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New Heritage Doll Company’s Report

Introduction

New Heritage Company is a business unit which deals in the production of the Doll and aims at extending their brand to capitalize on the customers’ loyalty and broaden their market Share and Framework (Henry 2007, 10). The main aim of this project is to strengthen the production division of the company and improve their future growth. To compel the committee to make a viable decision on the project to be implemented, two projects are provided for comparisons. The basis for the assessment where the two projects will be chosen is through computations which shall provide an option for accepting or rejecting the project. The main methods of project evaluation are the discounting cash flow and thus determine the Net Present Value of the two projects (Orsag and McClure 2013, 75). In this case, the company's project which has a positive value will be accepted for the project, and the one which has a negative NPV is not viable hence rejected the investment decision-making process. The implementation of the positive Net Present Value projects to show that the investments can generate enough returns which can be used to pay back the obligations or debt and help them to maximize the shareholders’ wealth (Militaru 2016, 80). The management team is keen on the capital structure since it helps them in the evaluation of the operating revenue which is got from the doll industry segment.

After an Evaluation and Analysis, a recommendation will be provided and the budget constraints which can limit the performance of the company over a given period in which the company is operational both in the Doll production industry.

 

 

 

The New Heritage Doll Company’s cash flow Analysis

In the analysis of the company over the last period of time, the following have been realized for the first project which was aiming at des ........

ny and improve their future growth. To compel the committee to make a viable decision on the project to be implemented, two projects are provided for comparisons. The basis for the assessment where the two projects will be chosen is through computations which shall provide an option for accepting or rejecting the project. The main methods of project evaluation are the discounting cash flow and thus determine the Net Present Value of the two projects (Orsag and McClure 2013, 75). In this case, the company's project which has a positive value will be accepted for the project, and the one which has a negative NPV is not viable hence rejected the investment decision-making process. The implementation of the positive Net Present Value projects to show that the investments can generate enough returns which can be used to pay back the obligations or debt and help them to maximize the shareholders’ wealth (Militaru 2016, 80). The management team is keen on the capital structure since it helps them in the evaluation of the operating revenue which is got from the doll industry segment.

After an Evaluation and Analysis, a recommendation will be provided and the budget constraints which can limit the performance of the company over a given period in which the company is operational both in the Doll production industry.

 

 

 

The New Heritage Doll Company’s cash flow Analysis

In the analysis of the company over the last period of time, the following have been realized for the first project which was aiming at designing the new doll match can be presented as shown below:

Free Cash Flow Analysis

Valuation of the New Heritage Doll company

Design Your Own DollOperating Projections

Particulars

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Operational Profit

-1201

0

550.3

1794.3

2723.7

2779.2

2946

3123

3310.1

3509

3719

Add: Depreciation

0

0

310

310

310

436

462

490

520

551

584

Less: Operational Capital

                 

Current Assets

                   

Minimum cash balance

0

0

180

430.8

606.65

643.04

681.63

722.53

765.879

811.83

860.54

Account receivables

0

0

972.66

2327.9

3278.1

3474.8

3683.3

3904.3

4138.54

4386.9

4650.1

Inventory

   

345.62

785.96

1065.2

1129.6

1197.4

1269.2

1345.39

1426.1

1511.7

Total current Assets

0

0

1498.3

3544.7

4950

5247.4

5562.3

5896.1

6249.82

6624.8

7022.3

Current Liabilities

                   

Accounts Payables

502.72

1163.6

1627.1

1734.7

1838.8

1949.1

2066.08

2190.1

2321.5

Net working capital

995.57

2381

3322.9

3512.7

3723.5

3946.9

4183.74

4434.8

4700.8

Less: Capital expenditure

4,610

0

310

310

2,192

826

875

928

983

1,043

1,105

Free cash flow

-5,811

0

-445

-586

-2,481

-1,123

-1,191

-1,262

-1,337

-1,417

-1,503

 

The changes for the designing of the own Doll product can be evident as shown in the figure below:

From the analysis and graph, the free cash flow has been improving over the years but fluctuating over time. For instance, the Free Cash flow increase from 2010 to 2011, then its decline slightly in 2012 to 2014 before it incline again in early 2014 to 2015 where it did touch zero mark. In late 2015 to 2020 it has experienced a steady decline. It thus shows that there has been inefficiency in management of the project as well as the loss of finances through fraud.

