New Heritage Doll Company: Capital Budgeting Exhibit 1 Selected Operating Projections for Match My Doll Clothing Line Expansion 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Revenue 4,500 6,860 8,409 9,082 9,808 10,593 11,440 12,355 13,344 14,411 Revenue Growth 52.4% 22.6% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Production Costs Fixed Production Expense (excl depreciation) 575 575 587 598 610 622 635 648 660 674 Variable Production Costs 2,035 3,404 4,291 4,669 5,078 5,521 6,000 6,519 7,079 7,685 Depreciation 152 152 152 152 164 178 192 207 224 242 Total Production Costs 0 2,762 4,131 5,029 5,419 5,853 6,321 6,827 7,373 7,963 8,600 Selling, General & Administrative 1,250 1,155 1,735 2,102 2,270 2,452 2,648 2,860 3,089 3,336 3,603 Total Operating Expenses 1,250 3,917 5,866 7,132 7,690 8,305 8,969 9,687 10,462 11,299 12,203 Operating Profit (1,250) 583 994 1,277 1,392 1,503 1,623 1,753 1,893 2,045 2,209 Working Capital Assumptions: Minimum Cash Balance as % of Sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Days Sales Outstanding (365 day year) 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x Inventory Turnover (prod. cost/ending inv.) 7.7x 8.3x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x Days Payable Outstanding (based on tot. op. exp.-depr.) 30.8x 30.9x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x Capital Expenditures 1,470 952 152 152 334 361 389 421 454 491 530 Tax Rate 40% Discount Factor 8.4% Terminal Value growth factor 3.0% Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cash Accounts Receivable Inventory Accounts Payable Net Working Capital 800 DNWC 800 NPV Analysis period 0 1 2 3 4 5 6 7 8 9 10 Free Cash Flows 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 EBIT (1-t) plus depreciation less DNWC less capital expenditures Free Cash Flows Terminal Value Cash Flows Discount factor Present value NPV IRR Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cash Flows IRR Payback Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cash flows Cumulative cash flow payback period 5 year Cumulative EBITDA Profitability Index NPV/Initial Investment New Heritage Doll Company: Capital Budgeting Exhibit 2 Selected Operating Projections for Design Your Own Doll 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Revenue 0 6,000 14,360 20,222 21,435 22,721 24,084 25,529 27,061 28,685 Revenue Growth 139.3% 40.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Production Costs Fixed Production Expense (excl depreciation) 0 1,650 1,683 1,717 1,751 1,786 1,822 1,858 1,895 1,933 Additional development costs (IT personnel) 435 Variable Production Costs 0 2,250 7,651 11,427 12,182 12,983 13,833 14,736 15,694 16,712 Depreciation 0 310 310 310 436 462 490 520 551 584 Total Production Costs 435 4,210 9,644 13,454 14,369 15,231 16,145 17,113 18,140 19,229 Selling, General & Administrative 1,201 0 1,240 2,922 4,044 4,287 4,544 4,817 5,106 5,412 5,737 Total Operating Expenses 1,201 435 5,450 12,566 17,498 18,656 19,775 20,962 22,219 23,553 24,966 Operating Profit (1,201) (435) 550 1,794 2,724 2,779 2,946 3,123 3,310 3,509 3,719 Working Capital Assumptions: Minimum Cash Balance as % of Sales 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Days Sales Outstanding (365 day year) 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x Inventory Turnover (prod. cost/ending inv.) 12.2x 12.3x 12.6x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x Days Payable Outstanding (based on tot. op. exp.-depr) 33.7x 33.8x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x Capital Expenditures 4,610 0 310 310 2,192 826 875 928 983 1,043 1,105 Tax Rate 40% Discount Factor 9.0% Terminal Value growth factor 3.0% Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cash Accounts Receivable Inventory Accounts Payable Net Working Capital DNWC NPV Analysis period 0 1 2 3 4 5 6 7 8 9 10 Free Cash Flows 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 EBIT (1-t) plus depreciation less DNWC less capital expenditures Free Cash Flows Terminal Value Cash Flows Discount factor Present value NPV IRR Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cash Flows IRR Payback Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cash flows Cumulative cash flow Payback period 5 year Cumulative EBITDA Profitability Index NPV/Initial Investment 1. Use the operating projections and other assumptions provided for each project to compute the net present value (NPV), internal rate of return (IRR), payback period, 5 year cumulative EBITDA, and profitability index for each using the template provided.Read the entire New Heritage Doll Company case. From the information given: 2. Which project creates more value? Why? 3. How do the IRR, payback period, 5 year cumulative EBITDA, and profitability index compare to NPV as tools for evaluating projects? When and how would you use each? 4. If Harris is forced to recommend one project over the other, which should she recommend? Why? 5. Elizabeth Holtz, brand manager for the Heirloom Dolls division planned to use existing IT staff to develop the web-based software tools and order entry system required for the Design Your Own Doll Project. These costs were not included in the initial outlays or forecast presented as the development personnel Holtz needed were considered corporate resources. Do you agree or disagree? If these costs were included would it change your answer to question 4