New Heritage Doll Company Capital Budgeting Analysis

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The Report contains capital budgeting decision based on NPV analysis between two alternatives for New Heritage

Doll Company. The company has to choose between extension of My Doll Clothing Line or go for Design Your

Own Doll project. Since the NOV and IRR are higher in case of extension of My Doll Clothing Line, the company

should consider the extension of My Doll Clothing Line.

 New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Match My Doll Clothing Line Extension

SN Narrative 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
1 Revenue 4,500 6,860 8,409
2 Revenue Growth NA 52.4% 22.6%
Production Costs
3 Fixed Production Expense (excl depreciation) 575 575 587
4 Variable Production Costs 2,035 3,404 4,291
5 Depreciation 152 152 152
6 Total Production Cos 0 2,762 4,131 5,029
7 Selling, General & Administrative 1,250 1,155 1,735 2,102
8 Total Operating Expense 1,250 3,917 5,866 7,132

9 Operating Profi (1,250) 583 994 1,277

Working Capital Assumptions:

10 Minimum Cash Balance as % of Sales NA 3.0% 3.0% 3.0%
11 Days Sales Outstanding NA 59.2x 59.2x 59.2x
12 Inventory Turnover (prod. cost/ending inv.) NA 7.7x 8.3x 12.7x
13 Days Payable Outstanding (based on tot. op. exp.) 0.0x 30.8x 30.9x 31.0x

14 Capital Expenditures 952 152 152

Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

15 Cash 135 206 252

16 Accounts Receivabl 729 1,112 1,363

17 Inventory 360 500 396

18 Accounts Payable 317 484 593

19 Net Working Capital (15 + 16 + 17 - 18) 800 907 1,334 1,418

New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Match My Doll Clothing Line Extension

SN NPV Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Period 0 1 2 3 4 5 6 7 8 9 10
20 Operating Profit before tax (9) (1,250) 583 994 1,277
21 Less: Tax @ 40% (40% * 20) 500 (233) (398) (511)
22 Operating Profit after tax (20 -21) (750) 350 596 766
23 Add: Depreciation (5) - 152 152 152
24 Less: Capital Expenditure (1,470) (952) (152) (152)
Less: Change in Working Capital
25 (800) (107) (427) (84)

26 Free cash flow to firm (22 + 23 + 24 + 25) (3,020) (557) 169 682
27 Terminal growth
28 WACC

29 Terminal Value

30 Free cash flow to firm including terminal value (26 + 29)

31 PV of FCFF discounted at X.X% (30 / (1 + 28) ^ period)

32 NPV with terminal value (sum of Row 31)

33 NPV without terminal value [NPV(X.X%,select row 26)

34 IRR including terminal value [IRR(select row 30)] 23.99%

35 IRR excluding terminal value [IRR(select row 26)] 7.64%

Sensitivity Analysis
Discount rate Terminal growth

7,150 0% 1% 2% 3% 4% 5% 6% 7% 8%
7.70%
8.40%
9.00%
Sensitivity analysis has been performed using table function of excel which can be find under the “XXX” and within Data under “XXXX”. Terminal
Growth has been selected for Row input cell and WACC has been used for Column input cell.
 New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Design Your Own Doll

SN Narrative 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
1 Revenue 0 6,000 14,360 20,222
2 Revenue Growth NA 139.3% 40.8%
Production Costs
3 Fixed Production Expense (excl depreciation) 0 1,650 1,683 1,717
4 Additional development costs (IT personnel)
5 Variable Production Costs 0 2,250 7,651 11,427
6 Depreciation 0 310 310 310
7 Total Production Cost 0 4,210 9,644 13,454
8 Selling, General & Administrative 0 1,240 2,922 4,044
9 Total Operating Expenses 5,450 12,566 17,498

10 Operating Profit (1 - 9) (435) 550 1,794 2,724

Working Capital Assumptions:

11 Minimum Cash Balance as % of Sales NA 3.0% 3.0% 3.0%
12 Days Sales Outstanding NA 59.2x 59.2x 59.2x
13 Inventory Turnover (prod. cost/ending inv.) NA 12.2x 12.3x 12.6x
14 Days Payable Outstanding (based on tot. op. exp.) NA 33.7x 33.8x 33.9x

15 Capital Expenditures 0 310 310 2,192

Net Working Capital Accounts 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
16 Cash 180 431 607
17 Accounts Receivable 973 2328 3278
18 Inventory 346 786 1065
19 Accounts Payable 474 1135 1598

20 Net Working Capital 1,000 1,024 2,410 3,352

New Heritage Doll Company Capital Budgeting Analysis

NPV and IRR analysis of Design Your Own Doll

SN NPV Analysis 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Period 0 1 2 3 4 5 6 7 8 9 10
21 Operating Profit before tax (10) (1,201) (435) 550 1,794
22 Less: Tax @ 40% (40% * 21) 480 174 (220) (718)
23 Operating Profit after tax (21 -22) (721) (261) 330 1,077
24 Add: Depreciation (6) 0 0 310 310
25 Less: Capital Expenditure 0 (310) (310)
Less: Change in Working Capital
26 0 (1,000) (24) (1,386)

27 Free cash flow to firm (1,261) 306 (309)

28 Terminal growth
29 WACC

30 Terminal Value

31 Free cash flow to firm including terminal value (27 + 30) (1261) 306 (309)
32 PV of FCFF discounted at (1157) 258 (239)

33 NPV with terminal value

34 NPV without terminal value

35 IRR including terminal value [IRR(select row 31)] 17.88%

36 IRR excluding terminal value [IRR(select row 27)] -0.52%

Sensitivity Analysis
Discount rate Terminal growth

7,058 0% 1% 2% 3% 4% 5% 6% 7% 8%
7.70%
8.40%
9%
Sensitivity analysis has been performed using table function of excel which can be find under the “XX” and within Data under “XX”. Terminal
Growth has been selected for Row input cell and WACC has been used for Column input cell.