New Heritage Doll Company: Capital Budgeting

Exhibit 1
Selected Operating Projections for Match My Doll Clothing Line Expansion
2010
Revenue

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

4,500.00

6,860.00

8,408.80

9,081.50

9,808.00

10,592.66

11,440.07

12,355.20

13,343.70

14,411.20

Revenue Growth

52.44%

22.58%

8.00%

8.00%

8.00%

8.00%

8.00%

8.00%

8.00%

575.00

575.00

586.50

598.20

610.10

622.30

634.80

647.50

660.40

673.70

2,035.00

3,403.80

4,290.60

4,669.00

5,078.40

5,521.30

6,000.30

6,518.50

7,078.80

7,684.70

152.20

152.20

152.20

152.20

164.40

177.50

191.70

207.10

223.60

241.50

0.00

2,762.20

4,131.00

5,029.30

5,419.40

5,852.90

6,321.10

6,826.80

7,373.10

7,962.80

8,599.90

Selling, General & Administrative

1,250.00

1,155.00

1,735.00

2,102.20

2,270.30

2,452.00

2,648.10

2,860.00

3,088.80

3,335.90

3,602.80

Total Operating Expenses

1,250.00

3,917.20

5,866.00

7,131.50

7,689.70

8,304.90

8,969.20

9,686.80

10,461.90

11,298.70

12,202.70

582.80

994.00

1,277.30

1,391.80

1,503.10

1,623.46

1,753.27

1,893.30

2,045.00

2,208.50

Production Costs
Fixed Production Expense (excl depreciation)
Variable Production Costs
Depreciation
Total Production Costs

Operating Profit

(1,250.00)

Working Capital Assumptions:

Minimum Cash Balance as % of Sales

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

Days Sales Outstanding

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

7.7x

8.3x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

30.8x

30.9x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

1,470.00

952.20

152.20

152.20

333.80

360.50

389.30

420.50

454.10

490.50

529.70

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

135.00

205.80

252.26

272.45

294.24

317.78

343.20

370.66

400.31

432.34

76.05

115.94

142.11

153.48

165.76

179.02

193.34

208.81

225.51

243.56

359.66

500.12

396.01

426.72

460.86

497.72

537.54

580.56

626.99

677.16

Inventory Turnover (prod. cost/ending inv.)

Days Payable Outstanding (based on tot. op. exp.)

Capital Expenditures

Net Working Capital (NWC)

Minimum Cash Balance
Accounts Receivables
Inventory

127.35

189.84

229.97

247.97

267.81

289.24

312.38

337.37

364.36

393.51

Total NWC

Payables
800.00

443.37

632.02

560.41

604.68

653.04

705.29

761.71

822.65

888.46

959.54

Change in NWC

(800.00)

356.63

(188.65)

71.61

(44.27)

(48.37)

(52.24)

(56.42)

(60.94)

(65.81)

(71.08)

Exhibit 1 Continued
Operating Cash Flow (OCF)
EBIT

(1,250.00)

582.80

994.00

1,277.30

1,391.80

1,503.10

1,623.46

1,753.27

1,893.30

2,045.00

2,208.50

233.12

397.60

510.92

556.72

601.24

649.38

701.31

757.32

818.00

883.40

(1,250.00)

349.68

596.40

766.38

835.08

901.86

974.08

1,051.96

1,135.98

1,227.00

1,325.10

0.00

152.20

152.20

152.20

152.20

164.40

177.50

191.70

207.10

223.60

241.50

(1,250.00)

501.88

748.60

918.58

987.28

1,066.26

1,151.58

1,243.66

1,343.08

1,450.60

1,566.60

(1,250.00)

501.88

748.60

918.58

987.28

1,066.26

1,151.58

1,243.66

1,343.08

1,450.60

1,566.60

(800.00)

356.63

(188.65)

71.61

(44.27)

(48.37)

(52.24)

(56.42)

(60.94)

(65.81)

(71.08)

(952.20)

(152.20)

(152.20)

(333.80)

(360.50)

(389.30)

(420.50)

(454.10)

(490.50)

(529.70)

