Christopher Denu, Jenny Kotz, Cassie Larson, Jessica Moes, Patrick Larson
MBA 6231 (070): Financial Management - Summer 2023 – Prof. Moser
Due: August 13, 2023 (10PM)
Hola-Kola Project Analysis
Introduction
Bebida Sol – a privately-owned soft drink company based in Puebla, Mexico – is considering
introducing a new diet soft drink into the Mexican market, to be launched under the name
Hola-Kola. Owner Antonio Ortega has hired The Best Frozen Gophers Consultancy Inc. to
evaluate the impacts to company cash flows (both positive and negative) and, using various
evaluation frameworks (including net present value, internal rate of return, and payback period),
provide a recommendation on whether Bebida Sol should move forward in launching Hola Kola.
Approach: Our base analysis utilizes inputs obtained from Bebida Sol and market analyses
conducted for the company by other consultancies. These impacts on working capital include:1
Volume:
Sale price:
Raw material cost:
Labor cost:
Energy costs:
Fixed costs:
Overhead costs:
CAPEX of machinery:
Opportunity cost of utilizing annex space:
Cannibalization of existing Bebida Sol products:
Inflation rate:
Tax rate:
Weighted Average Cost of Capital:
7.2 million units sold per year
$5 / unit
$1.80 / unit
$2,160,000 / year
$600,000 / year
$300,000 / year
1% of sales
$50 million; 5 years depreciation,
resale value $4 million
$60,000 / year
$800,000 / year
2%
30%
18.20%
In addition to analyzing impacts to working capital and providing an analysis via net present
value, internal rate of return, and payback period frameworks, the Best Frozen Gophers
Consultancy Inc. conducted a sensitivity analysis on sales volume, price, and cannibalization, to
ensure that the final recommendation factors in the range of potential market influences that may
impact the data within said decision frameworks.
Recommendation
As it relates to the decision by Bebida Sol to launch the diet soft drink Hola-Kola under current
proposed conditions, The Best Frozen Gophers Consultancy does not recommend the firm
should move forward with the project. However, there are select scenarios in which Bebida Sol
may opt to undertake the project, outlined at the close of this analysis. The most optimal path
forward that will allow Hola-Kola to still maintain its goal of producing a “low-cost” diet soda
1
All prices ($) in pesos
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will be to increase sales while keeping price constant at $5 or even lowering it. In scenarios one,
two, and six our team has mapped out different volume and price combinations that will allow
for a positive NPV return while still being conservative with overhead and cannibalization
impacts. At a minimum, if Bebida Sol is to maintain its pricing structure at $5, they would need
to slightly increase annual volume of sales to 7,267,959. However, this increase in volume sold
may require additional investments in marketing and distribution, both of which would be
incremental expenses for this project. As a result, we believe that if Bebida Sol would like to
move forward with this project they should strive to achieve a volume and pricing
combination as outlined in scenario 6 with annual volume at 7,560,000 and each soda
priced at $4.95. This scenario will achieve an NPV of $1,155,499,91.
We have reason to believe that Bebida Sol will be able to achieve this higher volume projection
and potentially even see a higher growth in sales over the next five years than what is originally
projected. Mexico is currently in the midst of an obesity and diabetes crisis and the government
is beginning to regulate the advertising of sugary drinks and impose sugar tax on companies (see
works cited). As these regulations continue, the potential market opportunity for a low sugar, diet
beverage like Hola-Kola will only increase. With this in mind, our consulting team is confident
that the market conditions are favorable for a diet beverage and that higher than projected sales
volumes could be yielded.
Rationale:
The Best Frozen Gophers utilized three widely-utilized project evaluation frameworks to analyze
the potential impacts a Hola Kola launch may have on Bebida Sol’s business:
Payback Period: Under current projects as outlined in the base case, our analysis estimates that
Bebida Sol would see a return on their investment in just over 3.36 years. Depending on how
quickly Bebida Sol requires firm projects to recoup their initial investment, this may be seen as
an appealing data point. However, we counsel Bebida Sol to not look at this metric in isolation,
because, when coupled with the evaluation frameworks outlined next, we see that long-term cash
flows past the payback period continue to impact the overall potential value of undertaking the
Hola-Kola launch – to the project’s overall detriment. Payback can be one factor in determining a
project’s potential return, but the lack of consideration for time value money and all cash flows
diminishes its value when looked at in a vacuum.
Internal Rate of Return: Our analysis estimates that Bebida Sol would see an internal rate of
return of 17.85%. While this may seem like a high rate of return to an objective third party,
Bebida Sol’s average rate of return demanded by its equity and debt holders is actually higher, at
18.20%. Accordingly, Bebida Sol is better served by investing its capital in a project that offers
an equal or higher rate of return to that weighted average cost of capital.
