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Hola Kola Case Capital Budgeting MP15030

The document discusses a capital budgeting decision for Bebida Sol, a Mexican soft drink company, to invest in Hola Kola, a new diet soft drink product. A financial analysis was conducted considering revenues of $36,000 in year 1 growing at 6.3% annually, variable expenses of 36% of revenues, fixed costs of $3,560 in year 1 growing at 6.3%, and a tax rate of 30%. The net present value of the investment is positive at $18,373 and the internal rate of return is 17.08%, indicating the project should be accepted. When opportunity costs of eroding sales from an existing product and market research costs are included, the net present value remains positive

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Francisco Romano
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359 views4 pages

Hola Kola Case Capital Budgeting MP15030

The document discusses a capital budgeting decision for Bebida Sol, a Mexican soft drink company, to invest in Hola Kola, a new diet soft drink product. A financial analysis was conducted considering revenues of $36,000 in year 1 growing at 6.3% annually, variable expenses of 36% of revenues, fixed costs of $3,560 in year 1 growing at 6.3%, and a tax rate of 30%. The net present value of the investment is positive at $18,373 and the internal rate of return is 17.08%, indicating the project should be accepted. When opportunity costs of eroding sales from an existing product and market research costs are included, the net present value remains positive

Uploaded by

Francisco Romano
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© © All Rights Reserved
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HOLA-KOLA – THE CAPITAL BUDGETING DECISION –

Executive Summary

 Mexico has the highest overweight rate in the world


 Bebida Sol a pvt owned carbonated soft drink company in Mexico
 Mexico had the highest consumption of alcohol , > 40% higher that USA at 163
gallons / capita
 Mexican soft drink market had a total revenue of 39.2 billon USD in 2011
representing a CAGR of 6.3% from 2007 to 2011.
 Sales for Bebida Sol increased from 80 million pesos to 1998 to 900 million in 2011
 With the global crisis in 2008 customers moved from a the branded products to
Bebida sol soft drink which resulted in 60% jump in sales in 2008 and a huge increase
in the cash for the organization.
 The owner of Bebida sol thinks that it a good time to invest in diet soft drink which
could increase his margin and help him to grow his business.

Problem Identification

With a strong cash flow Antonio decided seek the prospects of acquiring the Hola Kola
business investment but decided to first check the prospective options
Loans Availability :
Banker agrees to give 5 yr , 16% annual interest loan for 20% of the needed capital would
result in a WACC at 18.2%
Demand :
Consultant estimated sales of 600,000 ltr a month at a projected price of 5 pesos for 5 yrs
Cost to company to study – 5,000,000 pesos
Capacity & Cost of Investment :
Cost of m/c = 50,000,000 pesos , depreciated straight line method over 5 yrs
Resale value = 4,000,000 pesos
RM cost to produce = 1.8 pesos/ ltr
Labour cost = 180000 pesos/ month
Energy cost = 50000/month
Admin + Selling cost = 300,000 / year
A/c dept cost = 1% of sales as over head cost
Erosion Cost of Current Product
Cost of erosion = 800,000 pesos after tax cash flow / year

With respect to starting a new product could Antonio benefit and cover up his working
capital and have + ve cash flows on taking this product.

Solution
a. Assuming : (All fig in , thousand peso)
Discounted cash flow at 10% , Working Capital at 18% , Tax rate at 30% , depreciation using
straight line method.
With an investment of upto 50 million pesos – keeping in mind the variable expense at 36%
and fixed cost of 3560 pesos and the growth rate of the industry is at 6.3 % we would
receive a NPV of 18373 and a salvage value of the working capital and equipment at 12274
pesos in 5 years.

OPERATING
CASHFLOWS
Year 1 2 3 4 5
Revenues $36,000 $38,268 $40,679 $43,242 $45,966
-Var. Expenses $12,960 $13,776 $14,644 $15,567 $16,548
- Fixed Expenses $3,560 $3,784 $4,023 $4,276 $4,546
EBITDA $19,480 $20,707 $22,012 $23,399 $24,873
- Depreciation $9,200 $9,200 $9,200 $9,200 $9,200
EBIT $10,280 $11,507 $12,812 $14,199 $15,673
-Tax $3,084 $3,452 $3,844 $4,260 $4,702
EBIT(1-t) $7,196 $8,055 $8,968 $9,939 $10,971
+ Depreciation $9,200 $9,200 $9,200 $9,200 $9,200
- Work. Cap@18% $6,480 $6,888 ($6,046) $461 $490
FCF ($50,000) $9,916 $10,367 $24,214 $18,678 $19,680
Discount Factor 1 0.909090909 0.826446281 0.751314801 0.683013455 0.620921323
Discounted CF ($50,000) $9,015 $8,568 $18,193 $12,757 $19,841

Investment Measures
NPV = $18,373
IRR = 17.08%
ROC= 27.86%

BOOK VALUE & DEPRECIATION


Book Value (beginning) $50,000 $40,800 $31,600 $22,400 $13,200
Depreciation $9,200 $9,200 $9,200 $9,200 $9,200
BV(ending) $50,000 $40,800 $31,600 $22,400 $13,200 $4,000
INITIAL INVESTMENT CASHFLOW DETAILS
Initial Investment= $50,000 Revenues in year 1= $36,000
Opportunity cost (if Var. Expenses as % of
any)= $0 Rev= 36%
Lifetime of the
investment 5 Fixed expenses in year 1= 3560
Salvage Value at end of
project= $4,000 Tax rate on net income= 30%
Deprec.
method(1:St.line; 1

WORKING CAPITAL
Initial Investment in
Work. Cap= $0
Working Capital as % of
Rev= 18%
Salvageable fraction at
end= 100%

GROWTH RATES
1 2 3 4 5
Revenues 6.30% 6.30% 6.30% 6.30%
Fixed Expenses 6.30% 6.30% 6.30% 6.30%

Opportunity Cost : However, to consider the opportunity cost through erosion and the money
given to the survey team .
Errosion
Loss $800 $800 $800 $800 $800
Cost of $
Survey 5,000.00
$ $ $ $ $
CFC 4,116.00 9,566.83 23,414.30 17,877.68 18,880.49
Discounted $ $ $ $ $
CF 3,741.82 7,906.47 17,591.51 12,210.70 11,723.30

Taken into consideration the above said cost NPV of the investment at 5 years is 3174
+salvage value of 12274. Hence we can say that with the NPV of the investment is positive
even with forgoing the sales of the old product Bediba Sol should invest in Hola Kola for the
next 5 years.

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