Case Study “Great Eastern Toys” Designer Dolls’ Project – How to evaluate? Within the scope of Finance course, we are asked to apply our acquired knowledge in the analysis of the case study “Great Eastern Toys”, in order to build a solid decision concerning whether a new project should be taken or not by this firm. As a brief explanation, Great Eastern Toys firm is planning to extend its existing product line of plastic dolls by entering the market for designer dolls. Several studies were undertaken in order to estimate future cash flows of this project. After this step, the firm has to evaluate the project based on the information given by those studies. If so, which path should the firm follow as a means to reach a conclusion …show more content…
Unless market trends, market environment or consumer buying behaviour evolve in an unexpected way, we are assuming that firm cash flows from other projects will keep fairly constant in the next 5-years period. Under this assumption, erosion costs, which are defined by reductions on the cash flows from other existing projects as a side effect from the new project, are not being taken into account. However, we might argue, as well, that the scenario predicted by the sales manager, Robert Ho, is more likely to occur, if we strongly suspect changes in consumer’s perceptions and buying behaviour for dolls purchasing will happen shortly. According with these expectations, we must include erosion costs in the incremental cash flows evaluation. Due to this difficulty in either considering erosion costs as an incremental cash flow, or just dismiss it, we will analyse both scenarios, and reach a final conclusion according with the assumptions assumed in each of them. Note: This point will be addressed in the conclusion section. As we have mentioned above, the relevant cash flows to calculate the NPV of the project are the incremental cash flows, which mainly include the operating cash flows and the investment cash flows. Operating Cash Flows Operating cash flows are obtained through income calculation and taxes on income. Year Production Price Sales Revenue Cost per unit Operating Costs 1 36.000 300 10.800.000 141,3333333 5.088.000 2 36.000 300 10.800.000
Further, although the case facts include an estimated annual discount rate of 7 percent, the discount rate should not be used in Smooth Sailings’ impairment analysis since undiscounted cash flows should be used in the recoverability test.
Define the term “incremental cash flow.” Since the project will be financed in part by debt, should the cash flow statement include interest expense? Explain.
Revisit the selling price of specialty branded doll #106 based on the customization requirements by the customers.
Specialty Toys, Inc., sells a variety of new and innovative children’s toys. Management learned that the preholiday season is the best time to introduce a new toy, because many families use this time to look for new ideas for December holiday gifts. When Specialty discovers a new toy with good market potential, it chooses an October market entry date.
Evaluating the risks, calculating the probability of success, and factoring in the projected profit from sales will provide a clearer NPV to be compared with other projects in the
* Taxation and salvage: Tax regulation in every country is different, so the company should consider it when calculating NPV. Also, it should clarify the depreciation expense and interest expense to
I will approach the process of exploring more technologically advanced and interactive toys within the American Girl core brand by pulling a team of people to complete the strategic planning process (Ferrell & Hartline, 2014). A strategic plan is a roadmap to grow your business (Lavinsky, 2013). The roadmap will detail what it will take the implement the new technology and interactive product (Ferrell & Hartline, 2014). The team will explore the new technologies and understand the current status of interactive toys that the Mattel has had success with and the pain points. This will help the team understand what works and what has not worked. Research and analysis will be performed to understand the new technologically that is available
* There is cash flow loss that might causes continuing losses associated with the use of the asset
1) Incremental cash flows are the cash flows that should be used in calculating the NPV of a project. The cash flows are changes in cash flows that occur as a direct consequence of accepting a project, not the cash flows that the company is already receiving.
e) Maintenance contracts - Maintenance costs should be included as incremental cash flows because they could change the NPV of the project if the maintenance costs are significantly different for each of the different projects.
Two discounted cash flow analyses accompany this memo. Part A contains an adjustment for possible business erosion at Rotterdam, while part B does not make that adjustment.
(b) Calculate by how much the proposed addition will either increase or reduce operating income. Show all work.
1. Two commonly used methods of financial analysis are payback and present value. Payback determines the length of time for an investment to return its original cost (1). Using the assumptions stated below the payback of the Jiminy Nick wind turbine with a cost of about $3.3 million would return the investment in about four years time. Net present value summarizes the initial cost of an investment, the estimated annual cash flows, and expected salvage value, taking into account the time value of money (1). A NPV calculation for the scenario SED is reviewing equals $7,697,286 minus the investment costs of $3,318,000 totaling $4,379,286.
A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.
In the past, the toy business was just an annex of the publishing industry. Little effort was invested in toys which were not even mentioned strategic plans. Now the toy industry is the second-highest profit maker in Marvel, generating over $20 billion in sales in 2003. The toy business is very promising in the future. However its percentage in revenue will still remain stable or slightly decrease, just as publishing will do, because licensing has such a strong possibility for growth. In addition, while the toy industry competition is too fierce to permit further achievements.