1.

There are many relevant cash flows for this investment project such as the
initial investment of machines, materials, labour, overhead expenses, capital
expenditures, and working capital and SG&A expenses.
Market study cost
The market study cost is a past cost which has been incurred before the
appraisal of the project has been performed; therefore, it is a sunk cost and should
not be considered in the investment appraisal.
Potential rental value of the unoccupied annex
This is the opportunity lost therefore, this should be treated as a negative
cash flow as opportunity cost.
The interest charges
The cost of financing of debt and equity is included in the weighted
average cost of capital therefore; there is no need to include them again.
Working capital
The incremental working capital will be incurring and hence must be included for
the evaluation.

2. Yes, the erosion of the existing product as a result of the introduction of new
zero calorie carbonates should be considered as the cannibalization cost in the
analysis as the sales of this product are going to erode the sales of the existing
products of the company, which is regular soda. Furthermore, these costs are
going to have a significant impact on the earnings of the company therefore,
they should be included in the NPV analysis.
3. The NPV of the project is $ -1.72 million.
4. The sensitivity analysis has been performed in the excel spreadsheet and it
has been observed from the analysis that the raw material costs, labour costs,
sales revenues and other operating expenses such as the energy costs impact
significantly on the NPV of the new product.
5. Benefits
The benefits of investing in the Hola-Kola product would be increased
market share for the company. The sales of the company would also increase and
as a result, the earnings of the company would also grow. Furthermore, more
production space would be created and efficiency would be introduced in the
production processes of the company.
Risks
 The risks associated with this product are that it might cause the erosion
of the existing products of the company. The second risk is that there might not
be significant demand for this product in the market despite the findings of the
market study.
6. The net present value of this project is negative and its internal rate of return
is lower than the company’s cost of capital, therefore, if the company
undertakes this project, then it is going to destroy the wealth of the
shareholders.