New Heritage Doll Company: Capital Budgeting

Emily Harris is the Vice president of New Heritage Doll Company’s production division. In mid-September of 2010 she was trying to decide on project proposals for the company’s capital budget meeting in October. Of the proposals presented to her, two of them stood out based on their innovation and ability to strengthen the division’s product lines. The first project, Match My Doll Clothing Line Expansion (MMDC), would extend the warm weather products to an all-weather clothing line. The second project, Design your Own Doll (DYOD), would start with a website where customers would choose the doll’s features, color, etc. and then the dolls will be made to order. The

The New Heritage Doll Company offered a unique line of dolls as an alternative to its competitors, and it wanted to extend its brand for future growth. The company has three operating divisions: production, retailing and licensing. All three divisions planned to promote projects of their own to compete for the same limited resources. Emily Harris, vice president of the production division, had to be prepared to select one of the two project proposals from her division and come up with a compelling case to submit to the company’s capital budgeting committee.

Any capital project requests that exceed $100,000 are reviewed by the Capital Expenditure Committee (CEC), a group of top executives, on a monthly basis. Additionally, any project that exceeds $50 million would have to be approved by the board of directors. These meetings last several hours to carefully determine the future cash flows of the company. Projects could range from remodeling, relocation, rebuilding, and closing an existing store to building a new one. Typically it would take 1-2 years of planning before the projects even reach the CEC. Additionally, not all projects with positive NPV’s are accepted. If there was a disagreement between committee members on a particular project the CEO would have the final say on whether a project would be accepted.

Procedural Modifications and Recommendations: The CER system was developed to outline specific requirements of a project and create rigorous documentation of the projects. As well, the process was put into place to enable a more structured review of these proposals between employees and management. The implemented a two week review timeframe to receive and review the documentation. These processes while good had several flaws:

There are different types of budgeting that businesses typically use and those include Operating budgets, Capital Budgets and there are many subtypes that exist because a budget can also be created for special events, the recruitment and retention of new staff, and to manage the advertising expenses and return on investments for a business (Demand Media, 1999-2012). According to Demand Media (1999-2012), "An operating budget outlines the total operating expenses and income for the organization, typically for the period of a fiscal year. Capital budgets evaluate the investments and assets of the business, and a cash budget shows the predicted cash flow in and out of the business over a period of time” (para.2 ). According to the Cost-Benefit Analysis (2012), “Capital budgeting has at its core the tool of cost-benefit analysis; it merely extends the basic form into a multi-period analysis, with consideration of the time value of money. In this context, a new product, venture, or investment is evaluated on a start-to-finish basis, with care taken to capture all the impacts on the company, both cost and benefits. When these inputs and outputs are quantified by year, they can then be discounted to present value to determine the net present value of the opportunity at the time of the decision” ("Cost-Benefit Analysis," 2012).

Introduction to Financial Planning and how do we create an integrated plan: Focus on cash flow forecast using operations plan

The deliverable for Part 1 is a written proposal for the project selection criteria and a high level description of a proposed portfolio management process. You may also be expected to make an informal presentation of the report in class.

It is important to explain some of the assumptions made in the pro forma statement, as they play a critical part in determining the forecasted revenues. Cost of sales was determined by the equation purchases + other outlays – change in inventory, other outlays = cost of sales. Other Expenses was calculated by adding depreciation costs and four months’ worth of interest, which came to $47,000

3. Your project should be presented in report format and should contain an Executive Summary and a Bibliography. Use of Appendices would be appropriate.

The approach we use to forecast capex, depreciation and NWC is admittedly inadequate. However, it is very difficult to make a reasonable assumption without the knowledge of management strategy, depreciation schedule and other

As a first step in the budget process, sales forecasting allows for other budgets to be planned on sales activities. Purchases and production, for example, depend on the forecasted sales and subsequent inventory levels to be managed. The operating expenses are then budgeted as a result of the sales budget and expected costs of purchasing and production (materials, labor, manufacturing) as a measure of Cost of Good's Sold.

New Heritage Doll Company’s production division has two serious proposals that will be presented to the capital budget committee. The first proposal, named Match My Doll Clothing Line extension, will add year round seasonal clothing to Heritage’s product line. This proposal’s NPV was $7,326.11. The IRR was 24.10% and the MIRR was 20.68%. The Profitability Index was 3.08 and the payback period was 7.11 years. The value of the tax shield is $647,000.

However, the number of items was limited. The proposed expansion would create an “All Seasons Collection” of apparel and gear covering all four season of the year. It would expand the number of matching doll and girl clothing items available

In mid-September of 2010/ Emily Harris, vice president of New Heritage Doll Company's production division, was weighing project proposals for the company's upcoming capital budgeting meetings in October. Two proposals stood out based on their potential to strengthen the division's innovative product lines and drive future growth. However, due to constraints on financial and managerial resources, Harris knew it was possible that the firm's capital budgeting committee would decline to approve both projects. She also knew that New Heritage's licensing and retail divisions would promote compelling projects of their own. Consequently, Harris had to be prepared to recommend one of her projects over

Analyzing the company’s performance compared to its historical figures is always useful; nevertheless, these historical figures can be also a very useful tool to forecast future ProForma figures. We usually start by forecasting future sales (based on an average increase in sales figure) and other balance sheet and income statement items are forecasted as percentage of sales, this percent is normally consistent from historically figures. A close look should be given to the company’s operations and plan for the coming year while making our assumptions and forecasted figures. Normally we should follow