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New Heritage Doll

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Assignment topic: New Heritage Doll
Format: APA
Number of pages: 1 page / 275 words

Individually prepare a discounted cash flow analysis for the two alternative projects; “Design Your Own Doll” and “Match My Doll Clothing” base on the Excel valuation that you completed last week. Evaluate the projects based on net present value, internal rate of return, and payback period, Consider these results along with other strategic points made in the case and analyze the situation. Discuss the pros and cons of each project make and discuss your recommendation on which, if any, project to choose.

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Discounted Cash flow Analysis

  1. Match My Doll Clothing
Free Cash Flow (3,020) (557) 169 682 541 583 630 680 735 793 857
Terminal value 3.00%          16,345
Discount factor 8.40% 1.0000 0.9225 0.8510 0.7851 0.7242 0.6681 0.6163 0.5686 0.5245 0.4839 0.4464
Present value         (3,020)            (514)              144              536              392              390              388              387              385              384       7,678.79
Net Present Value  $       7,150
NPV without Terminal Value  $        (146)

 

  1. Design Your Own Doll

 

Project A: NPV has lower reliance on the Terminal Value for the NPV to become positive as compared to Project B. This is important since we can see from the TV sensitivity analysis that the TV can move significantly if the assumptions change by small amounts. For Project B, in the worst case TV sensitivity table, the NPV can be negative also.

  • The NPV and IRR for Project A are relatively higher and its payback period is lower which also makes it a better investment. Given the lower payback period and higher expected return, it provides more cushion against changing consumer tastes & preferences, changes in sales pattern over the product lifecycle and uncertainties in the business environment (boom or bust scenarios)
  • The NPV to Initial Investment ratio is also significantly better for Project A
  • The accounting ratio – operating profit to sales, SG&A expenses to sales and days outstanding ratio are also relatively (though small) better for Project..
  • The capital expenditure growth rate is lower for Project B but its initial outlay is much higher than Project A

Hence Project A should be chosen over Project B.

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