New Heritage Doll Company: Capital Budgeting

Exhibit 1 Selected Operating Projections for Match My Doll Clothing Line Expansion

2010 2011 2012

Revenue 4,500 6,860
Revenue Growth 52.4%
Production Costs
Fixed Production Expense (excl depreciation) 575 575
Variable Production Costs 2,035 3,404
Depreciation 152 152
Total Production Costs 0 2,762 4,131
Selling, General & Administrative 1,250 1,155 1,735
Total Operating Expenses 1,250 3,917 5,866

Operating Profit (1,250) 583 994

Working Capital Assumptions:

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

Capital Expenditures 1,470 952 152

MMDC SOLUTION

2010 2011 2012

Net Working Capital
MINIMUM CASH BALANCE 135.00 205.80
RECEIVABLES 729.49 1,112.07
INVENTORY 339.84 481.69
PAYABLES 317.29 483.72
TOTAL NET WORKING CAPITAL 800.00 887.05 1,315.85
CHANGE IN NET WORKING CAPITAL -800.00 -87.05 -428.81

FREE CASH FLOW:

EBIT -1,250.00 582.80 994.00
TAX @ 40% -233.12 -397.60
Earning After Tax -1,250.00 349.68 596.40
DEPRECIATION 0.00 152.20 152.20
CHANGE IN NWC -800.00 -87.05 -428.81
CAPITAL EXPENDITURE (10 yrs) -1,470.00 -952.20 -152.20
Tax Benefit 500.00
FREE CASH FLOW -3,520.00 -37.37 167.59
Terminal Value (Growth Rate Assumed at 2%)
Cash Flow After terminal value -3,520.00 -37.37 167.59
CUMULATIVE FREE CASH FLOW 15,792.60

DISCOUNT RATE 8.40%

NET PRESENT VALUE 5,937.39

INTERNAL RATE OF RETURN 22.12%
PAYBACK PERIOD (Note 1) 7 years and 4 months
Moddified Internal rate MIRR (Note 2) as Calculated in Note 2 19.66%

Note 1 - Payback Period

In 7 years 3,244
In 4.51 months in 8th year 276
Capital Outlay Amount 3,520

Year
Note 2 - MIRR 2010 2011 2012
Cash Flow After terminal value for IRR -3520 -37.36539 167.5949
Cash Flow After terminal value for MIRR -3520 0 0
Line Expansion

2013 2014 2015 2016 2017 2018 2019 2020

8,409 9,082 9,808 10,593 11,440 12,355 13,344 14,411
22.6% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

587 598 610 622 635 648 660 674

4,291 4,669 5,078 5,521 6,000 6,519 7,079 7,685
152 152 164 178 192 207 224 242
5,029 5,419 5,853 6,321 6,827 7,373 7,963 8,600
2,102 2,270 2,452 2,648 2,860 3,089 3,336 3,603
7,132 7,690 8,305 8,969 9,687 10,462 11,299 12,203

1,277 1,392 1,503 1,623 1,753 1,893 2,045 2,209

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

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

152 334 361 389 421 454 491 530

OLUTION

2013 2014 2015 2016 2017 2018 2019 2020

252.26 272.45 294.24 317.78 343.20 370.66 400.31 432.34

1,363.15 1,472.20 1,589.97 1,717.17 1,854.55 2,002.90 2,163.14 2,336.19
384.02 414.74 447.91 483.75 522.45 564.25 609.39 658.14
592.95 640.38 691.61 746.93 806.69 871.24 940.93 1,016.21
1,406.48 1,519.01 1,640.52 1,771.77 1,913.50 2,066.57 2,231.91 2,410.46
-90.63 -112.52 -121.51 -131.25 -141.74 -153.07 -165.34 -178.55

1,277.30 1,391.80 1,503.10 1,623.46 1,753.27 1,893.30 2,045.00 2,208.50

-510.92 -556.72 -601.24 -649.38 -701.31 -757.32 -818.00 -883.40
766.38 835.08 901.86 974.08 1,051.96 1,135.98 1,227.00 1,325.10
152.20 152.20 164.40 177.50 191.70 207.10 223.60 241.50
-90.63 -112.52 -121.51 -131.25 -141.74 -153.07 -165.34 -178.55
-152.20 -333.80 -360.50 -389.30 -420.50 -454.10 -490.50 -529.70

675.75 540.96 584.25 631.03 681.43 735.91 794.76 858.35

13,679.94
675.75 540.96 584.25 631.03 681.43 735.91 794.76 14,538.29
nd 4 months

2013 2014 2015 2016 2017 2018 2019 2020

675.7494 540.9554 584.2494 631.0259 681.4257 735.9149 794.7576 14538.29 22%
0 0 0 0 0 0 0 21186.74 19.7%
0 -5000
1 10000
2 -500
3 1000
4 2000
5 400
Rs. 5,398.84
New Heritage Doll Company: Capital Budgeting
Exhibit 2 Selected Operating Projections for Design Your Own Doll

