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New Heritage Doll Company: Capital Budgeting Case
The key issue in the case is which of one of the two projects recommended by the Production Division should the company pursue (if any). Below is the summary of the NPV analysis done for both the Match My Doll Clothing (MMDC) and Design Your Own Doll (DYOD)

As seen above the NPV for the MMDC project is $9.587 million and the NPV for the DYOD is $4.833 million.
Analysis:
Even though the NPV for the DYOD is lower than MMDC, it may be advisable the Company to pursue the DYOD doll as it is a more sustainable product line. The revenue of MMDC is based on trends and it is unlikely for the trend of matching doll and child clothing would continue forever. It is also important to note that historically, Heritage Doll has specialized in manufacturing the dolls and it is not specializing in clothing. Drifting from its core competency could go against the company. On the other hand, research has shown that by enabling the customer to design their own dolls that have features that are similar to their own, the company can create a loyal and sustainable customer base. Manufacturing dolls is also internally consistent with the company’s current strategy of manufacturing dolls rather than clothes. The company can continue to generate revenue by doing what it does best.
The key takeaway here is that a positive NPV project should not be considered in isolation but instead should be analyzed in conjunction with the overall strategy of the firm.
Assumptions in the NPV Calculation:
In order to arrive at the NPVs of both projects, the following assumptions were made
1. The discount rate was for MMDC was assumed at 8.4% given the “medium” risk of the project, and 9% of the DYOD project as it required changes in the production line and assumed to be riskier.
2. The perpetuity growth rate was assumed to be 4%, which is lower

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