Great Eastern Toys

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Case Study
“Great Eastern Toys”

Designer Dolls’ Project – How to evaluate?

Within the scope of Finance course, we are asked to apply our acquired knowledge in the analysis of the case study “Great Eastern Toys”, in order to build a solid decision concerning whether a new project should be taken or not by this firm.

As a brief explanation, Great Eastern Toys firm is planning to extend its existing product line of plastic dolls by entering the market for designer dolls. Several studies were undertaken in order to estimate future cash flows of this project.
After this step, the firm has to evaluate the project based on the information given by those studies. If so, which path should the firm follow as a means to reach a conclusion of either accepting/ rejecting the project?
Our job, is precisely to tell how relevant is this information, and why should we consider it in our calculations that lead to the project’s approval or rejection.

First of all, we need to mention which theoretical approach we considered to calculate the viability of the project. Without any surprise, we chose the NPV method.
Conceptually, the Net Present Value is the present value of future cash flows minus the present value of the cost of the investment, which determines the exact cost or benefit of a decision. Consequently, the NPV rule states that if NPV is negative we should reject the project, or conversely, if is positive, we should accept it.

But, why did we choose this method rather then Payback or Internal Rate of Return, for example? Simply, because NPV is the best method in leading to good investment decisions, as it uses all relevant cash flows of the project and discount them to their present value (time-value of money is absolutely important to the project evaluation). In addition, the NPV interpretation tells us by which amount the value of the firm will change if the project is taken.

Nevertheless, it does not mean that other mentioned methods above cannot

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