1. Introduction

1.1 Itroduction to the Industry :The US toy and game industry is huge and totaled 42 billion in 2008 with projected growth of 4.6% per year . 52% of this industry is Toys and Games of which 14.1% is from the doll industry , which we are covering below . See the illustration in Fig 1.1

Fig 1.1

1.2 Introduction to The New Heritage Doll company Founded in 1985 by Ingrid Beckwith, The New Heritage Doll company had generated almost $245 million of Revenue by 2009 with an operating profit 27 million from its 3 divisions: production, retailing and licensing.In September 2010, Emeline Harris, the Vice president of the Production unit of The New Heritage Doll company, was tasked with weighing up proposals of which 2 stood out significantly. The company is has sought to grow through its customer loyalty however all proposals will be reviewed and evaluated by the Budgeting committee. Emeline has to ensure that the proposal she puts forward have compelling support or the committee will most likely decline the proposal.

2. The growth oppurtunities

2.1 The 2 Proposals : ( all calculations are $(000) The 2 proposals that have been put forward to Emeline are a) Design your Doll (DYD) Design your doll put forward by the brand manger Elizabeth Holtz, the proposal is to design dolls that match the characteristcis and features of the owner. The approach will increase brand loyalty and has a strong social message as well . There is a fair bit of investment and software/hardware development required . she feels that this command a premium price however the initial investement worl be high as is the breakeven cost. This is in keeping with the companys USP. The project has a long pay back, period, some untested elements in the production and could damage the relationship with existing customers . the project carried higher risk.The upfornt investment in Fig 2.1Fig 2.1 Design your doll clothing extension outlays -

b) Match my Doll (MMD) Put forwad by the brand manager, Marcy McAdams, who belives that matching the dolls and childs clothing has already been a success for summer and wants to extend the range to 4 seasons . She belives that this will be as successful as the curent line. Her proposal includes maintaining premium pricing ans taking advantage of the suppliers off-peak discounts.Given the success of match my Doll clothing McAdams belived the project had moderate risk .

Fig 2.2 Match my doll clothing extension outlays -

2.2 The method The method that Emeline will adopt in keeping with the budgeting comittees requirements, will be based on analysing the investment, operationg profit but more importantly will be based on the discounting cash flow (DCF) which will help us to detemine the Net Present Value (NPV) of the proposal.

3. The Analysis :

The company needs evaluate productions runs ad volumes, manufacturing costcomplications, development and technology cost , sensitivity on the selling price of the completed good and the breakeven production volumes.

3.1 The initial investment-When comparing the initial investment between the 2 proposals we find the DYD has a much hihgher total cost $ 2291 $(000) than MMD . See Fig 3.1

Fig 3.1All this tells us that is that if the company was using cost as an appraisal process than MMD, would be excepted over DYD. However we need to look at the returns of the operating profit to see if the company is generating returns or losses or if operating at breakeven point and analyse to see if this ongoing or will generated profit through forecasting beyond the breakeven point.

3.2 DCF and Sensitivity Analysis : ( taken from 2010 to 2020)When making an analysis Emeline and the Budgeting committee will consider the cash management through capital rationing on whichever project the except . They will aslo look at the NPV implementation to refelct the time value of the money invested in each of the projects and in addition this will be further analysed through the IRR of both the proposals that have been put forward.

Match My Doll : has medium risk as we have discussed above, so the DCF will be 8.4% which will be applied. See the table below - Fig 3.2.1 ( for details of the analysis please refer to Appendix 1.1) Fig 3.2.1Risk level

RateNPVPayback PeriodIRR

Low 7.7%9304.575.8527.56%

Medium8.4%7782.975.8526.63%

High9.0%6724.725.8525.94%

To get the NPV, I have taken the cash flow after Terminal Value and a applied the DCF rate at medium risk. Because we have applied the DCF rate of 8.4% we can see through the analysis that the NPV rate is $7782.97 . The NPV is positive so this project is feasable. The IRR= 26.63% Design Your Doll : is a long term project and has high risk as we have discussed above, so the DCF will be 9.0% which will be applied to get the NPV. See the table below - Fig 3.2.2 ( for details of the analysis please refer to Appendix 1.2) Similar to above, to get the NPV, I have taken the cash flow after Terminal Value and a applied the DCF rate at medium risk. Fig 3.2.2Risk levelRateNPVPayback PeriodIRR

Low 7.7%12,356.35 8.4921.69%

Medium8.4% 9,893.93 8.4920.66%

High9.0% 8,187.48 8.4919.89%

Because we have applied the DCF rate of 9.0% we can see through the analysis that the NPV rate is $8187.48 . The NPV is positive so this project is feasable. The IRR= 19.88%

We can see based on the analysis that both projects are have are feasible however Design your Doll has the higher Net Present value than the Match My Doll Clothing. However MMD has a higher IRR than DYD and its also has a shorter payback period.

