Adrian RobertsFIN 630 Capital Budgeting .docx

Adrian Roberts
FIN 630 Capital Budgeting
Southern New Hampshire University (SNHU)
Professor: Zuzana
New Heritage Doll Company is a firm into the production
of dolls which want to expand its brand to a broader market, by
doing this they hope to capitalize on customer loyalty to
maximize profit. Vice President Emily Harris is looking to
forward her proposal to the budgeting committee for evaluation,

she is presented with two viable option to strengthen the
division product lines. The first project is Matching My Doll
Clothing Line Expansion (MMDC), this would extend the warm
weather products of the doll clothing line. The other project is
Design Your Own Doll (DYOD), this would include a website
where customers can choose the doll’s features, color etc. The
firm has to choose which of the two project that most lucrative
due to managerial and financial constraints.
Companies defined Capital Budgeting as the process used to
determine whether capital assets are worth investing in. Capital
assets are generally only a small portion of a company’s total
assets, but they are usually long-term investments like new
equipment, facilities and software upgrades (2017, August).
Methods use to evaluate a project are Internal Rate of Return
(IRR) calculation is used to determine whether a particular
investment is worthwhile by assessing the interest that should
be yielded over the course of a capital investment. The internal
rate of return measurement is similar to the net present value
metric (another capital budgeting method); however, the
internal rate of return is formulated to make the net present
value of all cash flows in a project equal to zero. It is for this
reason that companies shouldn’t rely solely on the internal rate
of return calculation to project profitability of a project and
should use it in conjunction with at least one other budgeting
metric, like net present value (2017, August). Net Present Value
(NPV) is used for the same purpose as the internal rate of
return, analyzing the projected returns for a potential
investment or project. The net present value represents the
difference between the current value of money flowing into the
project and the current value of money being spent. But the
industry must still recognize the potential room for error that
arises when relying on calculations like investment costs, rates
of discount, and projected returns, all of which rely heavily on
assumptions and estimates (August, 2017). Profitability Index is
a capital budgeting tool designed to identify the relationship
between the cost of a proposed investment and the benefits that

could be produced if the venture was successful. The
profitability index employs a ratio that consists of the present
value of future cash flows over the initial investment. As this
ratio increases beyond 1.0, the proposed investment becomes
more desirable to companies. However, the caveat to using the
profitability index for capital budgeting is that the technique
does not account for the size of a project; therefore, sizable
projects with significantly large cash flow figures often claim
lower profitability indexes because of their slimmer profit
margins. But it does give the exact rate of return for a project of
investment, which can be beneficial in understanding the cost-
benefit of a project much easier. Accounting Rate of Return
(ARR) is the projected return that a company can expect from a
proposed capital investment. To discover the accounting rate of
return, you must divide the average profit by the initial
investment. However, accounting rate of return metric also has
some minor drawbacks when used as the sole method for capital
budgeting. The first drawback is that it does not account for the
time value of the money involved meaning that future returns
may be worth significantly less than the returns currently being
taken in. And the second issue with relying solely on the
accounting rate of return in capital budgeting is the lack of
acknowledgement of cash flows. Pay Back Period is a unique
capital budgeting method. Specifically, the payback period is a
financial analytical tool that defines the length of time
necessary to earn back money that has been invested. As with
each method mentioned so far, the payback period does have its
limitations, such as not accounting for the time value of money,
risk factors, financing concerns or the opportunity cost of an
investment. Therefore, using the payback period in combination
with other capital budgeting methods is far more reliable. And
finally, Weight average cost of capital (WACC) is used as the
discount rate applied to future cash flows for deriving a
business's net present value. Investors use WACC as a tool to
decide whether to invest. The WACC represents the minimum
rate of return at which a company produces value for its

investors (McClure, B. 2019). The method that’s more
meaningful to my particular company is the NPV, IRR, payback
period and discount rate.
The expansion of MMDC project is a medium risk project
because it’s an extension of the existing product line. This
project would have a discount factor of 8.40% which could
calculate an NPV of $7,150.07 including terminal value and
negative $146.20 not including terminal value. While DYOD
project is of a higher risk because it’s based on a whole new
product line and requires innovative technology component, this
give the project a discount factor of 9.00%. the NPV for
DYOD’s is $7,058.65 which include a terminal factor and a
negative $3,390.88 without the terminal. Both projects have a
positive NPV and would create value for the company on a
whole. But, MMDC expansion project has a better and higher
NPV, so in reality it would maximize more profit for the
company. On the other hand, the internal rate of return (IRR)
for MMDC expansion is 23.99% with terminal value and 7.64%
without it included. IRR for DYOD is 17.88% with terminal and
negative 0.52% without it included. Furthermore, MMDC has a
payback period of 7.40 years while DYOD had a payback period
of 9.07 years. Analyzing both projects shows an above assigned
discount rate, MMDC has a 8.4% rate and DYOD is riskier with
9%. While DYOD could potentially generate higher revenue in
the future, this project would take longer to generate free cash
flow compare to MMDC. Even though the payback period is less
of an effective tool than the IRR or NPV, it should be used in
conjunction to both IRR and NPV to make a more inform
decision.
From the analysis capital budgeting decision base on NPV
analysis between the two alternatives for the New Heritage Doll
Company. And since the NPV and IRR are higher in case of
extension of My Doll Clothing line, the Company should
consider the extension of My Doll Clothing Line. However,
Design Your Own Doll (DYOB) seems to be a more sustainable
project them MMDC. I forecast MMDC costs will increase and

