New Heritage Doll Company
Capital Budgeting Simulation Analysis
Xiaomeng Jin (Emma)
Chuzhao Yin (Lavana)
Shuo Tang (Candy)
Cost of Capital Simulation
Capital Simulation Scenarios:
Constant EBITDA with high carryover
a. Fixed budget: 4.7 M per year
b. EBITDA percent 12%
c. Carryover 30%
For year 1
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Whatâ€™s more, these three programs are low risk, medium risk and high risk respectively, so by choosing them, we can balance the risk.
What was your APV for the company after year 1? Cash flow?
After year one, the APV is 320.01 M.
Cash Flow of 2010 |
Cash Flow from Operations | 23.35 |
Cash Flow From Investments | -15.52 |
Cash Flow from Financing | -7.63 |
Total Cash Flow | 0.2 |
How did you rank order the projects?
What we used to rank the projects at the first step is NPV. We consider high NPV as the most important indicator. However, besides NPV, we also care about the cost. The lower cost the better. Actually, we have run this simulation for many times as we used different rank principles each time. For example, in some runs we ranked the projects by payback period presuming that the lower payback period the better. In other runs we presumed that high EBITDA is more important. However, after several runs we find out that the most important thing is the NPV and the second important factor is the cost. With a relatively high NPV and relatively low cost, we can get the best pay back.
What decision rule did you observe?
Suppose this was the only year in the simulation? What is the optimal allocation of the budget?
Is NPV/APV the right decision rule when there is a binding budget constraint? What happens?
How did the choices you made in year 1 affect your decisions in later years?
Due to the scenario which was around 4.7 M budget in the first year with a high carryover, there were two different relative ideal choices we could take if this were a one year simulation. The first choice was taking Toddler Doll Accessory Line which cost 2.14 M, New Doll Film/DVD costing 1.05M and opened one new retail stores in the year1 to run out of our budget. The second choice was just adopt New Doll Film/DVD which had the highest NPV with the lowest and then put the money left to the later years using ours 30% carryover.
If we take choice 2, here is the result. In the second year, we will have 5.74M budget remaining and after investing them into three low cost projects, Retail Store Expansion in Northeast, Expansion of Mail-order Catalog Business to Asia and Tween Book Series, we still have 4.74M left to put it into Dolls of the World' Initiative which had relative low cost and high NPV than any others. After that, with ours low fixed budget and new high cost project coming out, the options for us was still limited, so that our scheme was picked low cost projects as many as possible ,as the year 5 comes to the end, decreased the budget remaining in each year and run out of the money in year5.
While, if we take choice 1, an aggressive investment, the result is as follow. We run out of our budget since the very beginning of five round despite ours high carryover, and continued our investment mission as we did in choice 2, we were surprised that we had a much better APV than in choice 2.(630 in choice1 VS 531 in choice 2). By...