DATE: October 27, 2014
SUBJECT: New Heritage Doll Company
The New Heritage Doll Company is a growing company within the U.S. toy and game industry, with two proposals to strengthen future growth, but only the resources to dedicate themselves to one according to the capital budgeting committee. Match My Doll Clothing line has lower initial costs, but projects lower operating profit. Design Your Own Doll, on the other hand, has double the initials costs, but shows much higher revenues along with operating profit compared to their other consideration. Within the Match My Doll Clothing option I discounted the cash flows to find the net present value after 10 years. Revenues increases every year, but after discounting them 9% to bring them to present value and also adding a terminal value of $924,500 I found that the cash flows summed up to $9,869,000. Taking out the initial expenditure of $3,520,000 gives us a NPV of $6,349,800. When I calculate the NPV for the Design Your Own Doll investment, I took the cash flow in year one to be 0 because the revenue was zero and it had not been launched at the time so the production costs would have been zero, leaving our operating profit nonexistent. So discounting the future cash flows leaves us with cash flows adding up to $9,869,800, with the terminal value of 1556500. After taking out the up-front expenditure of $5,811,000, I found the NPV to be $9,642,110. These assumptions are projected out 10 years. Assuming the projects would end after the 10 years, I believe that the Design Your Own Doll option would allow for more value in terms of selling off Property, Plant and Equiptment. I do believe a big issue with the Design Your Own Doll option cannibalizes revenue from the standard doll. I would say that especially first time customers would buy a customized doll instead of a standard one. You would have long term customers who buy a personalized one, making for organic revenue. I believe this is a concern with the...
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