New Heritage Doll.docx

New Heritage Doll.docx

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NewHeritageDoll

NewHeritageDoll

NewHeritageDollCompany:

CapitalBudgeting

MGT6060

20September2011

Overview

TwobusinessproposalsfromtheProductiondivisionoftheNewHeritageDollCompanyarebeingconsideredforsubmissiontothecapitalbudgetingcommittee.Onlyoneproposalwillbesubmitted.Theproposalsare:

MatchMyDollClothingLineExpansionandDesignYourOwnDoll.

Asystematicprocesswillbeusedtodeterminewhichproposaltorecommend.CriteriaInclude:

1.Comparisonofthebusinesscases

2.NPVanalysis

3.IRRandpaybackperiodanalysis

4.Analysisofadditionalinformation

5.Recommendation

ComparisonoftheBusinessCases

MostCompellingBusinessCaseMatchMyDollClothingLineExpansion

MatchMyDollClothingLineExpansionisthethemostcompellingopportunity.Thisinitialrecommendationisbasedsolelyonaqualitativecomparisonofthecasesandthefinancialexhibitsprovidedbythebrandmanagers.ASWOT（Strength,Weakness,Opportunity,&Threat）analysiswasusedtoaidthedecisionprocess.SeeTables1&2forSWOTanalysis.

BenefitsoftheMatchMyDollClothingLineExpansion:

*Successoftheoriginallineofbusiness

*Utilizationofthebusinessesexistingstrengths

*Longtermabilityfortheproducttostayuptodateanddrivebusiness

ConcernsfortheDesignYourOwnDoll:

*Highriskassociatedwithdevelopingaproprietarysoftwaresystem

*Complexityofmanufacturing

*Highbreak-evensalesvolume

OverviewBusinessCase1–MatchMyDollClothingLineExpansion

TheproposalfortheMatchMyDollClothingLineExpansionistoexpandtheline,basedonthesuccessandpopularityoftheexistingproductline,toincludeproductsforallfourseasons.Thecurrentproductincludesadollandtwosetsofmatchingwarmweatherclothingforchildanddoll.SeeTable1forSWOTanalysis.Benefitsoftheexpandedbusinesslineinclude:

*Projectedtobeasprofitableastheexistingline.

*Opportunitiesexistforoff-peakdiscountsinthesupplychainandmanufacturing

*Reductionofseasonalityinsalesandearnings

OverviewBusinessCase2–DesignYourOwnDoll

TheproposalfortheDesignYourOwnDollistocreateanewlineofbusinessof“one-of-a-kind”dollsforexistingloyalcustomers’collections.Marketresearchwithfocusgroupsindicatesthatgirlswantdollslikethemselves.Thenewbusinesswouldenablecustomersto:

*Participateintheexperienceofcreatingthedoll

*Gotoawebsiteandcustomizethedoll’sphysicalattributes,suchashairandeyecolor

*Selectaccessoriesandclothing

*

Oncethecustomerhascompletedthedesign,thedollismanufacturedandshippedtothecustomer.Abenefitofthenewbusinesslineispremiumpricing.Theintentofthebusinessistocreateanewmarketsegmentarounddesignadoll（designingadoll,ordidyoumeanDesignYourOwnDoll）.SeeTable2forSWOTanalysis.

OneofthemaindrawbacksofDesignYourOwnDollisthehighercostsassociatedwiththecustomizationprocess,whichoutweighitsbenefits.Insum,basedonourinitialevaluation,theMatchMyDollExpansionappearstobethemoreattractiveproject.

OverviewFinancialAnalysis

Threescenarioswereanalyzedinordertoviewarangeofpossiblefinancialoutcomes.

1.MatchMyDollClothingLineExpansion（Basescenario）asdescribedintheoperatingprojection

2.DesignYourOwnDoll（Basescenario）asdescribedintheoperatingprojection

3.DesignYourOwnDoll（+AdditionalLaborscenario）

+AdditionalLaborscenario-Thisscenarioisincludedbecausethebrandmanager’sdecisiontoexcludesomeinitiallaborcosts,aswellasongoinglaborcosts,isaconcern.Thebrandmanager’sdecisionappearstobebasedontheassumptionthatinternalresourceswillbeallocatedatnoadditionalcosttosupporttheproject.However,theseresourcesmustbefactoredintoascenarioincasetheassumptionisfalse.Toaccountfortheseadditionallaborcosts,anadditional$435,000isaddedtoyear2010.Thiscostwillgrowat5%peryear,overthecourseoftheproject,toaccountforcostoflivingandsalaryincreases.

NPVAnalysis

Table3-NPVScenarios

DiscountRate|CorporateDiscountRates（Risk）|

|7.7%（low）|8.4%（med）|9.0%（high）|

MatchMyDollClothingLine（Baseline）|$2,978.59|$2,653.89|$2,391.58|

DesignYourOwnDoll（Baseline）|$3,836.70|$3,248.91|$2,776.07|

DesignYourOwnDoll（+AdditionalLabor）|$1,319.93|$809.38|$399.68|

*MatchMyDollClothingLine=ModerateRisk（Declared）

*DesignYourOwnDoll=HighRisk（Assumption）

Comparingonlythebaselinescenariosforthedeclaredandassumedlevelsofrisk,theDesignYourOwnDollproposalshowsthehighestNPV.However,whentheadditionalcostoflaborisfactoredintothecomparison,theNPVofDesignYourOwnDoll+AdditionalLaborisreducedto$399,680.

