finance_wk 4 assignment template
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New Heritage Doll Company: Capital BudgetingExhibit 1
2010 2011 2012
Revenue 4,500 6,860
Revenue Growth 52.4%
Production Costs
Fixed Production Expense (excl depreciation) 575 575
Variable Production Costs 2,035 3,404
Depreciation 152 152
Total Production Costs 0 2,762 4,131
Selling, General & Administrative 1,250 1,155 1,735
Total Operating Expenses 1,250 3,917 5,866
Operating Profit (1,250) 583 994
Working Capital Assumptions:
Minimum Cash Balance as % of Sales 3.0% 3.0%
Days Sales Outstanding 59.2x 59.2x
Inventory Turnover (prod. cost/ending inv.) 7.7x 8.3x
Days Payable Outstanding (based on tot. op. exp.) 30.8x 30.9x
Capital Expenditures 1,470 952 152
2010 2011 2012
NET WORKING CAPITAL:MINIMUM CASH BALANCE 135.00 205.80 RECEIVABLES 76.05 115.94 INVENTORY 359.66 500.12 PAYABLES 127.35 189.84
TOTAL NET WORKING CAPITAL 800.00 443.37 632.02 CHANGE IN NET WORKING CAPITAL (800.00) 356.63 (188.65)
FREE CASH FLOW:EBIT (1250.00) 582.80 994.00 TAX @ 40% (233.12) (397.60)Earning After Tax (1250.00) 349.68 596.40 DEPRECIATION 0.00 152.20 152.20 CHANGE IN NWC (800.00) 356.63 (188.65)CAPITAL EXPENDITURE (1470.00) (952.20) (152.20)Tax Benefit 500.00
FREE CASH FLOW (3520.00) 406.31 407.75 Terminal ValueCash Flow After terminal value (3520.00) 406.31 407.75 CUMULATIVE FREE CASH FLOW 18956.34
Selected Operating Projections for Match My Doll Clothing Line Expansion
DISCOUNT RATE 8.40%
NET PRESENT VALUE $7,783PROFITABILITY INDEX 3.2INTERNAL RATE OF RETURN 27%PAYBACK PERIOD 5.84 Years
NPV VS DISCOUNT RATE
Rate NPV9% 7282
10% 650711% 580012% 515513% 456514% 402615% 353116% 307817% 266218% 228019% 192820% 160421% 130622% 103023% 77624% 54025% 32226% 12027% -6728% -24129% -40230% -55331% -693
Cash Flow vs TIMEYears Net Cash Flow
2010 (3520.00)2011 (3113.69)2012 (2705.94)2013 (1867.95)2014 (1258.74)2015 (601.34)2016 108.69 2017 875.43 2018 1703.47
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
NPV
NPV
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(4000.00)
(3000.00)
(2000.00)
(1000.00)
0.00
1000.00
2000.00
3000.00
4000.00
Net Cash Flow
Net Cash Flow
2019 2597.76 2020 3563.58
Without Terninal Value
TOTAL NET WORKING CAPITAL 800.00 443.37 632.02 CHANGE IN NET WORKING CAPITAL (800.00) 356.63 (188.65)FREE CASH FLOW -3520 406.31369 407.7463
DISCOUNT RATE (K-WACC) 9%
NET PRESENT VALUE 1155.27205288703PROFITABILITY INDEX 1.328202287752INTERNAL RATE OF RETURN 15%PAYBACK PERIOD 8.81628940469485
Rate NPV5% $2,3276% $1,9987% $1,6958% $1,4159% $1,155
10% $91511% $69212% $48513% $29214% $11315% -$5416% -$21017% -$35518% -$49119% -$61920% -$73821% -$85022% -$95523% -$1,05424% -$1,147
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(4000.00)
(3000.00)
(2000.00)
(1000.00)
0.00
1000.00
2000.00
3000.00
4000.00
Net Cash Flow
Net Cash Flow
SEE Q1 AT ROW 50 BELOW
2013 2014 2015 2016 2017 2018 2019
8,409 9,082 9,808 10,593 11,440 12,355 13,344
22.6% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
587 598 610 622 635 648 660
4,291 4,669 5,078 5,521 6,000 6,519 7,079
152 152 164 178 192 207 224
5,029 5,419 5,853 6,321 6,827 7,373 7,963
2,102 2,270 2,452 2,648 2,860 3,089 3,336
7,132 7,690 8,305 8,969 9,687 10,462 11,299
1,277 1,392 1,503 1,623 1,753 1,893 2,045
3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
12.7x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
