New Heritage Doll
Emily Harris is the Vice president of New Heritage Doll Company’s production division. In mid-September of 2010 she was trying to decide on project proposals for the company’s capital budget meeting in October. Of the proposals presented to her, two of them stood out based on their innovation and ability to strengthen the division’s product lines. The first project, Match My Doll Clothing Line Expansion (MMDC), would extend the warm weather products to an all-weather clothing line. The second project, Design your Own Doll (DYOD), would start with a website where customers would choose the doll’s features, color, etc. and then the dolls will be made to order. The firm could decline both of the proposals because of managerial and financial resource constraints. Other divisions in the company are also expected to promote projects of their own. Because of these factors Harris has to choose to promote one of her division’s projects over the other. The following questions will help Harris make the best decision for her division and help support her recommendation when communicating back with the divisions executives. 1. Set forth and compare the business cases for each of the two projections under consideration by Emily Harris. Which do you regard as more compelling? The Match My Doll Clothing Line Expansions (MMDC) Project involves expanding the existing successful Match My Doll Clothing line. This clothing line originally consisted of a few sets of matching doll and child clothing for warm weather. Given its current success, there is a consideration to expand it to include all season clothing line. Since it is an expansion to existing product line, investment in operating capital, pricing structure and product cost can be based on historical information. The company should be able to use current sales channels like selling to retail divisions or private labels. New Heritage should be able to outsource manufacturing of this product line expansion to Asia, similar to other existing products.
The Design Your Own Doll (DYOD) Project involves creation of new customized dolls to customer’s specification. This project will require new web-based doll-design software. Due to lead time constraints, the company will have to consider manufacturing this made-to-order product line in-house or outsource it to contract manufacturers in USA instead of Asia. This would be a new manufacturing channel for the company. Product cost is expected to be high due to low volume and customized set up. New Heritage Doll Company will have to be thorough when they calculate product cost and price structures for this new product line. This new product will probably be sold through on-line channels only.
Without any financial information, the Match My Doll Clothing Line Expansions (MMDC) looks more attractive because it involves less risk and less capital investment and utilizes existing infrastructure and well established sales channels. 2. Use the operating projections for each project to compute a net present value (NPV) for each. Which project creates more value? We assumed that the Match My Doll Clothing Line Expansions (MMDC) Project is a medium risk project since it is an extension to existing successful product line so we used risk-adjusted cost of capital of 8.4%. We believe that project 2 (DYOD) is a much higher risk project since it is a completely new product line for the company and requires an information technology component, so we used risk-adjusted cost of capital of 9%. According to Exhibit 1, the Match My Doll Clothing Line Expansions (MMDC) Project has a Net Present Value (NPV) of $7,150 and Exhibit 2 shows that the Design Your Own Doll (DYOD) Project has a Net Present Value (NPV) of $7,058. Both projects have positive NPV and would create value for the company. However, the Match My Doll Clothing Line Expansions (MMDC) Project has a slightly higher NPV...
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