On the other project which aims at matching the company’s Doll Clothing Line Expansion can also be put as shown in the table below:

The Discounting Cash-flow Statement

Valuation of the New Heritage Doll company

Selected Operating Projections for Match My Doll Clothing Line Expansion

Particulars

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Operating Profit

-1250

582.8

994

1277

1392

1503

1623

1753

1893

2045

2208.5

Add: Depreciation

0

152

152

152

152

164

178

192

207

224

242

Less: Operational  Capital

               

 

Minimum cash balance

0

135

205.8

252.3

272.4

294.2

317.78

343.2

370.66

400.3

432.34

Account receivables

0

729.49

1112.1

1363

1472

1590

1717.2

1854.5

2002.9

2163

2336.2

Inventory

0

359.7

500.1

396.0

426.7

460.9

497.7

537.5

580.6

627.0

677.2

Total current Assets

0

1224.2

1818

2011

2171

2345

2532.7

2735.3

2954.1

3190

3445.7

Current Liabilities

 

 

               

 

Accounts Payables

 

330.12

496.6

605.9

653.3

705.6

762.01

822.98

888.83

959.9

1036.7

Net working capital

 

894.04

1321.4

1406

1518

1639

1770.7

1912.3

2065.3

2231

2409

 

 

 

               

 

Less: Capital expenditure

1,470

952

152

152

334

361

389

421

454

491

530

Free cash flow

-2,720

-1,111

-327.6

-128.4

-308.1

-332.9

-359.0

-387.8

-419.4

-452.0

-488.2

                         

 

 

The changes in the free cash flow for this project can also be shown as provided below:

 

 

 

 

 

 

From the figure above, the company has also shown a fluctuating but inclining cash flow from the year 2010 to 2020.It also shows that the Match My Doll Expansion line project cannot generate the cash that the company can use to expand their capital base.The value of the cash flows are negative and the minimum value was recorded in 2013, where,$ -128400was recorded. Even though the two projects shows almost the same trends on the value of the free cash flow over time. The project which should be accepted or rejected can be determined when the Net Present Value is computed.

The Match My Doll Clothing Line Expansion and Design Your Own Doll project’s Terminal Value

During the situation where the perpetual increment of the free cash balances increases by 3 percent, the terminal value of these projects can thus be computed. The terminal value is the expected cash flow of the project which is beyond the explicit forecast horizon. It is very important since it accounts for the financial modeling since it accounts for a larger percentage of the project’s value in the discounted cash flows. Terminal value is computed by the formula:

Terminal Value = (Free cash flow of the last year +)/ (Discounted rate-Expected Growth Rate)

In this case, let’s assume the discount rate is 10%. Thus, the following can be presented for the Design Your Own Doll project.

Design your Own Doll Project’s Terminal Value

Year

 

2020

Terminal Value

Free cash flow of the last year

-1,503

 

Discount rate

10%

 

Growth Rate

3%

 

 

 

 

-21469.1

 

On the other handle, the terminal value for the My Doll Clothing Line Expansion can also be presented as shown in the figure below:

My Doll Clothing Line Expansion Terminal Value

Year

 

2020

Terminal Value

Free cash flow of the last year

-488

 

Discount rate

10%

 

Growth Rate

3%

 

 

 

 

-6973.7

 

 

 

 

 

From the analysis, it can be evident that My Doll Clothing Line Expansion has a lower terminal value as compared to the Design Your Own Doll project. For example, in the case of the Design Your Own Doll project, the terminal value is computed to be $- 21469.1 while that of the My Doll Clothing Line Expansion Project is $ -6973.7.The figures will be very important in the computation of the company’s Net Present value.

