New Heritage Doll Company: Business Overview

Index Executive summery…………………………………………………………………………………………. …1 Introduction………………………………………………………………………………………………………. 2 Case analysis Match My Doll Clothing…………………………….. ………………………. ………. …. …………. 2 Design Your Own Doll……………………………………………………………………………….. 3 Comparison………. ………………………………………………………………………….. …. ………4 Additional Questions…………………. ………………………………………………………………………5 Recommendations…………………………………………………………………………………………….. 5 Appendix Appendix 1: calculation formulas, definitions and assumptions………………. 6 Appendix 2: Exhibit 1 & 2…………………………………………………………………………. 9
Appendix 3: The NPV Profile…………………………………………………………………… 11 Executive Summary The production division at New Heritage Doll Company is considering between two business proposals to recommend at the firm’s upcoming capital budget meeting in October. In order to prioritize between the two projects, we needed to analyze both companies, quantitatively and qualitatively, to determine which proposal better suits NHDC’s goals. Using a qualitative analysis, we analyzed both Match My Doll clothing line and compared it to the Design Your Own Doll proposal.
We found, after comparing the strengths and weaknesses of both proposals, that MMDC’s business case is more compelling. We then analyzed the financial aspect of both projects using the financial information given in the exhibit. In order to complete this analysis we began with a profitability analysis. First we computed the NPV, IRR and the profitability index in order to determine which of the projects would be more profitable. We found that although DYOD’s NPV was slightly higher, MMDC’s ratio’s seemed more compelling. We then moved on to a risk analysis, in order to compare the riskiness of the two projects.

