FINANCE-500

CASE STUDY

New Heritage Doll Company Overview

Ingrid Beckwith founded New Heritage Doll Company in 1985. The company was known
for producing dolls with a unique story line and a wholesome theme to help kids develop an
imagination, as well as learn more about the history of the American culture. The theme was
hugely successful and by 2009 New Heritage doll company had about 450 Employees and
generated 245 millions in revenue and 27 million in operating profits.
They had 3 operating divisions namely production, retailing and licensing. The production
division manufactured the dolls and dolls accessories. Majority of the manufacturing was
outsourced to Asia. The retailing division consisted of an online website, a mail-order paper
catalog and a network of retail stores. The profits generated by the 3 divisions is as summarized
below:
Production
Retailing
Licensing
Operating Revenue
125
190
24.5
Operating Profits
7.5
4.8
14.5
(In Millions)
In September 2010, Emily Harris was considering between a few project proposals for the
upcoming companys budgeting session. There were two main projects that stood out based on
their potential to strengthen the companys innovative project lines and drive future growth.
However there were some concerns about the budgeting constrains they would put on the
company and could even result in both the proposal being turned down. She had to pick one of
these projects and come up with a compelling case to make the proposal stick over other
departments.

Investment opportunities:
The following are the two-investment opportunity available for the New Heritage Doll
Company:
Match my doll clothing line expansion:
Match my clothing line consisted of a couple of clothing and accessories for the summer. It was
hugely popular because of the celebrity kids who were seen wearing them. Marcy McAdams, the
brand manger of the line hoped to cash in on its success by expanding the clothing line to include
clothes and accessories of all seasons.
Pros:
The method was already tested and hugely popular. The new line would bring in at least
the same profit margin if not more.
There was a familiarity with the working of the project and the company had experience
with the implementation of a part of the project.
Would help reduce the seasonality of the New Heritages earnings.
Cons:

FINANCE-500
CASE STUDY

Due to the fickle nature of young kids fashion sense, the new line had to be launched
quickly and there was no time to waste.
It was also a gamble, as no one knew how long this particular project would fetch gains
for New Heritage.

The initial expenses were estimated as follows:

Initial Expenditures
Upfront R&D
Upfront Marketing
Investment in working capital
Property, Plant and Equipment
Tax Expenditure = 0.4* 3250
Total

Year - 2010
625
625
800
1470
1300
4820
(In Thousands)

Other details:
The R&D and marketing expenditure would be deductible for tax purposes at 40% corporate rate.
The Useful life of the Property, Plant and Equipment was about 10 years.
Depreciation charges were based on the modified accelerated cost recovery system allowed by the
IRS.
The risk level of the project was moderate if not the same as that of the risk level involved in the
current clothing line.

2010

1250

Capital
Expendit
ure
1470

2011

1155

952

583

233.2

2012

5866

152

994

397.6

2013

7132

152

1277

510.8

2014

7690

334

1392

556.8

2015

8305

361

1503

601.2

2016

8969

389

1623

649.2

2017

1753

421

1753

701.2

2018

1893

454

1893

757.2

2019

2045

491

2045

818

Year
Index

1
2
3
4
5
6
7
8
9

Operating
Expenses

Operating
Profit

Tax
Expenditu
re

Total

Present
value

-1250
2340.
2
6415.
6
7794.
8
8580.
8
9267.
2
10007
.2
2875.
2
3104.
2
3354

2148.9439
85
5409.8038
57
6035.6123
32
6101.2140
35
6050.7489
91
5999.9178
06
1582.9707
92
1569.3747
34
1557.0843
53

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CASE STUDY
10

2020

2209

530

2209

883.6

3622.
6

1544.3352
53

57361
.8

Total Paid

38000.006
14

Present Value

NPV= Present Value - initial investment

= 38000.00614 (4820)
= 33180.01
Design your own doll:
This initiative involved in personalizing the dolls according to the customers tastes and
customizing them to the personal data of future owners. This would attract a lot of current and
new owners to buy and create a new doll like them.
Elizabeth Holtz, manager for heirloom dolls was extremely excited about the project. The
customers relationship with the doll would increase with personalization. Market research also
indicated that there was a lot of enthusiasm for this project among a nice group of customers
The initial expenditures of the project was estimated as follows:
Initial Expenditures
Upfront R&D
Upfront Marketing
Investment in working capital
Property, Plant and Equipment
Application development costs
Tax Expenditure =
Total

Year - 2010
841
360

Year 2011
1000

4610
435
5811*0.4=
2324
1435
(In Thousands)

Pros:
Would help create more sales as this was a novel concept and the sales could be done to
new and existing customers.
It had a moderate fixed cost ratio.
It served well for the companys motto of creating a unique experience for the customers.
Cons:

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CASE STUDY

IT was a risky proposition. The company would be unknown territory for the company and
a lot of investment would be required.
It would require perfection in executing the project otherwise it would end up in
damaging New Heritages reputation and its relationship with some of the best customers

Cash flow predicted for the operation

Year
Index

1
2
3
4
5
6
7
8
9
10

201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
202
0

Operatin
g
Expense
s

Capital
Expenditu
re

Operati
ng Profit

1201

4610

-1201

550

310

550

220

12566

310

1794

717.6

17498

2192

2724

1089.6

18656

826

2779

1111.6

19775

875

2946

1178.4

20962

928

3123

1249.2

22219

983

3310

1324

23553

1043

3509

1403.6

24966

1105

3719

1487.6

Total Paid
Present
Value

Net present value is calculated as:

NPV= Present Value - initial investment
= 101702.3846 (8135.4+ 1435)

Tax
Expenditu
re

Total

Present Value

1080
13593.
6
20779.
6
20593.
6
21828.
4
23139.
2

910.6846072

24526
25999.
6
27558.
6
179098
.6

12399.48609

10525.69659
14774.9379
13445.99279
13087.43763
12739.52342

12070.23564
11748.38997

101702.3846

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CASE STUDY
= 92130.9846
The net present value of the Design your own doll is much higher compared to the net present
value of Make my doll clothing line. The return on investment is considerably higher for this
particular outcome. Also by reviewing the pros and cons of these projects, we can conclude that in
a longer run, the profits received by the design your own doll line is much higher compared to
make my doll clothing line.
Appendix:

Book1.xlsx