New Heritage Doll Company: Capital Budgeting
Teaching Note
TN Exhibit 1
NPV Analysis for Match My Doll Clothing Line Extension
2010
Revenue
Revenue Growth
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
4500
6860
8408.8
9081.5
9808
10592.66
11440.07
12355.2
13343.7
14411.2
NA
0.52
0.23
0.08
0.08
0.08
0.08
0.08
0.08
0.08
Production Costs
Fixed Production Expense (excl depreciation)
Variable Production Costs
Depreciation
Total Production Costs
575.00
575.00
586.50
598.20
610.10
622.30
634.80
647.50
660.40
673.70
2,035.00
3,403.80
4,290.60
4,669.00
5,078.40
5,521.30
6,000.30
6,518.50
7,078.80
7,684.70
0.45
0.50
0.51
0.51
0.52
0.52
0.52
0.53
0.53
0.53
152.20
152.20
152.20
152.20
164.40
177.50
191.70
207.10
223.60
241.50
8,599.90
2,762.20
4,131.00
5,029.30
5,419.40
5,852.90
6,321.10
6,826.80
7,373.10
7,962.80
Selling, General & Administrative
1,250
1,155.00
1,735.00
2,102.20
2,270.30
2,452.00
2,648.10
2,860.00
3,088.80
3,335.90
3,602.80
Total Operating Expenses
1,250
3,917.20
5,866.00
7,131.50
7,689.70
8,304.90
8,969.20
9,686.80
10,461.90
11,298.70
12,202.70
(1,250)
Operating Profit
582.80
994.00
1,277.30
1,391.80
1,503.10
1,623.46
1,753.27
1,893.30
2,045.00
2,208.50
Operating Profit/Sales
0.13
0.14
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
SG&A/Sales
0.26
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
Working Capital Assumptions:
Minimum Cash Balance as % of Sales
NA
0.03
0.03
0.03
0.03
0.03
0.03
0.03
0.03
0.03
0.03
Days Sales Outstanding
NA
59.17
59.17
59.17
59.17
59.17
59.17
59.17
59.17
59.17
59.17
Inventory Turnover (prod. cost/ending inv.)
Days Payable Outstanding (based on tot. op. exp.)
Capital Expenditures
NA
7.68
8.26
12.70
12.70
12.70
12.70
12.70
12.70
12.70
12.70
0.0x
30.76
30.90
31.01
31.01
31.01
31.01
31.01
31.01
31.01
31.01
1,470
952.20
152.20
152.20
333.80
360.50
389.30
420.50
454.10
490.50
529.70
(0.35)
0.21
2,011.00
135.00
729.49
359.66
317.29
906.86
106.86
0.20
(0.84)
0.02
2,012.00
205.80
1,112.07
500.12
483.72
1,334.28
427.41
0.19
0.00
0.02
2,013.00
252.26
1,363.15
396.01
592.95
1,418.47
84.19
0.17
1.19
0.04
2,014.00
272.45
1,472.20
426.72
640.38
1,530.99
112.52
0.17
0.08
0.04
2,015.00
294.24
1,589.97
460.86
691.61
1,653.46
122.47
0.17
0.08
0.04
2,016.00
317.78
1,717.17
497.72
746.93
1,785.74
132.28
0.17
0.08
0.04
2,017.00
343.20
1,854.55
537.54
806.69
1,928.60
142.85
0.17
0.08
0.04
2,018.00
370.66
2,002.90
580.56
871.24
2,082.87
154.28
0.17
0.08
0.04
2,019.00
400.31
2,163.14
626.99
940.93
2,249.52
166.64
0.17
0.08
0.04
2,020.00
432.34
2,336.19
677.16
1,016.21
2,429.48
179.96
0.17
2,011.00
349.68
152
(106.86)
(952)
(557.18)
2,012.00
596.40
152
(427.41)
(152)
168.99
2,013.00
766.38
152
(84.19)
(152)
682.19
2,014.00
835.08
152
(112.52)
(334)
540.96
2,015.00
901.86
164
(122.47)
(361)
583.29
2,016.00
974.08
178
(132.28)
(389)
629.99
