1. Describe and compare the business rationales for each of the two project proposals under consideration. Which do you feel is the more compelling? Project 1: Match My Doll Clothing Line Expansion
Expand the successful Match My Doll Clothing Line to include matching all-season clothing for tween girls and their dolls. Pros:
Current popularity will enable company to maintain premium prices. Company could take advantage of off-peak discounts offered by some suppliers and contract manufacturers. Would help reduce the seasonality in New Heritage’s sales and earnings. Project poses moderate risk – about the same as the production division’s existing business as a whole. Cons:
Company has to exploit the opportunity without delay to be able to exploit the current popularity of the original Match My Doll Clothing line. Large outlays for R&D, market research and marketing are needed. Project 2: Design Your Own Doll
Targets existing customers and will offer customized dolls that the customer could customize to create one-of-a-kind addition to their existing collection of dolls. Pros:
Market research with focus group indicates that there is a lot of enthusiasm for the product concept. Company will be able to charge premium prices for this product. Will improve customer loyalty.
Will create a unique experience for customers.
Increased manufacturing complexity and expense, involves higher risk. Low production runs and volumes would mean higher fixed costs per unit. Therefore, higher breakeven volume for project (longer payback period). Would require the company to make significant changes to its existing technology infrastructure, expand its webhosting capacity and involve legal measure to implement new third party service agreements to provide better service quality. Longer development time (including product testing) – up to 12 months. Much larger initial investment required than the first project. The Match My Doll Clothing Line expansion project uses existing infrastructure and technology/ products. It will also fill the “gap” in the year-round revenues that occur due to the seasonality of demand. This project requires a smaller investment and has a shorter payback period. The Design Your Own Doll project requires a larger investment and will require new equipment, technology and third-party agreements. The business plan and process will become more complicated. This project also has a longer payback period. On the other hand, this project will earn higher returns. Both the projects will require some continuing capital expenditures. However, the Design Your Own Doll option will require higher capital expenditures compared to the Match My Doll Clothing Line project. Design Your Own Doll project is expected to make higher returns according to the projections. It also carries a higher risk due to the complexity of operations involved.
See attached sheet for detailed calculations.
2. What are the free cash flows that are relevant to analyzing the two projects?
3. Match My Doll Clothing Line Free Cash Flow (without TV) = $2,091.54 Match My Doll Clothing Line Free Cash Flow (with TV) = $16,344.40 Design Your Own Doll Free Cash Flow (without TV) = -$1,019.8 Design Your Own Doll Free Cash Flow (with TV) = $24,732.06
4. What are the NPVs of the two projects? What decision should Emily Harris recommend?
5. NPV Calculation
Match My Doll Clothing Line: NPV = $7,148.35
Design My Doll: NPV = $7,285.68
Based on the calculations in the above steps, it is determined that Design My Doll project has a higher NPV and hence would be a better choice, but the first project is less risky and has a shorter payback period and therefore might be more attractive to the board.