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Capital Budgeting of New Heritage Company

As can be seen from the described cases, New Heritage is continually developing new projects in various areas. This allows the company to develop, interest the audience, and attract new customers. These projects relate to different areas of the company’s activities, such as creating new lines of clothing or the construction of new stores. Thus, the company increases its growth rates and gains unique competitive advantages.

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Each of the reviewed projects has its discount rate, which depends on their complexity and duration. The Toddler Doll Accessory Line project has a relatively low rate of 7.70% since it is a long-term project with a low risk level. ‘Match my Doll’ and Retail Store Expansion in Northeast projects have higher discount rates (9 percent and 10 percent) because they have more risks and a more extended payback period. The lowest discount rate belongs to the New Doll Film project since it should pay off quickly and has a high IRR.

In my opinion, the Toddler Doll Accessory Line project can bring the most income. The development of a new collection of products always attracts the target audience, such as seasonality or the need to update a wardrobe. In addition, these products will be placed in all retail stores of the chain, which will allow reaching the maximum audience (Namanda, 2017). Indeed, the payback period for this project may seem quite long. Despite this, creating a new product line is a standard way of earning money for such companies. This solution differs from the most optimal one: the New Doll Film project has the highest NVP. However, the PI of this project is negative, which, in my opinion, is a significant disadvantage. Moreover, the risk level of the Toddler Doll Accessory Line is the lowest, which underlines its attractiveness.

If the projects took place during one year, the budget’s largest part should be allocated to projects with low and medium risk. Thus, it would be possible to invest in the construction of new stores only with sufficient funds after creating new products. This would minimize risks and implement short-term projects. Thanks to this, the company will profit from them quickly enough, and there is no need to wait for payback.

The profitability index plays an essential role when choosing a project. The PI criterion is advantageous when choosing one project from several projects with approximately the same NPV values but different amounts of required investments. In this case, the one that provides greater investment efficiency is more profitable. In this regard, this indicator allows companies to rank projects with limited investment resources. According to this criterion, projects should be ranked as follows: ‘Match my Doll’ Clothing Line, Toddler Doll Accessory Line, Retail Store Expansion, and New Doll Film.

Ranking by NVP: New Doll Film, Toddler Doll Accessory Line, ‘Match my Doll’ Clothing Line, and Retail Store Expansion. Ranking by IRR: New Doll Film, Retail Store Expansion, Toddler Doll Accessory Line, and ‘Match my Doll’ Clothing Line. Ranking by Payback Period: New Doll Film, Retail Store Expansion, Toddler Doll Accessory Line, and ‘Match my Doll’ Clothing Line. These rankings show that the New Doll Film project can be called the most attractive among others. Retail Store Expansion can also be useful, but it is risky because it involves significant investments, whereas the customers’ behavior is not always predictable.

Reference

Namanda, M. (2017). Capital budgeting, net present value and other business decision making tools. GRIN Verlag.

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StudyCorgi. (2022, April 18). Capital Budgeting of New Heritage Company. Retrieved from https://studycorgi.com/capital-budgeting-of-new-heritage-company/

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