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    Hola Kola - Docx 2

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    Gabriela Pereira
    The document discusses the Hola-Kola case study and capital budgeting decision. It analyzes which cash flows are relevant to consider in the decision, such as the potential rental value of the unoccupied annex as an opportunity cost. It calculates the NPV, IRR, payback period and profitability index of the project. It determines that the NPV is negative, so the project does not create value for the company and should not be implemented. The company faces uncertainty around demand and risks if the project fails or competitors enter the market faster.

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    Hola Kola - Docx 2

    Uploaded by

    Gabriela Pereira
    580 views3 pages
    The document discusses the Hola-Kola case study and capital budgeting decision. It analyzes which cash flows are relevant to consider in the decision, such as the potential rental value of the unoccupied annex as an opportunity cost. It calculates the NPV, IRR, payback period and profitability index of the project. It determines that the NPV is negative, so the project does not create value for the company and should not be implemented. The company faces uncertainty around demand and risks if the project fails or competitors enter the market faster.

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    financial case study about hola kola

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    Hola Kola.docx 2

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    The document discusses the Hola-Kola case study and capital budgeting decision. It analyzes which cash flows are relevant to consider in the decision, such as the potential rental value of the unoccupied annex as an opportunity cost. It calculates the NPV, IRR, payback period and profitability index of the project. It determines that the NPV is negative, so the project does not create value for the company and should not be implemented. The company faces uncertainty around demand and risks if the project fails or competitors enter the market faster.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    580 views3 pages

    Hola Kola - Docx 2

    Uploaded by

    Gabriela Pereira
    The document discusses the Hola-Kola case study and capital budgeting decision. It analyzes which cash flows are relevant to consider in the decision, such as the potential rental value of the unoccupied annex as an opportunity cost. It calculates the NPV, IRR, payback period and profitability index of the project. It determines that the NPV is negative, so the project does not create value for the company and should not be implemented. The company faces uncertainty around demand and risks if the project fails or competitors enter the market faster.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Financial Management

    Hola-Kola Case Study

    9th October, 2019


    Faculdade de Economia da Universidade do Porto 2019/2020

    Hola-Kola – The Capital Budgeting Decision : Case Resolution

    1. Generally speaking, cash flows are the revenues and costs generated by the business. In this
    particular case, since we’re evaluating a project, the main goal being a decision making on
    whether to undertake the project or not, the relevant costs are the incremental cash flows. The
    incremental cash flows are the ones that will only happen if we decide to go ahead with the
    project and therefore derive exclusively from the project implementation. Once taxes
    payments must be considered, the cash flows must be considered after taxes.

    a) The consultant’s market study is not relevant once it should be considered a sunk cost,
    because ​the cost took place already (Pedro had paid shortly after its completion) and
    there’s no sign that it can be recovered even if the project doesn’t take place. This means
    that the five million are not a relevant cost to the project.

    b) The potential rental value of unoccupied annex is a relevant cost, to be considered. There’s
    an opportunity cost associated to the use of the annex, being this opportunity cost equal to
    the return from the best alternative use of the assets, that in this particular case is the
    lease out of the space for 60000 pesos a year.

    c) The interest charges are not relevant for the capital budgeting decision because we use the
    WACC (weighted average cost of the funds used to finance the project). There is a 16%
    interest charge on loan per annum and the WACC is 18.2% for this project, once the WACC
    includes the cost of debt and the cost of equity, it is unnecessary to include them again.

    d) The working capital is a relevant cash flows and must be considered, since it will depend on
    whether the project goes ahead or not.

    2. Regarding the erosion costs, when an investment project generates a reduction (increase) in
    the cash- flows of other project, the amount of such reduction (increase) must be considered as
    a negative (positive) cash-flow of the project. In this case, however, we considered that the
    sales would decrease whether Hola-Kola is launched or not, considering the competitive
    environment and the possibility that other companies launch the same product.

    3. On the calculation of working capital investment, we considered that:


    - accounts payable = purchase/365*12 (ignoring, to simplify, the external services)
    - purchase = raw material , since the inventory variation will be 0 along the 5 years

    NPV= -2276965 ​pesos


    IRR= 16%
    Payback period= 3,02 years
    Profitability Index= 0,96

    4. Investment decisions are taken under uncertainty, and so the future about the project cannot
    be fully predicted. If there were no uncertainty surrounding the project, the firm could predict
    the future and plan all the decisions/actions accordingly, being none of them contingent to
    some random event. This, however, is an unlikely scenario and so ​Bebiba Sol faces the
    uncertainty of the demand and the risk that the target income group may not consume
    low-calorie drinks. There is also the possibility of erosion of its current products, even though

    Financial Management 1
    Faculdade de Economia da Universidade do Porto 2019/2020

    we did not considered this in our calculations. Furthermore, they face the risk of losses if the
    project fails, not to mention the possibility that the competitors may be very fast in follow the
    idea and have a more competitive product. On the other hand, the benefits of the project
    include the competitive advantage of releasing this type of product before its competitors,
    increasing the market share by tapping into a new market and consequently increase the
    income. The company may also benefit from this project in case of an economic recession since
    it is a low price product and in catering to the larger part of the population including
    low-income households. Finally, there is also the positive aspect of using an inactive space and
    the growing demand in low-calorie sodas.

    5. Considering that NPV<0, the project does not create value for the company and therefore it
    should not be implemented.

    Financial Management 2

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