New Heritage Doll Company: Capital Budgeting

Teaching Note
TN Exhibit 1 NPV Analysis for Match My Doll Clothing Line Extension

2010 2011 2012 2013 2014

Revenue 4,500 6,860 8,409 9,082
Revenue Growth NA 52.4% 22.6% 8.0%
Production Costs
Fixed Production Expense (excl depreciation) 575 575 587 598
Variable Production Costs 2,035 3,404 4,291 4,669
0.4522 0.4962 0.5103 0.5141
Depreciation 152 152 152 152
Total Production Costs 0 2,762 4,131 5,029 5,419
Selling, General & Administrative 1,250 1,155 1,735 2,102 2,270
Total Operating Expenses 1,250 3,917 5,866 7,132 7,690

Operating Profit (1,250) 583 994 1,277 1,392

Operating Profit/Sales 0.130 0.145 0.152 0.153
SG&A/Sales 0.257 0.253 0.250 0.250

Working Capital Assumptions:

Minimum Cash Balance as % of Sales NA 3.0% 3.0% 3.0% 3.0%
Days Sales Outstanding NA 59.2x 59.2x 59.2x 59.2x
Inventory Turnover (prod. cost/ending inv.) NA 7.7x 8.3 12.7x 12.7x
x
Days Payable Outstanding (based on tot. op. e 0.0x 30.8x 30.9x 31.0x 31.0x

Capital Expenditures 1,470 952 152 152 334

Growth in capex -35.2% -84.0% 0.0% 119.7%
0.2116 0.022187 0.0181 0.036756
Net Working Capital Accounts 2010 2011 2012 2013 2014
Cash 135 206 252 272
Accounts Receivable 729 1112 1363 1472
Inventory 360 500 396 427
Accounts Payable 317 484 593 640
Net Working Capital 800 907 1334 1418 1531
NWC 800 107 427 84 113
2015 2016 2017 2018 2019 2020
9,808 10,593 11,440 12,355 13,344 14,411
8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

610 622 635 648 660 674

5,078 5,521 6,000 6,519 7,079 7,685
0.5178 0.5212 0.5245 0.5276 0.5305 0.5332
164 178 192 207 224 242
5,853 6,321 6,827 7,373 7,963 8,600
2,452 2,648 2,860 3,089 3,336 3,603
8,305 8,969 9,687 10,462 11,299 12,203

1,503 1,623 1,753 1,893 2,045 2,209

0.153 0.153 0.153 0.153 0.153 0.153

0.250 0.250 0.250 0.250 0.250 0.250

3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
31.0x 31.0x 31.0x 31.0x 31.0x 31.0x

361 389 421 454 491 530

8.1% 7.8% 8.2% 7.8% 8.1% 7.9%
0.036756 0.036752 0.036757 0.036754 0.036759 0.036756
2015 2016 2017 2018 2019 2020
294 318 343 371 400 432
1590 1717 1855 2003 2163 2336
461 498 538 581 627 677
692 747 807 871 941 1016
1653 1786 1929 2084 2249 2429
122 133 143 154 166 180
 NWC/Sales 0.202 0.195 0.169

NPV Analysis

Free Cash Flows 2010 2011 2012 2013

EBIT(1-t) (750) 350 596 766
plus depreciation 0 152 152 152
less NWC (800) (107) (427) (84)
less capital expenditures (1,470) (952) (152) (152)
Free Cash Flow (3,020) (557) 169 682
Terminal value 3.00%

Initial Outlays
Net working capital (800)
Net property, plant & equipment (1470)
Discount factor 8.40% 1.0000 0.9225 0.8510 0.7851
Present value (3,020) (514) 144 536
Net Present Value $ 7,150
NPV without Terminal Value ($ 147)

IRR Analysis
2010 2011 2012 2013
Cash Flows (3,020) (557) 169 682
IRR
7.6%
Payback Analysis
2010 2011 2012 2013
Cash flows (3,020) (557) 169 682
Cumulative cash flow (3,020) (3,577) (3,408) (2,726)
Payback period
5-year Cumulative EBITDA

Profitability Index
NPV/Initial Investment 1.35
 0.169 0.169 0.169 0.169 0.169 0.169 0.169

2014 2015 2016 2017 2018 2019 2020

835 902 974 1052 1136 1227 1325

152 164 178 192 207 224 242
(113) (122) (132) (143) (154) (167) (180)
(334) (361) (389) (421) (454) (491) (530)
540 583 631 680 735 793 857
16,345

0.7242 0.6681 0.6163 0.5686 0.5245 0.4839 0.4464

391 389 389 387 385 384 7679

2014 2015 2016 2017 2018 2019 2020

541 583 630 680 735 793 17,202

2014 2015 2016 2017 2018 2019 2020

541 583 630 680 735 793 17,202

(2,185) (1,602) (972) (291) 443
7.40 years
$ 6,522
 New Heritage Doll Company: Capital Budgeting Teaching Note
TN Exhibit 2 NPV Analyss for Design Your Own Doll

2010 2011 2012 2013

Revenue 0 6,000 14,360
Revenue Growth NA 139.3%
Production Costs
Fixed Production Expense (excl depreciation) 0 1,650 1,683
Additional development costs (IT personnel) 435
Variable Production Costs 0 2,250 7,651
Depreciation 0 310 310
Total Production Costs 0 435 4,210 9,644
Selling, General & Administrative 1,201 0 1,240 2,922
Total Operating Expenses 1,201 435 5,450 12,566

