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
FixedExpenses
EBITDA
Depreciation
EBIT
Tax
EBIT(1t)
+Depreciation
Work.Cap@18%
FCF
($50,000)
DiscountFactor
DiscountedCF

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

InvestmentMeasures
NPV=
$18,373
IRR=
17.08%
ROC=
27.86%

BookValue(beginning)
Depreciation
BV(ending)
$50,000

INITIALINVESTMENT
InitialInvestment=
Opportunitycost(if
any)=
Lifetimeofthe
investment
SalvageValueatendof
project=
Deprec.
method(1:St.line;

Revenues
FixedExpenses

$40,800
$9,200
$31,600

BOOKVALUE&DEPRECIATION
$31,600
$22,400
$13,200
$9,200
$9,200
$9,200
$22,400
$13,200
$4,000

CASHFLOWDETAILS
Revenuesinyear1=
Var.Expensesas%of
Rev=

$50,000
$0
5
$4,000

$36,000
36%

Fixedexpensesinyear1=

3560

Taxrateonnetincome=

30%

WORKINGCAPITAL
InitialInvestmentin
Work.Cap=
WorkingCapitalas%of
Rev=
Salvageablefractionat
end=
GROWTHRATES

$50,000
$9,200
$40,800

$0
18%
100%

2
6.30
%
6.30
%

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
Costof
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.