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 Revenues Var. Expenses Fixed Expenses EBITDA Depreciation EBIT Tax EBIT(1t) + Depreciation Work. Cap@18% FCF ($50,000) Discount Factor Discounted CF 1 ($50,000) 1 $36,000 $12,960 $3,560 $19,480 $9,200 $10,280 $3,084 $7,196 $9,200 $6,480 $9,916 0.90909090 9 $9,015 2 $38,268 $13,776 $3,784 $20,707 $9,200 $11,507 $3,452 $8,055 $9,200 $6,888 $10,367 0.82644628 1 $8,568 3 $40,679 $14,644 $4,023 $22,012 $9,200 $12,812 $3,844 $8,968 $9,200 ($6,046) $24,214 0.75131480 1 $18,193 4 $43,242 $15,567 $4,276 $23,399 $9,200 $14,199 $4,260 $9,939 $9,200 $461 $18,678 5 $45,966 $16,548 $4,546 $24,873 $9,200 $15,673 $4,702 $10,971 $9,200 $490 $19,680 0.683013455 $12,757 0.620921323 $19,841 Investment Measures NPV = $18,373 IRR = 17.08% ROC= 27.86% Book Value (beginning) Depreciation BV(ending) $50,000 INITIAL INVESTMENT Initial Investment= Opportunity cost (if any)= Lifetime of the investment Salvage Value at end of project= Deprec. method(1:St.line; Revenues Fixed Expenses $40,800 $9,200 $31,600 BOOK VALUE & DEPRECIATION $31,600 $22,400 $13,200 $9,200 $9,200 $9,200 $22,400 $13,200 $4,000 CASHFLOW DETAILS Revenues in year 1= Var. Expenses as % of Rev= $50,000 $0 5 $4,000 $36,000 36% Fixed expenses in year 1= 3560 Tax rate on net income= 30% 1 WORKING CAPITAL Initial Investment in Work. Cap= Working Capital as % of Rev= Salvageable fraction at end= GROWTH RATES $50,000 $9,200 $40,800 $0 18% 100% 1 2 6.30 % 6.30 % 3 4 5 6.30% 6.30% 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 Cost of Survey CFC Discounted CF $800 $ 5,000.00 $ 4,116.00 $ 3,741.82 $800 $ 9,566.83 $ 7,906.47 $800 $ 23,414.30 $ 17,591.51 $800 $ 17,877.68 $ 12,210.70 $800 $ 18,880.49 $ 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.
Report "Hola Kola Case- Capital Budgeting _MP15030"