Determine the incremental debt-free cash flow for each

Question

Question: Analysis: New Doll Company

Part 1: Compare the business cases for each of the projects under consideration by Emily Harris. Are they compatible with New Heritage's strategy? Which do you regard as more compelling? Why?

Part 2: Determine the incremental debt-free cash flow for each project (through 2020). Why is a debt-free cash flow used? Why does Free Cash flow exclude all interest?

Part 3: Find the terminal value of each project.

Part 4: Determine the discount rate for each project. Do you agree with the proposed rates given in the case? Why or why not?

Part 5: What is the relationship between the discount rate and the riskiness of the project? Do you agree with Emily's risk assessment of the project? Why or why not?

Part 6: Use the operating projections for each project to compute the NPV for each. Which project creates more value?

Part 7: Calculate the profitability index (PI) for each project. Which would you recommend based on the PI?

Part 8: What is the relationship between the NPV and the profitability index? Will they lead to the same conclusion? Why or why not?

Part 9: Compute the IRR for each project. Which project should be chosen based on IRR?

Part 10: What is the relationship between IRR, PI, and NPV? Will they lead to the same acceptance or rejection of the decision? Will they lead to the same ranking of projects? Why or why not?

Part 11: Compute the payback period for each project.

Part 12: What are the major drawbacks and advantages to using the payback period in decision making?

Part 13: What effect does the terminal value have on NPV and IRR? Would omitting or changing the terminal value change your decision?

Part 14: What additional information does Emily Harris need to complete her analyses and to compare the two projects? What specific questions should she ask each of the project sponsors?

Part 15: If Harris is forced to recommend one project over the other, which should she recommend? Why?