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A Report on

‘New Heritage Doll Company’

By: Group 4 (Master in Management, Section 1)

Members: Mohamed Amine Meftah


Rahul Lalwani Lalwani
Federico Tortonese
Jeannine Markwart
Vincenz Scheicher
Noemie Benaroch
Introduction:

New Heritage Doll Company is a Doll production company, whose aim is to expand its business
scope and, more importantly, to capitalize on high levels of market loyalty. The company's
vice-chair of production division, Emily Harris, needs to submit her plan for assessment to the
budgeting committee. Two of the proposals, Match My Doll Clothing (MMDC) and Design
Your Own Doll (DOYD), submitted to her were based on their creativity and the capacity to
strengthen the product lines of the division. MMDC, the first project, would extend warm
weather clothing to an all-weather clothing range. The second project, DYOD, is designed to
start with a website that allows the customers to choose the features of the doll, the colour,
etc and then dolls would be made to order. Due to administrative and financial constraints,
the company could refuse the plan in both cases. Other departments within the company are
also expected to support their own projects and Harris has to choose to pursue one of her
own division’s projects over the other.

1. Identification of the Correct Proposal:

The proposal, Match My Doll Clothing, will extend an already established clothing line
consisting of several matching dolls and children's clothing for warm weather. The proposal
consists of the following characteristics:
• Due to its current success, it may be expanded into a complete clothing line all season.
• Since the current product line is expanded, investments in operating capital, the pricing
structure and the cost of the products may rely on historical information.
• It is realized that the concept has already been evaluated and is very successful, with the
same profit margin if not more. Not to say, the execution of the project is familiar, and
the organization is acquainted with this part of a project.
• MMDC will lead to increasing or at least alleviating seasonal sales and profits for New
Heritage.
• The new line has to be quickly launched due to the unclear complexity of the fashion
sense of children.
• MMDC is also a risky bet because nobody knows how much time New Heritage would
benefit from this particular project.
The proposal, Design Your Own Doll, includes the development of new custom dolls to meet
the customer requirements. The proposal consists of the following characteristics:
• In this venture, a new doll design application is required on the internet.
• The company will have to allow the production of this assembled product line locally or
outsource it to the U.S. contract manufacturer rather than Asia due to time constraints.
• As this is a custom setup with a low volume, the cost of the product shall be high.
• Market research found that a large group of customers were very excited about this
initiative.
• The DYOD project would contribute to creating more sales, since this was a new concept
and potential and existing clients could continue buying. Not to mention, the company's
goal is to create a unique customer experience.
• The element of IT is dangerous because the business is in unknown territory which needs
a significant amount of investment.
• It would require excellence in task implementation as otherwise it would tarnish the
image and relationship of New Heritage with its best clients.
We think the Build Your Own Doll concept is more convincing, without considering the
financial analysis. Although the venture is more challenging, competition is fierce and New
Heritage will stay in line with its values, industry trends, and innovation dimension that is
always evolving. The creator of this organization saw that the big toy companies did little to
promote girls' imagination or to promote a good self-image, thereby developing a range of
dolls with unique stories and interesting themes. DYOD keeps following its core values,
allowing young children to express themselves. We consider that the Match My Doll Clothing
Line is not on the same path as DYOD but encourages kids to be trendy and up-to-date instead
of merely themselves.

2. NPV Evaluation:

Since the Match My Doll Clothing Line, an enhancement to an already successful product
range, is a medium-risk venture, the project would have an 8.40% discount factor which will
provide them with an NPV of $7,150 including terminal value, and a negative $146 excluding
terminal value. On the other hand, Design Your Own Doll project is riskier, as it represents a
whole new product line which requires an IT component, giving it a 9% discount factor.
DYOD's NPV was determined to be $7,058 with the terminal value and $3,391 with no
terminal value. As the NPV is favourable for both projects, including the terminal value, they
would generate value for the company. However, the Match My Doll Line expansion project
has a slightly higher IRR of 16.9% when the NPV is set to 0, whereas the Make My Own Doll
proposal has an IRR of 13.2% when the NPV is set to 0. In this way, MMDC would create more
quantitative value for the company.

