New Heritage Doll Company Case Study

                [pic 1][pic 2][pic 3]

Executive Summary

        New Heritage Doll Company is a firm that has ventured into Doll production which has sought to extend its brand in order to broaden its market framework and, more importantly, capitalize on high levels of customer loyalty. The Vice President of the company, Emily Harris, is to forward her project proposal to the budgeting committee for evaluation. Of the proposals presented to her, two of them stood out based on their innovation and ability to strengthen the division’s product lines. The first project, Match My Doll Clothing Line Expansion (MMDC), would extend the warm weather products to an all-weather clothing line. The second project, Design Your Own Doll (DYOD), would start with a website where customers would choose the doll’s features, color, etc. and then the dolls will be made to order. The firm would decline both of the proposals because of managerial and financial resource constraints. Other divisions in the company are also expected to promote projects of their own and because of these factors Harris has to choose to promote one of her division’s projects over the other.

Questions & Answers

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

Since the Match My Doll Clothing Line Expansion project is a medium risk project, since it is an extension to an existing successful product line, it would have a discount factor of 8.40%, giving them an NPV of $7,160 including terminal value. On the other hand, the Design Your Own Doll project is of higher risk since it is a completely new product line and requires an information technology component, giving them a discount factor of 9.00%. We found DYOD's NPV to be $7063 including terminal value. Both projects have a positive NPV including the terminal value, they would create value for the company. However, the Match My Doll Clothing Line Expansion project has a slightly higher NPV so, quantitatively, it would create more value for the company.

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

The internal rate of return (IRR) for the Match My Doll Clothing Line Expansion is 24.03% with the terminal value. The Design Your Own Doll project's IRR is 17.90% with terminal value. Looking at payback, MMDC has a payback period of 8.38 years while DYOD has a period of 10 years. Both projects IRR's are above their individually assigned discount rates, 8.4% for MMDC and the riskier 9.% for DYOD.

Based on our financial analysis, the MMDC project is more quantitively attractive than the DYOD project. This is because the MMDC project has a shorter payback period and higher NPV and IRR. The DYOD project is more capital intensive, however, and could generate higher revenues while taking longer to generate free cash flow. These metrics could affect Harris's deliberation by solely focusing on the minor financial aspect rather than looking at the long term potential qualitatively.