 

 

 

Evaluation and determination of the My Doll Clothing Line Expansion and Design Your Own Doll projects

During the evaluation of the risks which are embedded in the projects in question, there are various factors which should be taken into consideration (Hu, Homem-de-Mello and Mehrotra 2014, 579). These factors comprise of the following:

  • Whether the products of the project which is under evaluation is in need of new consumers or traders who have the willingness to accept the goods and services which are availed to the market by the company.
  • In the situation where the project has a higher level of sunk and fixed costs, the projects which are to be appraised tends to be at a higher risk of these type of costs does not generate any amount of revenue to the company over a given period of operations or project’s life.
  • The sensitivity of the selling price of the finished products should be done to the projects in question.
  • The high level of breakeven volumes of production as well as other numerous factors which influences the company to fail to reject the project and consider it for the implementation process.

In the situation where the company can make thorough considerations to these factors, then they stand a chance to implement the project not based on the values got from computation process only but also on the basis of the risks levels which the project can expose the company to either in the short or long run. In certain events, the risks can be high depicting that the returns are also high. Therefore, there is a need for the project manager to take a calculated risk. In the computation of the Net Present value, the 10% discount rate is to be used since it is a rate which is affordable and can be generated by the project over time. It can thus be referred to as the standard rate.

Depreciation and Capital Budgeting

During the capital budgeting process, depreciation value plays a very significant role. Capital costing is the design process which is utilized in the fortitude of whether the investments which runs for more than one year in an organization aresubstance to funding of cash through the capitalization edifice of the firm. Depreciation plays a vital role since it is noncash and it has no effect on the projects cash flow. It is one of the reasons as to why the value of the depreciation is added back to the computation of the cash flows (New Jersey Commission on Capital Budgeting and Planning 2011). Besides, the depreciation value is not being withdrawn from the company's bank accounts, but still, they remain in the company's finances in the form of cash. In certain situations, it may appear that the depreciation value does not affect the operations of the company. It is because; its values are deducted during the preparation of the financial statements of net income and the same amount is added back during the computation of the cash flow. Conversely, the depreciation process tends to affect the cash flow of the company or the project in an indirect manner since it has a massive effect on the taxes of the company over time

The Net Present value computation for My Doll Clothing Line Expansion and Design Your Own Doll projects

Net Present values of the projects which are to be implemented are computed based on the free cash flows figures. The NPV for the Design Your Own Doll projects can be provided as shown in the table below:

 

Year

Cash flow

PVif10%

Pv

2010

-5811

1

-5811

2011

0

0.9091

0

2012

-445

0.8264

-367.7

2013

-586

0.7513

-440.6

2014

-2,481

0.683

-1694

2015

-1,123

0.6209

-697.4

2016

-1,191

0.5645

-672.2

2017

-1,262

0.5132

-647.5

2018

-1,337

0.4665

-623.7

2019

-1,417

0.4241

-601.1

2020

-1,503

0.3855

-579.4

Terminal Year

-21469.08483

0.3505

-7525

Net Present Value

 

-8038

 

After the discounting process at a 10% discount rate, the NPV of this project is totaling to $ -8038.

On the other hand, the Net Present Value of My Doll Clothing Line Expansion project can be presented in the figure as shown in the table below:

Year

Cash flow

PVif10%

Pv

2010

-2,720

1

-2720

2011

-1,111

0.9091

-1010

2012

-328

0.8264

-270.7

2013

-128

0.7513

-96.49

2014

-308

0.683

-210.4

2015

-333

0.6209

-206.7

2016

-359

0.5645

-202.6

2017

-388

0.5132

-199

2018

-419

0.4665

-195.6

2019

-452

0.4241

-191.7

2020

-488

0.3855

-188.2

Terminal Year

-6974

0.3505

-2444

Net Present Value

 

-2496

The net present Value for the My Doll Clothing Line Expansion project is negative -2496.

