New Heritage Doll Company: Capital Budgeting

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

2010 2011 2012 2013 2014

Revenue 4,500 6,860 8,409 9,082
Revenue Growth 52.4% 22.6% 8.0%
Production Costs
Fixed Production Expense (excl depreciation) 575 575 587 598
Variable Production Costs 2,035 3,404 4,291 4,669
Depreciation 152 152 152 152
Total Production Costs 0 2,762 4,131 5,029 5,419
Selling, General & Administrative 1,250 1,155 1,735 2,102 2,270
Total Operating Expenses 1,250 3,917 5,866 7,132 7,690

Operating Profit (1,250) 583 994 1,277 1,392

Working Capital Assumptions:

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

Capital Expenditures 1,470 952 152 152 334

Net Working Capital Accounts 2010 2011 2012 2013 2014

Cash 135 206 252 272
Accounts Receivable 729 1,112 1,363 1,472
Inventory 360 500 396 427
Accounts Payable 330 497 606 653
Total Net working Capital 800 894 1,321 1,406 1,518
Change in Net Working Capital 800 94 427 84 113

NPV Analysis 2010 2011 2012 2013 2014

Time Index 0 1 2 3 4
Profit After Tax EBIT(1-t) (750) 350 596 766 835
plus depreciation 152 152 152 152
less Change in NWC (800) (94) (427) (84) (113)
less Capex (1,470) (952) (152) (152) (334)
Free Cash Flow (3,020) (544) 169 682 541

Initial Outlays
NWC (800)
Net PPE (1,470)
 Discount Factor 0.084 1 0.9225092 0.851023 0.785077 0.724241
PV of Free Cash Flow (3,020) -502.17399 143.8611 535.6086 391.7819
NPV (130)

IRR Analysis 2010 2011 2012 2013 2014

Cash Flows (3,020) (544) 169 682 541
IRR 8%
ne Expansion

2015 2016 2017 2018 2019 2020

9,808 10,593 11,440 12,355 13,344 14,411
8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

610 622 635 648 660 674

5,078 5,521 6,000 6,519 7,079 7,685
164 178 192 207 224 242
5,853 6,321 6,827 7,373 7,963 8,600
2,452 2,648 2,860 3,089 3,336 3,603
8,305 8,969 9,687 10,462 11,299 12,203

1,503 1,623 1,753 1,893 2,045 2,209

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
31.0x 31.0x 31.0x 31.0x 31.0x 31.0x

361 389 421 454 491 530

2015 2016 2017 2018 2019 2020

294 318 343 371 400 432
1,590 1,717 1,855 2,003 2,163 2,336
461 498 538 581 627 677
706 762 823 889 960 1,037
1,639 1,771 1,912 2,065 2,231 2,409
121 131 142 153 165 178

2015 2016 2017 2018 2019 2020

5 6 7 8 9 10
902 974 1,052 1,136 1,227 1,325
164 178 192 207 224 242
(121) (131) (142) (153) (165) (178)
(361) (389) (421) (454) (491) (530)
584 631 682 736 795 858

Discount Rates
low 0.077
medium 0.084
high 0.09
0.668119 0.616346 0.568585 0.524524 0.483879 0.446383
390.3986 388.9802 387.4983 386.0556 384.6159 383.2018

2015 2016 2017 2018 2019 2020

584 631 682 736 795 858
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) 0 550 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

Net Working Capital Accounts 2010 2011 2012 2013 2014

Cash 180 431 607
Accounts Receivable 973 2,328 3,278
Inventory 346 786 1,065
Accounts Payable 503 1,164 1,627
Total NWC 1,000 996 2,381 3,323
Change in NWC 1,000 (4) 1,385 942

NPV Analysis
Time Index 0 1 2 3 4
2010 2011 2012 2013 2014
Profit After Tax EBIT(1-t) (721) (261) 330 1,077 1,634
plus depreciation 310 310 310
less Change in NWC (1,000) 4 (1,385) (942)
less Capex (4,610) 0 (310) (310) (2,192)
Free Cash Flow (5,331) (1,261) 335 (309) (1,189)

Practice with Terminal growth

 Discount Factor 0.09 1 0.917431 0.84168 0.772183 0.708425
PV of Free Cash Flow (5,331) -1156.88 281.6385 -238.518 -842.64
NPV (3,352)

IRR Analysis 2010 2011 2012 2013 2014

Cash Flows (5,331) (1,261) 335 (309) (1,189)
IRR 0%
 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

643 682 723 766 812 861
3,475 3,683 3,904 4,139 4,387 4,650
1,130 1,197 1,269 1,345 1,426 1,512
1,735 1,839 1,949 2,066 2,190 2,321
3,513 3,723 3,947 4,184 4,435 4,701
190 211 223 237 251 266

5 6 7 8 9 10
2015 2016 2017 2018 2019 2020
1,668 1,767 1,874 1,986 2,105 2,231
436 462 490 520 551 584
(190) (211) (223) (237) (251) (266)
(826) (875) (928) (983) (1,043) (1,105)
1,088 1,144 1,212 1,285 1,362 1,444

Discount Rates
 low 0.077
medium 0.084
0.649931 0.596267 0.547034 0.501866 0.460428 0.422411 high 0.09
707.254 682.0196 663.2493 645.0659 627.2489 610.0109

2015 2016 2017 2018 2019 2020

1,088 1,144 1,212 1,285 1,362 1,444
1. Compare the business cases for reach of the two projects under consideration by Emily Harris. Which is more c
Design your Own Doll project aligns with the company's business values and efforts to create a unique experience f
New Heritage Doll company was started to help develop girls' imagination and foster positive self-images.
There is evidence that the Design your Own Doll idea will be liked by customers and would increase customer loyalt
Without looking at financial analysis, the Design your Own Doll project is more compelling.
Letting girls create their dolls that looks like them can result in getting a premiun price customization.

2. Estimate the NPV for each project

3. Calculate the IRR for each project. How should Harris use this information?

4. What additional information does Harris need to make a decision?

She should evaluate the long term sustainability of these projects. Match My Doll Clothing Line might do well in the
Design your Own Doll does take more capital initially and a longer time to set up production, but I think it could do
In addition, the company's values want to stay away from materialistic images that brands like Barbie emphasize, a
values, while DYOD would strengthen the company's message.
Harris should also consider trends in the doll industry. Popularity of doll lines only last for a few years so MMDCL m

5. If forced to choos ebtween the two projects, which one should Harris recommend and why?
 Emily Harris. Which is more compelling and why?
o create a unique experience for each of its customers.
positive self-images.
would increase customer loyalty.

e customization.

othing Line might do well in the short term, but it is very hard to keep up with fashion trends.
uction, but I think it could do well in the long run because girls will still want to customize their own dolls.
ands like Barbie emphasize, and promote positive self image and growth. MMDCL clashes with the company's

t for a few years so MMDCL might not work if girls don't like those kinds of dolls anymore.