New Doll Case Study

6. New Heritage Doll Company

a) Use the operating projections for each project to compute a net present value (NPV) for each. Which project creates more value?

The NPV of the “Match My Doll Clothing” project generates a NPV of 11,119 and a NPV under the assumption that operations will continue forever of 18,847, whereas “Design Your Own Doll” has a NPV of 16,305 and a NPVforever of 28,329. Therefore the investment in “Design Your Own Doll” yields in a higher return and so creates more value for the company.

Match My Doll ClothingNPV |   | 11.119 |

NPV (operations continue forever) | 18.847 |

Design Your Own DollNPV | 16.305 |

NPV (operations continue forever) | 28.329 |

b) Compute the internal rate of return (IRR) and payback period for each project. How should these metrics affect Harris’s deliberations? How do they compare to NPV as tools for evaluating projects? When and how would you use each?

“Match My Doll Clothing” has a IRR of 53,92% and a payback period 2,49, whereas “Design Your Own Doll” has an IRR of 37,96% and a payback period of 4,07. According to the results of the NPV calculation Harris should sponsor the MMDC project, however, the result from the IRR and payback period suggest that DYOD is a better project to pursue.

Match My Doll ClothingIRR |   | 53,92% |

Payback Period | 2,49 |

Design Your Own DollIRR | 37,96% |

Payback Period | 4,07 |

The NPV reflects a clearer picture then the IRR and the PP, nevertheless, using all three would allow to make a complete analysis. Payback period would be particularly useful if one has a project in line that is in the near future, but can´t be realized at the moment and for which the business needs to receive back the cash invested in the current project.

c) What additional information does Harris need to complete her analyses and compare the two projects? What specific questions should she ask each of the project sponsors?

When it comes to compare value of the two...