407.75

837.99

609.21

657.39

710.03

766.74

828.04

894.29

965.82

Tax (40% Corporate Rate)

Earning After Tax
Depreciation
Total OCF

Free Cash Flow (FCF)

OCF
Change in NWC
Capital Expenditure

(1,470.00)

Tax Benefit (40% of R&D and Marketing Expenditures from table 2)

500.00

(3,520.00)

Total FCF

406.31

17,283.10

Terminal Value (TV) at low risk

(3,520.00)

Cash Flow After TV at low risk

406.31

407.75

837.99

609.21

(3,113.69) (2,705.94) (1,867.95) (1,258.74)

Net Cash Flow

657.39

710.03

766.74

828.04

894.29

18,248.92

(601.34)

108.69

875.43

1,703.47

2,597.76

20,846.68

15,392.76

Terminal Value (TV) at medium risk

(3,520.00)

Cash Flow After TV at medium risk

406.31

407.75

837.99

609.21

(3,113.69) (2,705.94) (1,867.95) (1,258.74)

New Cash Flow

657.39

710.03

766.74

828.04

894.29

16,358.58

(601.34)

108.69

875.43

1,703.47

2,597.76

18,956.34

14,073.38

Terminal Value (TV) at high risk

(3,520.00)

Cash Flow After TV at high risk

Net Cash Flow

406.31

407.75

837.99

609.21

(3,113.69) (2,705.94) (1,867.95) (1,258.74)

Risk level

Rate

NPV

Payback Period

IRR

Low

7.7%

9304.57

5.85

27.56%

Medium

8.4%

7782.97

5.85

26.63%

High

9.0%

6724.72

5.85

25.94%

657.39

710.03

766.74

828.04

894.29

15,039.20

(601.34)

108.69

875.43

1,703.47

2,597.76

17,636.96

New Heritage Doll Company: Capital Budgeting

Exhibit 2
Selected Operating Projections for Design Your Own Doll
2010
Revenue

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0.00

6,000.00

14,360.00

20,221.60

21,434.80

22,720.90

24,084.20

25,529.30

27,061.06

28,684.70

139.3%

40.8%

6.0%

6.0%

6.0%

6.0%

6.0%

6.0%

Revenue Growth
Production Costs
Fixed Production Expense (excl depreciation)

0.00

1,650.00

1,683.00

1,716.60

1,750.90

1,786.00

1,821.70

1,858.10

1,895.30

1,933.20

Variable Production Costs

0.00

2,250.00

7,651.00

11,427.30

12,181.60

12,982.60

13,833.00

14,735.80

15,694.30

16,711.80

Depreciation

0.00

309.70

309.70

309.70

436.20

462.40

490.10

519.50

550.70

583.80

Application Development Personnel Costs (Table 4 of Case)

(435.00)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Total Production Costs

(435.00)

4,209.70

9,643.70

13,453.60

14,368.70

15,231.00

16,144.80

17,113.40

18,140.30

19,228.80

Selling, General & Administrative

1,201.00

0.00

1,240.00

2,922.00

4,044.30

4,286.90

4,544.10

4,816.80

5,105.80

5,412.20

5,736.90

Total Operating Expenses

1,201.00

(435.00)

5,449.70

12,565.70

17,497.90

18,655.60

19,775.10

20,961.60

22,219.20

23,552.50

24,965.70

(1,201.00)

(435.00)

550.30

1,794.30

2,723.70

2,779.20

2,945.80

3,122.60

3,310.10

3,508.56

3,719.00

Minimum Cash Balance as % of Sales

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

Days Sales Outstanding

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

Inventory Turnover (prod. cost/ending inv.)

12.2x

12.3x

12.6x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

Days Payable Outstanding (based on tot. op. exp.)