ComparingthebaselineMatchMyDollClothingLineExpansiontotheDesignYourOwnDoll+AdditionalLaborshowsthatMatchMyDollClothingLinehasapproximately$2.25millionmorevaluethanDesignMyOwnDoll.

IRRAnalysis

Table4–IRRSensitivityAnalysis|

|IRR|

RevenueChange|MatchMyDollClothingLine|DesignYourOwnDoll（baseline）|DesignYourOwnDoll（+additionallabor）|

3%|18.24%|14.68%|10.86%|

2%|17.74%|14.28%|10.45%|

1%|17.24%|13.87%|10.04%|

0%|16.74%|13.46%|9.62%|

-1%|16.23%|13.04%|9.20%|

-2%|15.72%|12.62%|8.78%|

-3%|15.21%|12.19%|8.35%|

-4%|14.69%|11.77%|7.91%|

-5%|14.16%|11.33%|7.48%|

-6%|13.63%|10.90%|7.03%|

*Themodelreflectsachangeinrevenuefrom+3%to-6%.RevenueandvariablecostsvarywithrespecttonominalaverageGDP.（Assumption）

*SGAcostsareconstant（Assumption）

*Capitalexpendituresareconstant（Assumption）

*NetWorkingCapitalratiosnotmodified（Assumption）

*IRRofNPVisnotusedbecausesensitivityisincludedinthediscountrate（Declared）

TheIRRfortheMatchMyDollClothingLineExpansionexceedsthatofBaselineDesignYourOwnDollandDesignYourOwnDoll+AdditionalLabor.Inadowneconomywithaprojectedreductioninrevenuesof6%,theMatchMyDollClothingLineExpansionoutperformstheothertwoscenarios.SeeGraph2foragraphicalcomparisonoftheIRR.Regardingthesensitivityanalysis,theIRRforDesignYourOwnDoll+AdditionalLaborfallsbelowthehigh-riskdiscountrateof9.0%atrevenuesof-2%.SeeGraphs3foragraphicalviewofthesensitivityanalysis.

PaybackPeriodAnalysis

Paybackperiodforeachofthethreescenarios:

*MatchMyDollClothingLineExpansion（baseline）=8.43years

*DesignYourOwnDoll（baseline）=10.09years

*DesignYourOwnDoll+AdditionalLabor=10.31years

AdditionalInformationRequired

1.WhathasbeenthehistoricalimpactofGDPoncompanyrevenueaswellasonthepreviousMatchMyDollClothingLine?

2.WhatistheimpactofrevenuechangeonfixedexpensesandSGA?

3.Whatchangeswouldbeexpectedincapitalexpendituresduringperiodsofchange?

4.Doesthefirmhavehistoricaldataforinventoryturnoverratios,DaysSalesOutstandingandDaysPayableOutstanding?

5.AretherehiddenlaborcostsnotbeingconsideredintheMatchMyDollClothingLineExpansion,similartotheadditionallaborcostsinDesignYourOwnDoll?

6.WhatlevelofriskisDesignYourOwnDoll?

7.Isachangeinrevenuebetween+3%&-6%valid?

8.RevenueandvariablecostsareadjusteddownproportionatelywithGDP.Isthisvalid?

9.Ishistoricaldataforinventoryturnoverratios,Dayssalesoutstandinganddayspayableoutstandingavailable.

Recommendation

RecommendationMatchMyDollClothingLineExpansion

1.NPVforDesignYourOwnDoll（baseline）isover-statedsinceitomitslaborcosts.

2.NPVforMatchMyDollClothingLineExpansion>NPVforDesignYourOwnDoll+AdditionalLabor（Greaterby$2.25million）

3.IRRforMatchMyDollClothingLineExpansion>IRRforDesignYourOwnDoll（baseline）

4.IRRforDesignYourOwnDoll（baseline）>IRRDesignYourOwnDoll+AdditionalLabor

5.IRRoftheDesignYourOwnDoll（baseline）ismoresensitivetorevenuechangesthantheIRRofMatchMyDollClothingLineExpansion

6.IRRoftheDesignYourOwnDoll+AdditionalLaborismoresensitivetorevenuechangesthantheIRRoftheDesignYourOwnDoll（baseline）

7.IRRofDesignYourOwnDoll+AdditionalLabordropsbelowthehigh-riskdiscountrateof9%ifrevenuesdropby2%

8.PaybackperiodforMatchMyDollClothingLineExpansion

9.SWOTanalysissuggeststhatMatchMyDollClothingLineExpansionismorecompelling.

10.

TablesandCharts

TABLE1-SWOT:

MatchMyDollClothingLineExpansion

Strengths*Currentpopularityandcelebritytrendsallowforpremiumpricingmaintenance.*Businessmodelleveragesthefirm’sexistingoperationalandsalesstrengths.*Riskiscomparabletothatofexistingbusinessline.|Weaknesses*Nomarketresearchconducted.*Salesprojectionbasedonexistingline.*Mustkeeppacewithcurrenttrendstomaintainpremiumpricing;smallwindowofopportunity（duetoficklenature）.*Supplychainandmanufacturingutilizationchallengeswithever-changingline.|

Opportunities*Expandthemarkettoallfourseasons;*reducetheseasonalityinsalesandearnings.*Leveragethepopularitywithcelebritytrend;opportunitywindowisnow.*Maintainpremiumprices.*Takeadvantageofoff-peakdiscountsfromsuppliersandmanufacturers.|Threats*Othervigorousentrantsorcompetitorsintomarketsegment.*Presumptionofdiscountsofferedbysuppliersandmanufacturers.*Continuedwillingnessforchildrentodressliketh