2010 2011 2012

Revenue 0 6,000
Revenue Growth
Production Costs
Fixed Production Expense (excl depreciation) 0 1,650
Variable Production Costs 0 2,250
Development Costs 435
Depreciation 0 310
Total Production Costs 435 4,210
Selling, General & Administrative 1,201 0 1,240
Total Operating Expenses 1,201 435 5,450

Operating Profit (1,201) (435) 550

Working Capital Assumptions:

Minimum Cash Balance as % of Sales 3.0%
Days Sales Outstanding 59.1
Inventory Turnover (prod. cost/ending inv.) 12.2x
Days Payable Outstanding (based on tot. op. exp.) 33.7

Capital Expenditures 4,610 0 310

DYOD SOLUTION

2010 2011 2012

Net Working Capital
MINIMUM CASH BALANCE 180.00
RECEIVABLES 971.51
INVENTORY 320.20
PAYABLES 474.15
TOTAL NET WORKING CAPITAL 0 1,000 997.56
CHANGE IN NET WORKING CAPITAL 0 (1,000) 2.44

FREE CASH FLOW:

EBIT -1,201.00 -435.00 550.30
TAX @ 40% -220.12
Earning After Tax -1,201.00 -435.00 330.18
DEPRECIATION 0.00 0.00 309.70
CHANGE IN NWC 0.00 -1,000.00 2.44
CAPITAL EXPENDITURE -4,610.00 0.00 -309.70
Tax Benefit 480.40 174.00
FREE CASH FLOW -5,811.00 -954.60 506.62
Terminal Value (Growth Rate Assumed at
Cash Flow After terminal value -5,811.00 -954.60 506.62
CUMULATIVE FREE CASH FLOW 20,808.44

DISCOUNT RATE 9.00%

NET PRESENT VALUE 5,475.06
INTERNAL RATE OF RETURN 16.28%
PAYBACK PERIOD (Note 1) 9 years & 1 month
Moddified Internal rate MIRR (Note 2) 15.81%

Note 1 - Payback Period

In 7 years 4,140
In 4.51 months in 8th year 1,671.13
Capital Outlay Amount 5,811

Year
Note 2 - MIRR 2010 2011 2012
Cash Flow After terminal value for IRR -5811 -954.6 506.6235
Cash Flow After terminal value for MIRR -5811 -954.6 0
 2013 2014 2015 2016 2017 2018 2019 2020
14,360 20,222 21,435 22,721 24,084 25,529 27,061 28,685
139.3% 40.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

1,683 1,717 1,751 1,786 1,822 1,858 1,895 1,933

7,651 11,427 12,182 12,983 13,833 14,736 15,694 16,712

310 310 436 462 490 520 551 584

9,644 13,454 14,369 15,231 16,145 17,113 18,140 19,229
2,922 4,044 4,287 4,544 4,817 5,106 5,412 5,737
12,566 17,498 18,656 19,775 20,962 22,219 23,553 24,966

1,794 2,724 2,779 2,946 3,123 3,310 3,509 3,719

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

59.2 59.2 59.2 59.2 59.2 59.2 59.2 59.2
12.3x 12.6x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
33.8 33.9 33.9 33.9 33.9 33.9 33.9 33.9

310 2,192 826 875 928 983 1,043 1,105

SOLUTION

2013 2014 2015 2016 2017 2018 2019 2020

430.80 606.65 643.04 681.63 722.53 765.88 811.83 860.54

2,327.89 3,278.12 3,474.79 3,683.28 3,904.28 4,138.54 4,386.86 4,650.06
760.72 1,040.69 1,095.32 1,161.05 1,230.72 1,304.55 1,382.83 1,465.80
1,134.94 1,598.27 1,694.15 1,795.82 1,903.57 2,017.77 2,138.85 2,267.18
2,384.47 3,327.18 3,519.00 3,730.14 3,953.95 4,191.20 4,442.67 4,709.23
-1,386.92 -942.71 -191.81 -211.14 -223.81 -237.25 -251.47 -266.56

1,794.30 2,723.70 2,779.20 2,945.80 3,122.60 3,310.10 3,508.56 3,719.00

-717.72 -1,089.48 -1,111.68 -1,178.32 -1,249.04 -1,324.04 -1,403.42 -1,487.60
1,076.58 1,634.22 1,667.52 1,767.48 1,873.56 1,986.06 2,105.14 2,231.40
309.70 309.70 436.20 462.40 490.10 519.50 550.70 583.80
-1,386.92 -942.71 -191.81 -211.14 -223.81 -237.25 -251.47 -266.56
-309.70 -2,191.50 -825.70 -875.30 -927.80 -983.40 -1,042.50 -1,105.00

-310.34 -1,190.29 1,086.21 1,143.44 1,212.05 1,284.91 1,361.87 1,443.64

21,035.92
-310.34 -1,190.29 1,086.21 1,143.44 1,212.05 1,284.91 1,361.87 22,479.57
 2013 2014 2015 2016 2017 2018 2019 2020 Rate Remarks
-310.3352 -1190.293 1086.207 1143.439 1212.048 1284.912 1361.869 22479.57 16% IRR
0 0 0 0 0 0 0 28791.5 15.8% MIRR