New Heritage Doll Company Write Up

Topics: Net present value, Internal rate of return, Rate of return Pages: 6 (1327 words) Published: November 12, 2014
Marina Chmykhalo-Friermood
Professor N. Cohen
FINA 6273-Section 10
October 23, 2014
New Heritage Doll Company Write-up

Introduction
New Heritage Doll Company is a firm that has ventured into doll production which has sought to extend its brand in order to broaden its market framework and more importantly capitalize on high levels of customer loyalty. The vice president of the Company, Emily Harris, is to forward her project proposal to the Budgeting Committee for evaluation. The Vice-president’s objective for proposing the project was based on potential to strengthen the Company’s division of production and drive future growth. Emily Harris has to produce a compelling project to avoid the committee from declining the proposal. Basis of Assessment

There are two projects between which the company can choose from or drop the proposals in their entirety. The methods of project evaluation would be based on discounting cash flows analysis and thereafter determining the Net Present Value (NPV) of each of the proposed project with Internal Rate of Return (IRR), Profitability Index and Payback Period. If the project has a positive NPV, it would suggests the project is generating more cash than is required to service the debt and provide the appropriate returns; thus, the higher NPV, the better it is for the company. The project proposal with the positive and highest NPV, IRR and profitability index along with the shortest payback period would be acceptable for investment. New Heritage Doll Company managed to produce a capital budgeting structure in order to evaluate the revenue generated in the Doll industry. It is clearly evident that a segment of the Doll industry generates income progressively with an increasing rate of 4.6%. Cash flows forecast is used to capture the incremental effect of a proposed project in order to acknowledge the breakeven point and profit or loss time frame. If the company continues with its investment in the toy and game segment, it is going to experience the economies of scale and have high operating profits. However, for a company to embrace another project proposal, it has to evaluate its financial capacity to fund the project. Thus, any project which does not generate significant revenue, the company must cultivate the capital rationing. Similarly, the company must consider some factors in the assessment of project’s risk, such as whether the project product’s required new traders or consumers who are willing to accept the goods or services rendered by the company; where the project proposal requires high level of the fixed costs, the project to be appraised is at very high risk considering such costs do not generate high returns; sensitivity of the selling price of the finished goods, and high level of breakeven production volumes. The prudent way to evaluate the company’s feasibility whether or not to invest on a new venture is by analyzing the returns or the operating profits. If the firm’s expects to experience some losses, it should reject the proposal. However, if the firm is operating at a breakeven point, the company may have the option to forecast whether it is an on-going concern. Problem Identification

The Heritage Doll Company is appraising two proposed projects, Match My Doll Clothing and Design Your Own Doll. Emily Harris, vice president of the company’s production division must have compelling reasons to influence the budgeting department to accept the project for implementation. The theoretical reasons behind Match My Doll Clothing to be implemented by the company budgeting committee is that the products produced fully match all seasonal clothing for the young girls and their preferred doll; the popularity of the company’s product; and it is the best time for expansion due to its popularity. The reasons for choosing Design Your Own Doll is that the company’s products would have high correlation with the consumers; the company’s doll can be customized based on the tastes...
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