New Heritage Doll Company: Capital Budgeting

Selected Operating Projections for Match My Doll Clothing Line Expansion

Exhibit 1
2010
Revenue

2011

2012

4,500

6,860

Revenue Growth

52.4%

Production Costs
Fixed Production Expense (excl depreciation)
Variable Production Costs
Depreciation
Total Production Costs

575

575

2,035

3,404

152

152

2,762

4,131

Selling, General & Administrative

1,250

1,155

1,735

Total Operating Expenses

1,250

3,917

5,866

583

994

Minimum Cash Balance as % of Sales

3.0%

3.0%

Days Sales Outstanding

59.2x

59.2x

7.7x

8.3x

30.8x

30.9x

1,470

952

152

2010

2011

2012

Operating Profit

(1,250)

Working Capital Assumptions:

Inventory Turnover (prod. cost/ending inv.)

Days Payable Outstanding (based on tot. op. exp.)
Capital Expenditures

NET WORKING CAPITAL:

MINIMUM CASH BALANCE
RECEIVABLES
INVENTORY
PAYABLES
TOTAL NET WORKING CAPITAL
CHANGE IN NET WORKING CAPITAL
FREE CASH FLOW:
EBIT
TAX @ 40%
Earning After Tax
DEPRECIATION
CHANGE IN NWC
CAPITAL EXPENDITURE
Tax Benefit
FREE CASH FLOW
Terminal Value
Cash Flow After terminal value
CUMULATIVE FREE CASH FLOW
DISCOUNT RATE

800.00
(800.00)

(1250.00)
(1250.00)
0.00
(800.00)
(1470.00)
(3520.00)
(3520.00)
18956.34
8.40%

135.00
76.05
359.66
127.35
443.37
356.63

205.80
115.94
500.12
189.84
632.02
(188.65)

582.80
(233.12)
349.68
152.20
356.63
(952.20)
500.00
406.31

994.00
(397.60)
596.40
152.20
(188.65)
(152.20)

406.31

407.75

407.75

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN
PAYBACK PERIOD

$7,783
3.2
27%
5.84 Years

NPV VS DISCOUNT RATE

Rate

NPV
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%

Cash Flow vs TIME

Years
Net Cash Flow
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

7282
6507
5800
5155
4565
4026
3531
3078
2662
2280
1928
1604
1306
1030
776
540
322
120
-67
-241
-402
-553
-693

(3520.00)
(3113.69)
(2705.94)
(1867.95)
(1258.74)
(601.34)
108.69
875.43
1703.47
2597.76
3563.58

8000
7000
6000
5000
4000
3000
2000
1000
0
-1000

9%

10% 11% 12%

-2000

4000.00
3000.00
2000.00
1000.00
0.00
2010
(1000.00)
(2000.00)
(3000.00)
(4000.00)

2011

Without Terninal Value

TOTAL NET WORKING CAPITAL
CHANGE IN NET WORKING CAPITAL

800.00
(800.00)

FREE CASH FLOW

443.37
356.63

-3520 406.31369

DISCOUNT RATE (K-WACC)

9%

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN
PAYBACK PERIOD

1155.272053
1.328202288
15%
8.816289405

Rate

NPV
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

$2,327
$1,998
$1,695
$1,415
$1,155
$915
$692
$485
$292
$113
-$54
-$210
-$355
-$491
-$619
-$738
-$850
-$955
-$1,054
-$1,147

632.02
(188.65)

407.7463

SEE Q1 AT ROW 50 BELOW

Expansion
2013

2014

2015

2016

2017

2018

2019

8,409

9,082

9,808

10,593

11,440

12,355

13,344

22.6%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

587

598

610

622

635

648

660

4,291

4,669

5,078

5,521

6,000

6,519

7,079

152

152

164

178

192

207

224

5,029

5,419

5,853

6,321

6,827

7,373

7,963

2,102

2,270

2,452

2,648

2,860

3,089

3,336

7,132

7,690

8,305

8,969

9,687

10,462

11,299

1,277

1,392

1,503

1,623

1,753

1,893

2,045

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

152

334

361

389

421

454

491

2013

2014

2015

2016

2017

2018

2019

252.26
142.11
396.01
229.97
560.41
71.61

272.45
153.48
426.72
247.97
604.68
(44.27)

294.24
165.76
460.86
267.81
653.04
(48.37)

317.78
179.02
497.72
289.24
705.29
(52.24)

343.20
193.34
537.54
312.38
761.71
(56.42)

370.66
208.81
580.56
337.37
822.65
(60.94)

400.31
225.51
626.99
364.36
888.46
(65.81)

1277.30
(510.92)
766.38
152.20
71.61
(152.20)

1391.80
(556.72)
835.08
152.20
(44.27)
(333.80)

1503.10
(601.24)
901.86
164.40
(48.37)
(360.50)

1623.46
(649.38)
974.08
177.50
(52.24)
(389.30)

1753.27
(701.31)
1051.96
191.70
(56.42)
(420.50)

