Capital budgeting analysis of Hola Kola Case
Atul Anand
MP15013
9263637337
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Executive Summary
Mr Robert Ortega founded Bebida Sol in 1998. It was a private labelled carbonated soft drink
company based in Mexico. Their customer base was mainly targeted towards middle to low
income individuals. The products are sold in small, independent grocery and convenient
stores in Mexico.
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Mexico has the highest consumption of carbonated soft drinks per capita in the world. The
market leaders in soft drinks category were Coca-Cola, Pepsi- Cola, Dr. Pepper Snapple,
Grupo Penafiel. They hold the combined market share of more than 90%. Market
consumption of soft drinks increased 4.5% between 2007-2011.
Mr Ortega wanted to fight obesity with a new product, a no-calorie alternative drink.
Problems identified
Is there a place in the market for a new product that Mr Ortega plans to introduce?
Should Bebida Sol undertake this project?
To broadly understand this and market situation and take a decision one has to try and
answer the following question:
1. What are the relevant cash flows?
2. Considering capital budgeting analysis we have to understand how should the
following items be dealt with?
a. Consultant’s market study cost?
b. Potential rental value of unoccupied annex?
c. Interest charges?
d. Working capital?
3. Should the erosion of the existing product, the regular sodas be considered?
4. Calculate the project’s
a. NVP
b. IRR
c. Payback
d. Discounted payback
e. Profitability index
5. Sensitive analysis on the following to be done.
a. Sales volume
b. Price
c. Direct labour
d. Materials
e. Energy cost
6. What are the benefits and risks of the project?
7. The final decision to take up the project or not?
Business Opportunity
The proposal is of a new product line, Hola Kola. A low priced zero-calorie carbonated soft
drink. The project financing is in a form of a loan for 5 years at 16% annual interest. 18.2% is
the weighted average cost of capital for this project.
What are the relevant cash flows?
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