FINANACIAL MANAGEMENT

Group Assignment
Group No. A04
Simulation Questions
For
Project Submission

Submitted by
Bhumit Patel

131115

Mitesh Patwa

131131

Mradul Saraswat 131132

Rahi Jain

131143

Saurabh Jain

131149

Questions:
1. Give your inference of the budget constraints your group was working under. What are
the possible consequences of these constraints?
The Board of directors would set an annual budget limiting the dollar spending on the capital
projects. This limit was generally a function of firms internal resources, ability to raise additional
capital and organizational constraints. The companys managers would propose more projects than
could be funded. So we had to select the best set of investments from the pool of given options.
So we analyzed the projects on the parameters of NPV, IRR and Payback Period.
We simulated the results considering different alternatives and through trial and error. We selected
the project which had the highest NPV and then its IRR rate and its payback period. Our selection
was based on Higher relative NPV and IRR rate, and lower Payback Period.
Name of Project
Todller Doll
Accessory Line
Match My Doll
Clothing Line
Retail Store
Expansion in
NorthEast
Warehouse Facility
Consolidation
New Doll
Film/DVD

Project Discount Rate

NPV

Risk

IRR

Payback Period

7.85%

6.82

Low

24.80%

8.7

7.85%

9.17

high

22.24%

9.21

7.85%

8.68

high

34.84%

5.33

7.85%

4.68

medium

15.35%

8.23

7.85%

9.25

medium

238.61%

1.43

2. What kind of projects did New Heritage have? Characterize them by division and project
attributes.

New Heritage had projects in three main divisions, Retail, Production and Licensing. As for
example we were given 5 projects to choose from in the initial year and they were as below.
Name of Project
Todller Doll
Accessory Line
Match My Doll
Clothing Line
Retail Store
Expansion in
NorthEast
Warehouse Facility
Consolidation
New Doll
Film/DVD

Project Division

NPV

Risk

IRR

Payback Period

Production

6.82

Low

24.80%

8.7

Produciton

9.17

high

22.24%

9.21

Retail

8.68

high

34.84%

5.33

Retail

4.68

medium

15.35%

8.23

Licensing

9.25

medium

238.61%

1.43

1. Todller Doll Accessory Line: This project involves developing a new line of
accessories-carriages, cribs, carriers-for an existing New Heritage Doll toddler doll line
('My First Baby and Accessories'). The target market is toddlers. This project is
considered low risk.
2. Match My Doll Clothing Line: New Heritage is considering a 'Match My Doll' line of
look-alike, matching doll and children's clothing for tween girls. NH has ample
experience designing and sourcing doll clothing and children's accessories, but this
proposal also will require it to follow quickly-changing children's fashion trends.
Initially, the 'Match My Doll' clothing line will offer only typical 'California warm
weather' clothing for various occasions. An 'all-season' line is likely to be proposed if
the initial line proves to be successful. This is considered a high-risk endeavor for the
company
3. Retail Store Expansion in NorthEast: The retail division is considering opening new
retail stores in five large Northeastern cities identified as having desirable
demographics. Due to uncertainty about city-by-city profitability, this project is
considered high risk, no matter how many locations are opened in a given year. Retail
division executives argue that because the concept has already been proven, new stores
are no more than medium risk, and it actually would be most efficient to open all the
stores simultaneously.
4. Warehouse Facility Consolidation: This project involves consolidation of NH's
warehouse facilities companywide. The consolidation plan promises to save operating
costs and increase the speed at which goods can be shipped from the factory to retailers.
This project is considered medium risk.
5. New Doll Film/DVD: The licensing division is proposing a third licensing deal with a
Hollywood studio with which NH had previously signed two movie deals. The
proposed new film features an established New Heritage doll character and is aimed at
the tween market. In some respects it resembles NH's previous films, which lost money
in their theatrical runs but did well in DVD sales. The significant difference with this
film is that it would be produced on a lower budget and distributed only on DVD. It
would not be shown in movie theaters, which was expected to yield significant savings.
Instead, the DVD is to be co-marketed by both the studio in print and in-DVD ads, and
by New Heritage in its retail and internet outlets. The proposal requires NH to commit
to an agreed dollar amount of marketing support. This project is considered medium
risk.