profitability decrease in the long run. On the other hand,
DYOB’s profitability will increase in the long run. I feel a
product line that allows customers to create a doll that
resembles or aligns with them is a more viable option compared
to New Heritage to come out with matching outfits which takes
away from the company core value. I would recommend DYOB
because it is more attractive, more sustainable in the long run,
more in line with the company core values fostering
individuality/customizations and focuses on the current loyal
customers.
Reference
Luehrman, T., & Abelli, H. (2010, September 15). Retrieved
August 21, 2019, from
https://hbsp.harvard.edu/download?url=/courses/631203/items/4
212-PDF-ENG/content&metadata=e30=
5 Methods for Capital Budgeting. (2017, August 1). Retrieved
from https://online.norwich.edu/academic-
programs/resources/5-methods-capital-budgeting
McClure, B. (2019, May 21). Investors Need a Good WACC.
Retrieved from
https://www.investopedia.com/articles/fundamental/03/061103.a
sp#targetText=For instance, in discounted cash,a business's net
present value.&targetText=Investors use WACC as a,produces
value for its investors.

No directly quoted material may be used in this project paper.
Resources should be summarized or paraphrased with
appropriate in-text and Resource page citations.
For this project you will write about a category of criminal
activity you studied and found most compelling during the
course of this class. In general, your assignment is to examine
this criminal activity, its theoretical perspectives, and the
underlying factors in an effort to explain the behavior and
reduce recidivism in the future. Use your critical thinking and
research skills to compose a paper that demonstrates what you
have learned in this course.
Instructions:
Choose a category of crime from the range of criminal activities
you studied this semester, such as terrorism, family violence,
cybercrime, sexual assault, etc.
Select a specific individual that perpetrated this type of crime.
Begin with a brief (150 to 200 word) abstract, which is a
comprehensive summary of the contents of your project.
Use your course materials and at least three (3) outside
resources (not course instructional material) to support your
work.
Write a concluding statement.
Project Outline
1. Define and describe the category of crime, its characteristics,
typical offenders, and the theoretical perspectives attributed to
it.
2. Identify and describe your chosen individual that perpetrated
this type of crime.
3. Explain the perpetrator/s background. For example:
· If an individual, explain where they were born, their family
structure, the socioeconomic conditions, education, their life
events that led up to the criminal act, etc.
4. If you have identified a specific exemplary incident describe

the crime. Explain what happened, when it happened, where it
happened, the conditions that led up to the crime (s), what if
any gain the perpetrator realized as a result of the crime etc.
5. Explain the factors or predictors that may have influenced
this criminal behavior such as, but not limited to:
· Risk factors
· Psychological disorders
· Mental illness
· Substance abuse
· Motivations
· Political ideologies
6. Explain whether the offender (s) were able to follow through
with the crime (s).
· If they were able to, how did they achieve it? Over what time
period?
· If not, why not?
7. Identify and describe the legal, corrective, and/or
rehabilitative action that is appropriately directed to
perpetrators of this criminal activity. Is there evidence (or do
you believe) the punishment and or treatment programs can be
effective in reducing recidivism?
8. Describe and evaluate any associated outcomes/impact
emanating from this criminal activity or specific incident, such
as increased social awareness, change in policy or laws,
negative backlash or unintended effects, etc.
9. Concluding statement
Grading:
The evaluation of this project will focus on:
1. Your understanding and description of the crime category you
selected.
2. Your comprehensive review of the example case.
3. Your analysis of the risk factors in the example case.
4. Overall quality of the composition.
5. Compliance with the format requirements.
Format:
1. A minimum of 2,500 words not including cover page and

references page
2. The cover page should include the name and number of the
course, the name of the student, title of the project and the date
of submission.
3. The narrative composition is to be 12 pt. font, double
spacing, with 1-inch margins
4. Resources, including course materials, must be cited both in
the narrative where appropriate and on a separate references
page, using APA citation rules.
5. Projects should be submitted using the Assignment Folder
unless instructed otherwise.
6. At the instructor’s discretion, this project may be submitted
to Turnitin or other services for verification of originality
LINE EXTENSIONSelected Operating Projections for Design
Your Own Doll ($ in
thousands)20102011201220132014201520162017201820192020
Revenue$4,500$6,860$8,409$9,082$9,808$10,593$11,440$12,3
55$13,344$14,411 Revenue
Growth52.4%22.6%8.0%8.0%8.0%8.0%8.0%8.0%8.0%Producti
on CostsFixed Production Expense (exlc. Depreciation)
Buzzell, Zuzana: Buzzell, Zuzana:
Given575575587598610622635648660674Variable Production
Costs
Given2,0353,4044,2914,6695,0785,5216,0006,5197,0797,685De
preciation
Given152152152152164178192207224242Total Production
Costs

