Overview
The New Heritage Doll Company was founded in 1985 and is known for the production of dolls with wholesome themes and unique storylines to help children develop their imagination, while also learning American history. The three main operating divisions in the organization are production, retailing, and licensing where the production division outsourced majority of doll and doll accessory production to Asia, whereas the retailing division ran various retail stores, a mail-order paper catalog, and an online website. Further, the licensing division in a choosy manner licenses doll themes and characters to a wide range of media outlets that grasps the company’s target market. Currently, Emily Harris, the production division’s vice president is considering two project proposals in the upcoming budgeting session which both stand out due to their potential to drive future company growth and strengthen innovative project lines. Nevertheless, there are several concerns regarding budgeting constraints, which requires her to select one project and deliver a compelling case in support of the selected project.

Match my doll clothing line has been particularly popular due to the number of celebrity children wearing the line, which provides an opportunity to cash in on the success through expansion of the line by including all-season clothing and accessories. The initial expenses for expanding this line are as shown below;

Further, the marketing and R&D expenditure is deductible at a corporate rate of 40% for tax purposes, while the useful life of the equipment, plant, and property is approximately 10 years. In addition, the level of risk in the project can be considered moderate if not similar to that linked to level of risk in the present line.

Net Present Value = Present Value – Initial Investment
= 38000.00614 – (4820)
= 33180.01
With regard to the design your own doll initiative, the project sought to personalize dolls according to consumer taste using personal data, which would attract new and current doll owners to create and buy dolls made in their image. The initial expenditures are as below;

The predicted cash flow for the design your own doll initiative is also shown below;

Net Present Value = Present Value – Initial Investment
= 101702.3846 – (8135.4 + 1435)
= 92130.9846

From the calculations above, it emerges that the NPV of the design your own doll initiative is higher in comparison to the make your own doll clothing line’s NPV. As such, it can be concluded that the ROI for design your doll is also significantly higher. As such, the design your doll initiative will be more profitable than expanding the match my doll clothing line.

Despite having a higher break-even volume, the ‘Design Your Own Doll’ initiative’s impact will lead to the opening of a new segment in the market, compared to the ‘Match My Doll Clothing Line Expansion’ that may cannibalize current sales of New Heritage Dolls. In this case, the ‘Design Your Own Doll’ initiative will deliver a unique customer experience, which could further strengthen the company’s brand and compensate for the higher break-even volume. This would, in turn, justify a less conservative rate of growth and risk assessment. The ‘Design Your Own Doll’ initiative will help in creating more sales due to the novelty of its concept, while the sales may also be made to existing and new customers. Furthermore, this initiative’s fixed cost ratio is also moderate, while it will serve the company’s vision and mission to provide its customers with a unique experience.

In selling this decision to the rest of the capital budgeting committee, Ms. Harris should point out that the ‘Match My Doll Clothing’ line expansion poses a bigger risk as a result of the fickle nature associated with fashion sense amongst young children and especially girls. In this case, the new line would have to be launched immediately since it would quickly go out of fashion. In addition, the ‘Match My Doll Clothing’ line expansion will also be a gamble because there is minimal knowledge about the period of time it will take for the initiative to make gains for the company. While the ‘Design Your Own Doll’ line’s NPV was higher than that calculated for ‘Match My Doll Clothing’ line, the latter has higher returns in comparison to the company’s competitors across all categories with the exception of NPV. Therefore, the capital budgeting committee should go for the ‘Match My Doll Clothing’ line on the basis of this information.