New Heritage Doll Company - Finance and Risk Analysis - Essay Example

Topic: Introduction New Heritage Doll Company main business specialization is in toys and game industries. It’s total revenue in U.S. game and toy industry was $42 billion in 2008 and this was projected to increase to $52.5billion by 2014, this implied an average 4.6% increase annually. Capital budgeting to facilitate the growth seems hectic since production division was weighing each project proposals. The two proposals to strengthen the division’s innovative product lines also drive future growth were major consideration. However; due to financial restraints financial committee may not approve both projects. This meant to give each proposal a chance to convince the capital budgeting committee for approval. The initial project concerned expanding an existing Match My Doll Clothing line, which had a demonstrated record of accomplishment in the earlier period. The subsequent project initiated a fresh initiative referred to as New Doll Film/DVD, which applied an online software permitting users to tailor a doll’s characteristic to the customers’ specifications. This required calculation of the Net Present Value (NPV) of both ventures to discover which project is more lucrative. Simulation Process Finance Simulation process involve accessing simulation platform. Click prepare tab to access simulation summary, which gives New Heritage Doll Company assignment summary and how to play tab for procedure. Simulation process involves comparison of the following parameters between chosen projects. Theses include NPV, payback period, IRR, profitability index and project milestones and risks.   Compare revenue by division, operation profit by division and total assets by division. Compare I/S and B/S in regards to Company consolidated, production consolidated, retail consolidated and licensing consolidated. Further, compare cashflow statement, financial analysis, project details and financial history. Balance sheet Finally decided on the projects to propose as Match My Doll Clothing and New Doll Film/DVD According to projects details they compare as follows. Project comparison The following discussion leads to project chosen for each year and reasons. The market is always divided into two major segments: video games and traditional toys and games. The second segment was additionally divided into child/preschool toys, sports toys and dolls outdoor, and other toys and games involve arts and crafts, action figures, plush toys, vehicles, and youth electronics gargets. The America market for games and toys was dominated by large international enterprises that benefit from economies of balance in production, design, and distribution. Revenues were exceedingly seasonal; the largest selling period in the United States during winter holiday period (Project Analysis Services, 2011, Pg 1-2). The observable fact of age compression; the propensity of younger kids to obtain dolls that had conventionally been intended for older ones, reduced growth in the baby doll segment hence hindering profitability. Competition is always a risk factor and a constraint in any business. New Heritage Doll Company is not exempted; other doll producers are vigorous and they targeted similar demographics and marketing media is similar. Lasting branded name for a doll is rare to come up with. Financial committee also reluctant to finance projects due to licensing proposals and conflict of interest, which posses a risk in regard to profiting (Studymode, 2009, Pg 1-2). Net Present Value is considered through measuring of the following parameters. Operating projections applied to build up cash flow forecasts and then to work out   Net Present Value, payback period, Internal Rates of Return and other investment metrics. The cash flows debarred all financing charges and non-cash objects such as depreciation, and were computed on an after-corporate-tax base. The New Heritage’s company tax rate stated as 40%. Discount rate stated to have been set at 8.4% - for mild-risk scheme. NPV calculations incorporated a terminal value calculated as the value of an infinity growing at stable rate. I computed Free Cash Flows (FCF) to discover the actual sum of cash from operations, which the corporation could use in developing its new projects. According to the computation the MMDC’s terminal worth in 2014 is 6,575,200 and NDF/DVD’s is 10,944,400. Despite fewer potential for exponential expansion, Match My Doll Clothing line is a much less risky, yet more cost-effective, venture and does necessitate the company to use as much upfront. By developing anticipate for the subsequent ten years, it is discovered that the MMDC growth would encompass an upper NPV and IRR than the New Doll Film/DVD project. In addition, given that MMDC needs a less financial input for its initial investment compared to NDF/DVD, it capitulate a higher profitability manifestation, while it has a minor payback period. MMDC is less unsafe since it has fewer chances to incur a loss and will pay back the original investment sooner. If the discount ratio is raised on the plan, the NPV of the New Doll Film/DVD line reduces at a much quicker rate compared to that of MMDC. Furthermore, if the projected returns are less than the projected, New Doll Film/DVD will also experience losses at a higher rate than MMDC. Profitability: In analyzing the estimate for Match My Doll Clothing and New Doll Film/DVD, it’s evident that MMDC is a more profitable venture for New Heritage. The projections reflect that both projects encompass an almost similar NPV, with MMDC’s figures given at $5,164,000 and New Doll Film/DVD at $5,120,000. However; even if the NPV for both projects are alike, MMDC possess a 24% IRR, this is a 6% higher compared to that of NDF/DVD. These findings are based on the initial capital cost for each project. Match My Doll Clothing’s initial capital cost was estimated as 1.47M, which is 68% lower than the original