Project Analysis Services
1801 Liacouras Walk
Philadelphia, PA 19122
New Heritage Doll Company:
Capital Budgeting
Production Division
Proposal Recommendation
October 25, 2011
Prepared For: Jonathan Scott, President
Emily Harris, Vice President
Prepared By: Dylan Baird
Brittany Brantley
David Hamme
Executive summary:
Given the assumptions available to New Heritage for the forecast of their Match My Doll
Clothing line (MMDC) and their Design Your Doll(DYOD) product line, we suggest New
Heritage to proceed with MMDC. Despite less potential for exponential growth, MMDC is a much safer, yet more profitable, investment and does require the company to spend as much upfront. By constructing a forecast for the next ten years, we found that the MMDC expansion would have a higher NPV and IRR than the DYOD project. Furthermore, since MMDC requires a less amount for its initial investment than DYOD, it yields a higher profitability index, while having a smaller payback period.
MMDC is less risky because it has less of a chance to incur a loss and will pay back the initial investment faster. If the discount rate is raised on the project, the NPV of the DYOD line decreases at a much faster rate than that of MMDC. Additionally, if the projected revenue is less than the forecast, DYOD will also suffer losses at a much faster rate than MMDC.
Profitability:
In analyzing the forecast for MMDC and DYOD we found that MMDC is a more profitable investment for New Heritage. The projections showed that both projects have a comparable NPV, with MMDC’s at $7,164,000 and DYOD’s at $7,120,000. However, though the NPV for both projects are similar, MMDC has a 24% IRR, which is 6% higher than DYOD.
One factor that contributed to these findings is the initial capital expenditures for each project.
MMDC’s initial capital expenditure of 1,470,000 is 68% lower than the