2/11/2018 New Heritage Doll Company Write-up Essay Example for Free

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New Heritage Doll (https://studymoose.com/privacy-policy)
Company Write-up Essay
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A+ Words:1314 Company (https://studymoose.com/company), Investment (https://studymoose.com/investment)

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Introduction

New Heritage Doll Company is a rm that has ventured into doll production which has sought to extend its
brand in order to broaden its market framework and more importantly capitalize on high levels of customer
loyalty. The vice president of the Company, Emily Harris, is to forward her project proposal to the Budgeting
Committee for evaluation. The Vice-president’s objective for proposing the project was based on potential to
strengthen the Company’s division of production and drive future growth. Emily Harris has to produce a
compelling project to avoid the committee from declining the proposal.

Basis of Assessment

There are two projects between which the company can choose from or drop the proposals in their entirety.
The methods of project evaluation would be based on discounting cash ows analysis and thereafter
determining the Net Present Value (NPV) of each of the proposed project with Internal Rate of Return (IRR),
Pro tability Index and Payback Period. If the project has a positive NPV, it would suggests the project is
generating more cash than is required to service the debt and provide the appropriate returns; thus, the higher
NPV, the better it is for the company. The project proposal with the positive and highest NPV, IRR and
pro tability index along with the shortest payback period would be acceptable for investment. New Heritage
Doll Company managed to produce a capital budgeting structure in order to evaluate the revenue generated in
the Doll industry. It is clearly evident that a segment of the Doll industry generates income progressively with an
increasing rate of 4.6%. Cash ows forecast is used to capture the incremental e ect of a proposed project in
order to acknowledge the breakeven point and pro t or loss time frame.

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If the company continues with its investment in the toy and game segment, it is going to experience the
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economies of scale and have high operating pro ts. However, for a company to embrace another project
proposal, it has to evaluate its nancial capacity to fund the project. Thus, any project which does not generate
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signi cant revenue, the company must cultivate the capital rationing. Similarly, the company must consider
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some factors in the assessment of project’s risk, such as whether the project product’s required new traders or
consumers who are willing to accept the goods or services rendered by the company; where the project
proposal requires high level of the xed costs, the project to be appraised is at very high risk considering such
costs do not generate high returns; sensitivity of the selling price of the nished goods, and high level of
breakeven production volumes. The prudent way to evaluate the company’s feasibility whether or not to invest
on a new venture is by analyzing the returns or the operating pro ts. If the rm’s expects to experience some
losses, it should reject the proposal. However, if the rm is operating at a breakeven point, the company may
have the option to forecast whether it is an on-going concern.

Problem Identi cation

The Heritage Doll Company is appraising two proposed projects, Match My Doll Clothing and Design Your Own
Doll. Emily Harris, vice president of the company’s production division must have compelling reasons to
in uence the budgeting department to accept the project for implementation. The theoretical reasons behind
Match My Doll Clothing to be implemented by the company budgeting committee is that the products produced
fully match all seasonal clothing for the young girls and their preferred doll; the popularity of the company’s
product; and it is the best time for expansion due to its popularity. The reasons for choosing Design Your Own
Doll is that the company’s products would have high correlation with the consumers; the company’s doll can be
customized based on the tastes and preferences of the consumers; permanent customer loyalty; dolls demand
a strong selling probability; and the company’s potential to strengthen its future growth.

However, the company is also limited to take this project due to several constrains including: low production
runs and volumes, limited gradation of customization increased manufacturing complication; increase in
production and development costs for the technology modi cation and infrastructure. One of the key
distinctions between the two projects is that Design Your Own Doll and Match My Doll Clothing are two
mutually exclusive projects. Their cash ows are related and have the same function and they compete with
each other meaning that the acceptance of one project eliminates consideration of the other project.

DCF and Sensitivity Analysis

The Company should maximize on cash management by capital rationing on the project accepted. NPV of the
project should be implemented as it re ects the time value of money invested in the accepted project. Similarly
this can be further elaborated by computation of IRR of both project proposal. The analysis was performed by
comparing the two projects using the same xed terminal growth rate of 3% because both projects include a
terminal growth rate element. For both projects, it would also be bene cial to know how the terminal growth
rate value is generated. Because the “medium”- risk projects in the production division received a discount rate
of 8.4% in 2010, this rate was used for the Match My Doll Clothing line’s DCF analysis. Design Your Own Doll
project is long-term project and it is considered to have a higher risk; thus, the rate of 9.00% was used in the
analysis. The results of the analysis are presented below.

Design Your Own Doll Match My Doll Clothing

NPV = $7,310.21
The NPV is positive – the project is feasible.
NPV = $7,139.18
The NPV is positive – the project is feasible.
IRR=18.24%
IRR=23.6%
Pro tability Index = 1.26
Pro tability Index = 2.03
Payback Period = 9.3 years
Payback Period = 9.2 year
Recommendations

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From the Working Capital requirements assumptions, Design Your Own Doll requires a higher amount of
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working capital than Match My Doll Clothing; however, the results of the analysis of the Operating Pro t show
that Design Your Own Doll line would generate a higher operating pro t than that of the Match My Doll Clothing
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line. Also, Design Your Own Doll generates higher cash ows compared to the Match My Doll Clothing and this
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is another argument for choosing Design Your Own Doll for its investment. From the NPV method standpoint,
the NPV rule chooses a project in terms of net dollars or net nancial impact on the company; thus, it can be
easier to use when allocating capital. Also, NPV method requires an assumed discount rate and also assumes
that this percentage rate will be stable over the life of the project. In the real world, this assumption does not
always work because the interest rates are uctuating.

From the analysis, both of the projects are feasible but Design Your Own Doll has the higher NPV than the
Match My Doll Clothing line. IRR method doesn’t assume a discount rate and the worthiness of the investment
is purely a function of the internal in ows and out ows of that particular investment. However, IRR does not
assess the nancial impact on a rm; it only requires meeting a minimum return rate. The internal rate of
return is the most critical method to determine the decision option for accepting the project proposal. Also, the
highest operating rate of returns with the shortest payback period of the cost of capital is opted to be accepted.

From the analysis, Match My Doll Clothing line has the higher IRR than the Design Your Own Doll line. In
conclusion, even though both projects are feasible and Design Your Own Doll has the higher NPV, Match My
Doll Clothing line project has a higher IRR, pro tability index and a shorter payback period. Thus, the budgeting
committee should accept Match My Doll Clothing line instead of Design Your Own Doll since Match My Doll
Clothing line has the higher IRR, pro tability and the shortest payback period. The NPV of both proposals are
not signi cantly di erent.

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