3.
Year 1 allocation: if year 1 is the only year of operation/decision making frame, what should
be the optimum allocation given the various constraints? What is the logical frame work of
your recommendations?
If year one is the only year of operation/decision making frame then maximum stress should be
given to 1 yr EBITDA and Payback period. The projects having greater 1 yr EBITDA and lesser
payback period should be preferred. More Stress should be given to EBITDA of 1 year as we are
worried about the Operation of year one. Following are the values of Payback period and EBITDA
Values for our projects.

Projects

Payback Period (in Years)

1 yr EBITDA

Toddler Doll Accessory Line

'Match my Doll' Clothing Line
Retail Store Expansion in Northeast

8.70

9.21
5.33

-0.63
-0.53
0.00

Warehouse Facility Consolidation

New Doll Film/DVD

8.23
1.43

0.00
-1.75

4.
What did your group actually decide in year 1 and how did the decision differ from the
optimal set, if any at all and why?
Initial decision regarding the optimal set was based more on the NPV and risk. The Project having
Higher NPV and the Lower Risk will be Preferred. But in the current scenario when we only have
to consider the one year Period EBITDA of that year have great importance along with the
Payback Period. If Payback period is large EBITDA is generally distributed over the longer period
and mostly towards latter years while in case of shorter Payback EBITDA is usually more in initial
years. If we see the values in case of our projects
Projects

Payback Period (in Years)

1 yr EBITDA

Toddler Doll Accessory Line

'Match my Doll' Clothing Line
Retail Store Expansion in Northeast

8.70

9.21
5.33

-0.63
-0.53
0.00

Warehouse Facility Consolidation

New Doll Film/DVD

8.23
1.43

0.00
-1.75

NPVs are higher for Match My Doll Clothing Line and New Doll Film/DVD while if we only
look at EBITDA situations are different which can be analyzed from above table.

5.

At the beginning of each simulation we were given the budget constraints and according to
that we had to select the projects. Then after each year, we have been given different budget
according to the selections we made in the previous year. Here are the following points on the
basis of which we selected projects each year in any scenario:
1) First and far most, we had to select the projects based on their investments, which come
within the range of the given Budget Constraint. (Budget Constraints were different for
each scenario and even each subsequent year for every iteration).
2) While selecting the projects we took into consideration the net present value of the project
(NPV). Along with NPV, we also took care of the investment ratio to that of NPV. If the
investment to NPV ration is lower, we have given it the higher priority.
3) We also looked at the discount rates, which was treated as the risk, while selecting the
project each year. Lesser the discount rate, higher the intent of selecting that project, given
it gives decent returns.
4) We also looked upon the EBITDA (Earnings before Interest Tax Depreciation) factor.
Higher the value of EBITDA, higher was the chances of selecting that project. While
selecting project we also had taken care of the extent at which EBITDA factor for a given
project, is depreciating in the next year (given the project prevails the next year as well), if
it is not selected in that year. [Partial rollover of EBITDA]
5) We also looked at the payback period for a given project. Shorter it is, better it is.
Budget Constraints did affect the choice of projects at each stage. There were times, when
there are lucrative projects which have been ignored due to their limits exceeding the
budget range. In such scenarios, we had to content with the best possible options we had to
move further.

6. What is the additional insight gained into capital budgeting processes through this
simulation, over and above the classroom discussions undertaken on capital budgeting
decisions.
Some insights which we got from the simulation exercise were:
1) It is not sacrosanct that choosing projects with greatest NPV may give us the best results
and will result in highest APV increase. There have been cases where choosing projects
with highest NPV have not given the highest returns. This is because some projects with
high NPVs were having high risk levels too. And many of such projects did not run on
expectations, for example
'Grow With Me' Doll Line
Unexpected quality problems caused first-year revenues to fall short of expectations by half.
High return rates and costs associated with reengineering a key electronic component raised
SG&A costs significantly.
2) Also sometimes choosing projects with High IRR can be a better proposition than choosing
the projects with the highest NPV. This was the observation we got in all scenarios.
3) There were also short term projects. Projects which may not be available for more than one
year. After choosing them we came to know that it is better not to take theese projects as
they do not result in significant returns in the long term.
4) There was also a scenario on Option to expand. but that option needs to be exercised
carefully by doing proper analysis of the risk level of the project.