read the case and find out the NPV for the new project (zero calories drink) For
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read the case and find out the NPV for the new project (zero calories drink)
For the exclusive use of E. SA, 2015 THUNDERBIRD SCHOOL OF OLOBAL MANAGEMENT TB0343 LENA CHUA BooTH HoLA-KolA-THE CAPITAL BUDGETING DECISION OLA-KOLA The consumption of sugar-swee tened beverages has been linked to risks for obesity, diabetes, and he art disease; therefore, a compelling case can be made for the need for reiced consmption of these beverages Health Policy Report, The New England Journal of Medicine, October 15, 2009 Mexico leads world in soda consumption, World Health Organization planning to fight it Carolyn Crist, Obesity Initiative, October 25, 2012 In December 2012, Antonio Ortega, the owner of Bebida Sol, had just finished reading a report done by his general manager, Pedro Cortez, about the possible investment in a new product line, Hola-Kola. The idea of Hola-Kola came about three months earlier when Antonio attended a seminar on youth obesity organized by a local high school that his two children attended. Even though he had often heard of the rising obesity problem in Mexico, Antonio was still very disturbed by the statistics indicating how the obesity rate in Mexico had tripled since 1980, and that 69.5% of the people 15 years and older were either obese or overweight. Even more shocking to Antonio, based on this statistic, Mexico now had the highest overweight rate in the world, surpassing the United States. After the seminar, Antonio discussed the idea of Hola-Kola, a low-price, zero-calorie carbonated soft drink, with Pedro Cortez. Pedro was excited about the idea, and liked the opportunity to launch something new, espe cially given that the company had not introduced a new product in the last five years. However, Pedro thought a market study should be done to gauge the potential demand before the firm undertook the investment. Company Background Bebida Sol is a small, privately owned carbonated soft drink company based in Puebla, Mexico. A retired ex ecutive from a popular fast-food restaurant chain, Roberto Ortega, founded it in 1998. During his career as a restaurant executive, Roberto learned that Mexicans, regardless of social status, loved their soda pop. Many would drink soda to quench their thirst on a regular basis, due to the lack of hygienic, drinkable water. With the influx of international brands of soda pop, Mexico now had the highest consumption of carbonated soft drinks per capita in the world." The average per capita consumption was 40% higher than the United States, at 163 liters (43 gallons) per year, wile the United States consumed 118 liters (31 gallons), according to statistics presented by the international organization Oxfam and the Mexican NGO Consumer's Power. Due to the high obesity problem, health and consumer groups in Mexico had demanded that the government impose a 20% tax on soft drinks, claiming that it would not only reduce consumption, but the tax revenue could also be used to fight health problems that soft drinks generated "The World is Fat" by Catherine Rampell, 9/23/2010 mix.blogs.nytimes.com/2010/09/23/the-world-is-f Mexico %20 TO Mexico 8-20.2009.pdf Global Agriculture Information Network (GAIN) report MX9326 3 "Mexico, Leader in Soft Drink Consumption", July 10, 2012 http://www.mexicanbusinessweb.mx/eng/2012 mexico-leader-in-soft-drink-consumption Copyright © 2013 Thunderbird School o Global Management All rights reserued This case was prepared by Profesor Lena Chua Booth for the pu classroom discussion only and not to indi er ive managemen in This document is authorized for use only by EU. SA in 2015Explanation / Answer
INITIAL INVESTMENT: cost of machinery 50000000 increase in working capital 3204000 total initial invesement 53204000 Net working capital: accounts receivable - 45 days 4500000 less: accounts payable--36 days 1296000 Net working capital required 3204000 ANNUAL OPERATING CASH FLOWS: aannual sales in litres 7200000 sales in pesos @ 5 pesos 36000000 cost of production: raw materials 12960000 labor costs (12*180000) 2160000 energy costs (12*50000) 600000 incremental selling & admn expenses 300000 depreciation (50000000)/5 10000000 total cost of production 26020000 EBIT 9980000 tax @ 30% 2994000 net income 6986000 add depreciation 10000000 cash flows from the new project 16986000 Less: lease rent foregone (after tax) 42000 Less: loss of after tax cash flows of 800000 existing products Net after tax annual cash flows 16144000 TERMINAL CASH FLOWS: Salvage value 4000000 Less: tax on gain--30% of 4000000 -1200000 2800000 release of net working capital 3204000 Net after tax terminal cash flows 6004000 NPV: PV of annual operating cash flows @18.2% = 16144000*pvifa(18.2,5) = 16144000*3.1131 = 50257886 PV of terminal cash flow = 6004000*pvif(18.2,5) = 6004000*0.4334 = 2602134 PV of cash inflows 52860020 Less: Initial cost 53204000 NPV -343980 As the NPV is negative, the project will not add value. Hence, need not be undertaken. Note: The amount of 5 million pesos spent on market study is a sunk cost and need not be considered.
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