investment of $4.6M for the NDF/DVD. Given the internal profits rate is greater for the MMDC it will be more lucrative at long last and if they preferred to further expand. Another issue that determined the productivity of the two projects was the productivity index. By computing the profitability index for each projects we resolute that MMDC is more profitable. For each dollar ventured in the MMDC expansion, the corporation would receive $3.37 in profit. The NDF/DVD venture gives a profitability index of $1.75. The vast dissimilarity in the productivity index in addition correlates with the payback phase of the investments. MMDC’s higher revenue investment ratio permits it to return its investment quicker. Besides having a higher IRR, NPV and PI, the NDF/DVD development is projected to necessitate less capital costs over a ten year span, Risk Analysis: Match My Doll Clothing is evidently a less risky venture. The first constituent to look at is the discount ratio, which is .06 less compared to that of NDF/DVD. Furthermore, a lower discount rate necessitates MMDC’s NPV decrease at a slightly lower pace comparative to an increase in the price cut rate than NDF/DVD. For instance, if you raise both interest rates by an eighth of their initial rate, the NPV for NDF/DVD falls from $7.M to $4.36M, which is 40%, whereas the NPV for MMDC falls from 7,16M to 5,2M, constitute a 27%. Although the project’s NPV rises at comparable rate relative to a decline in the discount rate, that is to say; the discount rate declines NDF/DVD has a quicker increase in NPV compared to MMDC, if the New Heritage requires reducing their chances of a loss, they ought to choose MMDC (Luehrman and Abelli, 2010). The next constituent to scrutinize is how a decrease in projected proceeds affects the NPV. If the proceeds decrease at a comparative rate for both NDF/DVD and MMDC, NDF/DVD suffers a bigger decrease in its NPV in comparison to MMDC. Commencing in year 2016, at which there is no longer disparity in the percentage raise of revenue, if the profits of NDF/DVD declines by 1/8 of the anticipated 6% the NPV decreases to $3,4M or approximately 51%. Nevertheless, if the returns from the MMDC shrink by the same quantity over the equal amount of time the NPV decrease to $4,608 or approximately 36%. MMDC also sustains a shorter payback rate. By halfway through 2018, MMDC will recuperate all of its original investment, where as NDF/DVD case will be by 2020. In addition, after second year MMDC needs very little in capital costs, where as NDF/DVD will need significant capital costs in year four and reasonable capital expenditures in the subsequent years. Given the lower payback rate, MMDC is less risky to loss owed to changes in the international environment. If there was a depression in year 2018, New Heritage could lapse MMDC and still cope, however a decline in the same year would render the NDF/DVD venture at a loss of about $3.5M. Given the general lower risk, comparative to comprisable NPVs, MMDC is obviously the better option. Marketing MMDC is a more rational choice than NDF/DVD from a quantitative stance for several reasons. MMDC is a mean to usher new existence into old and existing dolls, relatively than cannibalizing the marketplace as NDF/DVD would portray. By opting MMDC, New Heritage is capable to continue generating proceeds from existing customers as it still stay true to the principles upon which this corporation was instituted. NDF/DVD would weaken the familial worth of dolls that have been scaled down, and would significantly reduce the function of New Heritage playtime as a result. NDF/DVD targets a slighter market compared to MMDC, making New Heritage to fail to notice a broader returns stream (Luehrman, 2011). NDF/DVD is restricted to girls who are younger to still want a fresh doll especially below 13years old but who are mature enough to be assumed ready to exploit the internet by their guardians. In contrast, MMDC is obtainable to all girls and ladies of a more varied range of ages, and does not need the technical expertise to use internet or online proprietary design software. Lastly, NDF/DVD can be utilized almost entirely by the party who will be getting the doll. In other words, it is tricky to New Doll Film/DVD if that toy is anticipated to be a gift for another person, such as a niece or daughter. The observable fact of age compression; the propensity of younger kids to obtain dolls that had conventionally been intended for older ones, reduced growth in the baby doll segment hence hindering profitability. Competition is always a risk factor and a constraint in any business. New Heritage Doll Company is not exempted; other doll producers are vigorous and they targeted similar demographics and marketing media is similar. Lasting branded name for a doll is rare to come up with. Financial committee also reluctant to finance projects due to licensing proposals and conflict of interest, which posses a risk in regard to profiting. Conclusion MMDC project would be the best for New Heritage Doll Company if they require achieving the estimated growth rate. As evidence above, the profit provision market share and risks factors favor it compared to NDF/DVD. Bibliography Studymode, Capital Budgets. StudyMode.com. Accessed 28, 2013, from http://www.studymode.com/essays/Capital-Budgets-268918.html, 2009 Luehrman, T Finance Simulation-Capital Budgeting. Harvard Business School, Accessed 28th 2013 from hbsp.harvard.edu/he-main/.../web.../Capital_BudgetingM10674.pdf, 2011 "Capital Budgets." StudyMode.com. Accessed 28th, 2013 http://www.studymode.com/essays/Capital-Budgets-268918.html 12, 2009 Project Analysis Services, New Heritage Doll Company: Capital Budgeting Liacouras Walk Philadelphia, PA 19122 2010 Luehrman, T. & Abelli, H. |New Heritage Doll Company: capital budgeting. Harvard Business Publishing, Page 8. Accessed 28, 2013 from http://www.ecch.com/educators/products/view?id=97030, 2010 Read More