31.0x 31.0x 31.0x 31.0x 31.0x 31.0x 31.0x
152 334 361 389 421 454 491
2013 2014 2015 2016 2017 2018 2019
252.26 272.44 294.24 317.78 343.20 370.66 400.31 142.11 153.48 165.76 179.02 193.34 208.81 225.51 396.01 426.72 460.86 497.72 537.54 580.56 626.99 229.97 247.97 267.81 289.24 312.38 337.37 364.36 560.41 604.68 653.04 705.29 761.71 822.65 888.46
71.61 (44.27) (48.37) (52.24) (56.42) (60.94) (65.81)
1277.30 1391.80 1503.10 1623.46 1753.27 1893.30 2045.00 (510.92) (556.72) (601.24) (649.38) (701.31) (757.32) (818.00)766.38 835.08 901.86 974.08 1051.96 1135.98 1227.00 152.20 152.20 164.40 177.50 191.70 207.10 223.60
71.61 (44.27) (48.37) (52.24) (56.42) (60.94) (65.81)(152.20) (333.80) (360.50) (389.30) (420.50) (454.10) (490.50)
837.99 609.21 657.39 710.03 766.74 828.04 894.29
837.99 609.21 657.39 710.03 766.74 828.04 894.29
Line Expansion
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
NPV
NPV
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(4000.00)
(3000.00)
(2000.00)
(1000.00)
0.00
1000.00
2000.00
3000.00
4000.00
Net Cash Flow
Net Cash Flow
560.41 604.68 653.04 705.29 761.71 822.65 888.46 71.61 (44.27) (48.37) (52.24) (56.42) (60.94) (65.81)
837.989778791132 609.21417 657.39172 710.03107 766.74011 828.039400234102 894.29067
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(4000.00)
(3000.00)
(2000.00)
(1000.00)
0.00
1000.00
2000.00
3000.00
4000.00
Net Cash Flow
Net Cash Flow
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24%
-$1,500
-$1,000
-$500
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
NPV
NPV
2020
14,411
8.0%
674
7,685
242
8,600
3,603
12,203
2,209
3.0%
59.2x
12.7x
31.0x
530
2020
432.34 243.56 677.16 393.51 959.54 (71.08)
2208.50 (883.40)1325.10
241.50 (71.08)
(529.70)
965.82 15392.76 16358.58
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
8000
NPV
NPV
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(4000.00)
(3000.00)
(2000.00)
(1000.00)
0.00
1000.00
2000.00
3000.00
4000.00
Net Cash Flow
Net Cash Flow
0.00 888.46
1854.2813808
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(4000.00)
(3000.00)
(2000.00)
(1000.00)
0.00
1000.00
2000.00
3000.00
4000.00
Net Cash Flow
Net Cash Flow
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24%
-$1,500
-$1,000
-$500
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
NPV
NPV
New Heritage Doll Company: Capital BudgetingExhibit 2
2010 2011 2012
Revenue 0 6,000
Revenue Growth
Production Costs
Fixed Production Expense (excl depreciation) 0 1,650
Variable Production Costs 0 2,250
Development Costs 435
Depreciation 0 310
Total Production Costs 435 4,210
Selling, General & Administrative 1,201 0 1,240
Total Operating Expenses 1,201 435 5,450
Operating Profit (1,201) (435) 550
Working Capital Assumptions:
Minimum Cash Balance as % of Sales 3.0%
Days Sales Outstanding 59.2x
Inventory Turnover (prod. cost/ending inv.) 12.2x
Days Payable Outstanding (based on tot. op. exp.) 33.7x
Capital Expenditures 4,610 0 310
2010 2011 2012
NET WORKING CAPITAL:MINIMUM CASH REQUIRED 180.00 RECEIVABLES 101.40 INVENTORY 345.62 PAYABLES 161.86
TOTAL NET WORKING CAPITAL 0.00 1000.00 465.17 CHANGE IN NET WORKING CAPITAL (1000.00) 534.83
FREE CASH FLOW:EBIT (1201.00) (435.00) 550.30 TAX @ 40% (220.12)Earning After Tax (1201.00) (435.00) 330.18 DEPRECIATION 309.70 CHANGE IN NWC (1000.00) 534.83 Tax Benefit 480.40 174.00 CAPITAL EXPENDITURE (4610.00) 0.00 (309.70)
