Capital Budgeting
Simulation
New Heritage Doll Company
Asif Junaid – Corporate Finance class
Project Evaluation Process and Criteria
Followed the following steps and procedures to evaluate each project and select assortment of projects for each year:
1) In line with Corporate Strategy of Firm
-)
Build and grow customer identification with doll characters in various forms of product through all stages of a child’s life, from toddlerhood through teenage years
-)
Ensure activities across all divisions are coordinated to successfully leverage its doll character brands across all divisions simultaneously
2)
In line with Corporate Strategy of Each Division
A.
Production Division
.
Build on its core expertise in doll and accessory design and development in order to expand and deepen its offerings to two key demographic customer segments – toddlers/young girls and tweens B.
Retail Division
.
Expand geographically across the U.S in 3 Channels of website, mail-order and retail stores
.
Invest in the U.S using “retail as entertainment” concept through store expansion, and in the
North-East
.
Expand in strategic markets Asia and Europe to grow international revenue
C.
Licensing Division
.
Grow revenue derived from New Heritage’s core branded assets without damaging these brands 3) Capital Constraints
-)
Ensure that most of the Annual 8m budget is used on as wide a range of projects as possible
-)
ApplyNPV/IRR each division’s respective risk free rate in determiningReplacement/Expansion
NPV of each project
Payback Period & Profitability Index
Investment
4) Examined financial ratios and characteristics of each project including:
Any
Capital
Constraints
and
Debt-
Project Interdependence
Selections and Results by Year
2009-2010
2010-2011
1) Retail Store Expansion in Northeast
-) Was in line with company strategy to expand its retail presence within the U.S, specifically in the
Northeast
-) Decided to open 5 stores simultaneously to maximize efficiency of operations in the North East
-) Applied a high risk rate despite retail executives evaluating the project as medium risk
2) New Doll Film/DVD
-) Safer project than previous films due to direct release to DVD only format
-) Co-marketing strategy would lead to high returns and low expenses in this project
-) Would further enhance company brands amongst tweens 1) Tween Book Series
-) Helped provide tweens for a more mature version of new heritage doll characters through teen years
-) Was a low risk investment with 60% of net revenues allocated to New Heritage and also the termination option in the event of non-performance within 2 years
-) Extremely high IRR of 43.54% and NPV of 6.12
2) Toddler Doll Accessory Line
-) Low risk product for an existing toddler line
3) Expansion of Mail-Order Catalog Business to
Asia
-) Helps the company expand its presence in the Asia
Pacific regions and in line with corporate strategy
-) Relatively low risk project
4) ‘Match my Doll’ Clothing Line
-) Was a highly creative initiative in a category in which
New Heritage has plenty of experience of
-) Despite high risk, project represented a bold initiative by New Heritage
Additional Financial Considerations
2 chosen projects had the highest IRR from the available of projects, the highest NPV, shortest payback period, highest PI and highest 5 year EBITDA.
Results:
All the initiatives proved to be successful with the expansion into Asia proving more expensive than
Results:
anticipated but also generating higher revenues. 2011
Retail operations were profitable instantly while film had a 19.6% growth in sales and a 54.8% growth in net was successful. 2010 resulted in a lower net income income. The retail store operations and new doll DVD led margin than 2009 (5.0% vs 5.3%) and a small increase to signifcant profits in 2011.
in revenue due to investment in these projects
Selections and Results by Year
2011-2012
2012-2013
1) ‘Dolls of the World’ Initiative
-) Helped tap into additional
