New Heritage
New Heritage Doll Case
Lauren Knausenberger
1. Which of the two projects create more value?
In order to determine which of the two projects create more value, we must calculate NPV based on the assumptions relevant to the decision. The table below shows the NPV for the two product lines given discount rates of 7.7% (low risk), 8.4% (medium risk), and 9.0% (high risk). The Match My Doll Clothing line is currently rated as a medium risk project with 8.4% cost of capital. Given Emily’s knowledge of the industry we may be able to accept this; however, the firm should also consider whether children’s clothing lies within their core competencies and how different the market is from their current market for dolls. These factors could raise the risk rating to high. The Design your Doll project most likely falls into the high risk category due to the long payback period, new manufacturing processes, and reliance on flawless execution through a new web interface; however, the risk is potentially mitigated to the medium level due to the moderate fixed costs and the fact that it plays to the company’s key strength – creating a unique experience for consumers. Calculations for both projects include the terminal value assuming a 3% rate of perpetual growth, in line with the growth projections for US retail sales of dolls, and the growth of the US economy in general.
|Calculations |Match My Doll Clothing |Design Your Own Doll |
|NPV @ 7.7% (including TV) |$11,104 |$15,788 |
|NPV @ 8.4% (including TV) |$9,122 |$12,537 |
|NPV @ 9.0% (including TV) |$7,446 |$10,378 |
|IRR |32% |23% |
|Payback Period |6
Lauren Knausenberger
1. Which of the two projects create more value?
In order to determine which of the two projects create more value, we must calculate NPV based on the assumptions relevant to the decision. The table below shows the NPV for the two product lines given discount rates of 7.7% (low risk), 8.4% (medium risk), and 9.0% (high risk). The Match My Doll Clothing line is currently rated as a medium risk project with 8.4% cost of capital. Given Emily’s knowledge of the industry we may be able to accept this; however, the firm should also consider whether children’s clothing lies within their core competencies and how different the market is from their current market for dolls. These factors could raise the risk rating to high. The Design your Doll project most likely falls into the high risk category due to the long payback period, new manufacturing processes, and reliance on flawless execution through a new web interface; however, the risk is potentially mitigated to the medium level due to the moderate fixed costs and the fact that it plays to the company’s key strength – creating a unique experience for consumers. Calculations for both projects include the terminal value assuming a 3% rate of perpetual growth, in line with the growth projections for US retail sales of dolls, and the growth of the US economy in general.
|Calculations |Match My Doll Clothing |Design Your Own Doll |
|NPV @ 7.7% (including TV) |$11,104 |$15,788 |
|NPV @ 8.4% (including TV) |$9,122 |$12,537 |
|NPV @ 9.0% (including TV) |$7,446 |$10,378 |
|IRR |32% |23% |
|Payback Period |6