3.3 Operating Analysis : ( taken from 2010 to 2020)We look into the proposal and the finanacial accounting further. We have seen earlier that DYD has a higher initial investment that MMD (fig 2,1), however it has a much higher operating profit than MMD. See Fig 3.3.1 ( for details of the analysis please refer to Appendix 1.1 & 1.2)

Fig 3.3.1

Ultimately, the operating profit shows how effective a company is at managing its costs, so it provides an evaluation of the strength of a company's management. The margin is best evaluated over time and compared to those of competing firms. A higher operating profit margin means that the company is managing its costs well and earning more in revenue per dollar of sales. Investopedia(2015). In this case DYD has the upper hand.

We then look into Free cash flow and we find once again that DYD has a higher FCF than MYD. See Fig 3.3.2 1 ( for details of the analysis please refer to Appendix 1.1 & 1.2) Fig-3.3.2

Free cash flow is most often defined as operating cash flow minus capital expenditures, which, in analytical terms, are considered to be an essential outflow of funds to maintain a company's competitiveness and efficiency

The"free" cash flow, which becomes available to a company to use for expansion, acquisitions, and/or financial stability to weather difficult market conditions. The higher the percentage of free cash flow embedded in a company's operating cash flow, the greater the financial strength of the company. Investopedia.com(2015) . Both companies provide a good investment oppurtunity. 3.4 WCA & NWC Assumptions : ( taken from 2010 to 2020)As metioned above we have used 3% as the minimum cash balance of sales across both projects. From the revenue we have then derived the minimum cash balance for both companies and also calculated the total NWC to establish if both projects are able to sustain themselves in the short term . See Fig 3.4.1 (for details of the analysis please refer to Appendix 1.1 & 1.2)

Fig 3.4.1

The Net working capital is the aggregate amount of all current assets and current liabilities that is being used here to measure the short-term liquidity of both projects, and can also be used to obtain a general impression of the ability of company management to utilize assets in an efficient manner.In this case both DYD and MMD have net working capital figures that are substantially positive, it indicates that the amount of short-term funds available from current assets are more than adequate to pay for current liabilities as they come due for payment. So conclusively both projects are feasible and would be acceptable to Emeline and the committee.

4. Reccommendations & Conclusion As discussed above DYD requires more initial investment as well a higher working capital from the working capital requirements assumptions however its will aslo generate a higher operating profit than MMD. We can also see that DYD generates a higher cash flow compared to MYD and this makes it a better investment at this stage.We then look at this from an NPV view pont which shows the projects can manage and utlise their resources effieciently and have addequate fund to pay their current liabilities and allocating capital.We also need to consider that NPV, utilises an assumed discount rate and that this will remain stable for the life of the project, however interest rates do flutauate in the real world. However in this sceanrio DYD has the higher NPV than MMD and would be more likely to be choosen, howevr MMD is that far behind making them both viable projects.Finally we need to look at the internal rate of return (IIR) is critical as it determines the minimem rate of return that will be deliverded by the project without looking at the DCF and is a key method in determining if the project is acceptable. The company will also be looking for the highest operating rate of returns with the shortest payback period of the cost of capital, for the project to be accepted. From the analysis, Match My Doll Clothing line has the higher IRR than the Design Your Own Doll line and much shorter pay back period.Both Projects are mutually exclusive from each other, are cash flow realted and they compete with each other.So we can conclude that ,both projects are a good investment and the NPV of both proposals are not significantly different. DYD has a higher NPV, however MMD, has a higher IRR, profitability index and a shorter payback period and this would make it more attarctive to the budgeting committee so I would reccommned this to Emeline Harris as the more favourable option .This is supported by all my analysis above.

References :

Investopedia.com (2015),Should I look at a company's operating profit or net profit?,available online at : http://www.investopedia.com/ask/answers/032515/should-i-look-companys-operating-profit-or-net-profit.asp, [accessed on 10th May 2015}

Investopedia.com (2015), Flow/Operating Cash Flow Ratio,available online at : http://www.investopedia.com/university/ratios/cash-flow-indicator/ratio2.asp#ixzz3ZmWUazvc, [accessed on 10th May 2015}