New Heritage Doll Company Capital Budgeting Analysis The New Heritage Doll Company is a company that makes dolls for children between the ages 3 – 12 years. The company has revenues of 245 million USD and an operating profit of 24 million USD. The company has three major divisions – The Retailing division, the Licensing division and the Production division. The head of the production division has to choose between two capital intensive projects that have been presented to her - the “Make My Doll Clothing Extension” (MMDCE henceforth) and the “Design Your Own Doll” (DYOD henceforth). This paper will try and analyze some of the issues that may need to be taken into account by the division head before she chooses a project for final …show more content…
In deciding which product to approve, the production head could use historical data pertaining to customer buying habits to see if their buying habits change when a new product line is launched. Therefore, choosing MMDCE from a strategic stand point seems to be a better option. Issue 3: NPV Analysis Since DYOD is a brand new product line for the company, the inherent risks involved in its successful launch are higher than MMDCE, since it is merely an extension of an existing line of products. Therefore, in order to do an NPV analysis, the division head could use a discount rate of 8.4% for the MMDCE and 9% for the DYOD product lines respectively. An NPV analysis suggests that investment in the MMDCE product line is a more profitable proposition compared to the DYOD product line since the NPV of the DYOD product line is negative (-2,434,000). Since we reject projects with negative NPVs, MMDCE seems to be an obvious choice. The following table below shows the analysis for NPV: For MMDCE EBIT EBIT*(1-t) Dep Capex A/R Inventory A/P WC FCFF NPV 2010 2011 2012 2013 2014 2015 2016 (1,250) 583 994 1,277 1,392 1,503 1,623 (750) 350 596 766 835 902 974 0 152 152 152 152 164 178 1,470 952 152 152 334 361 389 0 729.4931507 1112.0718 1363.1471 1472.1982 1589.9708 1717.1718 0 359.661 500.121 396.008 426.724 460.858 497.724 0 330.118 496.601 605.884 653.308 705.575
Comparing only the baseline scenarios for the declared and assumed levels of risk, the Design Your Own Doll proposal shows the highest NPV. However, when the additional cost of labor is factored into the comparison, the NPV of Design Your Own Doll +Additional Labor is reduced to $399,680.
To make the most informed decision the IRRs and payback periods of the projects should be compared in conjunction with the NPVs of the two projects. The NPV analysis of the two projects under consideration indicates that the MMDC Project is the better of the two projects.
The first project proposal is Match My Doll Clothing line expansion consisted of expanding matching doll and child’s clothing and accessories. The second project proposal is Design Your Own Doll by creating customizable “one of a kind” doll features through the company’s website. The project selection criteria would base on quantitative and qualitative analysis. The quantitative analysis would base on the evaluation of discounting cash flow forecasts to determining the Net Present Value (NPV), Internal Rate of Return (IRR), and the Payback period of each proposed project. The qualitative analysis would include the potential project value of the company’s overall strategy, innovation, key project risks, and the project interdependencies to the whole company.
I would now like to examine Wal-marts financial data. Wal-Mart’s revenue improved over these three years by $39,736 million which is a gross increase of 9.1%. Additionally the Cost of Sales climbed from
Note: we are using end-of-year balance sheet items (rather than averages) in order to have three comparison years and to recognize that the firm’s business model (from a retailer of products manufactured by others to a manufacturer/wholesaler of eco-friendly products.
The standard costs and variances for direct materials, direct labor, and factory overhead for the month of May are as follows:
$135,000 $90,000 TOTAL REVENUE $3,136,500 $2,352,375 $1,568,250 Expences TOTAL VARIABLE COSTS $454,000 $340,500 $227,000 TOTAL FIXED COSTS $1,403,000 $1,403,001 $1,403,002 TOTAL EXPENSE BEFORE IT $1,857,000 $1,743,501 $1,630,002 EBIT $1,279,500 $608,874 -$61,752 Depreciation $320,000 $320,001 $320,002 EBITDA $1,599,500 $928,875 $258,250 Furnishing Interest $110,000 $110,000 $110,000 20yr Mortgage Interest $182,000 $182,000 $182,000 TOTAL INTEREST $292,000 $292,000 $292,000 TAXES (40%) $395,000.00 $126,749.60 -$141,500.80 Furnishing Principal $180,160 $180,160 $180,160 20yr Mortgage Principal $49,713 $49,713 $49,713 TOTAL PRINCIPAL $229,873 $229,873 $229,873 NET INCOME $362,627 -$39,749 -$442,124 DIVIDEND PAYMENT $29,010 -$3,180 -$35,370 RETAINED EARNINGS $333,617 -$36,569 EBIT/INTEREST 4.38 2.09 (0.21) EBITDA/INTEREST 5.48 3.18 0.88 BURDEN $675,121.67 $675,121.67 $675,121.67 EBIT/BURDEN 1.90 0.90 (0.09) ROE= Net Income/OE (H1) 32.97% -3.61% -40.19% Revenue Estimates Revenue Item 100% Monthly 75%
General Foods is a large corporation organized by product lines. They are evaluating Super Project, the manufacture of a new powdered dessert. Crosby Sanberg, a financial analysis manager, must determine the value in accepting the proposal, along with J.C. Kresslin, the Corporate Controller. The Super Project will increase profit with a payback period of less than ten years. The proposed capital investment for the project is $200,000 ($80,000 for building modifications and $120,000 for machinery and equipment) and production would take place
These number will be used for predicting future financial statements later in this case study.
For this proposal, Marcy McAdams, the proposer strongly believed it should be started without delay
Its activity during 2008 as measured by the cost of goods sold was $74,000 (COGS). It therefore had an inventory of turnover of 2.55 (74,000/29,000) times. This represents an improvement from 2.04 (43,000/21,000) times in 2005.
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
1. Compute the Free Cash Flows for the years 2010 to 2020 for both projects
I came up with $3.2m by taking the 1st quarter revenue of $718,000 which is historically approximately 22.5% of the yearly revenue. Assuming this holds true again in 1991, the annual revenue in 1991 will be around $3.2m. This is a 19% year over year increase in revenue for BLC, which is in line with their year over year growth in 1989, and less than the 34% in the best year, 1990.