FINANCE-500

CASE STUDY

New Heritage Doll Company Overview

Ingrid Beckwith founded New Heritage Doll Company in 1985. The company was known
for producing dolls with a unique story line and a wholesome theme to help kids develop an
imagination, as well as learn more about the history of the American culture. The theme was
hugely successful and by 2009 New Heritage doll company had about 450 Employees and
generated 245 millions in revenue and 27 million in operating profits.

They had 3 operating divisions namely production, retailing and licensing. The production
division manufactured the dolls and dolls accessories. Majority of the manufacturing was
outsourced to Asia. The retailing division consisted of an online website, a mail-order paper
catalog and a network of retail stores. The profits generated by the 3 divisions is as summarized
below:
Production Retailing Licensing
Operating Revenue 125 190 24.5
Operating Profits 7.5 4.8 14.5
(In Millions)
In September 2010, Emily Harris was considering between a few project proposals for the
upcoming company’s budgeting session. There were two main projects that stood out based on
their potential to strengthen the company’s innovative project lines and drive future growth.
However there were some concerns about the budgeting constrains they would put on the
company and could even result in both the proposal being turned down. She had to pick one of
these projects and come up with a compelling case to make the proposal stick over other
departments.

Investment opportunities:
The following are the two-investment opportunity available for the New Heritage Doll
Company:
Match my doll clothing line expansion:
Match my clothing line consisted of a couple of clothing and accessories for the summer. It was
hugely popular because of the celebrity kids who were seen wearing them. Marcy McAdams, the
brand manger of the line hoped to cash in on its success by expanding the clothing line to include
clothes and accessories of all seasons.
Pros:
 The method was already tested and hugely popular. The new line would bring in at least
the same profit margin if not more.
 There was a familiarity with the working of the project and the company had experience
with the implementation of a part of the project.
 Would help reduce the seasonality of the New Heritage’s earnings.
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CASE STUDY
Cons:
 Due to the fickle nature of young kid’s fashion sense, the new line had to be launched
quickly and there was no time to waste.
 It was also a gamble, as no one knew how long this particular project would fetch gains
for New Heritage.

The initial expenses were estimated as follows:

Initial Expenditures Year - 2010

Upfront R&D 625
Upfront Marketing 625
Investment in working capital 800
Property, Plant and Equipment 1470
Tax Expenditure = 0.4* 3250 1300
Total 4820
(In Thousands)

Other details:
The R&D and marketing expenditure would be deductible for tax purposes at 40% corporate rate.
The Useful life of the Property, Plant and Equipment was about 10 years.
Depreciation charges were based on the modified accelerated cost recovery system allowed by the
IRS.
The risk level of the project was moderate if not the same as that of the risk level involved in the
current clothing line.
Operating Capital Operating Tax
Year Total Present value
Index Expenses Expenditure Profit Expenditure
2010 1250 1470 -1250
1 2011 1155 952 583 233.2 2340.2 2148.943985
2 2012 5866 152 994 397.6 6415.6 5409.803857
3 2013 7132 152 1277 510.8 7794.8 6035.612332
4 2014 7690 334 1392 556.8 8580.8 6101.214035
5 2015 8305 361 1503 601.2 9267.2 6050.748991
6 2016 8969 389 1623 649.2 10007.2 5999.917806
7 2017 1753 421 1753 701.2 2875.2 1582.970792
8 2018 1893 454 1893 757.2 3104.2 1569.374734
9 2019 2045 491 2045 818 3354 1557.084353
10 2020 2209 530 2209 883.6 3622.6 1544.335253

Total Paid 57361.8

Present Value 38000.00614
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CASE STUDY
NPV= Present Value - initial investment
= 38000.00614 – (4820)
= 33180.01

Design your own doll:

This initiative involved in personalizing the dolls according to the customer’s tastes and
customizing them to the personal data of future owners. This would attract a lot of current and
new owners to buy and create a new doll like them.

Elizabeth Holtz, manager for heirloom dolls was extremely excited about the project. The
customer’s relationship with the doll would increase with personalization. Market research also
indicated that there was a lot of enthusiasm for this project among a nice group of customers

The initial expenditures of the project was estimated as follows:

Initial Expenditures Year - 2010 Year 2011

Upfront R&D 841
Upfront Marketing 360
Investment in working capital 1000
Property, Plant and Equipment 4610
Application development costs 435
Tax Expenditure = 5811*0.4=
2324
Total 1435
(In Thousands)

Pros:
 Would help create more sales as this was a novel concept and the sales could be done to
new and existing customers.
 It had a moderate fixed cost ratio.
 It served well for the company’s motto of creating a unique experience for the customers.

Cons:
 IT was a risky proposition. The company would be unknown territory for the company
and a lot of investment would be required.
 It would require perfection in executing the project otherwise it would end up in
damaging New Heritage’s reputation and its relationship with some of the best customers
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CASE STUDY
Cash flow predicted for the operation

Operating Capital Operating Tax

Year
Index Expenses Expenditure Profit Expenditure Total Present Value
2010 1201 4610 -1201
1 2011 0 0 0 0
2 2012 550 310 550 220 1080 910.6846072
3 2013 12566 310 1794 717.6 13593.6 10525.69659
4 2014 17498 2192 2724 1089.6 20779.6 14774.9379
5 2015 18656 826 2779 1111.6 20593.6 13445.99279
6 2016 19775 875 2946 1178.4 21828.4 13087.43763
7 2017 20962 928 3123 1249.2 23139.2 12739.52342
8 2018 22219 983 3310 1324 24526 12399.48609
9 2019 23553 1043 3509 1403.6 25999.6 12070.23564
10 2020 24966 1105 3719 1487.6 27558.6 11748.38997
Total Paid 179098.6
Present Value 101702.3846

Net present value is calculated as:

NPV= Present Value - initial investment

= 101702.3846 – (8135.4+ 1435)
= 92130.9846

The net present value of the Design your own doll is much higher compared to the net present
value of Make my doll clothing line. The return on investment is considerably higher for this
particular outcome. Also by reviewing the pros and cons of these projects, we can conclude that
in a longer run, the profits received by the design your own doll line is much higher compared to
make my doll clothing line.

Appendix:

Book1.xlsx