Heritage Doll Report

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The projected cash flows are as follow :

$-5'330’600 ; $0 ; $665’385 ; $-308’888 ; $-1’189’455 ; $1’088'198 ; $1'143’815 ; $1'212’446 ; $1'285'334 ; $1'362'318 ; $1'444'118

We will take 10 years for the time of the result.

When we compute the calculation for IRR, we obtain : 0,08%. This percentage measures the profitability of this potential investment over the next 10 years.

The payback period is 9 years and 11 months.

In both cases, the first project is the one that should be choosen. In the first project, our Net Present Value is $57'528, whereas the Net Present Value in the second project amounts

$-2'786'194. The NPV is the difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return. So, to sum up, we should take the higher NPV when comparing two projects, financialy speaking, according to the projected cash flows.

- What additional information does Harris need to complete her analyses and compare the two projects? What specific questions should she ask each of the project sponsors?

In order to take a decision, Harris needs to know other strategic elements of the company. There is obviously a difference of capital investment in the two projects. Would the company want to use its available cash differently ? Do they want to be aggressive and take risks, or, do they prefer to remain modest ? What is the financing way to finance those projects ? Do we use available cash or do we make a loan ? If so, at which rate ? Or do we need to issue stocks to finance this project ? The answers to those questions will tell us properly which project to choose.

Are the projected cashflows are correctely forecasted according to the market ? Does the discount rates were correctly evaluated ?

- If Harris is forced to recommend one project over the other, which should she recommend ? Why?

In this case, only the first project is feasable. The Net Present Values is positive only for the first project. We theorically estimate that a negative Net Present Value of a project corresponds to a non feasable project.

Then, the Internal Rate of Return is greater than for the first project as well. Therefore, in terms of money invested proportionaly, the investment will yield better according to the projections. In this project, we invest $3’520'000. Compare to the other project (costing $ 5'811'000), we invest $2'291'000 less than the second project.

The last indicator that we should use is the perpetuity. The first project offers a perpetuity of $23'259'163, whereas the second project offers a perpetuity of only $21'282'432.

In term of risk, the projected cash inflows are coming starting 2012, whereas the second project offers cash inflows starting from 2015. Since we start to recover earlier in the first project, it means that the project is less risky.