1893.30
(757.32)
1135.98
207.10
(60.94)
(454.10)

2045.00
(818.00)
1227.00
223.60
(65.81)
(490.50)

837.99

609.21

657.39

710.03

766.74

828.04

894.29

837.99

609.21

657.39

710.03

766.74

828.04

894.29

NPV

11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%

Net Cash Flow

2012

2013

2014

2015

2016

2017

2018

2019

2020

560.41
71.61

604.68
(44.27)

653.04
(48.37)

705.29
(52.24)

761.71
(56.42)

822.65
(60.94)

837.9897788 609.21417 657.39172 710.03107 766.74011

888.46
(65.81)

828.0394002 894.29067

NPV
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
-$500
-$1,000
-$1,500

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

2020
14,411
8.0%
674
7,685
242
8,600
3,603
12,203
2,209

3.0%
59.2x
12.7x
31.0x
530
2020

432.34
243.56
677.16
393.51
959.54
(71.08)

2208.50
(883.40)
1325.10
241.50
(71.08)
(529.70)
965.82
15392.76
16358.58

NPV

31%

Net Cash Flow

0.00
888.46

1854.281381

NPV

16%

17%

18%

19%

20%

21%

22%

23%

24%

New Heritage Doll Company: Capital Budgeting

Selected Operating Projections for Design Your Own Doll
Exhibit 2
2010

2011

2012

6,000

Fixed Production Expense (excl depreciation)

1,650

Variable Production Costs

2,250

Revenue
Revenue Growth
Production Costs

Development Costs

435

Depreciation
Total Production Costs

310

435

4,210

Selling, General & Administrative

1,201

1,240

Total Operating Expenses

1,201

435

5,450

(1,201)

(435)

Operating Profit

550

Working Capital Assumptions:

Minimum Cash Balance as % of Sales

3.0%

Days Sales Outstanding

59.2x

Inventory Turnover (prod. cost/ending inv.)

12.2x

Days Payable Outstanding (based on tot. op. exp.)

33.7x

Capital Expenditures

NET WORKING CAPITAL:

MINIMUM CASH REQUIRED
RECEIVABLES
INVENTORY
PAYABLES
TOTAL NET WORKING CAPITAL
CHANGE IN NET WORKING CAPITAL
FREE CASH FLOW:
EBIT
TAX @ 40%
Earning After Tax
DEPRECIATION
CHANGE IN NWC
Tax Benefit
CAPITAL EXPENDITURE
CASH FLOW
TERMINAL VALUE
Cash Flow After TV
CUMULATIVE FREE CASH FLOW

4,610

310

2010

2011

2012

0.00

1000.00
(1000.00)

180.00
101.40
345.62
161.86
465.17
534.83

(1201.00)

(435.00)

(1201.00)

(435.00)

(4610.00)
(5811.00)

(1000.00)
480.40
0.00
(954.60)

550.30
(220.12)
330.18
309.70
534.83
174.00
(309.70)
1039.01

(954.60)

1039.01

(5811.00)
25530.54

DISCOUNT RATE

9%

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN
PAYBACK PERIOD

NPV VS DISCOUNT RATE

Rate
NPV
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%

21%
22%

23%
24%

25%
26%

27%
28%

29%
30%

31%
Cash Flow vs TIME
Years
Net Cash Flow
2010
2011
2012
2013
2014
2015
2016
2017
2018

8187.48
2.41
20%
8.49

8187
7050
6015
5072
4214
3430
2715
2061
1463
915
413
48
471
859
1217
1546
1849
2129
2387
2625
2845
3049
3237

10000

8000

6000

4000

2000

0
9%

10%

11%

12%

13%

2000

4000

4000
5811
6766
5727
5273
5930
4740
3480
2145
730

2000

0
2010
2000

2011

2012

14%

2000

2019
2020

770
2360
4000

6000

Without Terninal Value

8000

TOTAL NET WORKING CAPITAL

CHANGE IN NWC
FREE CASH FLOW

-5811

DISCOUNT RATE (K-WACC)

0.09

NET PRESENT VALUE

PROFITABILITY INDEX
INTERNAL RATE OF RETURN
PAYBACK PERIOD

NPV VS DISCOUNT RATE

Rate
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

-754.4894272
0.870161861
7%
8.486650881

$1,025
$520
$58
-$366
-$754
-$1,112
-$1,441
-$1,743
-$2,022
-$2,280
-$2,518
-$2,738
-$2,941
-$3,130
-$3,304
-$3,467
-$3,617
-$3,757
-$3,888
-$4,009

1000 465.1705
-1000 534.8295
-954.6 1039.01

NPV VS DISCOUNT RATE

Rate
NPV Project 1
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%

NPV Project 2
1025
520
58
-366
-754
-1112
-1441
-1743
-2022
-2280
-2518
-2738
-2941
-3130
-3304
-3467
-3617
-3757
-3888
-4009