33.7x

33.8x

33.9x

33.9x

33.9x

33.9x

33.9x

33.9x

33.9x

Operating Profit

Working Capital Assumptions:

Capital Expenditures

4,610

310

310

2,192

826

875

928

983

1,043

1,105

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Minimum Cash Balance

180.00

430.80

606.65

643.04

681.63

722.53

765.88

811.83

860.54

Accounts Receivables

101.40

242.69

341.75

362.26

383.99

407.03

431.46

457.34

484.78

Inventory

345.62

785.96

1,065.21

1,129.61

1,197.41

1,269.25

1,345.39

1,426.12

1,511.70

Payables

161.86

371.77

515.55

549.66

582.65

617.61

654.66

693.95

735.58

1,000.00

465.17

1,087.68

1,498.06

1,585.25

1,680.38

1,781.20

1,888.07

2,001.36

2,121.44

(1,000.00)

534.83

(622.51)

(410.38)

(87.19)

(95.12)

(100.82)

(106.87)

(113.29)

(120.09)

Net Working Capital (NWC)

Total NWC
Change in NWC

Exhibit 2 Continued
Operating Cash Flow (OCF)
EBIT

(1,201.00)

(435.00)

Tax (40% Corporate Rate)

Earning After Tax
Depreciation
Total OCF

550.30

1,794.30

2,723.70

2,779.20

2,945.80

3,122.60

3,310.10

3,508.56

3,719.00

(220.12)

(717.72)

(1,089.48)

(1,111.68)

(1,178.32)

(1,249.04)

(1,324.04)

(1,403.42)

(1,487.60)

(1,201.00)

(435.00)

330.18

1,076.58

1,634.22

1,667.52

1,767.48

1,873.56

1,986.06

2,105.14

2,231.40

0.00

0.00

309.70

309.70

309.70

436.20

462.40

490.10

519.50

550.70

583.80

(1,201.00)

(435.00)

639.88

1,386.28

1,943.92

2,103.72

2,229.88

2,363.66

2,505.56

2,655.84

2,815.20

(1,201.00)

(435.00)

639.88

1,386.28

1,943.92

2,103.72

2,229.88

2,363.66

2,505.56

2,655.84

2,815.20

0.00

(1,000.00)

534.83

(622.51)

(410.38)

(87.19)

(95.12)

(100.82)

(106.87)

(113.29)

(120.09)

(309.70)

(2,191.50)

(825.70)

(875.30)

(927.80)

(983.40)

(1,042.50)

(1,105.00)

454.07

(657.96)

1,190.83

1,259.46

1,335.04

1,415.29

1,500.05

1,590.11

Free Cash Flow (FCF)

OCF
Change in NWC
Capital Expenditure
Tax Benefit (40% of R&D/Mktg - table 3 and App. Dev. Cost table 4)
Total FCF

(4,610.00)

(5,811.00)

0.00

(309.70)

480.40

174.00

(954.60)

1,039.01

28,454.69

Terminal Value (TV) at low risk

(5,811.00)

Cash Flow After TV at low risk

(954.60) 1,039.01

454.07

(657.96) 1,190.83

1,259.46

1,335.04

(6,765.60) (5,726.59) (5,272.52) (5,930.48) (4,739.65) (3,480.20) (2,145.16)

Net Cash Flow

1,415.29
(729.87)

1,500.05

30,044.80

770.18

30,814.98

25,342.46

Terminal Value (TV) at medium risk

(5,811.00)

Cash Flow After TV at medium risk

(954.60) 1,039.01

454.07

(657.96) 1,190.83

1,259.46

1,335.04

(6,765.60) (5,726.59) (5,272.52) (5,930.48) (4,739.65) (3,480.20) (2,145.16)

Net Cash Flow

1,415.29
(729.87)

1,500.05

26,932.57

770.18

27,702.75

23,170.24

Terminal Value (TV) at high risk

(5,811.00)

Cash Flow After TV at high risk

(954.60) 1,039.01

454.07

(657.96) 1,190.83

1,259.46

1,335.04

(6,765.60) (5,726.59) (5,272.52) (5,930.48) (4,739.65) (3,480.20) (2,145.16)

Net Cash Flow

Risk level

Rate

NPV

Payback Period

IRR

Low

7.7%

12,356.35

8.49

21.69%

Medium

8.4%

9,893.93

8.49

20.66%

High

9.0%

8,187.48

8.49

19.89%

1,415.29
(729.87)

1,500.05

24,760.36

770.18

25,530.54