Subject Student data Date

Members:
Bazalar Acosta Sthefany
Finance in a Digital Gonzalez Salazar Jhony Alexander
Environment Montoya Garcia Darnelly Alejandra May 24, 2021
Torres Silva Dayana Alexandra
Group 131 - Team 3

Case: New Heritage Doll Company. The

investment budget
1. What is the group's strategy and what are the main financial
variables that define it?

New Heritage Strategy Identification Strategies Chart

STRATEGIES DETAIL

Value In this case, the company invests in products that are included in the
proposition same product line aimed at a specific segment, in this case dolls and
strategy accessories.

It has a specialized product , an intergenerational doll that is designed

Differentiation according to psychological analysis of the generations.

In this case, the company invests in products that are included in the
Selective growth
same product line aimed at a specific segment, in this case dolls and
strategy
accessories.

Segmentation
The company is currently targeting a diversification proposal with the
strategy with a
objective of increasing its market share through an investment in a
diversification
new strategic unit within the same product family.
approach

The company has developed a line of private labels and through the
production department the licensing division in order to generate
greater profitability, also, it is currently targeting a diversification
R&D&I Strategy proposal with the objective of increasing its market share through an
investment in a new strategic unit within the same product family.
Source: Own creation

The main financial variables that define the strategy are divided into two groups:
General variables applied by the production division team
● Cash Flow
● Asset forecasts
● Continuous growth rate.

For the project development strategy they also apply:

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Group 131 - Team 3

● Net Present Value (NPV)

● Internal rates of return (IRR)
● Payback period
● Risk assessment in high, medium and low categories

Lean Matrix Applied to the New Heritage Doll Company Case

Source: Own creation

Within the lines of the product development strategy model applied, the following is a
brief description of the conditions established:

There are 2 proposals that stand out for their potential to strengthen the company's
product innovation lines and to generate future growth so it is possible that the
company's capital budget committee will approve only 1, so they are analyzed to
recommend one of the two projects over the other. To determine which of the New

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Finance in a Digital Gonzalez Salazar Jhony Alexander
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Torres Silva Dayana Alexandra
Group 131 - Team 3

Heritage Doll Company's projects is more convenient, several criteria must be used to
determine the advantages and disadvantages of both.

Source: Own creation

2. What are the cash flows of each project? The estimation criteria and
the time horizon used must be justified.
The cash flows of both projects are estimated in thousands of dollars in the following
tables, in order to measure the level of liquidity of New Heritage Doll Company.
● Design Your Own Doll Line (Thousands of Dollars)

Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Operating
-1.201 0 550 1.794 2.724 2.774 2.946 3.122 3.304 3.509 3.179
profit

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Torres Silva Dayana Alexandra
Group 131 - Team 3

● Match My Doll Line Expansion (Thousands of Dollars)

Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Operating
-1.250 583 994 1.277 1.393 1.504 1.624 1.753 1.892 2.045 2.207
profit

In both cash flows (CF), a 10-year time horizon has been considered, being 2010 the
base year and the net assets to be discounted are the operating profits obtained in each
annual period. Both projects for the year 2020, present a positive cash flow, which
indicates that the current assets regardless of which of the 2 lines are chosen are
increasing, therefore, New Heritage Doll Company will be able to pay off debts, reinvest
in the business or return money to shareholders.

Positive cash flows provide a cushion against future financial risks, but on the other
hand, it means that banks are more willing to give you credit if you need it and that
creditors supply goods ahead of time.

3. What is the discount rate or cost of capital (WACC) used?

To calculate the WACC for both lines, basically the value of the cost of financial debt
(Kd) and the cost of equity (Ke) must be known.

● Design Your Own Doll 2009 line

r= Profit / Revenue
r= 14.5 / 24.5 * 100 r=59.18% r=59.18%.
● Match My Doll 2009 Line Expansion

Since there is no WACC reference in this case, the result obtained in the previous
project is taken as a reference WACC: 59.18%.

4. What are the NPV, IRR and payback period for each of the projects?
● Design Your Own Doll line
A. Net Present Value (NPV)

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Group 131 - Team 3

NPV

= -1.201 + 0/1.591836 + 550/1.591836^2 +1.794/1.591836^3 + 2.729/1.591836^4 + 2.779/1.591836^5 + 2.94

NPV= 608,1595 thousand dollars

B. Internal Rate of Return (IRR)
IRR= r 1. 201= 550/(1+r)^2 + 1.794/(1+r)^3 + 2.729/(1+r)^4 + 2.779/(1+r)^5 +
2.946/(1+r)^6 + 3.122/(1+r)^7 + 3.304/(1+r)^8 + 3.509/(1+r)^9 + 3.719/(1+r)^10
r= 0.7542

IRR= 75.42%.
C. Payback Time (Payback Time)

