New Heritage Doll Company: Capital Budgeting

The New Heritage Doll Company’s Vice-President of Production, Emily Harris, had to decide which of two proposals she should approve for the company’s upcoming capital budgeting meetings. The first project involved expanding an existing “Match My Doll Clothing” line, which had a proven record of success in the past. The second project introduced a new initiative called “Design Your Own Doll”, which used a web-based software enabling users to customize a doll’s features to the customers’ specifications. To help Emily reach her decision, I will calculate the Net Present Value (NPV) of both projects to find out which project is more profitable.

In the financial analysis of both projects Emily was given the following assumptions:

1. Operating projections were used to develop cash flow forecasts and then to calculate Net Present Value, Internal Rates of Return, payback period and other investment metrics. The cash flows excluded all financing charges and non-cash items (i.e. depreciation), and were calculated on an after-corporate-tax basis.

Get quality help now
Marrie pro writer
Verified writer

Proficient in: Budgeting

5 (204)

“ She followed all my directions. It was really easy to contact her and respond very fast as well. ”

+84 relevant experts are online
Hire writer

The New Heritage’s corporate tax rate was 40%

2. Discount rate was set at 8.4% – for medium-risk project

3. NPV calculations included a terminal value computed as the value of a perpetuity growing at constant rate. I computed Free Cash Flows (FCF) to find out the actual amount of cash from operations that the company could use in developing its new projects. I calculated the terminal value for 2020 as projected FCF in the first year beyond the projection horizon divided by discount rate of 8.4% less the perpetuity growth rate, which in this case was 3%.

Get to Know The Price Estimate For Your Paper
Topic
Number of pages
Email Invalid email

By clicking “Check Writers’ Offers”, you agree to our terms of service and privacy policy. We’ll occasionally send you promo and account related email

"You must agree to out terms of services and privacy policy"
Write my paper

You won’t be charged yet!

According to my calculations the MMDM’s terminal value in 2020 is 16,346,000 and DYOD’s is 27,486,000.

Cite this page

New Heritage Doll Company: Capital Budgeting. (2016, Mar 29). Retrieved from https://studymoose.com/new-heritage-doll-company-capital-budgeting-essay

New Heritage Doll Company: Capital Budgeting

👋 Hi! I’m your smart assistant Amy!

Don’t know where to start? Type your requirements and I’ll connect you to an academic expert within 3 minutes.

get help with your assignment