Operating Profit (1,201) (435) 550 1,794

Operating Profit/Sales 0.092 0.125
SG&A/Sales 0.207 0.203

Working Capital Assumptions:

Minimum Cash Balance as % of Sales NA NA 3.0% 3.0%
Days Sales Outstanding NA NA 59.2x 59.2x
Inventory Turnover (prod. cost/ending inv.) NA NA 12.2x 12.3x
Days Payable Outstanding (based on tot. op. exp.) NA NA 33.7x 33.8x

Capital Expenditures 4,610 0 310 310

Growth in capex 0%
0.052 0.022
Net Working Capital Accounts 2010 2011 2012 2013
Cash 0 180 431
Accounts Receivable 973 2328
Inventory 346 786
Accounts Payable 474 1135
Net Working Capital 1,000 1,024 2,410
NWC 1,000 24 1,386
NWC/Sales 0.171 0.168
 2014 2015 2016 2017 2018 2019 2020
20,222 21,435 22,721 24,084 25,529 27,061 28,685
40.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

1,717 1,751 1,786 1,822 1,858 1,895 1,933

11,427 12,182 12,983 13,833 14,736 15,694 16,712

310 436 462 490 520 551 584
13,454 14,369 15,231 16,145 17,113 18,140 19,229
4,044 4,287 4,544 4,817 5,106 5,412 5,737
17,498 18,656 19,775 20,962 22,219 23,553 24,966

2,724 2,779 2,946 3,123 3,310 3,508 3,719

0.135 0.130 0.130 0.130 0.130 0.130 0.130
0.200 0.200 0.200 0.200 0.200 0.200 0.200

3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
12.6x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
33.9x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x

2,192 826 875 928 983 1,043 1,105

608% -62% 6% 6% 6% 6% 6%
0.108 0.039 0.039 0.039 0.039 0.039 0.039
2014 2015 2016 2017 2018 2019 2020
607 643 682 723 766 812 861
3278 3475 3683 3904 4139 4387 4650
1065 1130 1197 1269 1345 1426 1512
1598 1694 1796 1904 2018 2139 2267
3,352 3,553 3,766 3,992 4,232 4,486 4,755
942 202 213 226 240 254 269
0.166 0.166 0.166 0.166 0.166 0.166 0.166
 NPV Analysis
2010 2011 2012 2013 2014 2015 2016 2017

(721) (261) 330 1,077 1,634 1,667 1,767 1,874

0 310 310 310 436 462 490

(1,000) (24) (1,386) (942) (202) (213) (226)
(4,610) 0 (310) (310) (2,192) (826) (875) (928)
(5,331) (1,261) 306 (309) (1,190) 1,076 1,141 1,210

1.000 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470

(5,331) (1,157) 258 (239) (843) 700 681 662
$ 7,058
($ 3,391)

2010 2011 2012 2013 2014 2015 2016 2017

(5,331) (1,261) 306 (309) (1,190) 1,076 1,141 1,210
-0.5%

2010 2011 2012 2013 2014 2015 2016 2017

(5,331) (1,261) 306 (309) (1,190) 1,076 1,141 1,210
(5,331) (6,592) (6,286) (6,595) (7,784) (6,708) (5,566) (4,357)
Free Cash Flows
EBIT(1-t)
plus depreciation less NWC
less capital expenditures Free Cash Flow
Terminal value 3.00%

Discount factor 9.00% Present value

Net Present Value
NPV without Terminal Value

IRR Analysis
Cash Flows
IRR

Payback Analysis
Cash flows Cumulative cash flow
Payback period

5-year Cumulative EBITDA $ 8,778

Profitability Index
NPV/Initial Investment 1.32
 2018 2019 2020

1,986 2,105 2,231

520 551 584

(240) (254) (269)
(983) (1,043) (1,105)
1,283 1,359 1,441
24,737

0.5019 0.4604 0.4224

644 626 11,058

2018 2019 2020

1,283 1,359 26,178

2018 2019 2020

1,283 1,359 26,178
(3,074) (1,715) 24,464

>10 years

$ 8,778
New Heritage Doll Company: Capital Budgeting
Teaching Note
TN Exhibit 3 NPV Sensitivity Analyses

NPV of Match My Doll Clothing Line Extension

NPV if
TV growth rate TV=BV of
Discount rate 0% 1% 2% 3% NWC + PPE
7.70% $ 5,289 $ 6,141 $ 7,292 $ 8,932 $ 3,011
8.40% $ 4,408 $ 5,075 $ 5,950 $ 7,150 $ 2,687
9.00% $ 3,766 $ 4,314 $ 5,019 $ 5,958 $ 2,425

NPV of Design Your Own Doll

NPV if
TV growth rate TV=BV of
Discount rate 0% 1% 2% 3% NWC + PPE
7.70% $ 5,830 $ 7,263 $ 9,198 $ 11,957 $ 3,567
8.40% $ 4,404 $ 5,526 $ 6,998 $ 9,016 $ 2,980
9.00% $ 3,372 $ 4,294 $ 5,479 $ 7,058 $ 2,507