Part 1: Estimate FCFs and compute NPVs, IRRs, paybacks, and PIs

1) Expanding the successful Match My Doll Clothing Line to include matching all-season clothing for tween g
2) A new initiative, the Design Your Own Doll line, which employes web-based doll-design software to let us

She expected the new offerings to be at least as profitable as the existing line,
g all-season clothing for tween girls and their favorite dolls
ed doll-design software to let users “customize” a doll’s features to the customer’s specifications.
 Table 1 - Match My Doll Clothing Extension Outlays Cost of Capital 8.40%

Initial Expenditures ($ thousands) 2010

Upfront R&D $625 (40% tax)
Upfront Marketing $625 (40% tax)
Investment in Working Capital $800 (10 year depreciation)
Property, Plant & Equipment $1,470
Total $3,520

Table 2 Design Your Own Doll Outlays Cost of Capital 9%

Initial Expenditures ($ thousands) 2010 2011

Upfront R&D $841 (40% tax)
Upfront Marketing $360 (40% tax)
Investment in Working Capital $1,000
Property, Plant & Equipment $4,610
Total $5,811 $1,000

2015 and following years WC will revert to traditional production pattern

Table 3 Design Your Own Doll Development Personnel ($ 000s)

Application Development Personnel Costs: Number Salary Total

Web Application Developers 1 $150 $150
Database Manager 1 $160 $160
Systems Integration Specialist 1 $125 $125
Total Cost $435
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 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.) 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
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
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 0 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 0 5,450 12,566 17,498 18,656 19,775 20,962 22,219 23,553 24,966

Operating Profit (1,201) 0 550 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 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.) 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