Fixed Prod Exp+Variable Prod
Cost+Depreciaton2,7624,1315,0305,4195,8526,3216,8277,3747,
9638,601Selling, General, & Administrative
Given1,2501,1551,7352,1022,2702,4522,6482,8603,0893,3363,6
03Total Operating Expense
Total Production Cost + Total Operating
Expense$1,250$3,917$5,866$7,132$7,689$8,304$8,969$9,687$
10,463$11,299$12,204Operating Profit
Given($1,250)$583$994$1,277$1,393$1,504$1,624$1,753$1,89
2$2,045$2,207 Operating
Profit/Sales0.1300.1450.1520.1530.1530.1530.1530.1530.1530.
153
SG&A/Sales0.2570.2530.2500.2500.2500.2500.2500.2500.2500.
250Working Capital Assumptions:Minimum Cash Balance as %
of Sales
Given
NANA3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0%Days Sales
Outstanding
GivenNANA59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2xI
nventory Turnover (prod. Cost/ending inv.)
GivenNANA12.2x12.3x12.6x12.7x12.7x12.7x12.7x12.7x12.7xD
ays Payable Outstanding (based on tot. op. exp.)

GivenNANA33.7x33.8x33.9x33.9x33.9x33.9x33.9x33.9x33.9xC
apital Expenditure
Given$1,470$952$152$152$334$361$389$421$454$491$530
Growth in Capex-35.24%-
84.03%0.00%119.74%8.08%7.76%8.23%7.84%8.15%7.94%MIL
ESTONE #1 (hint: start by calculating Net Working
Capital)Step 1: Net Working Capital
20102011201220132014201520162017201820192020Cash
Given135206252272294318343371400432Accounts Receivable
Given7291,1121,3631,4721,5901,7171,8552,0032,1632,336Inve
ntory
Given360500396427461498538581627677Accounts Payable
Given3174845936406927478078719411,016Net working
Capital
Net Working Capital = Cash+AR+Inv-
AP8009071,3341,4181,5311,6531,7861,9292,0842,2492,429ΔN
WC10742784113122133143155165180
NWC/Sales0.2020.1940.1690.1690.1690.1690.1690.1690.1690.1
69Step 2: NPV and IRRNPV AnalysisFree Cash
Flows20102011201220132014201520162017201820192020EBI
T (1-t)
We assume Tax Rate of 40%

plus depreciationless
ΔNWC(107)(427)(84)(113)(122)(133)(143)(155)(165)(180)less
capital expendituresFree Cash Flows
FCF= EBIT(1-t)+ depreciation + (lessΔNWC)+(less capital
expenditure)Terminal Value 3.00%
TV = [FCF(2020)*(1+TV rate)]/(discount factor+TV rate)0Intial
Outlays Net Working Capital
Given(800) Net Property, plant & equipment
Given(1,470)Discount Factor 8.40%
Discount Factor = (1/1+r)T1.0000Present Value with TV in
2020
PV=FCF*Discount Factor(2,270)0000000000Present Value
without TV in 2020(2,270)0000000000Net Present
Value($2,270)NPV without Terminal Value($2,270)IRR
analysis20102011201220132014201520162017201820192020Ca
sh Flows(2,270)0000000000IRRERROR:#NUM!MILESTONE
#2Payback
Analysis20102011201220132014201520162017201820192020C
ash Flows (including TV)
Using the same cash flow s for IRS
analysis(2,270)0000000000Cumulative Cash Flows
(2,270)(2,270)(2,270)(2,270)(2,270)(2,270)(2,270)(2,270)(2,270

