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Hola-Kola—The Capital Budgeting Decision

Antonio Ortega, the owner of Bebida Sol, a private-label carbonated soft drink company based in Mexico, was contemplating whether to invest in a new zero-calories soda product line, Hola-Kola. This was the first major capital investment decision Antonio had to make after his father unexpectedly passed away. Through a market study, he collected some data about the potential market size and the costs associated with this new product line. Along with these data was also the fact that the new product line might severely erode his existing regular soda sales. He needed to determine if this capital investment was worth making and would create value for his company.

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Hola Kola Capital Budgeting Decision – Case Solution

Bebida Sol is a Mexican-based, private-label carbonated soft drink company. Its owner, Antonio Ortega, was considering investing in a new zero-calories soda product line, Hola-Kola. Data gathered through a market study dwells on the potential market size and the costs associated with this new product line. However, the same data shows that there is the possibility that this product line might adversely affect his existing regular soda sales. Thus, Antonio was faced with deciding if investing in this new product line would be worth the possible negative effect and if it would bring value to his company.

​Lena Booth Harvard Business Review ( TB0343-PDF-ENG ) September 13, 2013

Case questions answered:

• What are the relevant cash flows? In the capital budgeting analysis of this low-price, low-calorie soda project (Hola Kola), how shall we treat: a. the consultant’s market study cost? b. the potential rental value of the unoccupied annex? c. the interest charges? d. working capital?
• Should we consider the erosion of the existing product—the regular sodas—in the analysis? Why or why not?
• Calculate the project’s NPV, IRR, payback period, discounted payback, and profitability index.
• Perform sensitivity analyses on sales volume, price, direct labor, materials, and energy cost. What do you observe?
• What are the benefits and risks of undertaking this project?
• Should Bebida Sol undertake this project?

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Hola Kola Capital Budgeting Decision Case Answers

This case solution includes an Excel file with calculations.

Introduction – Hola Kola Capital Budgeting Decision

It was in December 2012 when Antonio Ortega, the owner of Bebida Sol, a private-label carbonated soft drink company based in Mexico, was thinking about whether the company should invest in Hola Kola, which was a new zero-calorie soda product line. After his father had passed away unexpectedly, this was the first major capital investment decision that had to be made by Antonio.

The costs and the market size data had been collected about this product line through a market research study, and the size of the market showed that this would be a valuable investment. However, there was also the issue of cannibalization, and the market study showed that the sales of Hola Kola might erode the sales of his existing regular soda.

The general manager of the company, Pedro Cortez, was also excited about this idea, and he was interested in this idea because the company did not have the opportunity to launch the product in the last five years.

Therefore, now, a final decision needs to be made about whether this capital investment would create wealth for the company or not. They also had to follow their father, who always said that capital investment should only be made when there is sufficient demand, and the company has the financial resources.

Lastly, the launch of this product line would be important in helping consumers with their obesity problems. This product line would be targeted toward lower-income consumers because they still consumed regular, high-sugar carbonated soft drinks.

Case Report

The analysis of the low-price, low-calorie soda project investment is performed as follows:

Relevant Cash Flows & Treatment

In the analysis of the investment of this capital project, a number of relevant cash flows would be included, such as the initial capital investment, labor, material, and overhead expenses, working capital investment, capital expenditures, and the selling, general, and administrative expenses.

Apart from this, the treatment of some of the specific costs associated with this project would be as follows:

Market Study Cost : The market research study cost has already been incurred for…

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Hola-Kola: The Capital Budgeting Decision Harvard Case Solution & Analysis

Home >> Finance Case Studies Analysis >> Hola-Kola: The Capital Budgeting Decision

The investment project of Hola-Kola, a zero calorie soft drink is being considered by the owner of Bebida Sol, as a significant opportunity by the owner, Antonio Ortega. A detailed evaluation has been performed for this project in order to make the final decision.

a.      What are the relevant cash flows?

            There are many relevant cash flows for this investment project such as the initial investment of machines, materials, labour, overhead expenses, capital expenditures, and working capital and SG&A expenses.

 How shall we treat?

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, it is a sunk cost and should not be considered in the investment appraisal.

Potential rental value of the unoccupied annex

            This is the opportunity lost therefore, this should be treated as a negative cash flow as opportunity cost.

The interest charges

            The cost of financing of debt and equity is included in the weighted average cost of capital therefore; there is no need to include them again.

Working capital

            This should be included in the appraisal. Only the incremental working capital would be deducted.

b.      Should we consider the erosion of existing product – the regular soda – in the analysis? Why or why not?

            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.

c.       Calculate the project’s NPV, IRR, payback period, discounted payback, and profitability index.

