New heritage doll company capital budgeting case analysis

Question Description
Please read case thoroughly and anser the question . Two deliverables are needed: a fact sheet (at least 4 pages long showing calculations, please see attached file for the specific questions to be answered) and a PowerPoint with 10 slides. The PowerPoint presentation should be at least 10 slides which provides analysis of the case and the team's recommendation. The rubric is attached. Rubric for the factsheet is as follows:

Overview and Assumptions - 5 pts

Understanding of capital budgeting techniques/computations - 10 pts
"What if" Analysis and impact on decision - 10 pts
Rationale and Recommendation including both tangible and intangible benefits - 10 pts
Selling points to capital budgeting committee – 10 pts
Format and Layout of Information - 5 ptsNew Heritage Doll Case – Additional Information to compute cash flows – Helpful Hints I. Compute the initial outlay For Exhibit #1, use table 2:   Upfront R&D = $625 plus Upfront marketing = $625 => $1,250 Capital Expenditure => $1,470 Using the Free Cash flow equation; where operating profit is “revenues – costs – depreciation” Operating profit (1-T) + Depreciation -  net working capital - Capital expenditures _______________ = FCF So for 2010, the initial outlay is: - $1250 (1-T)+ 0 - $800 - $1,470 = ($3,020) NOTE: it is not uncommon for a project to have negative cash flows in out years (beyond year zero) II. Compute net working capital Recall: net working capital equals current assets minus current liabilities Use the working capital assumptions to compute net working capital for each year. For year 2011:  Cash =>3% of sales or revenue = $135  Account receivables: o Days sales in receivable = 365 / receivable turnover =>59.2 = 365/receivable turnover o Account receivable = Sales/ receivable turnover => $4,500/6.17 o So, Account receivable = $729  Inventory: 1  o Inventory = COGS (use total production cost)/inventory =>7.7 = $2,762/ inventory o So, Inventory = $359 Accounts payable (note: this is a liability which will be subtracted): o DPO = 365/payable turnover =>30.8 = 365/payable turnover o Payable turnover = Cost of Sales (use total operating costs minus depreciation)/ accounts payable => 11.85 = (3,917 – 152)/accounts payable o Accounts payable = $318 Net working capital = $135 + $ 729 + $359 - $318 = $905 III. Compute Change in net working capital – NOTE: the FCF equation uses “change in net working capital” o o For 2011,  net working capital => look at difference between years; so, for year 2011, the difference is between Year 2010 and Year 2011; So,  net working capital in 2011 is $905-$800 = $105 IV. Compute Terminal Cash Flows Use the following formula to compute terminal cash flows in 2020: where 2020 is the end of project TV2020 = FCF2020 (1+ g)/ (r – g) If we using the following : g = 3%; computed FCF2020= $857; and if project risk of medium is used, then r = 8.4%, then: TV2020 = $857 (1.03)/ (.084- .03) = $16.35 mil NOTE: both the TV2020 cash flow plus the FCF2020must be included in the NPV, IRR, PI, and payback period computations. Therefore, for year 2020, the total cash flow (FCF, plus TV) would be $16.35 mil + $857 or $17,202. Of course, if you use different growth rates (g) and different required returns ( r), the value will be different. 2 4212 SEPTEMBER 15, 2010 TIMOTHY LUEHRMAN HEIDE ABELLI New Heritage Doll Company: Capital Budgeting In mid-September of 2010, Emily Harris, vice president of New Heritage Doll Company’s production division, was weighing project proposals for the company’s upcoming capital budgeting meetings in October. Two proposals stood out based on their potential to strengthen the division’s innovative product lines and drive future growth. However, due to constraints on financial and managerial resources, Harris knew it was possible that the firm’s capital budgeting committee would decline to approve both projects. She also knew that New Heritage’s licensing and retail divisions would promote compelling projects of their own. Consequently, Harris had to be prepared to recommend one of her projects over the other. The Doll Industry Revenues in the U.S. toy and game industry totaled $42 billion in 2008 and were projected to increase by 4.6% per year to $52.5 billion by 2013. The market was divided into two broad segments: video games (48%) and traditional toys and games (52%). The second segment was further divided into infant/preschool toys (14.5%), dolls (14.1%), outdoor & sports toys (12.3%), and other toys & games (59.1%) including arts and crafts, plush toys, action figures, vehicles, and youth electronics. The U.S. market for toys and games was dominated by large global enterprises that enjoyed economies of scale in design, production, and distribution. Revenues were highly seasonal; the largest selling season in the United States coincided with the winter holiday period. Within the toy and game segment, U.S. retail sales of dolls totaled $3.1 billion in 2008 and were projected to grow by 3% per year to $3.6 billion by 2013. The doll category included large, soft, and mini dolls, as well as doll clothing and other accessories. The phenomenon of “age compression”— the tendency of younger children to acquire dolls that had traditionally been designed for older girls—reduced growth in the “baby-doll” sub-segment. Competition among doll producers was vigorous, as a small number of large producers targeted similar demographics and marketed their dolls through the same media. Lasting franchise value for a branded line of dolls was rare; the enormous success of Barbie® dolls was an obvious exception. More recently and on a much smaller scale, New Heritage also had created a durable franchise for its line of heirloom dolls. But the popularity of most doll lines waned after a few years.