2,017.00
1,051.96
192
(142.85)
(421)
680.31
2,018.00
1,135.98
207
(154.28)
(454)
734.70
2,019.00
1,227.00
224
(166.64)
(491)
793.46
2,020.00
1,325.10
242
(179.96)
(530)
856.94
Growth in capex
Net Working Capital Accounts
Cash
Accounts Receivable
Inventory
Accounts Payable
Net Working Capital
NWC
NWC/Sales
2010
800
800
NPV Analysis
Free Cash Flows
EBIT(1-t)
plus depreciation
less NWC
less capital expenditures
Free Cash Flow
Terminal value
Initial Outlays
2010
(750)
0
(800.00)
(1,470)
(3,020)
3.00%
16,345.33
Net working capital
Net property, plant & equipment
Discount factor
Present value
Net Present Value
NPV without Terminal Value
8.40%
(800)
(1470)
1.0000
(3,020)
$7,150
$(146)
0.92
(514.01)
0.85
143.81
0.79
535.57
0.72
391.78
0.67
389.71
0.62
388.29
0.57
386.81
0.52
385.37
0.48
383.94
0.45
7,678.79
2010
(3,020)
7.6%
2,011.00
(557.18)
2,012.00
168.99
2,013.00
682.19
2,014.00
540.96
2,015.00
583.29
2,016.00
629.99
2,017.00
680.31
2,018.00
734.70
2,019.00
793.46
2,020.00
856.94
2010
(3,020)
(3,020)
2,011.00
(557.18)
(3,577.18)
2,012.00
168.99
(3,408.20)
2,013.00
682.19
(2,726.01)
2,014.00
540.96
(2,185.05)
2,015.00
583.29
(1,601.76)
2,016.00
629.99
(971.77)
2,017.00
680.31
(291.46)
2,018.00
734.70
443.24
7.40 years
2,019.00
793.46
2,020.00
856.94
IRR Analysis
Cash Flows
IRR
Payback Analysis
Cash flows
Cumulative cash flow
Payback period
5-year Cumulative EBITDA
6,522.20
Profitability Index
NPV/Initial Investment
1.35
New Heritage Doll Company: Capital Budgeting
Teaching Note
TN Exhibit 2 NPV Analyss for Design Your Own Doll
2010
Revenue
2011
2012
Revenue Growth
2013
2014
2015
2016
2017
2018
2019
2020
6,000
14,360
20,222
21,435
22,721
24,084
25,529
27,061
28,685
NA
139.3%
40.8%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
1,650
1,683
1,717
1,751
1,786
1,822
1,858
1,895
1,933
2,250
7,651
11,427
12,182
12,983
13,833
14,736
15,694
16,712
Production Costs
Fixed Production Expense (excl depreciation)
Additional development costs (IT personnel)
435
Variable Production Costs
Depreciation
310
310
310
436
462
490
520
551
584
435
4,210
9,644
13,454
14,369
15,231
16,145
17,113
18,140
19,229
Selling, General & Administrative
1,201
1,240
2,922
4,044
4,287
4,544
4,817
5,106
5,412
5,737
Total Operating Expenses
1,201
435
5,450
12,566
17,498
18,656
19,775
20,962
22,219
23,553
24,966
(1,201)
(435)
550
1,794
2,724
2,779
2,946
3,123
3,310
3,508
3,719
Operating Profit/Sales
0.092
0.125
0.135
0.130
0.130
0.130
0.130
0.130
0.130
SG&A/Sales
0.207
0.203
0.200
0.200
0.200
0.200
0.200
0.200
0.200
Total Production Costs
Operating Profit
Working Capital Assumptions:
Minimum Cash Balance as % of Sales
NA
NA
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
Days Sales Outstanding
NA
NA
59.2x
59.2x
59.2x
59.2x
59.2x
59.2x
59.2x
59.2x
59.2x
Inventory Turnover (prod. cost/ending inv.)