Investment 1201 Accumulated

FC 1 0 0

FC 2 550 550

FC 3 1794
Source: Own creation

Shortfall in year 3: 1,201 - 550 = 651

PR= 2 years + 651/1,794 * 12 months
PR= 2 years 4.35 months
● Match My Doll Line Expansion
A. Net Present Value (NPV)
VAN= -1.250 + 583/1.591836 + 994/(1.591836)^2 + 1.277/(1.591836)^3 +
1.393/(1.591836)^4 + 1.504/(1.591836)^5 + 1.624/(1.591836)^6 + 1.753/(1.591836)^7
+ 1.892/(1.591836)^8 + 2.045/(1.591836)^9 + 2.207/(1.591836)^10

NPV= 454.8836 Thousands of dollars

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Group 131 - Team 3

B. Internal Rate of Return (IRR)

IRR= r 1. 250= 583/(1+r) + 994/(1+r)^2 + 1.277/(1+r)^3 + 1.393/(1+r)^4 +
1.504/(1+r)^5 + 1.624/(1+r)^6 + 1.753/(1+r)^7 + 1.892/(1+r)^8 + 2.045/(1+r)^9 +
2.207(1+r)^10
r= 0.7605
IRR= 76.05%.
C. Payback Time (Payback Time)

Investment 1250 Accumulated

FC 1 583 583

FC 2 994

Shortage in year 2: 1,250- 583 = 667

PR= 1 year + 667/994 * 12 months
PR= 1 year 8.05 months

5. Which of the two projects would you recommend?

Project VAN IRR PAYBACK

Design Your Own 2 years 4.35

608.1595 75.42%
Doll line months

Match My Doll 1 year 8.05

454.8836 76.05%
Clothing Line months

As an advisory team we have decided to recommend to Vice President Emily Harris the
Match My Doll Clothing project option, although when performing the financial
projection analysis, at first sight it seems that the Design your Own Doll option is more
profitable due to the results obtained in a general EBIT perspective, actually when
examining the production costs and administrative expenses they are almost
equivalent, since in the case of project 2 (DYOD) the costs and expenses are almost
double those of the MMDC project.However, when performing the NPV criterion, the

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Group 131 - Team 3

DYOD project can be seen as more optimistic in terms of obtaining profits, but when
weighing criteria such as IRR and PAYBACK, the MMDC project is more convenient.
Another of the items that we have taken into account to give more relevance to this
recommendation is the level of risk that the DYOD project entails, since it requires
more time to guarantee a net cash flow from the investment and would be exposed to
all the macroeconomic and financial changes that may influence the project in future
terms.
On the other hand, a situational analysis of the market with respect to the information
recorded in the case must take into account the seasonality of the market, which affects
the permanent rotation of inventory and therefore the projection to be made on the
business model.
Given the above, we believe that the MMDC project can help to provide a guarantee of
permanent cash flow that is not affected by the seasonality of the market and facilitate
the management of its competitive position by breaking into the market share of other
competing brands that have dolls with similar characteristics and in which their
customers are captivated to explore the company's products. Also, to enhance the
possibilities in the development of diversification strategies (strategies in which the
company has timidly explored).
Finally, although the NPV criterion of the MMDC project shows a lower return on
investment than the DYOD project, in reality, the chosen project (MMDC) begins to
recover its investment more quickly, guaranteeing its operation as of 2010, thus
allowing the necessary adjustments to be applied for future cash flow projections and
profit generation.Finally, although the NPV criterion of the MMDC project shows a
lower profitability than the DYOD project, in reality, the chosen project (MMDC) starts
to recover its investment more quickly, guaranteeing its operation since 2010, thus
allowing the application of the necessary adjustments for the future cash flow
projection and profit generation.

6. Which of the two projects presents a higher risk?

The risk of obtaining a rate of return on the entire cash flow is given by the variations
that these have as a result of exogenous factors, such as macroeconomic means of
adjustment, fiscal and monetary policy that discourages investment.

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So we can say that the payback indicator shows a longer time to recover the investment,
in which there is a risk of changes in the country's economy, which may reduce the net
cash flows. In this sense, the investment in the first project of the Design Your Own
Doll line presents a higher risk for the company.
Both projects seem to have both pros and cons to be realized. With the case of Match
my Doll Clothing we find ourselves in a less risky situation than the other project and
more advantageous at first sight since it shows that making a new clothing line will
allow us to take advantage of the popularity of the current brand and obtain high prices
and at the same time we have the advantage of the discounts that the suppliers will give
us. In addition, he recently received publicity from famous people. On the other hand,
the DYOD project has a more striking idea at the time of analysis, which seeks to
engage the customer by creating its own doll, which, according to them, will generate
higher payments, but entails higher costs, such as investment, fixed costs and higher
discount rate due to higher risk.
In addition, in order to have a better analysis of which project to choose, we first need
to know how each project will be financed; it is necessary to identify whether they will
use equity or liabilities, so we will be able to calculate the WACC- Also despite having
the IRR, we need to know the possible assumptions that could affect the project
decision.

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Finance in a Digital Gonzalez Salazar Jhony Alexander
Environment Montoya Garcia Darnelly Alejandra May 24, 2021
Torres Silva Dayana Alexandra
Group 131 - Team 3

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