CASH FLOW (5811.00) (954.60) 1039.01 TERMINAL VALUECash Flow After TV (5811.00) (954.60) 1039.01 CUMULATIVE FREE CASH FLOW 25530.54
Selected Operating Projections for Design Your Own Doll
DISCOUNT RATE 9%
NET PRESENT VALUE 8187.48 PROFITABILITY INDEX 2.41 INTERNAL RATE OF RETURN 20%PAYBACK PERIOD 8.49
NPV VS DISCOUNT RATERate NPV
9% 818710% 705011% 601512% 507213% 421414% 343015% 271516% 206117% 146318% 91519% 41320% 4821% 47122% 85923% 121724% 154625% 184926% 212927% 238728% 262529% 284530% 304931% 3237
Cash Flow vs TIMEYears Net Cash Flow
2010 58112011 67662012 57272013 52732014 59302015 47402016 3480
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
4000
2000
0
2000
4000
6000
8000
10000
NPV
NPV
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
8000
6000
4000
2000
0
2000
4000
Net Cash Flow
Net Cash Flow
2017 21452018 7302019 7702020 2360
Without Terninal Value
TOTAL NET WORKING CAPITAL 0 1000 465.17046CHANGE IN NWC -1000 534.82954
FREE CASH FLOW -5811 -954.6 1039.0095
DISCOUNT RATE (K-WACC) 0.09
NET PRESENT VALUE -754.489427242833PROFITABILITY INDEX 0.870161860739488INTERNAL RATE OF RETURN 7%PAYBACK PERIOD 8.48665088113769
NPV VS DISCOUNT RATERate
5% $1,0256% $5207% $588% -$3669% -$754
10% -$1,11211% -$1,44112% -$1,74313% -$2,02214% -$2,28015% -$2,51816% -$2,73817% -$2,94118% -$3,13019% -$3,30420% -$3,46721% -$3,61722% -$3,75723% -$3,88824% -$4,009
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
8000
6000
4000
2000
0
2000
4000
Net Cash Flow
Net Cash Flow
NPV VS DISCOUNT RATERate NPV Project 1 NPV Project 2
5% 1025 23276% 520 19987% 58 16958% -366 14159% -754 1155
10% -1112 91511% -1441 69212% -1743 48513% -2022 29214% -2280 11315% -2518 -5416% -2738 -21017% -2941 -35518% -3130 -49119% -3304 -61920% -3467 -73821% -3617 -85022% -3757 -95523% -3888 -105424% -4009 -1147
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24%
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
Sensitivity Analysis (Without terminal value)
Project 1Project 2
SEE Q2 AT ROW 50 BELOW
2013 2014 2015 2016 2017 2018 2019 2020
14,360 20,222 21,435 22,721 24,084 25,529 27,061 28,685
139.3% 40.8% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
1,683 1,717 1,751 1,786 1,822 1,858 1,895 1,933
7,651 11,427 12,182 12,983 13,833 14,736 15,694 16,712
310 310 436 462 490 520 551 584
9,644 13,454 14,369 15,231 16,145 17,113 18,140 19,229
2,922 4,044 4,287 4,544 4,817 5,106 5,412 5,737
12,566 17,498 18,656 19,775 20,962 22,219 23,553 24,966
1,794 2,724 2,779 2,946 3,123 3,310 3,509 3,719
3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x 59.2x
12.3x 12.6x 12.7x 12.7x 12.7x 12.7x 12.7x 12.7x
33.8x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x 33.9x
310 2,192 826 875 928 983 1,043 1,105
2013 2014 2015 2016 2017 2018 2019 2020
430.80 606.65 643.04 681.63 722.53 765.88 811.83 860.54 242.69 341.75 362.26 383.99 407.03 431.46 457.34 484.78 785.96 1065.21 1129.61 1197.41 1269.25 1345.39 1426.12 1511.70 371.77 515.55 549.66 582.65 617.61 654.66 693.95 735.58
1087.68 1498.06 1585.25 1680.38 1781.20 1888.07 2001.36 2121.44 (622.51) (410.38) (87.19) (95.12) (100.82) (106.87) (113.29) (120.09)
1794.30 2723.70 2779.20 2945.80 3122.60 3310.10 3508.56 3719.00 (717.72) (1089.48) (1111.68) (1178.32) (1249.04) (1324.04) (1403.42) (1487.60)1076.58 1634.22 1667.52 1767.48 1873.56 1986.06 2105.14 2231.40
