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Hola-Kola case study
Transcript of Hola-Kola case study
What is the problem?
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?
Should Bebida Sol commence this product?
High rates of overweight/obesity due to high soft drink consumption
Soft drink company in Mexico
A no-calory alternative soft drink
NPV, IRR, Profability Index, Payback Period
Benefits and Risks
- Increased market share for Bebida Sol
- Increased net income
- Possible erosion on current products
- No demand in the market
Net Present Value
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.
Profability Index: 1.05
Payback Period: 3.2 years
Internal Rate of Return
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