The report contain detailed analysis of Harvard Publishing Case, New Heritage Doll Company, Capital Budgeting. It include NPV analysis of both option with and without Terminal Growth and IRR wit...Full description
New heritage doll capital budgeting excel file
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New Heritage Doll Company – Capital Budgeting Harvard Business School – Case 4214 The New Heritage Doll Companys Companys production division has !een !een has given the responsi!ility o" evaluating two proposals "or new pro#ects$ The %rst pro#ect pro#ect e&pands on a current current '(atch (y Doll Clothing Clothing )ine*+ and the second involves creating creating a "ully customi,ed doll under the 'Design -our .wn Doll* proposal$
Proposal Backgrounds Match My Doll Clothing Line Expansion MMDCLE! The (atch (y Doll /&pansion includes includes the "urther development development o" an already esta!lish+ success"ul doll line$ The original line included limited out%ts and accessories "or warm weather only$ only$ 0t had !ecome a popular line once cele!rity children were photographed wearing the clothing and also when prevalent maga,ines maga,ines showcased the items in the trendy clothing sections$ The !rand manager o" o " this line has e&pressed e&pressed her !elie" that this pu!licity will help the sales o" the new 'll Seasonal Collection* Collection* clothing tae o3$ The new clothing e&pands e&pands the line "rom only warm weather apparel to clothing and accessories "or all seasons$ s easons$ The supplier prices "or the material material to produce this this clothing is low and will help the !ottom line as selling price "or the dollsclothing can !e at a premium due to the current current !u,, around the products$ products$ This line will also help end the seasonal sales that New Heritage has !een e&periencing e&periencing due sales o" o " only summer related items$ The new e&pansion will however re5uire high research research and development costs to help the line gain ga in 5uic popularity and maintain long6term success$ Design "our #wn Doll D"#D! D"#D! The Design -our -our .wn Doll line is a proposal proposal where dolls are are "ully customi,ed to the desires o" the consumer$ consumer$ ttri!utes such as hair colorlength+ eye colorshape+ sin color+ and other "eatures will !e customi,a!le through the use o" new so"tware and technology$ New Heritage would !e creating a 'one o" a ind* doll that tha t will !e appealing to the higher end consumer who possi!ly owns the e&pensive heirloom dolls$ So"tware So"tware and application development development "or the we!site and modi%cations to e&isting technology in"rastructure will re5uire help "rom in6house 0T personnel$ The 78D and up"ront up"ront mareting mareting costs are compara!le to those proposed in the ((DC)/ pro#ect$ However+ However+ manu"acturing is concerned with the increased comple&ity comple&ity and
e&pense o" constructing these dolls as well as the dependence on 9awless operation$ This pro#ect also commands higher initial outlays and a longer pay!ac period$
$inancial %nalysis Match My Doll Clothing Line Expansion MMDCLE! The initial e&penditures "or this pro#ect include up"ront 78D 8 mareting costs+ as well as an :;<< investment in woring capital+ and a :1+4=< investment in property+ plants and e5uipment$ Based on the in"ormation provided !y (s$ (cdams+ this is a moderately risy pro#ect >similar to the current line?$ There"ore+ we evaluated the cash 9ows !ased on a discount rate o" ;$4@$ Ae did not include the :;<< as a capital e&penditure !ecause it was stated to !e part o" the e&isting clothing line$ "ter reviewing all %nancial in"ormation "or the pro#ect+ we have concluded that the N will !e :see the attached spread sheets "or clari%cation?$ Since the N is positive and 077 is greater than the discount rate+ the pro#ect will prove to !e a !ene%cial+ pro%ta!le investment$
Design "our #wn Doll D"#D! The initial e&penditures "or this pro#ect also includes up"ront 78D 8 mareting costs+ as well as the original :1+<<< investment in woring capital+ and a :4+1< investment in property+ plant and e5uipment$ Due to the increased so"tware and technology needed to produce a custom doll+ 0T personnel costs o" :4EF are re5uired$ This is a high6ris pro#ect due to the new customer acceptance+ high %&ed cost+ high !rea6even levels+ and price sensitivity to recession$ There"ore+ we evaluated the cash 9ows !ased on a discount rate o" G$<@$ "ter reviewing all %nancial in"ormation "or the pro#ect+ we have concluded that the N will !e :>E11<$G with an 077 o" 61@ >see the attached spread sheets "or clari%cation?$ D-.D re5uires high initial outlays+ which in turn leads to a high6e&pected !rea6even volume$ Ae "eel that this will not !e a pro%ta!le pro#ect due to the high capital e&penditures and the re5uired re6investments in e5uipment$
Conclusion and &ecommendation /mily and 0 %rmly !elieve it is a !etter investment decision to move "orward with the '(atch (y Doll Clothing )ine /&pansion$* ((DC)/ has !oth a positive N and an 077 greater than the ;$4@ discount rate while the D-.D proposal produces a negative N and 077$ These %ndings prove that the ((DC)/ will !e a much more pro%ta!le and
!ene%cial pro#ect "or the company$ This pro#ect also more closely aligns with the Capital Budget Committees previous decisions and !elie"s$ 0t has a potential to strengthen the company as a whole+ and will also help maintain a !alance !etween all divisions$ 0t does not re5uire New Heritage to develop new production methods+ technologyso"tware advancements+ and overall divisional changes which D-.D will need$ Be"ore a %nal decision is e&ecuted+ we suggest that (s$ Holt, review our %nancials and assumptions to con%rm the accuracy$ 0" accurate+ the (atch (y Doll Clothing )ine /&pansion will !e the pro%ta!le pro#ect$