We found that not only is MMDC’s risk lower than that of DYOD, but its payback period was approximately 30% lower as well. Based on these analyses, we recommend that the company should choose the Match My Doll Clothing line expansion proposal. Introduction In this case study, two business proposals from the Production division of the New Heritage Doll Company (NHDC) are being considered for submission at the capital budgeting committee meeting which makes decisions at the corporate level for all large spending proposals.
The first proposal is to extend the company’s Match My Doll Clothing line, and the second is to develop a new Design Your Own Doll product. Emily Harris, vice president of NHDC’s production division, is weighing the two proposals. Due to constraints on financial and managerial resources, it is possible that the committee will decline to approve both projects as other divisions of the company such as licensing and retail are also presenting projects that may prove more attractive to the committee. Harris has to be prepared to recommend only one of the projects.
In order to evaluate which of the projects Emily should promote, we look at the criteria of the committee. They will examine the proposed project for consistency with the company’s overall business strategy and they will see if the project balances the needs and priorities of each division against the practical, financial, and organizational constraints of the company. The committee will evaluate whether the proposed project will strengthen the entire company, not just the particular division. We would try to evaluate which of the proposals based on the projects’ qualitative and quantitative analysis.
We have used in our analysis both the figures that were supplied by the line managers, and further information that seem relevant from online researches we had conducted. Match My Doll Clothing This investment proposal is the expansion of the Match My Doll Clothing line (MMDC), an existing clothing line of matching doll and child clothing and accessories. The original line was a success, due to the strong identification that girls feel with their NH dolls. Due to the growing popularity of the line the line’s manager believe that the timing is right for expansion.
The original line selected several items of New Heritage dolls’ fashions and produced identical items in girl’s sizes. However, the number of items was limited. The proposed expansion would create an “All Seasons Collection” of apparel and gear covering all four season of the year. It would expand the number of matching doll and girl clothing items available One of the benefits of expanding the MMDC’ line is that the line has already demonstrated the commercial viability of the matching doll and child clothing model. The concept has a proven track record and now the company has only to further build on this successful model.
Furthermore, the recent positive publicity engendered by the celebrity sightings, will create an even greater demand for the product, and will allow for the maintenance of premium pricing. We believe that the expanded line will be at least as profitable as the existing line. Another strength this project possesses is the project’s moderate risk , which is almost identical to that of MMDC’s existing business line. One of our concerns regarding the expansion of MMDC’s clothing line is the company’s inexperience within the clothing industry. NHDC will have to compete outside its current niche of dolls and accessories.
The fickle nature of children’s fashion trends requires that the management keep up with current market trends, in order to maintain its premium pricing. Another concern we think is important to address is the expected lifetime of the project. Based on the risk that the company would not be able to stay up to date with the current trends and fashion we think that the life p of the projected CF may be somewhat optimistic, and might not reflect correctly the characters of this project. However, we do believe that for the sake of comparison this projection should be kept.
Another concern that arises from the unexpectedness of children’s fashion trends is that the company may be faced with a very limited time frame in which it can make profitable investment decisions. One of the opportunities that arise with the current proposal is the reduction in the seasonality of the company’s sales and earnings. The new line created an additional benefit of supplying clothing all year round, which in turn could provide the firm with a more stable revenue stream. By taking advantage of the “off peak discount” offered by some suppliers and anufacturers, the line manager expected to reduce the company’s seasonality which would create a more stable revenue stream for the firm. A threat which attributed to this proposal is its reliance on supposed discounts offered by suppliers and manufacturers. The failure of obtaining these discounts can cause an increase in costs, resulting in lower profitability. Capital expenditures in 2010 are predicted to be high since the project is during its first year of operation . In the following year they are still relatively high, but this can still be explained by it still being the beginning years of operation. 012-2013 have the lowest Capital expenditure of all projected years; this could be explained by the high growth in revenues . It is important to note that these years are considered “day one”- since the product is new in the market, the market should embrace the product first and the depreciation is still on the lower numbers. From 2014 and onward, we see an increase in the firm’s Capital expenditure coupled with a constant growth . This might be due to maintaining the operation scope and compensating for the growth in depreciation (During year 2015 and onward). Design Your Own Doll
The Design Your Own Doll (DYOD) project sets out to make dolls products more personal to customers, by creating dolls that can be designed to look like their owners. The new project was targeted to both new customers and loyal customers, who may already own a number of dolls, but are looking to add a unique addition to their collection. The strategy behind the project is that by becoming an active part of the creation of the dolls the customers will become more loyal customers. The whole creation and participation will take part in a new section of New Heritage’s website.
We believes that because of all the new features, the experience and the uniqueness in this product, the customers would be willing to pay premium price. The fact that this project is web-based also enlarge the accessibility for customers, and by that enabling people that have hard time to approach an actual store to still purchase the company’s product. On the other hand, there is a risk that the premium price, as discussed earlier, might narrow the audience since it approach higher socio economic level people. Due to the projects’ unique the initial investing costs are higher, but so does the expected return .
As a product which is “one of a kind” (“OOAK”), the production costs are going to be higher than usual (in particular fixed costs on a per unit basis, which come from low production runs and volume ), meaning that the payback period would be high. In addition, there are untested elements that need to be put into the manufacturing process, a risk that might cause future unexpected expenses. This project is considered to be a high risk project, due to the fact that it is completely new and contains (as mentioned) high costs of production.
The initial equipment costs high (comparing to MMDC and) the time for it to be ready for production is going to be two years instead of 1 year in the MMDC proposal. Moreover, there is more equipment that shall be installed by the end of 2014 and that’s why in the forecasts of DYOD (exhibit 2) there is a very high spike in the capital expenditures line. The good thing in purchasing this kind equipment is the option to pay custom equipment quarterly, so New Heritage can decide to pay everything in front, so it can get a sustainable discount.
The projections for this project are based upon a near-flawless operation. Since this project was not tested and there is no experience with it, this may add to the riskiness of the project. New Heritage’s website should be developed with the new software, which will take a year to write and test before starting with the sales. This is an explanation for the high initial R&D costs . Financial Comparison Net Present Value In order to evaluate both of the projects, we used the projections for MMDC and DYOD and calculated MMDC’s NPV to be slightly lower than that of DYOD.
Our projections show that MMDC’s NPV is $7,150,070 , while DYOD’s is $7,298,100 . Due to the relatively small difference between the NPV’s we found, we believe that we should consider putting more emphasis on alternative factors when coming to a final decision. IRR Although we observed rather similar NPV’s, the two projects’ IRR are very different. Despite the slightly lower NPV, MMDC has an IRR of approximately 24%, compared to the 18% IRR of DYOD. This substantial difference we’ve found can be explained by the significantly lower initial spending on capital by MMDC . Profitability index
Using the Profitability index (PI) allows us to quantify the amount of value each project makes for every dollar invested. We calculated the Profitability ratios for both projects and found MMDC PI to be 2. 367, compared to 1. 17 of DYOD. After analyzing these results, it would seem that MMDC would generate a higher return on their investment. Risk analysis For MMDC, we took on the recommended moderate risk rate of 8. 4%. Based it is an already existing line that has no need for consumer acceptance, in addition to its proven ability to maintain premium prices, we decided that it was a logical assumption.
For the DYOD, we assumed a high risk rate of 9%. After considering multiple factors, such as DYOD’s lengthy payback period , relatively high fixed costs and the use of new untested elements in the manufacturing process, a high discount rate is appropriate. Given these assumptions, we can see that MMDC is less risky than DYOD. Furthermore, we analyzed the NPV Profile and found that MMDC’s NPV is less sensitive to increases in the discount rate than DYOD. Another relevant figure we examined is the projects’ payback periods, which calculates the amount of time until a project’s initial investment is returned.
According to our calculations, MMDC’s payback period is lower than that of DYOD . While MMDC will recuperate their initial investment in slightly over 7 years, it will take DYOD over 10 years to return their initial investment. Since the Payback period we calculated doesn’t take into account the time value of money, we calculated the Discounted Payback Period, and confirmed that here too, MMDC is faster at recuperating its initial investment . Profit Margin The average profit margin for the MMDC is 14. 9%, while for the DYOD it is 12. 55%. This suggests that MMDC is a more profitable company, and may have better control over its costs than DYOD. Acid Test The result for the MMDC is 2. 43, while the result for DYOD is 2. 72. The significant of this is relating to the “worst case scenario” – what if the project would fail and the firm will need to get rid of it. Internal growth rate Even though we don’t know how much of New Heritage’s NI goes to dividends, we know that in both of the cases it will be the same and it would be

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