Case New Heritage Dolls

The exercise is done in groups of 2 (also possible to do single-handedly). No three-person groups are allowed. If you have a group of two, please remember to include the names of both members when returning the assignments.

There are two separate assignments and the case discussion.

Assignment 1: Prepare the cash flow calculation for the two projects and calculate Net Present Value and Internal Rate of Return. Pay attention to following items:

  • NPV and IRR formulae in Excel are slightly different, you can check the result by keeping in mind that IRR is equal to the discount rate which gives NPV=0. Thus, you can also calculate IRR by using the Goal Seek –function in Excel and applying it to the NPV formula.
  • How to deal with depreciations (why are they added back to EBIT (1-t))
  • What is working capital here, and how much does it influence the end result?
  • The firm uses a rather peculiar method that calculates the value of successful projects “Projects that created value indefinitely, given continuing investment, were treated as going concerns with a perpetual life. That is, NPV calculations included a terminal value computed as the value of a perpetuity growing at a constant rate”. Use Gordon growth model T0= FCFN+1/(k – g)in computing the terminal value,whichmeans that the free cash flow is divided by (discount rate k –growth g). Howdoes this affect the calculations? Whatif this kind of valuewas not used – howmuchwould it alter the results?
  • Deadline is February 13th, 2015

The Case is discussed as follows :

  • Group 1: Tue 17.02. 12:15-16
  • Group 2: Wed 18.02. 8:15-12

You have signed in to either one of the groups. If in a two-person group you have signed up to different groups, that does not matter much, for this is only a technical matter.

Assignment 2: On basis of case discussion prepare a written report, supported by calculations, arguing which investment opportunity you choose and why. For this, read Chapter 12 of the course book, and consider, whether the case has any characteristics that would justify the criticisms about cash-flow based investment analyses. For instance, how is the risk measured, and what benefits might be realized that are difficult to quantify in a cash flow analysis.

In addition, you may consider the following:

  • How should the salaries of IT-personnel be handled?
  • If one performs sensitivity analyses for discount rates and future growth, what is the conclusion?
  • Why are the investments mutually exclusive, and will they remain so (for how long)?
  • Will there be an effect on other products’ sales? How probable this is?
  • Deadline is February 27th, 2015.