Capital Budgeting Hbr

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REVISED: 11/05/10

O NL IN E SI MU LA TIO N F OR EG R OU ND R E A D IN G

Finance: Capital Budgeting
Company and Industry Overview
The New Heritage Doll Company, based in Sacramento, California, was a privately held company with 450 employees and approximately $245 million in fiscal 2009 revenues. This represented approximately 8% of the $3.1 billion U.S. doll industry, which was projected to grow by 2% annually to $3.4 billion in retail sales by 2013. In turn, the doll industry represented a 7.4% share of the total
$42 billion U.S. market for toys and games, which was dominated by global enterprises that enjoyed economies of scale in design, production, and distribution. Revenues were highly seasonal; the
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Online Simulation Foreground Reading—Finance Simulation: Capital Budgeting

to $150 range) for the “tween” (ages 8 to 12) demographic. Doll accessories, which made up 15% of the division’s total revenue, included doll clothing and “doll gear” to mimic real‐life situations in which the doll “character” might find herself (camping gear, sports gear, etc.).
Similar to other U.S. toy manufacturers, a large portion of New Heritage’s assembly and packaging was done overseas, in China and Taiwan, using components manufactured by third‐party vendors. However, manufacturing activities that required precise tolerances or proprietary processes, along with all the creative functions (concept testing, product design, and product‐ prototype development) were handled in‐house at the company’s headquarters facilities in
Sacramento.
New Heritage’s Retail Division
The second division of New Heritage Doll Company was the retail division, which generated $190 million of New Heritage’s revenue and $4.8 million in operating profit. The retail division managed the sale of the dolls and accessories that the production division designed, assembled and packaged.
The retail division sold its merchandise through three channels: a website (42%), a mail‐order paper
catalog
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