)(2,270)(2,270)Payback Period (in years)Result in Years5-year
Cumulative EBITDACalc
Here20102011201220132014201520162017201820192020Disco
unted Cash Flows (including TV)
This was calculated as part of the NPV
analysis(2,270)0000000000Cumulative Discounted Cash
Flows(2,270)(2,270)(2,270)(2,270)(2,270)(2,270)(2,270)(2,270)
(2,270)(2,270)(2,270)Payback Period (in years)Result in
YearsMILESTONE #3Profitability IndexNPV/Initial
InvestmentCalc Here
OWN DOLLSelected Operating Projections for Design Your
Own Doll ($ in
thousands)20102011201220132014201520162017201820192020
Revenue$0$6,000$14,360$20,222$21,435$22,721$24,084$25,52
9$27,061$28,685 Revenue
Growth139.3%40.8%6.0%6.0%6.0%6.0%6.0%6.0%Production
CostsFixed Production Expense (exlc. Depreciation)
Given01,6501,6831,7171,7511,7861,8221,8581,8951,933Additi
onal development costs (IT)
Table #4 in the case study435Variable Production Costs
Given02,2507,65111,42712,18212,98313,83314,73615,69416,71
2Depreciation
Given0310310310436462490520551584Total Production Costs
Fixed Prod Exp+Variable Prod

Cost+Depreciaton4354,2109,64413,45414,36915,23116,14517,1
1418,14019,229Selling, General, & Administrative
Given1,20101,2402,9224,0444,2874,5444,8175,1065,4125,737T
otal Operating Expense
Total Production Cost + Total Operating
Expense$1,201$435$5,450$12,566$17,498$18,656$19,775$20,9
62$22,220$23,552$24,966Operating Profit
Given($1,201)($435)$550$1,794$2,724$2,779$2,946$3,122$3,3
09$3,509$3,719 Operating
Profit/Sales0.0920.1250.1350.1300.1300.1300.1300.1300.130
SG&A/Sales0.2070.2030.2000.2000.2000.2000.2000.2000.200
Working Capital Assumptions:Minimum Cash Balance as % of
Sales
Given
NANA3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0%3.0%Days Sales
Outstanding
GivenNANA59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2x59.2xI
nventory Turnover (prod. Cost/ending inv.)
GivenNANA12.2x12.3x12.6x12.7x12.7x12.7x12.7x12.7x12.7xD
ays Payable Outstanding (based on tot. op. exp.)
GivenNANA33.7x33.8x33.9x33.9x33.9x33.9x33.9x33.9x33.9xC
apital

Expenditure$4,610$0$310$310$2,192$826$875$928$983$1,043
$1,105 Growth in Capex0.00%607.10%-
62.32%5.93%6.06%5.93%6.10%5.94%MILESTONE #1 (hint:
start by calculating Net Working Capital)Step 1: Net Working
Capital
20102011201220132014201520162017201820192020Cash
Given0180431607643682723766812861Accounts Receivable
Given9732,3283,2783,4753,6833,9044,1394,3874,650Inventory
Given3467861,0651,1301,1971,2691,3451,4261,512Accounts
Payable
Given4741,1351,5981,6941,7961,9042,0182,1392,267Net
working Capital
Net Working Capital = Cash+AR+Inv-
AP1,0001,0252,4103,3523,5543,7663,9924,2324,4864,756ΔNW
C1,000251,385942202212226240254270
NWC/Sales0.1710.1680.1660.1660.1660.1660.1660.1660.166Ste
p 2: NPV and IRRNPV AnalysisFree Cash
Flows20102011201220132014201520162017201820192020EBI
T (1-t)
We assume Tax Rate of 40%
plus depreciationless ΔNWCless capital expendituresFree Cash
Flows

FCF= EBIT(1-t)+ depreciation + (lessΔNWC)+(less capital
expenditure)00000000000Terminal Value 3.00%
TV = [FCF(2020)*(1+TV rate)]/(discount factor+TV
rate)0Discount Factor 9.00%
Discount Factor = (1/1+r)T1.0000Present Value with TV in
2020
PV=FCF*Discount Factor00000000000Present Value without
TV in 202000000000000Net Present Value$0NPV without
Terminal Value$0IRR
analysis20102011201220132014201520162017201820192020Ca
sh Flows00000000000IRRERROR:#NUM!MILESTONE
#2Payback
Analysis20102011201220132014201520162017201820192020C
ash Flows (including TV)
Using the same cash flow s for IRS
analysis00000000000Cumulative Cash Flows
00000000000Payback Period (in years)Result in Years5-year
Cumulative EBITDACalc
Here20102011201220132014201520162017201820192020Disco
unted Cash Flows (including TV)
This was calculated as part of the NPV
analysis00000000000Cumulative Discounted Cash
Flows00000000000Payback Period (in years)Result in
YearsMILESTONE #3Profitability IndexNPV/Initial
InvestmentCalc Here

Adrian RobertsFIN 630 Capital Budgeting .docx

Adrian RobertsFIN 630 Capital Budgeting .docx

Recommended

Recommended

More Related Content

Similar to Adrian RobertsFIN 630 Capital Budgeting .docx

Similar to Adrian RobertsFIN 630 Capital Budgeting .docx (14)

More from daniahendric

More from daniahendric (20)

Recently uploaded

Recently uploaded (20)

Adrian RobertsFIN 630 Capital Budgeting .docx