MBA FM MODULE ASSIGNMENT 2

MAY 8, 2014 ADMIN

Write a report for the New Heritage Doll Company on which new product they
should adopt supporting your argument with full workings. This is an
individual project.

New Heritage Doll Company Report

INTRODUCTION
New Heritage Doll Company is a firm that has ventured into Doll production
which has sought to extend its brand in order to broaden its market
framework and more importantly capitalise on high levels of customer
loyalty. The vice president of the Company, Emily Harris is to forward her
project proposal to the Budgeting Committee for evaluation. The Vicepresidents objective for proposing the project stood out based on potential
to strengthen the Companys division of production and to drive future
growth. Emily Harris has to produce a compelling project to avoid the
committee to decline the proposal.

Basis of assessment
There are two projects between which the company will have decision option
to accept or drop the proposal. The method of project evaluation would be
based on discounting cash flows (DCFs) and thereafter determining the Net

Present value (NPV) of each of the proposed project. The project proposal
with the positive and highest NPV would be acceptable for investment. If the
project has a positive NPV suggests that such a project is generating more
cash than is required to service the debt and to provide the appropriate
returns to the firms shareholders and this cash accrues solely to the firms
shareholders. If the firm projects generate a negative NPV then the project is
not feasible.

New Heritage Doll Company managed to produce a capital budgeting

structure in order to evaluate the revenue generated in the Doll industry. It is
clearly evident that, a segment of the Doll industry generates the income
progressively with an increasing rate of 4.6%. It is a project that has a going
concern as illustrated;

The Doll industry Company revenues outlays: market for doll toy and game
industry

year

2008

2009

2010

2011

2012

2013

Cash
outlays
$(000)

42

43.93

45.95

48.06

50..2
7

52.5

Cash flows forecast is used to capture the incremental effect of a proposed

project in order to acknowledge the breakeven point and profit or loss time
frame

If the company continues with its investment in for toy and game segment it
is going to experience the economies of scale and have high operating
profits.
However, for a company to embrace another project proposal it has to
oversight its financial capacity to fund the project .Meaning for any project
which does generate insignificant revenues the Company must cultivate the
capital rationing. Similarly, the Company must consider some factors in the
assessment of projects risk. Factors considered in the assessment of a
projects risk include;
(a)Whether the project products required new traders or consumers who are
willing to accept the goods or services rendered by the Company
(b)Where the project proposal requires high level of the fixed costs, the
project to be appraised is at very high risk considering such costs do not
generate high returns.
(c)Sensitivity of the selling price of the finished goods
(d)High level of breakeven production volumes
PROBLEM IDENTIFICATION
The Heritage Doll Company is appraising two proposed projects that are;
Design My Doll and Match My Doll Clothing. The Vice president must have a
compelling reasons and factors to influence the Budgeting Company to
accept the project for implementation.
The theoretical reason behind Match My Doll Clothing to be implemented
by the Company Budgeting Committee is that;
(a) The products produced do fully match all season clothing for the young
girls and their preferred doll;
(b)Popularity of the Companys product

(c) It was the best time for the expansion due to its popularity
For the Design Your Own Doll;
(a)The Companies products would have high correlation with the consumers
(b)The Companys doll can be customized based on the tastes and prefers by
the consumers
(c) Permanent customer loyalty
(d) Dolls could command a continued selling proposed
(e)The Company has the potential to strengthen and the future growth

The Company is also limited to take this project due to the following reasons
for proposal;
(a)The Company Low production runs and volumes
(b)Limited gradation of customization increased manufacturing complication,
the production costs increased with a significant rate
(c) Increased development cost for the technology modification and
infrastructure
Practically the proposed project is to have the following investment costs;

Match my Doll clothing line and Design My doll cash outlay

Titles

Initial
expense$(0
00)

Upfront
R&d$(000
)

Investment
in working
capital$(00
0)

Property,
plant and
equipment$(0
00)

Total
cost
$(000)

Match my
Doll
clothing

625

625

800

1470

3520

Design
my Doll

841

360

4610

(1000)

5811

Differenc
e

(216)

265

(3810)

2470

(2291)

This means that the Design my Doll has got higher Total cost by $ 2291 than
the Match my Doll Clothing. If Company uses the total cost to appraise these
projects the Match Doll clothing would be feasible for acceptance since it has
less of capital invested on it yet much returns would be realised. Design my
Doll would be rejected due to its high costs of investment.
Critically, the prudent way to evaluate the Companys feasibility in order to
invest on it is by analysing the returns or the operating profits. If the firms is
to experience some losses the Company should reject such a proposal
otherwise accept the proposal. However, if the firm is operating at a
breakeven point the Company may have the option to forecast whether it is
a going concern.

