Introduction
Emily Harris is the vice president of the production department at New Heritage Doll Company that ventures in producing Dolls. The company seeking is to extend its brand to have a broader market structure and, more crucially, have high levels of customer loyalty. Harris is supposed to submit a project proposal to the Budgeting Committee for assessment. The main aim of Harris’s proposal is to stand out depending on the likelihood to strengthen the production department of the company as well as enhance future growth.
Assumptions
Match My Doll Clothing
- The popularity of the company’s products.
- The dolls to be produced will completely match all-season garments for tween girls.
Design Your Doll
- Dolls will control continuous sales from the project.
- Permanent customer loyalty.
- The company will have the likelihood of strength and future growth.
The assumptions of the two proposals (match my doll clothing and design your doll) appeal to the budget committee because they show how they will strengthen and enhance the future growth of the production company, as reflected in the next section.
Quantitative Analysis
Design Your Doll
- NPV=$11647
- IRR=75%
Payback= 32months
Match My Doll Clothing
- NPV=$7866.32
- IRR=76%
Payback =57months
Sensitivity Analysis
Using Capital rationing will maximize cash management on the project that will be accepted. The net present value should be executed because it shows the time value of funds invested in the selected proposal. The calculated IRR further reflects this for the two proposals. The IRR is critical when determining which proposals should be selected. In this case, “design my doll” has the most significant IRR, and it implies that it has the highest operating rate of returns with the quick repaying time (32 months) of the price capital; hence, it is the best for implementing. However, risk factors and other considerations in the next chapter will be considered during implementation.
Risk Factors and other considerations
- Sensitivity of selling price of the final products.
- When a proposal needs a high level of fixed cost, it should be estimated at a very high risk-taking to account that price does not produce high returns.
- High level of breakeven production capacity.
Conclusion
Harris should recommend designing the consumers’ doll to the budget committee because it has a higher IRR, higher net present value as well as quick paying time, as shown by the quantitative analysis section.
Reference
Luehrman, T., & Abelli, H. (2010). New Heritage Doll Company: capital budget [Pdf] (pp. 1-8). Harvard Business. Web.
Appendix
