New Heritage Doll Essay

1493 Words Apr 15th, 2014 6 Pages
New Heritage Doll
Case Analysis


Introduction Emily Harris is the Vice president of New Heritage Doll Company’s production division. In mid-September of 2010 she was trying to decide on project proposals for the company’s capital budget meeting in October. 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
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How should these metrics affect Harris’s deliberations? How do they compare to NPV as tools for evaluating projects? When and how would you use each? The internal rate of return (IRR) for the Match My Doll Clothing Line Expansions (MMDC) is 24.0% based on the NPV calculated above ($7,150). The IRR for the Design Your Own Doll (DYOD) project is 17.9% based on the NPV calculated above ($7058). The calculated IRRs of the two projects do not eliminate either from consideration. Both projects IRR’s are above their individually assigned discount rates, 8.4% for MMDC and the higher (riskier) 9.0% for DYOD. The MMDC Project has an IRR=24%, MIRR=21%, payback of 7.4 years and discounted payback of 9.1 years. The DYOD Project has IRR=17.9%, MIRR=16.4%, payback of 9.1 years and discounted payback of 9.4 years. The MMDC Project has a higher NPV and better internal rate of returns (both IRR and MIRR) than DYOD Project. The MMDC Project has a shorter payback and discounted payback period than DYOD Project. So based on financial analysis, the MMDC Project is more attractive than DYOD Project. The DYOD Project is more capital intensive and even though it might potentially generate higher revenues, it would take longer to generate free cash flow. The NPV is lower for the DYOD Project in this case because it uses higher risk-adjusted cost of capital than the MMDC Project. One point to mention is that the payback period is less sophisticated than IRR

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