The division revenue figures include approximately $95 million of internal sales within divisions which are eliminated when considering unconsolidated revenue for the company. We must look closer on the financial projections and the operating details for the two proposals. By looking we can see a big difference in Revenue growth. We realize that Design your own doll can handle much more additional annual revenue according to the resources in the balance sheet.

According to the outlays the initial expenditures for Design Your Own Dolls is much higher than Match my Doll Clothing. As with Match my Doll Clothing the required R&D and marketing costs would be tax deductible. BIT Is a good gauge of how well those two companies Is being managed. It Is watched closely by all stakeholders, because It measures both overall demand for the company ‘s products and the company’ s efficiency In delivering those products. The operating projections tell us that Design Your Own Doll has gained more in operating profits.

Substantial investment in working capital (primarily work in process inventory of partially manufactured dolls) would be required beginning in 2011 for Match My Doll Clothing to support the forecasted level of sales. The value of a risky alternative to the decision maker may be deferent than the expected value of the alternative because f the risk that the alternative poses of serious losses. The concept of the certainty equivalent is useful for such situation.

Factors considered in the assessment of a project ‘s risk for Emily Harris included, for example, whether it required new consumer acceptance or new technology, high levels of fixed costs and hence high breakable production volumes, the sensitively of price or volume to macroeconomic recession, the anticipated degree of price competition, and so forth. Given the proven success of Match My Doll Clothing, Harris believed the project entailed moderate risk hat is, about the same degree of risk as the production division ;s existing business as a whole.

Design Your Own Doll had a relatively long payback period, introduced some untested elements into the manufacturing process, and depended on near- flawless operation of new customer-facing software and user interfaces. If the project stumbled for some reason, New Heritage risked damaging relationships with the best customers. On the other hand, the project had a relatively modest fixed cost ratio, and it played to the company’s key strength – creating a unique experience for its nonusers. The cash flows excluded all financing charges and non-cash Items (I. . Depreciation), and were calculated on an after-corporate-tax basis. The New Heritage’s corporate tax rate Is 40%. We think that the Design Your Own Doll project Is more compelling. Project creates more value? (Please find the calculations in the attachment) NP calculations include a terminal value computed as the value of a perpetuity growing at constant rate. We computed Free Cash Flows (FCC) to find out the actual amount of cash from operations that the company could use in developing its new rejects.

We calculated the terminal value for 2020 as projected FCC in the first year beyond the projection horizon divided by discount rate of 8. 4% less the perpetuity growth rate, which in this case was 3%. According to our calculations the Mad’s terminal value in 2020 and ODD’S Based on the our calculation the NP of the Match My Doll Clothing project is $7,1 51,000 ( and the NP of the Design Your Own Doll project is $9,257,000 . In both cases the NP is greater than zero but NP of project 2 is greater than NP of project 1, therefore project number 2 should be selected.

Payback period, profitability index, AIR, NP, and a sensitivity analysis will be calculated to figure out if this is a good investment opportunity for the company or f they should reject the project. Analysis 1 . What is the payback period of the project? The payback period is approximately 3 years for the new PDA design. “The payback investment rule, states that you should only accept a project If Its cash flows pay back Its Initial Investment within a specific period” (Beer, & Demeanor, 201 1, p. 164).

Firms usually use the payback rule first because It Is easiest and fastest to calculate but they usually also calculate the AIR and NP before making a decision to accept or reject a project (Beer, & Demeanor, 2. What is the profitability index of the project? The profitability index for 011). The new PDA is . 557 which is the value created in terms of NP per unit of resource consumed (Beer, & Demeanor, 2011). “Practitioners often use the profitability index to identify the optimal combination of projects to undertake in such situations” (Beer, & Demeanor, 2011, p. 172).

It is especially helpful if a firm is trying to decide which project to take on out of several different projects, it helps to find the most profitable. 3. What is the AIR of the project? The AIR of the new PDA Is 28. 31% and since the cost of capital is 12% this Investment would be recommended to undertake. As Beer & Demeanor, 2011, describe applying the AIR rule “Take any Investment opportunity where the AIR exceeds the opportunity cost of capital” (p. 160). Just like the payback and the NP rules, AIR Is usually applied to stand alone projects such as the new PDA design that Conch Republic is considering. . What is the NP of the project? The NP of the new PDA is $18,096,793. 00 and since this is a positive number the NP rules states to accept the project. “Although the NP rule is the most accurate and reliable decision rule, in practice a wide variety of tools are applied often in tandem with the NP rule” (Beer, & Demeanor, 2011, p. 58). These other tools for example are the AIR, profitability index, figuring the payback period and conducting a sensitivity analysis. 5. How sensitive is the Invent changes in the price of the new PDA?

As illustrated in appendix A table 1, the NP is sensitive to changes in the price of the new PDA. “Sensitivity analysis breaks the NP calculation Into its component assumptions and shows how the NP varies as the underlying assumptions change” (Beer, & Demeanor, 2011, p. 201). The sensitively analysis performed was to show the difference In price with an Increase and decrease In price by 10%. . How sensitive is the NP to changes in the quantity sold? The sensitivity analysis by 10%.

The increase raised the NP to $12,959,41 5 and the decrease lowered the Novo 7. Should Conch Republic produce the new PDA? Yes, Conch Republic should produce the new PDA since the AIR is larger than the cost of capital and the NP is positive. The profitability isn’t a big factor since this is a stand-alone project. The sensitivity analysis also supports the decision to accept the project. 8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis?

This is to be expected, the new model will cost more and Conch Republic should want customers to purchase the newer more expensive model instead of the older model. They should slow down on production of the older model and plan only producing it for warranty replacements or to have a few on hand as the less expensive alternative. This would not affect my analysis since as a company they should plan on selling the new model more than the older model to produce more revenue. Conclusion In conclusion this analysis evaluated the investment opportunity for Conch

Republic Electronics for designing a new PDA. This analysis was evaluated using payback period, profitability index, AIR, NP, and a sensitivity analysis. Any electronics company is going to have to upgrade their devices to stay relevant and to get customers to want to buy their products. If Conch Republic couldn’t afford to upgrade their PDA, this would be a bad sign for their company overall since it is imperative for a company to be innovative to be sustainable. Beer, J. , & Demeanor, P. (2011). Corporate finance: the core. (2nd deed. ). Boston, MA: Pearson Education.