2327
1998
1695
1415
1155
915
692
485
292
113
-54
-210
-355
-491
-619
-738
-850
-955
-1054
-1147

4000
3000
2000
1000

-1000
-2000
-3000
-4000
-5000
-6000

SEE Q2 AT ROW 50 BELOW

2013

2014

2015

2016

2017

2018

2019

2020

14,360

20,222

21,435

22,721

24,084

25,529

27,061

28,685

139.3%

40.8%

6.0%

6.0%

6.0%

6.0%

6.0%

6.0%

1,683

1,717

1,751

1,786

1,822

1,858

1,895

1,933

7,651

11,427

12,182

12,983

13,833

14,736

15,694

16,712

310

310

436

462

490

520

551

584

9,644

13,454

14,369

15,231

16,145

17,113

18,140

19,229

2,922

4,044

4,287

4,544

4,817

5,106

5,412

5,737

12,566

17,498

18,656

19,775

20,962

22,219

23,553

24,966

1,794

2,724

2,779

2,946

3,123

3,310

3,509

3,719

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

59.2x

12.3x

12.6x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

33.8x

33.9x

33.9x

33.9x

33.9x

33.9x

33.9x

33.9x

310

2,192

826

875

928

983

1,043

1,105

2013

2014

2015

2016

2017

2018

2019

2020

430.80
242.69
785.96
371.77
1087.68
(622.51)

811.83
457.34
1426.12
693.95
2001.36
(113.29)

860.54
484.78
1511.70
735.58
2121.44
(120.09)

1794.30 2723.70 2779.20 2945.80 3122.60 3310.10 3508.56

(717.72) (1089.48) (1111.68) (1178.32) (1249.04) (1324.04) (1403.42)
1076.58 1634.22 1667.52 1767.48 1873.56 1986.06 2105.14
309.70
309.70
436.20
462.40
490.10
519.50
550.70
(622.51) (410.38)
(87.19)
(95.12) (100.82) (106.87) (113.29)

3719.00
(1487.60)
2231.40
583.80
(120.09)

(309.70) (2191.50)
454.07
(657.96)

(1105.00)
1590.11
23170.24
24760.36

454.07

606.65
341.75
1065.21
515.55
1498.06
(410.38)

(657.96)

643.04
362.26
1129.61
549.66
1585.25
(87.19)

681.63
383.99
1197.41
582.65
1680.38
(95.12)

722.53
407.03
1269.25
617.61
1781.20
(100.82)

765.88
431.46
1345.39
654.66
1888.07
(106.87)

(825.70)
1190.83

(875.30)
1259.46

(927.80)
1335.04

(983.40) (1042.50)
1415.29 1500.05

1190.83

1259.46

1335.04

1415.29

1500.05

NPV

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

Net Cash Flow

2013

2014

2015

2016

2017

2018

2019

2020

1087.682 1498.058 1585.253 1680.377 1781.198 1888.068 2001.355

0
-622.511 -410.376 -87.1944 -95.1249 -100.82 -106.87 -113.287 2001.3551
454.0686 -657.956 1190.826 1259.455 1335.04 1415.29 1500.049 3591.4699

NPV
$2,000
$1,000
$0
5%
-$1,000
-$2,000
-$3,000
-$4,000
-$5,000

6%

7%

8%

9%

10% 11% 12% 13% 14% 15% 16% 17%

Sensitivity Analysis (Without terminal value)

4000
3000
2000
1000
0
5%
-1000
-2000
-3000
-4000
-5000
-6000

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

Rate

NPV

30%

31%

9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%

NPV
7282.045
6506.988
5800.219
5154.991
4565.283
4025.717
3531.487
3078.287
2662.261
2279.949
1928.244
1604.354
1305.767
1030.218
775.6679
540.275
322.3759
120.467
-66.813
-240.697
-402.302
-552.643
-692.642

8187.478
7049.649
6014.717
5072.432
4213.651
3430.209
2714.812
2060.928
1462.711 10000
914.9173
412.84
-47.7487 8000
-470.651
-859.29
-1216.75 6000
-1545.81
-1848.98
4000
-2128.53
-2386.52
-2624.79
2000
-2845.03
-3048.76
-3237.38
0

9%
-2000

-4000
2020
Net Cash Flow

10%

11%

12%

13%

14%

15%

Net Cash Flow

17% 18% 19% 20% 21% 22% 23% 24%

NPV

t terminal value)

18%

19%

20%

21%

22%

23%

24%

Project 1
Project 2

Sensitivity Chart

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

Project 1
Project 2

30%

31%

Q3a
Briefly present the business cases for each project. Which one is the most compelling and why?

Q3b
How do the capital budgeting metrics you calculated in Q1 and Q2 influence Emily's deliberations?
Which project creates more value for Heritage Doll Company?

Q3c
Does Emily need additional information to complete her analysis, and if so,
what questions should she put to the sponsors of each prioject.

Q3d
As Emily, using the information you have and your professional judgment, make the recommendation and justify it.

eliberations?

ecommendation and justify it.