
WC 0 1000 1024 2410 3352
+CASH 180 431 607
+A/R 973 2328 3278
+INV 346 786 1065
-A/P 474 1135 1598
+/- +/- WC (1,000) (24) (1,386) (942)
- CAPEX 4,610 (310) (310) (2,192)

FCF without Terminal Value (5,331) (1,261) 306 (309) (1,190)

3% Terminal Value

FCF (5,331) (1,261) 306 (309) (1,190)

(5,331) (6,592) (6,286) (6,595) (7,784)

Discount Rate 9.00%

NPV 7,058.65
IRR 17.88%
Payback 10.07 years
Profitability Index 1.32
 2015 2016 2017 2018 2019 2020
21,435 22,721 24,084 25,529 27,061 28,685
6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

1,751 1,786 1,822 1,858 1,895 1,933

12,182 12,983 13,833 14,736 15,694 16,712
436 462 490 520 551 584
14,369 15,231 16,145 17,113 18,140 19,229
4,287 4,544 4,817 5,106 5,412 5,737
18,656 19,775 20,962 22,219 23,553 24,966

2,779 2,946 3,123 3,310 3,509 3,719

3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
33.9x 33.9x 33.9x 33.9x 33.9x 33.9x

826 875 928 983 1,043 1,105

2015 2016 2017 2018 2019 2020 2021

1,668 1,767 1,874 1,986 2,105 2,231
436 462 490 520 551 584
3553 3766 3992 4232 4486 4755
643 682 723 766 812 861
3475 3683 3904 4139 4387 4650
1130 1197 1269 1345 1426 1512
1694 1796 1904 2018 2139 2267
(202) (213) (226) (240) (254) (269)
(826) (875) (928) (983) (1,043) (1,105)

1,076 1,141 1,210 1,283 1,359 1,441 1,484

24,738

1,076 1,141 1,210 1,283 1,359 26,179

(6,708) (5,566) (4,356) (3,074) (1,714) 24,464