Case data

Obesity rate in Mexico had tripled since 1980

69.5% of people (15+ yo) either obese or overweight

Soda consumption in Mexico (avg per capita) 163 litres

Tax rate on soda drinks 20%

Rates of overweight and obesity persons by country

Market data

The market leaders for carbonated soft drinks in

Mexico were Coca-Cola, Pepsi-Cola, Dr. Pepper
Snapple, and Grupo Penafiel. Together, they
accounted for a combined market share of more than
90%, with Coca Cola being the major player. The
Mexican soft drink market (products include bottled
water, carbonates, RTD tea/coffee, functional drinks,
fruit/vegetable juices, and other soft drinks) had total
revenues of $39.2bn in 2011, representing a
compound annual growth rate (CAGR) of 6.3%
between 2007 and 2011. Market consumption
volumes increased with a CAGR of 4.5% between
2007 and 2011, reaching a total of 49.3 billion liters in
2011.4

Revenues in 2007-2011 (CAGR) 6.30%

Market revenue in 2011 39.2 USDbn

Consumption in 2007-2011 (CAGR) 4.50%

Consumption volume in 2011 49.3 Litres bn

The proposal
Loan
Maturity 5 years
Interest 16% annualy The cost of financing of debt and equity is included in the weig

Debt in the project 20%

Equity in the project 80%
Project WACC 18.20%

The consultant estimated that the company could sell a total of 600,000 liters of these zero-calorie carbonates a month, at a projected price of five pesos a liter
Hola-Kola volume 600,000 litres/month
Price 5 pesos/liter
Projected period 5 years

Market study outlook length 2 months

Market study outlook cost 5,000,000 pesos

New plant
Semi-automated machines and installation 50,000,000 pesos
Fully depreciated on a strait line basis 5 years
Pedro believed that the purchase of these machines would enable Bebida Sol to reduce its cost of labor and therefore the price to the customers, putting the firm
Resale value in 5 years 4,000,000 pesos
Machines planted in vacant annex

Offer for leasing out annex 60,000 pesos/year

Pedro determined that additional working capital was needed to ensure smooth production and sales of this new product line. He proposed keeping raw material
WC amount 1,080,000 pesos
To encourage the independent grocery stores to carry the new product line, he proposed offering a longer collection period, letting the grocers pay in 45 days, in
Collection period for project 45 days
Collection period normal 30 days
Accounts payable days 36 days

Raw materials cost 1.8 pesos/liter

Labor costs 180,000 pesos/month
Energy costs 50,000 pesos/month
Incremental SG&A costs 300,000 pesos/year
Accounting overhead costs 1% of sales

Erosion 800,000 pesos of after-tax cash flow per year

New tax rate 30% for both income and capital gains
and equity is included in the weighted average cost of capital therefore; there is no need to include them again.

projected price of five pesos a liter

ice to the customers, putting the firm in a more competitive position

e. He proposed keeping raw materials inventory at a level equal to one month of production.

etting the grocers pay in 45 days, instead of the normal 30 days. As far as accounts payable, he would follow the company’s normal policy, and settle the accounts in 36 days.
licy, and settle the accounts in 36 days.
Period beginning 0 30 60 90 120
Period end 30 60 90 120 150
Sales 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

- 30 60 90 120
45 75 105 135 165
Cash collection (45 days)

WACC 18.20%
Taxes 30%

Year 0 1 2 3 4 5
CAPEX (50,000,000)
WC requirements (1,080,000) 1,080,000
Gain on sale 4,000,000
Sales 36,000,000 36,000,000 36,000,000 36,000,000 36,000,000
COGS (12,960,000) (12,960,000) (12,960,000) (12,960,000) (12,960,000)
Labor (2,160,000) (2,160,000) (2,160,000) (2,160,000) (2,160,000)
Energy (600,000) (600,000) (600,000) (600,000) (600,000)
Accounting overhead costs (360,000) (360,000) (360,000) (360,000) (360,000)
Incremental SG&A (300,000) (300,000) (300,000) (300,000) (300,000)
Alternative leasing costs (60,000) (60,000) (60,000) (60,000) (60,000)
D&A (10,000,000) (10,000,000) (10,000,000) (10,000,000) (10,000,000)
PBT (51,080,000) 9,560,000 9,560,000 9,560,000 9,560,000 14,640,000
Taxes (2,868,000) (2,868,000) (2,868,000) (2,868,000) (4,392,000)
PAT (51,080,000) 6,692,000 6,692,000 6,692,000 6,692,000 10,248,000
Cash flow before erosion (D&A (51,080,000) 16,692,000 16,692,000 16,692,000 16,692,000 20,248,000
Erosion (800,000) (800,000) (800,000) (800,000) (800,000)
Cash flow (51,080,000) 15,892,000 15,892,000 15,892,000 15,892,000 19,448,000

Discount factor 1.00 0.85 0.72 0.61 0.51 0.43

DCF (51,080,000) 13,445,008 11,374,796 9,623,347 8,141,579 8,429,223
NPV (66,047)
IRR 18.1%
 150 180 210 240 270 300 330 360
180 210 240 270 300 330 360 390
3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

150 180 210 240 270 300 330 360

195 225 255 285 315 345 375 405
 390 420 450 480 510 540 570 600
420 450 480 510 540 570 600 630
3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

390 420 450 480 510 540 570 600

435 465 495 525 555 585 615 645
 630 660 690 720 750 780 810 840
660 690 720 750 780 810 840 870
3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

630 660 690 720 750 780 810 840

675 705 735 765 795 825 855 885
 870 900 930 960 990 1020 1050 1080
900 930 960 990 1020 1050 1080 1110
3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

870 900 930 960 990 1,020 1,050 1,080

915 945 975 1,005 1,035 1,065 1,095 1,125
 1110 1140 1170 1200 1230 1260 1290 1320
1140 1170 1200 1230 1260 1290 1320 1350
3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

1,110 1,140 1,170 1,200 1,230 1,260 1,290 1,320

1,155 1,185 1,215 1,245 1,275 1,305 1,335 1,365
 1350 1380 1410 1440 1470 1500 1530 1560
1380 1410 1440 1470 1500 1530 1560 1590
3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

1,350 1,380 1,410 1,440 1,470 1,500 1,530 1,560

1,395 1,425 1,455 1,485 1,515 1,545 1,575 1,605
 1590 1620 1650 1680 1710 1740 1770
1620 1650 1680 1710 1740 1770 1800
3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000

1,590 1,620 1,650 1,680 1,710 1,740 1,770

1,635 1,665 1,695 1,725 1,755 1,785 1,815