Presentation of DCFs and arguments for assumptions Match My Doll Clothing

Line
Total cost= $ 3,520,000
Terminal Cash flow in 2015= $361,000

Using NPV analysis

Year

Operating
profit $(000)

PVIF,9%

PV

2011

583

0.9174

534.84

2012

994

0.8417

836.65

2013

1277

0.7722

986.10

2014

1392

0.7084

986.09

2015

1503+ 361

0.6499

1211.41
4555.09

NPV $(000) = 4555.09- 3520= 1085.09

The NPV is positive meaning that the project is feasible.
Internal rate of return
IRR=a+(A/A-B *a-b)%)
IRR=12%(1945.1/1945.1-2267.44) * 7% -12%)
=0.0362
3.6%

TRY12%

PVIFPV

PV

TRY 7%

PV

1250

1.OO

1250

1.0

1250

583

0.8929

520.56

0.9346

544.87

944

0.7972

792.42

0.8734

868.16

12.77

0.7118

908.97

0.8163

1042.42

NPV

1945

NPV

2267.41

Design My doll Clothing Line

Total cost $(000) = 5811+1000+435= 7246
Terminal Cash flow$(000)= 875
Using NPV analysis;

Year

Operating
profit $(000)

PVIF,9%

PV

2011

550

0.9174

504.57

2012

1794

0.8417

1510

2013

2724

0.7722

2103.47

2014

2779

0.7084

1968.64

2015

2946+ 875

0.6499

2483.21
8569.95

Design my Doll
PVIF12%
(1201)

PV

TRY 7%

(1201)

1.00

(1201)

1.0

(1201)

550

0.8929

491.00

0.9346

514.03

1794

0.7972

1430.18

0.8734

1566.88

2724

0.7118

1938.44

0.8163

2223.60

3821

NPV

0.6991

2671.26

5329.96

0.7629

2915.04

8419.55

NPV $(000) = 8569.95- 7246= 1323.95

The NPV is positive meaning that the project is feasible.
IRR=12% (5329.96/5329.96/5329.96-8419.55) *7%-12%)
0.01035
=1.035%
Conclusively, both of the projects are feasible but Design my Doll has the
higher Net Present value $ 238.86 than the Match My Doll Clothing. This
means that the Company would accept Design My Doll for its investment. It
again means that this project, Design My Doll generates high cash flows
compared to the other, match my doll clothing. High returns is for the
company would be realized, and therefore the projects that the Vice
President, Emily Harris would go with is Design my Doll. One of the key
distinctions between the two projects, Match My Doll Clothing and Design My
doll is that the two are mutually exclusive projects. These are projects are
those whose cash flows are related, they do have the same function and they
thus compete with one another. This means that the acceptance of one
project eliminates from further consideration other projects.

Working Capital Assumptions

Minimum Cash Balance % of Sales

2012 $(000)

2013 $(000)

2014 $(000)

Match My Doll

3% x 6860=
205.8

3% x8409=
352.27

3% x 9082=
272.46

Design My
Doll

3% x 6000=
180

3% x 14360=
430.8

3% x 20222=
606.66

It is assumed that the working capital is apportion or percentage ratio of

revenue generated from sales and capital itself comprised approximately
15% of the Companys earnings before income taxation and it is within the
Capital budgeting of New Heritage Doll company.

Sensitivity analysis
The Company should maximize on Cash management by capital rationing on
the project accepted.Net present Value of the project should be implemented
as it reflects the time value of money invested in the accepted project.
Similarly this can be further be elaborated by computation of IRR of each two
project proposal

MATCH NY DOLL
Let 12%be b
9%=be a
Pv9%
(1250)

1.00

(1250)

583

0.9174

534.844

994

0.8417

836.65

1277

0.7722

986.10

1392

0.7084

986.10

2093.69
IRR=9%(2093.69/2093.69-1945.1)*(12%-9%))
=3.8%

DESIGN MY DOLL
Let
12% be b
9% be a
(1201)

1.00

1200

550

0.9174

504.07

1794

0.8417

1510.0

2724

0.7722

2103.47

3821

0.7084

2706.80

Npv =

5623.84

IRR=9%{5623.84/5623.84-5329.96 * (12%-9%))
=0.0517
=5.17%
The internal rate of return is the most critical method to determine the
decision option for accepting the project proposal. In this case Design my
Doll again has the highest IRR meaning it has the highest operating rate of
returns with the shortest payback period of the cost of capital and therefore
it is opted to be accepted.

Recommendation and its support by discussion and analysis

Design My Doll is best project proposal to be accepted instead of Match My
Doll by the Budgeting Committee since it has the higher Net present value,
Higher IRR and the shortest payback period as it is computed above.