HOLA KOLA CASE Write up PDF

Preview

Summary

Hola Kola case write up...

Description

Carter Auth Professor Xu MBUS624 9 June 2019

Hola-Kola Case Study

The Hola-Kola case is a study that looks at a potential investment for a soft drink company down in Mexico. Bebida Sol is looking to potentially invest in this new zero calorie soft drink called Hola-Kola. This paper will dive deeper into the evaluation of Hola-Kola as a project and whether or not Antonio Ortega should take on the investment of acquiring HolaKola. When looking at this investment project, there are relevant cash flows that should and need to be taken into consideration. These relevant cash flows include the expected revenue if the project is performed, the potential value of the annex that is unoccupied, working capital, depreciation of equipment, materials, labor, initial investments, overhead expenses, capital expenditures, etc. The consultant’s market study cost is something that was necessary but not a cost that is relevant as it is a sunk cost. The outflow of cash has already taken place and the acceptance or rejection of the project will not reverse the cost already occurred. The potential rental value of the unoccupied annex is a relevant cost as Antonio received an offer to lease out the space for 60,000 pesos a year, making it an opportunity cost to rent out and earn some type of income. For the interest charges, it is not necessary to include them again as they are already built into the WAAC. Working capital should also indeed be included in the evaluation. The cash

inflow and outflow are important in the incremental working capital which will be deducted. The erosion of the existing product as a result of the introduction of Hola-Kola should also be included in the analysis. The sales of Hola-Kola would lead to the erosion of the sales from the existing products that the company already has. These costs would have an impact on the earnings of the company and for that reason, they should be included in the NPV analysis of Hola Kola. The company has a lot of different benefits and risks associated with undertaking the project. Hola-Kola would operate in Mexico, which has the highest market for soft-drink consumption, showing that opportunity that it is a very successful market. With that being said, the soft-drink consumption is making the people of Mexico obese and cause many different health problems. To again add to the opportunity, Hola-Kola has the opportunity to enter into the market with a soft-drink that would be good for the demographic they are trying to serve. The benefits here are that if the company were to take on the project, they know that there is a market for them to tap into, as there is a lot of soft-drink drinkers. There is also this opportunity for the company as they define themselves as different from the other companies in the market. Investing in the company would also give the company a larger market share, which would likely increase sales of the company which would result in the earnings of the company growing. The taking on of the project would also create more production space and efficiency would be increased. Different potential risks include the fact that the drink is not accepted among the people of Mexico just yet, as well as the fact that if the new product were to fail that it could potentially ruin the reputation of the company and put the company in a bad financial position. The erosion cost that is also incurred in this project highlights another risk that the company would be taking on as well. The demand for the product is really unknown, so it’s hard to really

say if it is going to be a success or not. The final risk that can be thought of is the significant tax that the government has imposed on soft-drinks. The different regulations pose a threat as well as competitors potentially entering the market and offering a similar product at a lower price. Given the different relevant cash flows, the calculation of NPV, IRR, payback period, discounted payback, and profitability index can be found for the project. Respectively, the project gives the following calculations: NPV = -$1.82 Million, IRR = 16.77%, Payback period = 3.41, Discounted payback period = 4.03, and Profitability index = 0.966. Given these calculated figures, Antonio should reject the project for a couple of different reasons. The first, and probably the most important reason is that the project has a negative NPV, so if the company were to take on the project then it would lose money, which is not what the company wants when they accept different projects. The IRR is also lower than the company's cost of capital, so by accepting this project, it would hurt the wealth of the shareholders inside the company. A sensitivity analysis was also performed given two different scenarios. The first of the given scenario’s had the stipulations that there was an annual 5% increase in raw materials, labor cost, and energy costs. In respects to NPV, IRR, payback period, discounted payback, and profitability index the following was found upon the analysis: NPV = -$4.813 Million, IRR = 14.3%, Payback period = 3.58, Discounted payback period = 4.03, and Profitability index = 0.911. The second given scenario for the sensitivity analysis given the restrictions that there was a 2% decrease in sales annually, but an increase of 5% annually in terms of the sales price as well as raw materials, labor cost, and energy costs. NPV, IRR, payback period, discounted payback, and profitability index came out the following: NPV = -$.952 Million, IRR = 17.46%, Payback period = 3.37, Discounted payback period = 4.03, and Profitability index = 0.986.

In conclusion, in no scenario given should the company accept the project and take on Hola-Kola, as there is never a positive NPV found for any of the scenarios given, meaning the company would just lose money on the project if they were ever to accept it. The IRR of all the given analyses never is above the cost of capital, showing that the company should not accept either. Through the different analyses, it is also found that the project is sensitive to many important inputs. This right here is a concern as it could be another risk if the company did take on the project. Overall, the initial case and the sensitivity analyses help to show that Bebida Sol should not undertake the project that is Hola-Kola....