CASE ANALYSIS:

CAPITAL BUDGETING

SUBMITTED BY
NIKON MADHU
KEVIN SOUTHIL
SNAHA GIJI SAJI
TANUJA VARGHESE
1) Set forth and compare the business cases for each of the two projections under
consideration by Emily Harris. Which do you regard as more compelling?
 The two projects that was under consideration by Emily Harris was Match My
Doll Clothing and Design Your Own Doll.

Matching doll project

 It involves the expansion of existing successful clothing line.

 It consists of few sets of matching doll and child clothing for warm weather.

 In this project the investment, pricing structure, product cost are based on
historical data’s.

 Company already have experience in this project.

Design Your Own Doll

 Involves creation of customized dolls to increase customer satisfaction.

 This requires web based doll design software.

 This has the problem of time constraint, product cost is also expected to be high.

 Investment in this project is also expected to be high and it also need high level
of perfection in execution of the project.

 This would create unique experience to the customers.

Prefer Design Your Own Doll

 “Design Your Own Doll” is more compelling.

 It goes along with the trend and technological aspect.

 Develop girls imagination and develop positive self- image.

 Helps young children to express themselves.

 This helps children to move along with the day to day fashion and style.
2) Use the operating projections for each project to compute a net present value
(NPV) for each. Which project created more value?

 Match My Doll Clothing is of medium risk and Design Your Own Doll has high
risk, the discount rate of former is 8.4% and latter is 9%.

 NPV of Match My Doll Clothing is 7,190.15.

 NPV of Design Your Own Doll is 7116.83.

 Here both the project have positive NPV value but greater NPV is for Match My
Doll Clothing so it creates more value for the company.
3) Compute the internal rate of return (IRR) and payback period for each project. How should these metrics affect
Harris's deliberations? How do they compare to NPV as tools for evaluating projects? When and how would you
use each?

IRR
 IRR for MMDC is 24%.
 IRR for DYOD is 18%.
 Higher the IRR higher the cash inflow a company gets from the project. So, with IRR we prefer
MMDC over DYOD.

Payback period
 Payback period of MMDC is 7.4 years.
 Payback period of DYOD is 9.24 years.
 As MMDC has lower payback period, we prefer MMDC over DYOD.
Q4) What additional information does Harris need to complete her analysis and
compare the two projects? What specific questions should she ask each of the
project sponsors?
On comparing the two projects, the net present value as well as the initial rate of return are quite similar to each other. This
results in dissimilar feature about each project needing to be examined in such that they are able to identify which project is
right for the company. One feature is that Harris examines the sustainability of each project. If one project shows large
profits for some years and the other projects takes some time to generate any return, it is preferable to go with the project
that makes the quick buck. However, it is very important to understand about each projects long term sustainability. The
better one is the short run project that could be less profitable in the long run than the project that takes time to develop.
The second feature Harris needs to think about is the company’s values. New Heritage is a company that has set a goal to
foster positive self-images in girls, expand young girls imagination and create a generational bond between mothers,
daughters and grandmothers. Harris needs to examine each projects direction and decide which project suits New Heritage’s
company values. If one project was projecting numbers that were vastly superior to the other project then the financially
stronger project would be the obvious choice. Fortunately or unfortunately depending on the point of view both projects
exhibit similarly strong numbers. This means that the project that has a closer stance to the company’s core value should be
given a chance. Finally Harris needs to examine the economic trends. As of 2008 the doll market consisted of $3.1 billion
and are projected to increase by 3% per year till 2013. Unfortunately because of high competition the doll industry rarely
saw lasting franchise value. Barbie was one of the few buy Heritage has been able to carve out some franchise value in
recent years. This gives the company sustainability within the doll industry. Additionally the Design your own project would
be targeting the core base of the company’s customers. With the match my doll clothing line expansion clothing line
competition must be considered and thus is also an industry with strong competition. Furthermore, fashion trends needs to
be factored inn and determined seeing the fashion trends can do change rapidly. In order for this project to succeed research
in fashion trends needs to be precise
5) If Harris is forced to recommend one project over the other, which should she
recommend? Why?

 We recommend that Harris chooses DYOD project because it is more

sustainable, focuses on customer satisfaction and develops children’s
imagination.

 When looking at the financial analysis, NPV of DYOD is less than that of
MMDC, but they have more over similar NPV range.

 This gives advantage to MMDC for short run period.

 DYOD will have more equipment cost or startup cost at the beginning but it has
the ability to overcome it afterwards.
 DYOD has more initial cost than MMDC, but gradually the cost
decreases for DYOD and increases for MMDC
 DYOD profitability will increase in long run.

 DYOD improves girls self- image and also develops imagination of

children, it also showcase value to customers.
 So we recommend Design Your Own Doll over Match My Doll
Clothing line to Harris.
THANK YOU