New Heritage Doll

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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

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