Essay on Capital Budgeting Simulation Asif Junaid

Submitted By asif13
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Pages: 6

Capital Budgeting
New Heritage Doll Company
Asif Junaid – Corporate Finance class

Project Evaluation Process and Criteria
Followed the following steps and procedures to evaluate each project and select assortment of projects for each year:
1) In line with Corporate Strategy of Firm
Build and grow customer identification with doll characters in various forms of product through all stages of a child’s life, from toddlerhood through teenage years
Ensure activities across all divisions are coordinated to successfully leverage its doll character brands across all divisions simultaneously
In line with Corporate Strategy of Each Division
Production Division
Build on its core expertise in doll and accessory design and development in order to expand and deepen its offerings to two key demographic customer segments – toddlers/young girls and tweens B.
Retail Division
Expand geographically across the U.S in 3 Channels of website, mail-order and retail stores
Invest in the U.S using “retail as entertainment” concept through store expansion, and in the
Expand in strategic markets Asia and Europe to grow international revenue
Licensing Division
Grow revenue derived from New Heritage’s core branded assets without damaging these brands 3) Capital Constraints
Ensure that most of the Annual 8m budget is used on as wide a range of projects as possible

ApplyNPV/IRR each division’s respective risk free rate in determiningReplacement/Expansion
NPV of each project

Payback Period & Profitability Index
4) Examined financial ratios and characteristics of each project including:






Project Interdependence

Selections and Results by Year


1) Retail Store Expansion in Northeast
-) Was in line with company strategy to expand its retail presence within the U.S, specifically in the
-) Decided to open 5 stores simultaneously to maximize efficiency of operations in the North East
-) Applied a high risk rate despite retail executives evaluating the project as medium risk
2) New Doll Film/DVD
-) Safer project than previous films due to direct release to DVD only format
-) Co-marketing strategy would lead to high returns and low expenses in this project
-) Would further enhance company brands amongst tweens 1) Tween Book Series
-) Helped provide tweens for a more mature version of new heritage doll characters through teen years
-) Was a low risk investment with 60% of net revenues allocated to New Heritage and also the termination option in the event of non-performance within 2 years
-) Extremely high IRR of 43.54% and NPV of 6.12
2) Toddler Doll Accessory Line
-) Low risk product for an existing toddler line
3) Expansion of Mail-Order Catalog Business to
-) Helps the company expand its presence in the Asia
Pacific regions and in line with corporate strategy
-) Relatively low risk project
4) ‘Match my Doll’ Clothing Line
-) Was a highly creative initiative in a category in which
New Heritage has plenty of experience of
-) Despite high risk, project represented a bold initiative by New Heritage

Additional Financial Considerations
2 chosen projects had the highest IRR from the available of projects, the highest NPV, shortest payback period, highest PI and highest 5 year EBITDA.

All the initiatives proved to be successful with the expansion into Asia proving more expensive than
anticipated but also generating higher revenues. 2011
Retail operations were profitable instantly while film had a 19.6% growth in sales and a 54.8% growth in net was successful. 2010 resulted in a lower net income income. The retail store operations and new doll DVD led margin than 2009 (5.0% vs 5.3%) and a small increase to signifcant profits in 2011.

in revenue due to investment in these projects

Selections and Results by Year


1) ‘Dolls of the World’ Initiative
-) Helped tap into additional