309.70 309.70 436.20 462.40 490.10 519.50 550.70 583.80 (622.51) (410.38) (87.19) (95.12) (100.82) (106.87) (113.29) (120.09)
(309.70) (2191.50) (825.70) (875.30) (927.80) (983.40) (1042.50) (1105.00)454.07 (657.96) 1190.83 1259.46 1335.04 1415.29 1500.05 1590.11
23170.24 454.07 (657.96) 1190.83 1259.46 1335.04 1415.29 1500.05 24760.36
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
4000
2000
0
2000
4000
6000
8000
10000
NPV
NPV
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
8000
6000
4000
2000
0
2000
4000
Net Cash Flow
Net Cash Flow
1087.6819 1498.0582 1585.2526 1680.3774 1781.1977 1888.0677 2001.3551 0-622.5114 -410.3763 -87.1944 -95.12488 -100.8203 -106.87 -113.2873 2001.35508454.06856 -657.9563 1190.8256 1259.4551 1335.0397 1415.29 1500.0487 3591.46991
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
8000
6000
4000
2000
0
2000
4000
Net Cash Flow
Net Cash Flow
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24%
-$5,000
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
NPV
NPV
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24%
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
Sensitivity Analysis (Without terminal value)
Project 1Project 2
Rate NPV9% 7282.045 8187.478
10% 6506.988 7049.64911% 5800.219 6014.71712% 5154.991 5072.43213% 4565.283 4213.65114% 4025.717 3430.20915% 3531.487 2714.81216% 3078.287 2060.92817% 2662.261 1462.71118% 2279.949 914.917319% 1928.244 412.8420% 1604.354 -47.7487421% 1305.767 -470.651122% 1030.218 -859.289723% 775.6679 -1216.74824% 540.275 -1545.80925% 322.3759 -1848.9826% 120.467 -2128.53327% -66.81301 -2386.51628% -240.6968 -2624.78729% -402.3022 -2845.02830% -552.6434 -3048.76431% -692.6419 -3237.377
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
4000
2000
0
2000
4000
6000
8000
10000
NPV
NPV
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
8000
6000
4000
2000
0
2000
4000
Net Cash Flow
Net Cash Flow
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
-4000
-2000
0
2000
4000
6000
8000
10000
Sensitivity Chart
Project 1Project 2
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
8000
6000
4000
2000
0
2000
4000
Net Cash Flow
Net Cash Flow
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24%
-$5,000
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
NPV
NPV
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24%
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
Sensitivity Analysis (Without terminal value)
Project 1Project 2
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
-4000
-2000
0
2000
4000
6000
8000
10000
Sensitivity Chart
Project 1Project 2
9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30% 31%
-4000
-2000
0
2000
4000
6000
8000
10000
Sensitivity Chart
Project 1Project 2
Q3aBriefly present the business cases for each project. Which one is the most compelling and why?
Q3bHow do the capital budgeting metrics you calculated in Q1 and Q2 influence Emily's deliberations?Which project creates more value for Heritage Doll Company?
Q3cDoes Emily need additional information to complete her analysis, and if so, what questions should she put to the sponsors of each prioject.
Q3dAs Emily, using the information you have and your professional judgment, make the recommendation and justify it.
How do the capital budgeting metrics you calculated in Q1 and Q2 influence Emily's deliberations?
As Emily, using the information you have and your professional judgment, make the recommendation and justify it.