3. Internal Rate of Return & Payback Period:

The internal rate of return (IRR) for the expansion of the Match my doll clothing line is 24%
with the terminal value and is 7.6% without the terminal value. The IRR of the Design Your
Own Doll project is 17.9% with terminal and negative 0.5% without terminal. With regard to
payback, MMDC has a 7.40 year payback period while DYOD has a 9.07 year payback period.
Both projects IRRs exceed their individual discount rates, 8.4% for the MMDC and 9% for the
DYOD. The MMDC project is quantitatively more compelling than the DYOD project, based on
our financial analysis. This is due to the shortest payback period and higher NPV and IRR in
the MMDC project. Nonetheless, the DYOD plan is more capital-intensive and could generate
higher revenue while taking longer to generate free cash flow. These indicators may impact
the deliberations of Harris by concentrating solely on the minor financial aspect rather than
on the qualitative long-term potential.
One thing to note is that the payback period is less extensive than the IRR or NPV. The payback
period evaluates cash flows and establishes when the capital that is paid out is returned by
the benefits of a project. It looks at a project only until the investment is recovered and is
often neglected, because the time value of money is not taken into account. The downside
with the IRR is that sometimes, relative with NPV for ventures that are mutually exclusive, it
may provide you with contrasting answers. Not to mention, if cash flow over project life is
negative, a multiple IRR issue will arise, just like in DYOD.
The IRR and payback periods for the projects should be compared in conjunction to the NPV
for the two projects in order to make the most informed decision. Furthermore, as the IRR
does not consider capital costs, it should not be used to compare projects of different
durations. The Modified Internal Return Rate (MIRR) takes the cost of capital into account
and better indicates the efficiency of the project to contribute towards the discounted cash
flow of the organization. In this regard, we feel it is important to evaluate certain financial
instruments, like MIRR, and look at competitive advantages as well as future market
developments.

4. Further Research

After comparing the two projects, the net present value is somewhat similar. This contributes
to various aspects of each project to be investigated to determine which project is suitable
for the organization. The sustainability of each project is one aspect Harris must examine. If
one project has great profits for a couple of years and the other takes time to produce a
return, the project that makes a quick buck will be attractive. It is important, however, to
understand how the long-term sustainability of each project is. In the long term, the better
short-run project could be less profitable than the project that takes time to develop.
Harris must take a second aspect into account: the values of the company. New Heritage is
an organization whose goal is to encourage positive self-images for girls to widen their
creativity and to build a generational bond between mothers, daughters, and grandmothers.
Harris needs to look into the direction of each project to determine which project matches
better the ideals of New Heritage. If a project were to depict numbers that were much higher
than the other project, the obvious choice would be the financially stronger one. Fortunately,
or unfortunately, both projects show similar figures, depending on the point of view.
Finally, Harris must examine the trends in the economy. The doll market amounted to $3.1
billion in 2008 and is expected to increase annually by 3% through 2013. However, the doll
industry has never seen a sustainable brand interest due to high demand. Barbie was one of
the few exceptions, but Heritage in recent years has been able to establish some franchise
value. This gives the company sustainability in the doll industry. Moreover, the Design Your
Own Doll project would address the core base of customers of the company. Clothing line
markets must be addressed with the extension of Match My Doll Clothing Line, and this also
is an area with strong competition. In addition, fashion trends must be considered and
established, as trends in fashion can and do change rapidly. To succeed in this venture,
fashion trend research needs to be accurate.
5. Final Recommendation:

In our view, Match My Doll Clothing Line Expansion is the most rational of these two
investment plans, for the following three factors:

Sr. No. Match My Doll Clothing Line Design Your Own Doll
NPV = $7,150 NPV = $7,058
1
NPV without Terminal = -$146 NPV without Terminal = -$3391
2 Payback Period = 7.40 Years Payback Period = 9.07 Years
IRR = 24% IRR = 17.9%
3 IRR without Terminal = 7.6% IRR without Terminal = -0.5%
When NPV = 0, IRR = 16.9% When NPV = 0, IRR = 13.2%

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