Professional Documents
Culture Documents
Write a report for the New Heritage Doll Company on which new product they
should adopt supporting your argument with full workings. This is an
individual project.
Basis of assessment
There are two projects between which the company will have decision option
to accept or drop the proposal. The method of project evaluation would be
based on discounting cash flows (DCFs) and thereafter determining the Net
Present value (NPV) of each of the proposed project. The project proposal
with the positive and highest NPV would be acceptable for investment. If the
project has a positive NPV suggests that such a project is generating more
cash than is required to service the debt and to provide the appropriate
returns to the firms shareholders and this cash accrues solely to the firms
shareholders. If the firm projects generate a negative NPV then the project is
not feasible.
The Doll industry Company revenues outlays: market for doll toy and game
industry
year
2008
2009
2010
2011
2012
2013
Cash
outlays
$(000)
42
43.93
45.95
48.06
50..2
7
52.5
If the company continues with its investment in for toy and game segment it
is going to experience the economies of scale and have high operating
profits.
However, for a company to embrace another project proposal it has to
oversight its financial capacity to fund the project .Meaning for any project
which does generate insignificant revenues the Company must cultivate the
capital rationing. Similarly, the Company must consider some factors in the
assessment of projects risk. Factors considered in the assessment of a
projects risk include;
(a)Whether the project products required new traders or consumers who are
willing to accept the goods or services rendered by the Company
(b)Where the project proposal requires high level of the fixed costs, the
project to be appraised is at very high risk considering such costs do not
generate high returns.
(c)Sensitivity of the selling price of the finished goods
(d)High level of breakeven production volumes
PROBLEM IDENTIFICATION
The Heritage Doll Company is appraising two proposed projects that are;
Design My Doll and Match My Doll Clothing. The Vice president must have a
compelling reasons and factors to influence the Budgeting Company to
accept the project for implementation.
The theoretical reason behind Match My Doll Clothing to be implemented
by the Company Budgeting Committee is that;
(a) The products produced do fully match all season clothing for the young
girls and their preferred doll;
(b)Popularity of the Companys product
(c) It was the best time for the expansion due to its popularity
For the Design Your Own Doll;
(a)The Companies products would have high correlation with the consumers
(b)The Companys doll can be customized based on the tastes and prefers by
the consumers
(c) Permanent customer loyalty
(d) Dolls could command a continued selling proposed
(e)The Company has the potential to strengthen and the future growth
The Company is also limited to take this project due to the following reasons
for proposal;
(a)The Company Low production runs and volumes
(b)Limited gradation of customization increased manufacturing complication,
the production costs increased with a significant rate
(c) Increased development cost for the technology modification and
infrastructure
Practically the proposed project is to have the following investment costs;
Titles
Initial
expense$(0
00)
Upfront
R&d$(000
)
Investment
in working
capital$(00
0)
Property,
plant and
equipment$(0
00)
Total
cost
$(000)
Match my
Doll
clothing
625
625
800
1470
3520
Design
my Doll
841
360
4610
(1000)
5811
Differenc
e
(216)
265
(3810)
2470
(2291)
This means that the Design my Doll has got higher Total cost by $ 2291 than
the Match my Doll Clothing. If Company uses the total cost to appraise these
projects the Match Doll clothing would be feasible for acceptance since it has
less of capital invested on it yet much returns would be realised. Design my
Doll would be rejected due to its high costs of investment.
Critically, the prudent way to evaluate the Companys feasibility in order to
invest on it is by analysing the returns or the operating profits. If the firms is
to experience some losses the Company should reject such a proposal
otherwise accept the proposal. However, if the firm is operating at a
breakeven point the Company may have the option to forecast whether it is
a going concern.
Year
Operating
profit $(000)
PVIF,9%
PV
2011
583
0.9174
534.84
2012
994
0.8417
836.65
2013
1277
0.7722
986.10
2014
1392
0.7084
986.09
2015
1503+ 361
0.6499
1211.41
4555.09
TRY12%
PVIFPV
PV
TRY 7%
PV
1250
1.OO
1250
1.0
1250
583
0.8929
520.56
0.9346
544.87
944
0.7972
792.42
0.8734
868.16
12.77
0.7118
908.97
0.8163
1042.42
NPV
1945
NPV
2267.41
Year
Operating
profit $(000)
PVIF,9%
PV
2011
550
0.9174
504.57
2012
1794
0.8417
1510
2013
2724
0.7722
2103.47
2014
2779
0.7084
1968.64
2015
2946+ 875
0.6499
2483.21
8569.95
Design my Doll
PVIF12%
(1201)
PV
TRY 7%
(1201)
1.00
(1201)
1.0
(1201)
550
0.8929
491.00
0.9346
514.03
1794
0.7972
1430.18
0.8734
1566.88
2724
0.7118
1938.44
0.8163
2223.60
3821
NPV
0.6991
2671.26
5329.96
0.7629
2915.04
8419.55
2012 $(000)
2013 $(000)
2014 $(000)
Match My Doll
3% x 6860=
205.8
3% x8409=
352.27
3% x 9082=
272.46
Design My
Doll
3% x 6000=
180
3% x 14360=
430.8
3% x 20222=
606.66
Sensitivity analysis
The Company should maximize on Cash management by capital rationing on
the project accepted.Net present Value of the project should be implemented
as it reflects the time value of money invested in the accepted project.
Similarly this can be further be elaborated by computation of IRR of each two
project proposal
MATCH NY DOLL
Let 12%be b
9%=be a
Pv9%
(1250)
1.00
(1250)
583
0.9174
534.844
994
0.8417
836.65
1277
0.7722
986.10
1392
0.7084
986.10
2093.69
IRR=9%(2093.69/2093.69-1945.1)*(12%-9%))
=3.8%
DESIGN MY DOLL
Let
12% be b
9% be a
(1201)
1.00
1200
550
0.9174
504.07
1794
0.8417
1510.0
2724
0.7722
2103.47
3821
0.7084
2706.80
Npv =
5623.84
IRR=9%{5623.84/5623.84-5329.96 * (12%-9%))
=0.0517
=5.17%
The internal rate of return is the most critical method to determine the
decision option for accepting the project proposal. In this case Design my
Doll again has the highest IRR meaning it has the highest operating rate of
returns with the shortest payback period of the cost of capital and therefore
it is opted to be accepted.