Bebida Sol is a Mexican-based, private-label carbonated soft drink company. Its owner, Antonio Ortega, was considering investing in a new zero-calories soda product line, Hola-Kola. Data gathered through a market study dwells on the potential market size and the costs associated with this new product line. However, the same data shows that there is the possibility that this product line might adversely affect his existing regular soda sales. Thus, Antonio was faced with deciding if investing in this new product line would be worth the possible negative effect, and if it would bring value for his company.
Harvard Business Review (TB0343-PDF-ENG)
September 13, 2013
Case questions answered:
- What are the relevant cash flows? In the capital budgeting analysis of this low-price, low calorie soda project, how shall we treat:a. the consultant’s market study cost?b. the potential rental value of the unoccupied annex?c. the interest charges?d. working capital?
- Should we consider the erosion of the existing product—the regular sodas—in the analysis? Why or why not?
- Calculate the project’s NPV, IRR, payback period, discounted payback, and profitability index.
- Perform sensitivity analyses on sales volume, price, direct labor, materials, and energy cost. What do you observe?
- What are the benefits and risks of undertaking this project?
- Should Bebida Sol undertake this project?
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Case answers for Hola Kola Capital Budgeting Decision
This case solution includes an Excel file with calculations.
Introduction – Hola Kola Capital Budgeting Decision
It was in December 2012, when, Antonio Ortega, the owner of Bebida Sol, a private label carbonated soft drink company based in Mexico was thinking that whether the company should invest in Hola Kola, which was a new zero-calorie soda product line. After his father had passed away unexpectedly, this was the first major capital investment decision, which had to be made by Antonio.
The costs and the market size data had been collected by Antonio about this product line through a market research study and the size of the market showed that this would be a valuable investment. However, there was also the issue of cannibalization and the market study showed that the sales of Hola Kola might erode the sales of his existing regular soda.
The general manager of the company, Pedro Cortez was also excited about this idea and he was interested in this idea because the company did not have the opportunity to launch the product in the last five years.
Therefore, now a final decision needs to be made about whether this capital investment would create wealth for the company or not. They also had to follow their father who always said that capital investment should only be made when there is sufficient demand and the company has the financial resources.
Lastly, the launch of this product line would be important in helping consumers with their obesity problems. This product line would be targeted towards lower-income consumers because they still consumed the regular, high sugared carbonated soft drinks.
The analysis of the low price, low-calorie soda project investment is performed as follows:
Relevant Cash Flows & Treatment
In the analysis of the investment of this capital project, a number of relevant cash flows would be included such as the initial capital investment, labor, material, and the overhead expenses, working capital investment, capital expenditures, and the selling, general and admin expenses. Apart from this, the treatment of some of the specific costs associated with this project would be as follows:
Market Study Cost: The market research study cost has already been incurred for…