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New Heritage Doll Company Capital Budgeting Analysis
The New Heritage Doll Company is a company that makes dolls for children between the ages 3 – 12 years. The company has revenues of 245 million USD and an operating profit of 24 million USD. The company has three major divisions – The Retailing division, the Licensing division and the Production division. The head of the production division has to choose between two capital intensive projects that have been presented to her - the “Make My Doll Clothing Extension” (MMDCE henceforth) and the “Design Your Own Doll” (DYOD henceforth). This paper will try and analyze some of the issues that may need to be taken into account by the division head before she chooses a project for final approval. Issue 1: Product Line Growth Rate vs Industry Growth Rate The doll segment in the US is slated to grow at 3% in 2013 and lasting franchise value for branded lines of dolls is considered rare – most doll lines lose their popularity within a few years of launch. Given this reality, the underlying assumption of the two brand managers for the two projects is, in my opinion, quite optimistic. The MMDCE line is expected to grow at 8% while the DYOD line is expected to grow at 6% - which is much higher than the expected rate of growth in the dolls segment. The production head must, in my opinion, do due diligence and consider if the growth rates for these product lines can exceed the average industry growth rate by such a large extent. Issue 2: Possibility of Cannibalization In order to decide which project to present to the capital budgeting committee, the production division head must consider the possibility of cannibalization of sales. The MMDCE line of products were an extension of an existing line of products and would most likely lead to an increase in sales of that product line due to the improvements made to the product. On the

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