New Heritage Doll Company: Capital Budgeting

Teaching Note
NPV Analysis for Match My Doll Clothing Line Extension
TN Exhibit 1
2010
Revenue

2011
4,500

2012

2013

2014

2015

2016

2017

2018

2019

2020

9,082

9,808

10,593

11,440

12,355

13,344

14,411

6,860

8,409

52.4%

22.6%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

8.0%

575

575

587

598

610

622

635

648

660

674

2,035

3,404

4,291

4,669

5,078

5,521

6,000

6,519

7,079

7,685

0.4522

0.4962

0.5103

0.5141

0.5178

0.5212

0.5245

0.5276

0.5305

0.5332

152

152

152

152

164

178

192

207

224

242

2,762

4,131

5,029

5,419

5,853

6,321

6,827

7,373

7,963

8,600

Selling, General & Administrative

1,250

1,155

1,735

2,102

2,270

2,452

2,648

2,860

3,089

3,336

3,603

Total Operating Expenses

1,250

3,917

5,866

7,132

7,690

8,305

8,969

9,687

10,462

11,299

12,203

583

994

1,277

1,392

1,503

1,623

1,753

1,893

2,045

2,209

Operating Profit/Sales

0.130

0.145

0.152

0.153

0.153

0.153

0.153

0.153

0.153

0.153

SG&A/Sales

0.257

0.253

0.250

0.250

0.250

0.250

0.250

0.250

0.250

0.250

Revenue Growth

NA

Production Costs
Fixed Production Expense (excl depreciation)
Variable Production Costs
Depreciation
Total Production Costs

Operating Profit

(1,250)

Working Capital Assumptions:

Minimum Cash Balance as % of Sales

NA

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

Days Sales Outstanding

NA

59.2x

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

7.7x

8.3x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

12.7x

0.0x

30.8x

30.9x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

31.0x

952

152

152

334

361

389

421

454

491

530

Days Payable Outstanding (based on tot. op. exp.)

Capital Expenditures

1,470

Growth in capex
Net Working Capital Accounts
Cash
Accounts Receivable
Inventory
Accounts Payable
Net Working Capital
DNWC

2010

800
800

-35.2% -84.0%
0.2116 0.022187
2011
2012
135
206
729
1112
360
500
317
484
907
1334
107
427

0.0% 119.3%
8.0%
8.0%
8.0%
8.0%
8.0%
8.0%
0.0181 0.036756 0.036756 0.036752 0.036757 0.036754 0.036759 0.036756
2013
2014
2015
2016
2017
2018
2019
2020
252
272
294
318
343
371
400
432
1363
1472
1590
1717
1855
2003
2163
2336
396
427
461
498
538
581
627
677
593
640
692
747
807
871
941
1016
1418
1531
1653
1786
1929
2083
2250
2429
84
113
122
132
143
154
167
180

NWC/Sales

0.202

0.195

0.169

0.169

0.169

0.169

0.169

0.169

0.169

0.169

2011
350
152
(107)
(952)
(557)

2012
596
152
(427)
(152)
169

2013
766
152
(84)
(152)
682

2014
835
152
(113)
(334)
541

2015
902
164
(122)
(361)
583

2016
974
178
(132)
(389)
630

2017
1,052
192
(143)
(421)
680

2018
1,136
207
(154)
(454)
735

2019
1,227
224
(167)
(491)
793

2020
1,325
242
(180)
(530)
857

NPV Analysis
Free Cash Flows
EBIT(1-t)
plus depreciation
less DNWC
less capital expenditures
Free Cash Flow
Terminal value

2010
(750)
0
(800)
(1,470)
(3,020)
3.00%

16,345

Initial Outlays
Net working capital
Net property, plant & equipment
Discount factor
Present value
Net Present Value
NPV without Terminal Value

(800)
(1470)

8.40%
$
$

1.0000
(3,020)
7,150
(146)

0.9225
(514)

0.8510
144

0.7851
536

0.7242
392

0.6681
390

0.6163
388

0.5686
387

0.5245
385

0.4839
384

0.4464
7679

2010
(3,020)
7.6%

2011
(557)

2012
169

2013
682

2014
541

2015
583

2016
630

2017
680

2018
735

2019
793

2020
17,202

2010
(3,020)
(3,020)

2011
(557)
(3,577)

2012
169
(3,408)

2013
682
(2,726)

2014
541
(2,185)

2015
583
(1,602)

2016
630
(972)

2017
680
(291)

2018
2019
735
793
443
7.40 years

2020
17,202

IRR Analysis
Cash Flows
IRR

Payback Analysis
Cash flows
Cumulative cash flow
Payback period
5-year Cumulative EBITDA

$ 6,522

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

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

Revenue Growth

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

310

310

826

875

928

983

Capital Expenditures

4,610

Growth in capex
Net Working Capital Accounts
Cash

2010

2,192

1,043

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

2328

3278

3475

3683

3904

4139

4387

4650
1512

Accounts Receivable

973

Inventory

346

786

1065

1130

1197

1269

1345

1426

Accounts Payable

474

1135

1598

1694

1796

1904

2018

2139

Net Working Capital

DNWC
NWC/Sales

1,105

0%

1,000
1,000

3,352

3,553

3,766

3,992

4,232

4,486

2267

1,024

2,410

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

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 DNWC

(1,000)

less capital expenditures

(4,610)

Free Cash Flow

(5,331)

Terminal value

3.00%

Discount factor

9.00%

0
(1,261)

(24)

(1,386)

(942)

(202)

(213)

(226)

(240)

(254)

(269)

(310)

(310)

(2,192)

(826)

(875)

(928)

(983)

(1,043)

(1,105)

306

(309)

(1,190)

1,359

1,441

1,076

1,141

1,210

1,283

24,737

Present value

1.000

0.9174

0.8417

(5,331)

(1,157)

2010
(5,331)
-0.5%

2010
(5,331)
(5,331)

Net Present Value

7,058

NPV without Terminal Value

(3,391)

0.7722

0.7084

0.6499

0.5963

0.5470

0.5019

0.4604

258

(239)

2011
(1,261)

2012
306

2011
(1,261)
(6,592)

2012
306
(6,286)

0.4224

(843)

700

681

662

644

626

11,058

2013
(309)

2014
(1,190)

2015
1,076

2016
1,141

2017
1,210

2018
1,283

2019
1,359

2020
26,178

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)

IRR Analysis
Cash Flows
IRR

Payback Analysis
Cash flows
Cumulative cash flow
Payback period
5-year Cumulative EBITDA

Profitability Index
NPV/Initial Investment

1.32

8,778

2020
26,178
24,464
>10 years

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 $