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?