Heritage Doll Report

1. Set forth and compare the business cases for each of the two projections under consideration by Emily Harris. Which do you regard as more compelling?  

This case presents the doll market in the US. The company New Heritage Doll is considering between two options to expand the company. The first one called « Match My Doll ». The concept is to match a doll with several accessories. It can be exploited without any delay and the risk of failure is pretty low. The cost of investment is estimated to be at $3'520'000 with a useful life of 10 years.

On the other hand, the second project is called « Design Your Own Doll ». This is a whole new concept and this company has never experienced this kind of principle. Of course, the retail price will be different and this company has no knowledge about this concept. Consequently, the risk of failure is a lot greater. The cost of the investment is estimated to be at $5'811'000 for the first year, and 1'000'000 the next year. Additionally, there is staff cost which amounts to : $435'000 every years. The total estimated cash flow for the next 10 years amounts to $23'252’560. The capital expenditure at the end of the 10th year amounts to $1'105'000, which means that as the time goes by, the risk of failure goes down.

If we compare the total profit realized and the capital expenditure set aside, the second project, « Design Your Own Doll » is the one with the most potential success.

1. Use the operating projections for each project to compute a net present value (NPV) for each. Which project creates more value?  

        For the first project (« Match My Doll »), in order to calculate the Net Present Value, we would need the initial investment, the projected cash flow, the time we want to calculate for the investment, and the discount rate.

Our initial investment is $3'520'000.

The projected cash flows are as follow :

$-2'220'000 ; $-1'344’357 ; $169'045 ; $682'237 ; $540'955 ; $584'325 ; $631'107 ; $681'514 ; $736'011 ; $794'860 ; $858'461.

We will take 10 years for the time of the result.

For the discount rate, we choosed to take the moderate one that is 7,70%. 

When we compute the calculation for NPV, we obtain : $57’528.

This number is the sum of the present values of incoming and outgoing cash flows over the next 10 years.

        For the second project (« Design Your Own Doll »), in order to calculate the Net Present Value, we would need the initial investment, the projected cash flow, the time we want to calculate for the investment, and the discount rate.

Our initial investment is $5'811'000

the projected cash flows are as follow :

$-5'330’600 ; $0 ; $665’385 ; $-308’888 ; $-1’189’455 ; $1’088'198 ; $1'143’815 ; $1'212’446 ; $1'285'334 ; $1'362'318 ; $1'444'118

We will take 10 years for the time of the result.

For the discount rate, we choosed to take the one that is considered aa risky one, which is 9%. 

When we compute the calculation for NPV, we obtain : $-2'786’194. This number is the sum of the present values of incoming and outgoing cash flows over the next 10 years.

Computing the Net Present Value, the 2nd project (« Design Your Own Doll ») present the best financial success.

1. Compute the internal rate of return (IRR) and payback period for each project. How should these metrics affect Harris’s deliberations ? How do they compare to NPV as tools for evaluating projects?         ?  

        For the first project (« Match My Doll »), in order to calculate the Internal Rate of Return, we would need the initial investment, the projected cash flow, the time we want to calculate for the investment, and the discount rate.

Our initial investment is $3'520'000

The projected cash flows are as follow :

$-2'220'000 ; $-1'344’357 ; $169'045 ; $682'237 ; $540'955 ; $584'325 ; $631'107 ; $681'514 ; $736'011 ; $794'860 ; $858'461.

We will take 10 years for the time of the result.

When we compute the calculation for IRR, we obtain : 8,03%. This percentage measures the profitability of this potential investment over the next 10 years.

The payback period is 8 years and 4 months.

        For the first project (« Match My Doll »), in order to calculate the Internal Rate of Return, we would need the initial investment, the projected cash flow, the time we want to calculate for the investment, and the discount rate.

Our initial investment is $ 5'811'000.