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Hola-Kola case study

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on 6 June 2014

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Transcript of Hola-Kola case study

Hola-Kola case study

What is the problem?
Sensitivity Analysis
What numbers impact the NPV?
- (Raw) material costs
- Labor costs
- Sales revenues
- Other operating expenses

Capital Budgeting Analysis
How will this project contribute to
the firm's value?
Which questions do we have to answer?
1) What are the relevant cash flows?

2) Should we consider the erostion of the existing product?

3) What are the NPV, IRR, payback, discounted payback and profitability index?

4) Sensitivity analysis

5) What are the benefits and risks for undertaking this project?

6) Should Bebida Sol undertake this project?
What are the relevant cash flows?
Conclusion
Should Bebida Sol commence this product?

Mexico
High rates of overweight/obesity due to high soft drink consumption
Bebida Sol
Soft drink company in Mexico
Hola-Kola
A no-calory alternative soft drink
Erosion Costs?
NPV, IRR, Profability Index, Payback Period
Benefits and Risks
Benefits:
- Increased market share for Bebida Sol
- Increased net income

Risks:
- Possible erosion on current products
- No demand in the market
Payback Period
3.2 years
Net Present Value
-1.421.622 pesos
Yes !
Based on Jim Harvey's speech structures
Wants to fight obesity with a new product
Successful due to lower priced soft drinks
Is there a place in the market for this?
Should Bebida Sol undertake this project?
- Consultants study market costs are 5 million pesos but these are irrelevant costs!
- Potential rental value of the unoccupied annex is 60.000 pesos a year
- Interest charges on a loan are 16% p. a. -> 18.2% cost of capital for this project

The erosion costs will have a negative effect on the companies overall earnings.

Because the costs are substantial (800.000/p.a.) they have an effect on the projects NPV and are therefore relevant to our analysis.
NPV: -1.421.622
IRR: -0.94%
Profability Index: 1.05
Payback Period: 3.2 years
Profitability Index
1.05
Internal Rate of Return
-0.94%
IRR was calculated by taking the PV of each year and dividing it by 1+i and try to get the NPV close to 0.
Payback Period = Cost of Project / Annual Cash Inflows
PV of future cash flows/ initial investment
Full transcript