Net Present Value: Our final analysis estimates this project will result in a loss in capital value
for the company (with a net present value of -$458,663.92). In short, the costs of this project,
over time, when adjusted to reflect how that money could otherwise be utilized by the company,
affirms that Bebida Sol is better served to invest in projects that bring long-term value to the
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company or to make necessary adjustments as outlined in the various scenarios that would help
them achieve a positive NPV.
Considerations:
As part of The Best Frozen Gophers Consultancy’s process, we also wanted to make sure that we
provide Bebida Sol with an understanding of the ways by which the company could launch
Hola-Kola (and not just shut down the project outright). We looked at four factors that, if
somehow adjusted, may impact the feasibility of this proposed project: price, volume, operating
cost, and cannibalization.
The impact of price and volume:
If Bebida Sol is able to raise the price of the product to $5.04 / unit or higher, and maintain the
anticipated sales volume of 7.2 million units sold each year, the project creates a positive net
present value for the firm and is worth undertaking ($5.03 is the breakeven price, all other
conditions the same). On the contrary, an increase in volume to 7,267,959 while maintaining a
price of $5 will also accomplish a positive NPV. Of course, the increased costs associated with
marketing to maintain that volume may slightly impact the net present value, thus the firm may
need to adjust price upwards slightly more to ensure any additional fixed marketing costs do not
result in a negative net present value (further evaluation would need to be undertaken to do so).
As prices increase, there is a likelihood that sales volume decreases, but there may be a feasible
balance of price and volume that Bebida Sol can achieve. CHART 1 highlights (in green) the
combinations of price and volume where, all other things constant, the project may result in a
positive net present value for the firm (and thus be worth undertaking).
CHART 1: Visual showing the various combinations of volume and unit price that would result in positive NPV
(green) and negative NPV (red). All variables held constant.
The impact of cannibalization: In addition to evaluating the impact price and volume may have
on the success of launching Hola-Kola, we also evaluated the impact cannibalization may have
on the project’s net present value. Currently, Bebida Sol has estimated that $800,000 in annual
sales of its other soda products may be cannibalized by the launch of Hola-Kola. If Bebida Sol
could somehow prevent cannibalization through effective marketing and product positioning, we
project that undertaking this project would result in a positive net present value for the firm.
However, if current cannibalization projections are accurate, Bebida Sol would need to either
increase volume sold or increase price of each unit sold. The cannibalization projections may be
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regarded as unreliable if the potential loss is due to an action that could be implemented by a
competitor (ex. Hola-Kola decided not to introduce a diet beverage and sales are impacted due to
the introduction of a competitor's diet beverage.) See scenario four for an analysis of NPV
impact when cannibalization is reduced to $0.
The impact of Operating Costs: As part of our analysis, our team included the 1% of sales that
the accounting department recommended be included as operating costs. This expense is
reflected in the base case and certainly has an impact on the final NPV. In Scenario five (Chart
2), our team excluded the operating costs which would result in a positive NPV of $352,504.25.
Further discussion would need to be had with Bebida Sol to determine whether the operating
costs are incremental and should be applied to this project or not.
A note on utilizing The Best Frozen Gopher’s analysis to evaluate project options: In reality,
there are many combinations of adjustments across volume, price, cannibalization, and operating
costs that may result in a positive net present value (see CHART 2). In addition to the scenarios
outlined above, we projected the following scenarios to demonstrate potential combinations
Bebida Sol could undertake that would result in a positive net present value:
Scenario 1: Increase volume 25%, decrease price 10%, increase cannibalization 10%
Scenario 2: Increase volume 35%, decrease price 15%, increase cannibalization 15%
Scenario 3: Decrease volume 10%, increase price 15%, cannibalization constant
Scenario 4: Volume, price are constant, no cannibalization
Scenario 5: Volume, price, cannibalization constant. No operating costs.
Scenario 6: Increase volume 10%, decrease price to $4.95. All other variables constant
If Bebida Sol remains enthusiastic about launching Hola Kola it must evaluate which
combination of factors feels most obtainable before it pursues the project.
CHART 2: Summary of the Scenario Analysis and the resulting NPV and IRR
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References
Gallagher, J. (2014, July 16). Mexico restricts soft drink TV ads to fight obesity. BBC. Retrieved August 13, 2023,
from https://www.bbc.com/news/world-latin-america-28325105
Oyesola, B. (2018, March 13). Sugar crisis in Mexico. dandc.eu. Retrieved August 13, 2023, from
https://www.dandc.eu/en/article/mexico-consumer-protection-organisation-campaigns-against-food-lobby-a
nd-fights-sensible
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