New Heritage Doll Company Harvard Case Study Capital Budgeting

The case write-up is intended to be a sample report to your boss. In this report, you should

evaluate the situation given in the case and make a recommendation(s) as to what your boss

should (or should not) do. You may append as many exhibits as you like to back up your

recommendation(s). Number crunching is simply a means to end not an end in and of

itself. It is crucial that the write-up state and defend the recommendation(s). The exhibits are

meant to lend credence to your recommendation(s). What the numbers actually mean is

important. You may document any assumptions you make in your analysis and do any needed

calculations in the exhibit instead of in the write-up.

For each case, Ill provide you with some suggested questions to guide your analysis. These

questions are a starting point and are not meant to act as a limit to your analysis. If you feel

other issues are worth discussing in addition to the questions I give you, I encourage you to

address them.

Abstract:

The retailer and manufacturer of the specialty doll products, New Heritage Doll Company, has to decide about the next capital budgeting investment project and the vice president of the production division, Ms. Harris has been tasked with the analysis and recommendation for one of the two projects to invest in. Both the projects have the potential to drive the growth and the innovative potential of the product lines however, Match My Clothing Line (MMDC) project tends to have low fixed costs and moderate risk and the products line as already proven to be successful in the market. However, the Design Your Own Doll (DYOD) project is new project where dolls would be designed based on customer preferences and needs. However, the fixed costs and risk is high in this project and the demand is unknown for this line of products. Given the range of qualitative factors and the NPV, IRR, PI and Payback of the two products, Harris should recommend to invest in the MMDC project as it yields higher value for the investors and sponsors of the company. Business Cases for MMDC and DYOD (Question 1) Both the opportunities look compelling for the management of the company for driving the future growth. First, the business case for investing in the MMDC project is as follows: This product of the company is highly popular in the market. The products that would be produced under this project fully matches the seasoned clothing for the girls and also for their preferred dolls.

Points to be considered: Use 3% for the terminal growth rate.

Which business case would seem more compelling to Emily Harris strategically?

Set out the appropriate cash flows for each project and find the NPV.

Combining (1) and (2), which project should Emily Harris accept?

Match My Doll Clothing Line Expansion (Option #1:

Design Your Own Doll (Option #2)