New Heritage Doll Company Capital

Budgeting
Harvard Business School Case 4214
The New Heritage Doll Companys production division has been has
given the responsibility of evaluating two proposals for new projects.
The first project expands on a current Match My Doll Clothing Line,
and the second involves creating a fully customized doll under the
Design Your Own Doll proposal.

Proposal Backgrounds
Match My Doll Clothing Line Expansion (MMDCLE)
The Match My Doll Expansion includes the further development of an
already establish, successful doll line. The original line included limited
outfits and accessories for warm weather only. It had become a popular
line once celebrity children were photographed wearing the clothing
and also when prevalent magazines showcased the items in the trendy
clothing sections. The brand manager of this line has expressed her
belief that this publicity will help the sales of the new All Seasonal
Collection clothing take off. The new clothing expands the line from
only warm weather apparel to clothing and accessories for all seasons.
The supplier prices for the material to produce this clothing is low and
will help the bottom line as selling price for the dolls/clothing can be at
a premium due to the current buzz around the products. This line will
also help end the seasonal sales that New Heritage has been
experiencing due sales of only summer related items. The new
expansion will however require high research and development costs
to help the line gain quick popularity and maintain long-term success.
Design Your Own Doll (DYOD)
The Design Your Own Doll line is a proposal where dolls are fully
customized to the desires of the consumer. Attributes such as hair
color/length, eye color/shape, skin color, and other features will be
customizable through the use of new software and technology. New
Heritage would be creating a one of a kind doll that will be appealing
to the higher end consumer who possibly owns the expensive heirloom
dolls. Software and application development for the website and
modifications to existing technology infrastructure will require help
from in-house IT personnel. The R&D and upfront marketing costs are
comparable to those proposed in the MMDCLE project. However,
manufacturing is concerned with the increased complexity and

expense of constructing these dolls as well as the dependence on

flawless operation. This project also commands higher initial outlays
and a longer payback period.

Financial Analysis
Match My Doll Clothing Line Expansion (MMDCLE)
The initial expenditures for this project include upfront R&D &
marketing costs, as well as an $800 investment in working capital, and
a $1,470 investment in property, plants and equipment. Based on the
information provided by Ms. McAdams, this is a moderately risky
project (similar to the current line). Therefore, we evaluated the cash
flows based on a discount rate of 8.4%. We did not include the $800
as a capital expenditure because it was stated to be part of the
existing clothing line. After reviewing all financial information for the
project, we have concluded that the NPV will be $603.08 with an IRR of
12% (see the attached spread sheets for clarification). Since the NPV
is positive and IRR is greater than the discount rate, the project will
prove to be a beneficial, profitable investment.
Design Your Own Doll (DYOD)
The initial expenditures for this project also includes upfront R&D &
marketing costs, as well as the original $1,000 investment in working
capital, and a $4,610 investment in property, plant and equipment.
Due to the increased software and technology needed to produce a
custom doll, IT personnel costs of $435 are required. This is a high-risk
project due to the new customer acceptance, high fixed cost, high
break-even levels, and price sensitivity to recession. Therefore, we
evaluated the cash flows based on a discount rate of 9.0%. After
reviewing all financial information for the project, we have concluded
that the NPV will be $(3110.90) with an IRR of -1% (see the attached
spread sheets for clarification). DYOD requires high initial outlays,
which in turn leads to a high-expected break-even volume. We feel that
this will not be a profitable project due to the high capital expenditures
and the required re-investments in equipment.

Conclusion and Recommendation

Emily and I firmly believe it is a better investment decision to move
forward with the Match My Doll Clothing Line Expansion. MMDCLE
has both a positive NPV and an IRR greater than the 8.4% discount rate
while the DYOD proposal produces a negative NPV and IRR. These
findings prove that the MMDCLE will be a much more profitable and

beneficial project for the company. This project also more closely aligns
with the Capital Budget Committees previous decisions and beliefs. It
has a potential to strengthen the company as a whole, and will also
help maintain a balance between all divisions. It does not require New
Heritage to develop new production methods, technology/software
advancements, and overall divisional changes which DYOD will need.
Before a final decision is executed, we suggest that Ms. Holtz review
our financials and assumptions to confirm the accuracy. If accurate, the
Match My Doll Clothing Line Expansion will be the profitable project.