New Heritage Doll Company Capital Budgeting Analysis

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The Report contains capital budgeting decision based on NPV analysis between two alternatives for New Heritage

Doll Company. The company has to choose between extension of My Doll Clothing Line or go for Design Your

Own Doll project. Since the NOV and IRR are higher in case of extension of My Doll Clothing Line, the company

should consider the extension of My Doll Clothing Line.

 New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Match My Doll Clothing Line Extension

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

9 Operating Profit (1 - 8) (1,250) 583 994 1,277 1,392 1,503 1,623 1,753 1,893 2,045 2,209

Working Capital Assumptions:

10 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%
11 Days Sales Outstanding NA 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
12 Inventory Turnover (prod. cost/ending inv.) NA 7.7x 8.3x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
13 Days Payable Outstanding (based on tot. op. exp.) 0.0x 30.8x 30.9x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x

14 Capital Expenditures 1,470 952 152 152 334 361 389 421 454 491 530

Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

15 Cash (10 * 1) 135 206 252 272 294 318 343 371 400 432

16 Accounts Receivable (1 * 11 / 365) 729 1,112 1,363 1,472 1,590 1,717 1,855 2,003 2,163 2,336

17 Inventory (6 / 12) 360 500 396 427 461 498 538 581 627 677

18 Accounts Payable [(8 - 5) * 13 / 365] 317 484 593 640 692 747 807 871 941 1,016

19 Net Working Capital (15 + 16 + 17 - 18) 800 907 1,334 1,418 1,531 1,653 1,786 1,929 2,083 2,250 2,429
New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Match My Doll Clothing Line Extension

SN NPV Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Period 0 1 2 3 4 5 6 7 8 9 10
20 Operating Profit before tax (9) (1,250) 583 994 1,277 1,392 1,503 1,623 1,753 1,893 2,045 2,209
21 Less: Tax @ 40% (40% * 20) 500 (233) (398) (511) (557) (601) (649) (701) (757) (818) (883)
22 Operating Profit after tax (20 -21) (750) 350 596 766 835 902 974 1,052 1,136 1,227 1,325
23 Add: Depreciation (5) - 152 152 152 152 164 178 192 207 224 242
24 Less: Capital Expenditure (-14) (1,470) (952) (152) (152) (334) (361) (389) (421) (454) (491) (530)
Less: Change in Working Capital
25 (800) (107) (427) (84) (113) (122) (132) (143) (154) (167) (180)
(Row 19, previous yr NWC - current year NWC)

26 Free cash flow to firm (22 + 23 + 24 + 25) (3,020) (557) 169 682 541 583 630 680 735 793 857
27 Terminal growth 3.00%
28 WACC 8.40%

29 Terminal Value [FCFF of 2020 * (1 + 27) / (28 - 27)] 16,345

30 Free cash flow to firm including terminal value (26 + 29) (3,020) (557) 169 682 541 583 630 680 735 793 17,202
31 PV of FCFF discounted at 8.4% (30 / (1 + 28) ^ period) (3,020) (514) 144 536 392 390 388 387 385 384 7,679

32 NPV with terminal value (sum of Row 31) 7,150

33 NPV without terminal value [NPV(8.4%,select row 26) (146)

34 IRR including terminal value [IRR(select row 30)] 23.99%

35 IRR excluding terminal value [IRR(select row 26)] 7.64%

Sensitivity Analysis
Discount rate Terminal growth

7,150 0% 1% 2% 3% 4% 5% 6% 7% 8%
7.70% 5289 6141 7292 8932 11460 15860 25436 62373 -146937
8.40% 4408 5075 5950 7150 8895 11667 16749 29089 103135
9.00% 3766 4314 5019 5958 7273 9246 12534 19110 38838
Sensitivity analysis has been performed using table function of excel which can be find under the “Data” and within Data under “What-If
Analysis”. Terminal Growth has been selected for Row input cell and WACC has been used for Column input cell.
 New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Design Your Own Doll

