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

Revenue 4,500 6,860 8,409 9,082 9,808
Revenue Growth NA 52.4% 22.6% 8.0% 8.0%
Production Costs
Fixed Production Expense (excl depreciation) 575 575 587 598 610
Variable Production Costs 2,035 3,404 4,291 4,669 5,078
0.4522 0.4962 0.5103 0.5141 0.5178
Depreciation 152 152 152 152 164
Total Production Costs 0 2,762 4,131 5,029 5,419 5,853
Selling, General & Administrative 1,250 1,155 1,735 2,102 2,270 2,452
Total Operating Expenses 1,250 3,917 5,866 7,132 7,690 8,305

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

Operating Profit/Sales 0.130 0.145 0.152 0.153 0.153

SG&A/Sales 0.257 0.253 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%

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

Capital Expenditures 1,470 952 152 152 334 361

Growth in capex -35.2% -84.0% 0.0% 119.3% 8.0%

0.2116 0.022187 0.0181 0.036756 3.7%
Net Working Capital Accounts 2010 2011 2012 2013 2014 2015
Cash 135 206 252 272 294
Accounts Receivable 729 1112 1363 1472 1590
Inventory 360 500 396 427 461
Accounts Payable 317 484 593 640 692
Net Working Capital 800 907 1334 1418 1531 1653
NWC 800 107 427 84 113 122

NWC/Sales 0.202 0.195 0.169 0.169

NPV Analysis

Free Cash Flows 2010 2011 2012 2013 2014 2015

EBIT(1-t) (750) 350 596 766 835 902
plus depreciation 0 152 152 152 152 164
less NWC (800) (107) (427) (84) (113) (122)
less capital expenditures (1,470) (952) (152) (152) (334) (361)
Free Cash Flow (3,020) (557) 169 682 541 583
Terminal value 3.00%

Initial Outlays

Net working capital (800)

Net property, plant & equipment (1470)
Discount factor 8.40% 1.0000 0.9225 0.8510 0.7851 0.7242 0.6681
Present value (3,020) (514) 144 536 392 390
Net Present Value $ 7,150
NPV without Terminal Value ($ 146)

IRR Analysis
2010 2011 2012 2013 2014 2015
Cash Flows (3,020) (557) 169 682 541 583
IRR 7.6%

Payback Analysis
2010 2011 2012 2013 2014 2015
Cash flows (3,020) (557) 169 682 541 583
Cumulative cash flow (3,020) (3,577) (3,408) (2,726) (2,185) (1,602)
Payback period
5-year Cumulative EBITDA

Profitability Index
NPV/Initial Investment 1.35
 2016 2017 2018 2019 2020
10,593 11,440 12,355 13,344 14,411
8.0% 8.0% 8.0% 8.0% 8.0%

622 635 648 660 674

5,521 6,000 6,519 7,079 7,685
0.5212 0.5245 0.5276 0.5305 0.5332
178 192 207 224 242
6,321 6,827 7,373 7,963 8,600
2,648 2,860 3,089 3,336 3,603
8,969 9,687 10,462 11,299 12,203

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

0.153 0.153 0.153 0.153 0.153

0.250 0.250 0.250 0.250 0.250

3.0% 3.0% 3.0% 3.0% 3.0%

59.2x 59.2x 59.2x 59.2x 59.2x
12.7x 12.7x 12.7x 12.7x 12.7x
31.0x 31.0x 31.0x 31.0x 31.0x

389 421 454 491 530

8.0% 8.0% 8.0% 8.0% 8.0%

0.036752 0.036757 0.036754 0.036759 0.036756
2016 2017 2018 2019 2020
318 343 371 400 432
1717 1855 2003 2163 2336
498 538 581 627 677
747 807 871 941 1016
1786 1929 2083 2250 2429
132 143 154 167 180

0.169 0.169 0.169 0.169 0.169

2016 2017 2018 2019 2020

974 1,052 1,136 1,227 1,325
178 192 207 224 242
(132) (143) (154) (167) (180)
(389) (421) (454) (491) (530)
630 680 735 793 857
16,345
 0.6163 0.5686 0.5245 0.4839 0.4464
388 387 385 384 7669

384

2016 2017 2018 2019 2020

630 680 2019
735 793 17,202
793

2016 2017 2018 2019 2020

630 680 2019
735 793 17,202
(972) (291) 793
443
7.40 years
$ 6,522
 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

Revenue 0 6,000 14,360 20,222 21,435 22,721
Revenue Growth NA 139.3% 40.8% 6.0% 6.0%
Production Costs
Fixed Production Expense (excl 0 1,650 1,683 1,717 1,751 1,786
depreciation)
Additional development costs (IT 435
personnel)
Variable Production Costs 0 2,250 7,651 11,427 12,182 12,983
Depreciation 0 310 310 310 436 462
Total Production Costs 0 435 4,210 9,644 13,454 14,369 15,231
Selling, General & Administrative 1,201 0 1,240 2,922 4,044 4,287 4,544

