Two good projects. One budget slot. Nearly identical NPVs.
Which one would you fund, and can you defend it?
You are an analyst working for Elena Hart, Vice President of the Production Division at the Heirloom Lane Doll Company. It is September 2025. Next month the capital committee meets, and Elena can probably get only one of her two best proposals funded.
Your job: build the free cash flows, value both projects, stress-test the assumptions, and recommend one. The committee will scrutinise every number.
All amounts in US$ thousands unless stated. A fictionalised teaching scenario.
Founded in 1988 by a retired schoolteacher, Heirloom Lane makes dolls with storylines and positive themes for girls aged 3–12. In 2024 it had about $310 million of revenue and $34 million of operating profit across three divisions: production, retail and licensing.
The doll market is mature, growing only 2–3% a year. Most doll lines fade after a few seasons; Heirloom Lane's keepsake dolls are a rare lasting franchise.
The capital budget is set at about 12% of EBITDA, so money is limited. Projects are valued on after-tax, debt-free incremental cash flows. Sunk costs and non-cash items are excluded; financing charges are excluded.
Discount rates in the Production Division: low risk 7.75%, medium 8.5%, high 9.25%. Tax rate: 38%.
Going-concern projects get a terminal value: a growing perpetuity at a deliberately low growth rate (2.5%), below historical and near-term growth.
An extension of a hit line of matching outfits for girls and their dolls. Influencer videos made the summer range go viral; brand manager Marisa Cole wants a year-round collection now, before the trend fades.
Upfront (2025): R&D $820, marketing $740, working capital $1,000, equipment $1,840 (total $4,400). Elena rates it medium risk, like the division's existing business.
An online design tool lets a girl create a one-of-a-kind doll that looks like her. Brand manager Leah Brandt says loyal customers will pay a premium. But customisation adds manufacturing complexity, the website must work flawlessly, and break-even volume is high.
Upfront: R&D $1,010 and marketing $430 (2025), equipment $5,530 (2025), working capital $1,100 (2026). More equipment is needed by 2029. Three existing IT staff ($480 in 2026) would build the platform; Leah left their cost out.
Year 2025 holds the upfront R&D and marketing (in SG&A) and the initial equipment. Working-capital balances follow the ratios shown; 2025 (and 2026 for Craft-a-Doll) working capital is given directly.
Cash = % of sales · Receivables = DSO/365 × sales · Inventory = production cost ÷ inventory turnover · Payables = DPO/365 × (total operating expenses − depreciation). Net working capital = cash + receivables + inventory − payables.
| Role | Cost ($000) |
|---|---|
| Full-stack developer | 165 |
| Data engineer | 175 |
| Cloud integration specialist | 140 |
| Total | 480 |
Existing employees, "corporate" resources, almost certainly available. Not in Leah's forecast.
The committee meets tomorrow. Elena needs your recommendation. The budget will almost certainly fund only one of the two projects this year.