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 Vice-presidents 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 50..2
$(000) 42 43.93 45.95 48.06 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

Investment Property,
Initial Upfront in working plant and Total
expense$(0 R&d$(000 capital$(00 equipment$(0 cost
Titles 00) ) 0) 00) $(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

Operating
Year 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;

Operating
Year 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
(1201) PVIF12% 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 0.6991 2671.26 0.7629 2915.04

NPV 5329.96 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)

3% x 6860= 3% x8409= 3% x 9082=

Match My Doll 205.8 352.27 272.46

Design My 3% x 6000= 3% x 14360= 3% x 20222=

Doll 180 430.8 606.66

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.