SN Narrative 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
1 Revenue 0 6,000 14,360 20,222 21,435 22,721 24,084 25,529 27,061 28,685
2 Revenue Growth NA 139.3% 40.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Production Costs
3 Fixed Production Expense (excl depreciation) 0 1,650 1,683 1,717 1,751 1,786 1,822 1,858 1,895 1,933
4 Additional development costs (IT personnel) 435
5 Variable Production Costs 0 2,250 7,651 11,427 12,182 12,983 13,833 14,736 15,694 16,712
6 Depreciation 0 310 310 310 436 462 490 520 551 584
7 Total Production Costs (3 + 4 +5 + 6) 0 435 4,210 9,644 13,454 14,369 15,231 16,145 17,113 18,140 19,229
8 Selling, General & Administrative 1,201 0 1,240 2,922 4,044 4,287 4,544 4,817 5,106 5,412 5,737
9 Total Operating Expenses (7 + 8) 1,201 435 5,450 12,566 17,498 18,656 19,775 20,962 22,219 23,553 24,966

(1,20
10 Operating Profit (1 - 9) 1) (435) 550 1,794 2,724 2,779 2,946 3,123 3,310 3,508 3,719

Working Capital Assumptions:

11 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%
12 Days Sales Outstanding NA NA 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
13 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
14 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

15 Capital Expenditures 4,610 0 310 310 2,192 826 875 928 983 1,043 1,105

Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
16 Cash (11 * 1) 180 431 607 643 682 723 766 812 861
17 Accounts Receivable (1 * 12 / 365) 973 2328 3278 3475 3683 3904 4139 4387 4650
18 Inventory (7 / 12) 346 786 1065 1130 1197 1269 1345 1426 1512
19 Accounts Payable [(9 - 6) * 14 / 365] 474 1135 1598 1694 1796 1904 2018 2139 2267

20 Net Working Capital (16 + 17 + 18 - 19) 1,000 1,024 2,410 3,352 3,553 3,766 3,992 4,232 4,486 4,755
New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Design Your Own Doll

SN NPV Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Period 0 1 2 3 4 5 6 7 8 9 10
21 Operating Profit before tax (10) (1,201) (435) 550 1,794 2,724 2,779 2,946 3,123 3,310 3,508 3,719
22 Less: Tax @ 40% (40% * 21) 480 174 (220) (718) (1,089) (1,112) (1,178) (1,249) (1,324) (1,403) (1,488)
23 Operating Profit after tax (21 -22) (721) (261) 330 1,077 1,634 1,667 1,767 1,874 1,986 2,105 2,231
24 Add: Depreciation (6) 0 0 310 310 310 436 462 490 520 551 584
25 Less: Capital Expenditure (-15) (4,610) 0 (310) (310) (2,192) (826) (875) (928) (983) (1,043) (1,105)
Less: Change in Working Capital
26 (Row 20, previous yr NWC - current year NWC) 0 (1,000) (24) (1,386) (942) (202) (213) (226) (240) (254) (269)

27 Free cash flow to firm (23 + 24 + 25 + 26) (5,331) (1,261) 306 (309) (1,190) 1,076 1,141 1,210 1,283 1,359 1,441
28 Terminal growth 3.00%
29 WACC 9.00%

30 Terminal Value [FCFF of 2020 * (1 + 28) / (29 - 28)] 24737

31 Free cash flow to firm including terminal value (27 + 30) (5331) (1261) 306 (309) (1190) 1076 1141 1210 1283 1359 26178
32 PV of FCFF discounted at 9.0% (31 / (1 + 29) ^ period) (5331) (1157) 258 (239) (843) 700 681 662 644 626 11058

33 NPV with terminal value (sum of Row 32) 7058

34 NPV without terminal value [NPV(9.0%,select row 27) (3391)

35 IRR including terminal value [IRR(select row 31)] 17.88%

36 IRR excluding terminal value [IRR(select row 27)] -0.52%

Sensitivity Analysis
Discount rate Terminal growth

7,058 0% 1% 2% 3% 4% 5% 6% 7% 8%
7.70% 5830 7263 9198 11957 16207 23606 39709 101821 -250148
8.40% 4404 5526 6998 9016 11951 16611 25156 45909 170421
9% 3372 4294 5479 7058 9270 12587 18116 29174 62348
Sensitivity analysis has been performed using table function of excel which can be find under the “Data” and within Data under “What-If
Analysis”. Terminal Growth has been selected for Row input cell and WACC has been used for Column input cell.