1. Compare the business cases for each of the two projections under considerations by Emily Harris.
Qualitatively, which one do you regard as more compelling?
2. Use the operating projections to compute a net present value (NPV) for each project. Which project creates more value?
3. Compute the internal rate of return (IRR) and payback period for each project. How should these metrics affect Harris’s deliberations? How do they compare to NPV as tools for evaluating projects?
When and how would you use each?
4. What additional information does Harris need to complete her analyses and compare the two projects? What speciﬁc questions should she ask each of the project sponsors?
5. If Harris is forced to recommend only one project over the other, which should she recommend?
Study Guide for New Heritage Doll
The company has two project proposals: Match My Doll Clothing expansion (MMDC) and Design Your
Own Doll (DYOD) initiative. The case analyzes various investment criteria for New Heritage Doll. We will start with NPV, and then move on to other criteria.
A. NPV for MMDC
We start by focusing on MMDC. In order to compute NPV for MMDC, we need two ingredients: discount rate and cash ﬂow forecasts
1. Discount rate: From the case, what is the discount rate you should use for MMDC? Why?
2. Expected cash ﬂows:
a. In class, we know that free cash ﬂow (FCF) = EBITDA*(1 – t) + Depreciation*t - Change in NWC CAPEX. Show that we can rewrite this expression and compute FCF from FCF = EBIT*(1-t) +
Depreciation - Change in Net Working Capital - Capital Expenditure.
b. Compute EBIT for each year from 2010 to 2020. Compute after-tax EBIT, i.e. EBIT*(1-t), for each of those years. (Hint: Get the tax rate, t, from the case.)
c. Working capital in this case consists of four components: (1) cash, (2) account receivables, (3) inventories, and (4) account payables. Compute each of these four items of working capital. (Hint:
You may need to