Hola-Kola – the Capital Budgeting Decision

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