Hola-Kola: The Capital Budgeting Decision

HOLA-KOLA: THE CAPITAL BUDGETING DECISION

1.  Executive summary

Bebida Sol is a soft drink company based in Mexico. Mexico had the highest consumption of carbonated soft drink in the world. The company basically reached out to the poorer segment of the people. To capture this market the company started to provide private labeled carbonated soft drinks with similar tastes as coca cola and Pepsi but at half their price. Bebida Sol’s products were sold in small, independent grocery stores and convenience stores in Mexico. Sales of this company, Bebida Sol increased from eighty million pesos in 1998 to about ninety million pesos in 2011.

Bebida Sol owner Antonio Ortega is faced with an issue of deciding whether to start producing Hola Kola carbonated no calorie drink. The introduction of the product faces the uncertainty regarding its acceptability in the low end market, and its likelihood of eroding the company’s earnings from its existing product. The burning question in this case is whether Antonio should go for the new product or just stick to the old one.

1.  Problems related to the case

1. In Mexico the major health problem is overweight/obesity due to very high sof drink consumption.
2. Bebida sol which is a successful soft drink company in Mexico, due to its low priced product wants to fight obesity by launching a new product.
3. HOLA KOLA is a no calorie alternative soft drink.
4. Through an extensive survey the company has come to know that a market exists for no calorie HOLA KOLA and has also come to know the demand for the next five years.
5. Now the question in front of Antonio is whether to go for the project or no?
6. The weighted average cost of capital for the firm for taking up this new project is 18.2%.

The major questions that the firm needs to answer are as follows:

1. What are the relevant cash flows?
2. Should we consider the cannibalization of the existing product?
3. What are NPV, IRR, payback period, profitability index?
4. Sensitivity analysis
5. What are the benefits and risks of undertaking the project?
6. Should Bebida sol undertake this project?

Relevant cash flows in this case are -