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    Hola Kola Case Write Up Hola Kola Case Write Up

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    Fuad Hasan Gazi
    The document analyzes whether a soft drink company should acquire Hola-Kola, a new zero-calorie Mexican soft drink. Key financial metrics like NPV, IRR, payback period, and profitability index are calculated for the potential acquisition. Across the initial case and two sensitivity analysis scenarios, the NPV is found to be negative and the IRR is below the company's cost of capital. Therefore, in no scenario analyzed would the acquisition of Hola-Kola be financially beneficial, and the conclusion is that the company should reject taking on the project.

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    Hola Kola Case Write Up Hola Kola Case Write Up

    Uploaded by

    Fuad Hasan Gazi
    418 views5 pages
    The document analyzes whether a soft drink company should acquire Hola-Kola, a new zero-calorie Mexican soft drink. Key financial metrics like NPV, IRR, payback period, and profitability index are calculated for the potential acquisition. Across the initial case and two sensitivity analysis scenarios, the NPV is found to be negative and the IRR is below the company's cost of capital. Therefore, in no scenario analyzed would the acquisition of Hola-Kola be financially beneficial, and the conclusion is that the company should reject taking on the project.

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    The document analyzes whether a soft drink company should acquire Hola-Kola, a new zero-calorie Mexican soft drink. Key financial metrics like NPV, IRR, payback period, and profitability index are calculated for the potential acquisition. Across the initial case and two sensitivity analysis scenarios, the NPV is found to be negative and the IRR is below the company's cost of capital. Therefore, in no scenario analyzed would the acquisition of Hola-Kola be financially beneficial, and the conclusion is that the company should reject taking on the project.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    418 views5 pages

    Hola Kola Case Write Up Hola Kola Case Write Up

    Uploaded by

    Fuad Hasan Gazi
    The document analyzes whether a soft drink company should acquire Hola-Kola, a new zero-calorie Mexican soft drink. Key financial metrics like NPV, IRR, payback period, and profitability index are calculated for the potential acquisition. Across the initial case and two sensitivity analysis scenarios, the NPV is found to be negative and the IRR is below the company's cost of capital. Therefore, in no scenario analyzed would the acquisition of Hola-Kola be financially beneficial, and the conclusion is that the company should reject taking on the project.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    The case study evaluates whether Bebida Sol should invest in the new zero-calorie soft drink Hola-Kola operating in Mexico. Various financial analyses are performed to determine the project's viability.

    The case study looks at a potential investment by Bebida Sol in Hola-Kola, a new zero-calorie soft drink in Mexico. It evaluates Hola-Kola as an investment project and whether Antonio Ortega should acquire Hola-Kola.

    Relevant cash flows to consider include expected revenue, potential rental income from unused space, working capital needs, depreciation, materials and labor costs, initial investments, overhead expenses, and capital expenditures.

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    HOLA KOLA CASE Write up

    Finance Theory And Practice (Gonzaga University)

    StuDocu is not sponsored or endorsed by any college or university


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    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 Hola-

    Kola.

    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

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    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

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    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.

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    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.

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