Hola Kola- The
Capital
Budgeting
Decision
Section 3 Group 8
DM243001 Aashay Rai
DM243010 Anjali
DM243020 Chandransh Shekhawat
DM243030 Hrutwik Palyekar
DM243075 Sharda Sharma
DM243085 Suraj T
1. What are the relevant cash flows? In the capital budgeting analysis of this low price, lowcalorie soda project how shall we treat
• The consultant’s market study cost?
• The potential rental value of the unoccupied annex
• The interest charges?
• Working capital?
Answer:
There are many relevant cash flows for this investment project such as the initial investment of
machines, materials, labour, overhead expenses, capital expenditures, & working Capital and
SG& A expenses.
 Market Study Cost
The market Study cost is a past cost which has been incurred before the appraisal of
the project has been performed; therefore, this should be treated as a negative
cashflow as opportunity cost.
1. What are the relevant cash flows? In the capital budgeting analysis of this low price, lowcalorie soda project how shall we treat
• The consultant’s market study cost?
• The potential rental value of the unoccupied annex
• The interest charges?
• Working capital?
Answer:
 Interest Charges
The cost of financing debt and equity is included in the wacc therefore there is no need
to include them again.
 Potential Rental Value of the unoccupied annex
This is the opportunity lose, so this will be a negative cashflow as opportunity cost.
 Working Capital
This should be included in the appraisal. Only Incremental working capital should be
deducted.
2. Should we consider the erosion of existing product- the regular soda- in the analysis? Why or
Why not?
Answer :
Yes, the erosion of the existing product as a result of the introduction of new zero calorie
carbonates should be considered as the cannibalization cost in the analysis as the sales
of this product are going to erode the sales of the existing products of the company,
which is regular soda. Furthermore, these costs are going to have a significant impact
on the earnings of the company therefore, they should be included in the NPV analysis.
3. Calculate the project’s NPV ?
Project’s NPV in the case is 19,72,972.78 with cannibalization and
44,63,418.22 without cannibalization
4. Perform sensitivity Analysis on sales volume, price, direct labour, material and energy costs.
What do you observe?
Answer:
The sensitivity analysis has been performed in the excel spreadsheet and it has been
observed from the analysis that the raw material costs, labour costs, sales revenues and
other operating expenses such as the energy costs impact significantly on the NPV of
the new product.
5. What are the benefits and risks of undertaking this project?
Answer:
 Benefits
The benefits of investing in the Hola-Kola product would be increased market share for
the company. The sales of the company would also increase and as a result, the
earnings of the company would also grow. Furthermore, more production space would
be created, and efficiency would be introduced in the production processes of the
company.
 Risks
The risks associated with this product are that it might cause the erosion of the existing
products of the company. The second risk is that it might cause the erosion of the
existing products of the company. The second risk is that there might not be significant
demand for this product in the market despite the findings of the market study.
Furthermore, the government might introduce new regulations regarding soda and the
competitors might also lower the prices of their products.
6. Should Bebida Sol undertake the project?
Answer:
 Yes she should opt for the project as it has a positive NPV.
 Also it has a higher IRR value then cost of capital.
 Also the payback period is less than 5 years.