The payback period and profitability index of the two projects

  • My Doll Clothing Line Expansion project

Payback Period

Payback Period

Year

Cash flow

PB

2010

-2720

-2720

2011

-1111

-3831

2012

-327.6

-4159

2013

-128.4

-4287

2014

-308.1

-4596

2015

-332.9

-4928

2016

-359

-5287

2017

-387.8

-5675

2018

-419.4

-6095

2019

-452

-6547

2020

-488.2

-7035

Terminal Year

-6974

-9479

 

 

The payback period will be infinitive since it takes more than 10 years

 

Profitability Index

Payback Period

 

Year

Cash flow

PVif10%

Pv

2010

-2720

1

-2720

2011

-1111

0.9091

-1010

2012

-327.6

0.8264

-270.7

2013

-128.4

0.7513

-96.49

2014

-308.1

0.683

-210.4

2015

-332.9

0.6209

-206.7

2016

-359

0.5645

-202.6

2017

-387.8

0.5132

-199

2018

-419.4

0.4665

-195.6

2019

-452

0.4241

-191.7

2020

-488.2

0.3855

-188.2

Terminal Year

-6974

0.3505

-2444

Pv

   

-5216

PI

   

1.918

  • Design Your Own Doll projects

The payback period

Payback Periods

Year

Cash flow

PBP

2010

-5811

-5811

2011

0

-5811

2012

-445

-6256

2013

-586.4

-6842.4

2014

-2481

-9323.1

2015

-1123

-10446

2016

-1191

-11637

2017

-1262

-12899

2018

-1337

-14236

2019

-1417

-15653

2020

-1503

-17156

Terminal Year

-21469

-38625

 

The payback period will be infinitive since it takes more than 10 years

 

The profitability Index

 

Profitability Index

 

Year

Cash flow

PVif10%

Pv

2010

-5811

1

-5811

2011

0

0.909091

0

2012

-444.965

0.826446

-367.74

2013

-586.433

0.751315

-440.596

2014

-2480.71

0.683013

-1694.36

2015

-1123.23

0.620921

-697.438

2016

-1190.8

0.564474

-672.173

2017

-1261.71

0.513158

-647.456

2018

-1337.04

0.466507

-623.737

2019

-1417.25

0.424098

-601.054

2020

-1502.84

0.385543

-579.408

Terminal Year

-21469.1

0.350494

-7524.78

Pv

   

-13848.7

Pi

   

2.383194

 

Summary of the project's projections

Summary of the project's projections

 

NPV

Payback Period

Profitability Index

Design your Own Doll

-8037.741685

Infinitive

-2.383194

My Doll Clothing Line

-2496.162238

Infinitive

-1.917707

 

 

Recommendation for the project Implementation

From the analysis provided, the Design Your Own Doll project and the My Doll Clothing Line Expansion project are not feasible or viable for the implementation since both have a negative NPV, a longer or infinite payback period. Besides, the projects can be evaluated by their profitability indexes. Both of them have a negative profitability index hence are not viable for implementation process. Therefore, the company should implement and produce the Design Your Own Doll since they are mutually exclusive.

Budget constraint for the project

During the implementation of the project, there are various budget constraints which can make the project not to be efficiently implemented. They comprise of the optimal timing, long vs. short time life, the replacement problems, the excess capacity, the peak loads problems, and capital constraints. The capital budgeting complication can prevent the firm from taking all the positive NPV of a given project hence making the firm to land into very big problems either in the short or long run (Zhang, Huang and Zhang 2015, 765). It is because the firm can tend to make losses due to failure to implement the project which would have boosted their revenues over time.

Conclusions

Therefore, in the management of the investment project, the capital budgeting techniques should be used to evaluate the viable project for investment purposes. Both the Design, Your Own Doll project and the My Doll Clothing Line Expansion project has a negative NPV, negative Profitability index as well as the infinite payback period. These are the conditions which provides abasis as to which these investments should be rejected and not considered during implementation process especially while making a choice between mutually exclusive projects.However,during the evaluation process,there are certain risks factors which should be taken into consideration before accepting or rejecting the project. They comprise of the Whether the products of the project which is under evaluation is in need of new consumers or traders who have the willingness to accept the goods and services which are availed to the market by the company. In the situation where the project has a higher level of sunk and fixed costs, the projects which are to be appraised tends to be at a higher risk of these type of costs does not generate any amount of revenue to the company over a given period of operations or project’s life. Others also include the sensitivity of the selling price of the finished products should be done to the projects in question and the high level of breakeven volumes of production as well as other numerous factors which influences the company to fail to reject the project and consider it for the implementation process.