CASE 3 Capital Budgeting Phelps Toy Company The Phelps Toy Company was considering the advisability of adding a new product to its line. Ike Bames was in charge of new product development. Since the founding of the company in 1995, he had seen sales grow from $150,000 a year to almost $40 million in 2015. Although the firm had initially started out manufacturing toy trucks, it had diversified into such items as puzzles, stuffed animals, wall posters, miniature trains, and board games. In 2009, it developed the third most popular board game for the year, based on a popular television quiz show, but the show was canceled two years later. Nevertheless, the firm learned its lesson well and continued to produce board games related not only to quiz shows but to situation comedies and even a popular detective series. However, by January of 2016, the need to generate new products was becoming evident. As can be seen in Figure 1. sales and net income were beginning to level off after the previously cited phenomenal growth. After doing a market analysis of possible products, Mr. Barnes decided that the baseball card market was a good area for potential new sales. Baseball cards were a popular product not only among youngsters but also among adults who were trying to recapture the experience of their youth A market survey by Ikes Bares indicated that the Topps Chewing Gum Company was the largest competitor in the industry. The company actually had a public distribution of its common stock in 2001. Other major sellers in 2016 were Upper Deck, Fleer, Leaf, and Donruss. All produce millions of baseball cards on an annual basis. The cards can be purchased in packs of 15-20 cards for $3.00-18.00 at drug or convenience stores or in boxes of 700-800 cards for $40 and up. These larger quantities of cards were usually purchased from sport card specialty stores or at baseball card conventions (over 1,000 such conventions throughout the country took place a year). In doing his analysis, Mr. Barnes discovered that the appeal of baseball cards was not only in opening a wrapper and finding a favorite player enclosed but also that any baseball cards initially purchased for pennies had gained substantially in value. Once a player achieved star status, his rookie card (first issued) might greatly increase in worth *Some packs are more expensive than others due to quality and buyer preference. Case 19 Se Sales Year DOU Figure 1 Phelps Toy Company 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006