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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  1 2 3 4 5
Revenues $36,000  $38,268  $40,679  $43,242  $45,966 
 ­Var. Expenses $12,960  $13,776  $14,644  $15,567  $16,548 
 ­ Fixed Expenses $3,560  $3,784  $4,023  $4,276  $4,546 
EBITDA $19,480  $20,707  $22,012  $23,399  $24,873 
 ­ Depreciation $9,200  $9,200  $9,200  $9,200  $9,200 
EBIT $10,280  $11,507  $12,812  $14,199  $15,673 
 ­Tax $3,084  $3,452  $3,844  $4,260  $4,702 
EBIT(1­t) $7,196  $8,055  $8,968  $9,939  $10,971 
 + Depreciation $9,200  $9,200  $9,200  $9,200  $9,200 
 ­  Work. Cap@18% $6,480  $6,888  ($6,046) $461  $490 
FCF ($50,000) $9,916  $10,367  $24,214  $18,678  $19,680 
Discount Factor 1 0.909090909 0.826446281 0.751314801 0.683013455 0.620921323
Discounted CF ($50,000) $9,015  $8,568  $18,193  $12,757  $19,841 
Investment Measures
NPV = $18,373 
IRR = 17.08%
ROC= 27.86%
BOOK VALUE & DEPRECIATION
Book Value (beginning) $50,000  $40,800  $31,600  $22,400  $13,200 
Depreciation $9,200  $9,200  $9,200  $9,200  $9,200 
BV(ending) $50,000  $40,800  $31,600  $22,400  $13,200  $4,000 
INITIAL INVESTMENT   CASHFLOW DETAILS  
Initial Investment= $50,000  Revenues in  year 1= $36,000 
Opportunity cost (if  Var. Expenses as % of 
any)= $0  Rev= 36%
Lifetime of the 
investment 5 Fixed expenses in year 1= 3560
Salvage Value at end of 
project= $4,000  Tax rate on net income= 30%
Deprec. 
method(1:St.line; 1

WORKING CAPITAL  
Initial Investment in 
Work. Cap= $0 
Working Capital as % of 
Rev= 18%
Salvageable fraction at 
end= 100%
GROWTH RATES          
  1 2 3 4 5
6.30
Revenues % 6.30% 6.30% 6.30%
6.30
Fixed Expenses % 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    $800  $800  $800  $800  $800 
Cost of  $       
Survey 5,000.00  
 $         $         $       $       $     
CFC   4,116.00  9,566.83  23,414.30  17,877.68  18,880.49 
Discounted   $         $         $       $       $     
CF   3,741.82  7,906.47  17,591.51  12,210.70  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.