New Heritage Doll Company Case Solution & Answer

New Heritage Doll Company

Part 2

Debt free cash flow is used to determine how much cash to be received will not be used to pay off the debts. It provides the company with a more accurate picture of its cash flows. It reflects the soundness of the company and helps in figuring out the cost and return on debt and helps in making effective decisions for managing debt. It eliminates any interest expense by taking debt free cash flows before financing and adjusts them by excluding any interest expense incurred and adjusting them for taxes. This is done to identify the amount of cash flow being utilized by the interest expense on the debt of the company before financing. It is done because the cash flow before financing included the effect of interest expense. Therefore, all the interest expenses are eliminated while calculating debt free cash flow.

Part 3

            The terminal value of the project “Match My Doll” is 29,051 whereas the terminal value of the project “Design Your Own Doll” is 48965.

Part 4

The discount rate determined for the two projects, the MMDC and DYOD are 8.4% and 9% respectively. As high returns are expected from the DYOD projects as it contains high risk because the company will be experimenting a new idea that requires significant investment and a major change in the current technology structure of the company and a failure can negatively hit the company’s position and image in the market..

MMDC is being assumed as a medium risk project because it is an extension of the existing business line and the company is already familiar with its working patterns and can easily predict project’s estimated returns looking at the historical data and performance of the product line. Therefore, this project is comparatively a much safer investment as it is expected to be as profitable as the current line is without any hefty investments.

The proposed discount rate by the company, seems to be justified as they are demanding high discount rates for the project DYOD that incorporates high degree of risk and is itself very challenging. Conversely the idea of extending the current product line of MMDC is not as risky as DYOD. Therefore the discount rate proposed from this project is not as high as DYOD project by the company.

Part 5

Project riskiness and discount rate of the project are both interlinked with each other. The riskier investment demands higher return because the projects contain high risk which contains a high probability of loss. In contrast, the projects containing low risk are expected to have low return on their investments as such projects bear minimum or moderate chances of incurring any loss.

Emily’s risk assessment of the two projects is reasonable as she is expecting higher returns on the DYOD project because of the high risk it contains and comparatively, a lower return on the other project related to MMDC in which the company has prior experience and expertise, containing minimum chances of failure.

Part 6

            The net present value of each project is calculated by using operating projection given in dissertation. The net present value of the first project “Match My Doll” is 16,992,whereas the net present value of another project “Design Your Own Doll” is 23190, 78838, depicting that the project “Design Your Own Doll” project has high value as compared to another project.

Part 7

The profitability index for each of the two projects is calculated in order to rank the projects based on the value created per unit of investment. The profitability index of project one “Match My Doll” is 6.23 while the profitability index of project two “Design Your Own Doll” is 5.07. Thus, it is analyzed and recommended that the project one “Match My Doll” is financially more attractive over project two.

Part 8 and 10

Profitability index tends to reflect the relationship between the benefits and cost attached to the project being proposed. As the P.I of the project increases, so does the attractiveness of the project while NPV differentiates between the present value of cash inflows and the outflows of the project. By comparing the dollar value of the project today and in future, incorporating returns and inflation and IRR are used often in capitalizing budgets, making the NPV of all cash flows of the project equal to zero.

All three methods used to determine or calculate the value of the investment, in most of the cases may result in same acceptance and rejection decision, but will lead to different ranking and in the criteria for accepting and rejecting, in terms of mutually exclusive projects because of different scale of investments, having different initial investment in the alternative proposals resulting in different rankings.

Part 9

The IRR of project Match My Doll is 19.65% whereas the IRR of project Design Your Own Doll is 15%. However, it is recommended that the project with higher IRR must be chosen i.e. Match My Doll Project.

Part 11

The payback period of Match My Doll project is 6.1 and of Design My Own Doll is 7.0…..

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