Total Operating Expenses 1,201 435 5,450 12,566 17,498 18,656 19,775
Operating Profit (1,201) (435) 550 1,794 2,724 2,779 2,946
Operating Profit/Sales 0.092 0.125 0.135 0.130 0.130
SG&A/Sales 0.207 0.203 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%

Days Sales Outstanding NA NA 59.2x 59.2x 59.2x 59.2x 59.2x

Inventory Turnover (prod. cost/ending NA NA 12.2x 12.3x 12.6x 12.7x 12.7x
inv.)
Days Payable Outstanding (based on NA NA 33.7x 33.8x 33.9x 33.9x 33.9x
tot. op. exp.)
Capital Expenditures 4,610 0 310 310 2,192 826 875
Growth in capex 0% 608% -62% 6%
0.052 0.022 0.108 0.039 0.039
Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016

Cash 0 180 431 607 643 682

Accounts Receivable 973 2328 3278 3475 3683
Inventory 346 786 1065 1130 1197
Accounts Payable 474 1135 1598 1694 1796
Net Working Capital 1,000 1,024 2,410 3,352 3,553 3,766
NWC 1,000 24 1,386 942 202 213
NWC/Sales 0.171 0.168 0.166 0.166 0.166
 2017 2018 2019 2020
24,084 25,529 27,061 28,685
6.0% 6.0% 6.0% 6.0%

1,822 1,858 1,895 1,933

13,833 14,736 15,694 16,712

490 520 551 584
16,145 17,113 18,140 19,229
4,817 5,106 5,412 5,737

20,962 22,219 23,553 24,966

3,123 3,310 3,508 3,719
0.130 0.130 0.130 0.130
0.200 0.200 0.200 0.200

3.0% 3.0% 3.0% 3.0%

59.2x 59.2x 59.2x 59.2x

12.7x 12.7x 12.7x 12.7x

33.9x 33.9x 33.9x 33.9x

928 983 1,043 1,105

6% 6% 6% 6%
0.039 0.039 0.039 0.039
2017 2018 2019 2020

723 766 812 861

3904 4139 4387 4650
1269 1345 1426 1512
1904 2018 2139 2267
3,992 4,232 4,486 4,755
226 240 254 269
0.166 0.166 0.166 0.166
NPV Analysis
2010 2011 2012 2013 2014
Free Cash Flows
EBIT(1-t) (721) (261) 330 1,077 1,634
plus depreciation 0 310 310 310
less NWC (1,000) (24) (1,386) (942)
less capital expenditures (4,610) 0 (310) (310) (2,192)
Free Cash Flow (5,331) (1,261) 306 (309) (1,190)
Terminal value 3.00%

Discount factor 9.00% 1.000 0.9174 0.8417 0.7722 0.7084

Present value (5,331) (1,157) 258 (239) (843)

Net Present Value $ 7,058
NPV without Terminal Value ($ 3,391)

IRR Analysis
2010 2011 2012 2013 2014
Cash Flows (5,331) (1,261) 306 (309) (1,190)
IRR -0.5%

Payback Analysis
2010 2011 2012 2013 2014
Cash flows (5,331) (1,261) 306 (309) (1,190)
Cumulative cash flow (5,331) (6,592) (6,286) (6,595) (7,784)
Payback period
5-year Cumulative EBITDA

Profitability Index
NPV/Initial Investment 1.32
 2015 2016 2017 2018 2019 2020

1,667 1,767 1,874 1,986 2,105 2,231

436 462 490 520 551 584
(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
24,737

0.6499 0.5963 0.5470 0.5019 0.4604 0.4224

700 681 662 644 626 11,058

2015 2016 2017 2018 2019 2020

1,076 1,141 1,210 1,283 1,359 26,178

2015 2016 2017 2018 2019 2020

1,076 1,141 1,210 1,283 1,359 26,178
(6,708) (5,566) (4,357) (3,074) (1,715) 24,464
>10 years
$ 8,778
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%
8.40%
9.00%

$ 5,289 $ 6,141 $ 7,292 $ 8,932

$ 4,408 $ 5,075 $ 5,950 $ 7,150
$ 3,766 $ 4,314 $ 5,019 $ 5,958
$ 3,011
$ 2,687
$ 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%
8.40%
9.00%

$ 5,830 $ 7,263 $ 9,198 $ 11,957

$ 4,404 $ 5,526 $ 6,998 $ 9,016
$ 3,372 $ 4,294 $ 5,479 $ 7,058
$ 3,567
$ 2,980
$ 2,507
ital Budgeting

vity Analyses
n

=BV of
2% 3% NWC + PPE

=BV of

2% 3% NWC + PPE