NA
NA
12.2x
12.3x
12.6x
12.7x
12.7x
12.7x
12.7x
12.7x
12.7x
Days Payable Outstanding (based on tot. op. exp.)
NA
NA
33.7x
33.8x
33.9x
33.9x
33.9x
33.9x
33.9x
33.9x
33.9x
4,610
310
310
2,192
826
875
928
983
1,043
1,105
0%
608%
-62%
6%
6%
6%
6%
6%
0.052
0.022
0.108
0.039
0.039
0.039
0.039
0.039
0.039
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
180
431
607
643
682
723
766
812
861
Accounts Receivable
973
2328
3278
3475
3683
3904
4139
4387
4650
Inventory
346
786
1065
1130
1197
1269
1345
1426
1512
Accounts Payable
474
1135
1598
1694
1796
1904
2018
2139
2267
1,024
2,410
3,352
3,553
3,766
3,992
4,232
4,486
4,755
24
1,386
942
202
213
226
240
254
269
0.171
0.168
0.166
0.166
0.166
0.166
0.166
0.166
0.166
Capital Expenditures
Growth in capex
Net Working Capital Accounts
Cash
2010
Net Working Capital
1,000
NWC
1,000
NWC/Sales
NPV Analysis
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
(721)
(261)
330
1,077
1,634
1,667
1,767
1,874
1,986
2,105
2,231
310
310
310
436
462
490
520
551
584
Free Cash Flows
EBIT(1-t)
plus depreciation
less NWC
(1,000)
(24)
(1,386)
(942)
(202)
(213)
(226)
(240)
(254)
(269)
less capital expenditures
(4,610)
(310)
(310)
(2,192)
(826)
(875)
(928)
(983)
(1,043)
(1,105)
Free Cash Flow
(5,331)
(1,261)
306
(309)
(1,190)
1,076
1,141
1,210
1,283
1,359
1,441
Terminal value
3.00%
Discount factor
9.00%
24,737
1.000
0.9174
0.8417
0.7722
0.7084
0.6499
0.5963
0.5470
0.5019
0.4604
0.4224
Present value
(5,331)
(1,157)
258
(239)
(843)
700
681
662
644
626
11,058
Net Present Value
$7,058
2010
(5,331)
-0.5%
2011
(1,261)
2012
306
2013
(309)
2014
(1,190)
2015
1,076
2016
1,141
2017
1,210
2018
1,283
2019
1,359
2020
26,178
2010
(5,331)
(5,331)
2011
(1,261)
(6,592)
2012
306
(6,286)
2013
(309)
(6,595)
2014
(1,190)
(7,784)
2015
1,076
(6,708)
2016
1,141
(5,566)
2017
1,210
(4,357)
2018
1,283
(3,074)
2019
1,359
(1,715)
2020
26,178
24,464
>10 years
NPV without Terminal Value
$(3,391)
IRR Analysis
Cash Flows
IRR
Payback Analysis
Cash flows
Cumulative cash flow
Payback period
5-year Cumulative EBITDA
$8,778
Profitability Index
NPV/Initial Investment
1.32
New Heritage Doll Company: Capital Budgeting
Teaching Note
TN Exhibit 3
NPV Sensitivity Analyses
NPV of Match My Doll Clothing Line Extension
Discount rate
7.70%
8.40%
9.00%
0%
$5,289
$4,408
$3,766
TV growth rate
1%
2%
$6,141
$7,292
$5,075
$5,950
$4,314
$5,019
3%
$8,932
$7,150
$5,958
NPV if
TV=BV of
NWC + PPE
$3,011
$2,687
$2,425
3%
$11,957
$9,016
$7,058
NPV if
TV=BV of
NWC + PPE
$3,567
$2,980
$2,507
NPV of Design Your Own Doll
Discount rate
7.70%
8.40%
9.00%
0%
$5,830
$4,404
$3,372
TV growth rate
1%
2%
$7,263
$9,198
$5,526
$6,998
$4,294
$5,479