            The NPV of the project has been calculated to be $ -1.72 million, its IRR is 17%, payback period is 3 years and 5 months approximately, discounted payback period is more than 5 years approximately which means never and profitability index is almost 1. The calculations are shown in the excel spreadsheet.

d.      Perform sensitivity analyses on sales volume, price, direct labour, materials, and energy costs. What do you observe?

            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. Furthermore, it is recommended for the company to increase the selling price of the new product by 0.5 pesos.

e.       What are the “benefits” and “risks” of undertaking this project?

            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.

            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 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. Hola Kola The Capital Budgeting Decision Case Solution

f.        Should Bebida Sol undertake the project? Justify

                The net present value of this project is lower and its internal rate of return is lower than the company’s cost of capital, therefore, if the company undertakes this project, then it is going to destroy the wealth of the shareholders. Furthermore, the project is also sensitive to many key inputs therefore ; Bebida Sol should not undertake this project. On the other hand, Ortega needs to consider the opportunity that had also been considered by his father, which was to venture into the mineral water business......................

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Hola-Kola-The Capital Budgeting Decision Case Study Solution

Posted by John Berg on Feb-16-2018

Introduction

Hola-Kola-The Capital Budgeting Decision Case Study is included in the Harvard Business Review Case Study. Therefore, it is necessary to touch HBR fundamentals before starting the Hola-Kola-The Capital Budgeting Decision case analysis. HBR will help you assess which piece of information is relevant. Harvard Business review will also help you solve your case. Thus, HBR fundamentals assist in easily comprehending the case study description and brainstorming the Hola-Kola-The Capital Budgeting Decision case analysis. Also, a major benefit of HBR is that it widens your approach. HBR also brings new ideas into the picture which would help you in your Hola-Kola-The Capital Budgeting Decision case analysis.

To write an effective Harvard Business Case Solution, a deep Hola-Kola-The Capital Budgeting Decision case analysis is essential. A proper analysis requires deep investigative reading. You should have a strong grasp of the concepts discussed and be able to identify the central problem in the given HBR case study. It is very important to read the HBR case study thoroughly as at times identifying the key problem becomes challenging. Thus by underlining every single detail which you think relevant, you will be quickly able to solve the HBR case study as is addressed in Harvard Business Case Solution.

Problem Identification

The first step in solving the HBR Case Study is to identify the problem. A problem can be regarded as a difference between the actual situation and the desired situation. This means that to identify a problem, you must know where it is intended to be. To do a Hola-Kola-The Capital Budgeting Decision case study analysis and a financial analysis, you need to have a clear understanding of where the problem currently is about the perceived problem.

For effective and efficient problem identification,

• A multi-source and multi-method approach should be adopted.
• The problem identified should be thoroughly reviewed and evaluated before continuing with the case study solution.
• The problem should be backed by sufficient evidence to make sure a wrong problem isn't being worked upon.

Problem identification, if done well, will form a strong foundation for your Hola-Kola-The Capital Budgeting Decision Case Study. Effective problem identification is clear, objective, and specific. An ambiguous problem will result in vague solutions being discovered. It is also well-informed and timely. It should be noted that the right amount of time should be spent on this part. Spending too much time will leave lesser time for the rest of the process.

Hola-Kola-The Capital Budgeting Decision Case Analysis

Once you have completed the first step which was problem identification, you move on to developing a case study answers. This is the second step which will include evaluation and analysis of the given company. For this step, tools like SWOT analysis, Porter's five forces analysis for Hola-Kola-The Capital Budgeting Decision, etc. can be used. Porter’s five forces analysis for Hola-Kola-The Capital Budgeting Decision analyses a company’s substitutes, buyer and supplier power, rivalry, etc.

To do an effective HBR case study analysis, you need to explore the following areas:

1. Company history:

The Hola-Kola-The Capital Budgeting Decision case study consists of the history of the company given at the start. Reading it thoroughly will provide you with an understanding of the company's aims and objectives. You will keep these in mind as any Harvard Business Case Solutions you provide will need to be aligned with these.

2. Company growth trends:

This will help you obtain an understanding of the company's current stage in the business cycle and will give you an idea of what the scope of the solution should be.

3. Company culture:

Work culture in a company tells a lot about the workforce itself. You can understand this by going through the instances involving employees that the HBR case study provides. This will be helpful in understanding if the proposed case study solution will be accepted by the workforce and whether it will consist of the prevailing culture in the company.

Hola-Kola-The Capital Budgeting Decision Financial Analysis

The third step of solving the Hola-Kola-The Capital Budgeting Decision Case Study is Hola-Kola-The Capital Budgeting Decision Financial Analysis. You can go about it in a similar way as is done for a finance and accounting case study. For solving any Hola-Kola-The Capital Budgeting Decision case, Financial Analysis is of extreme importance. You should place extra focus on conducting Hola-Kola-The Capital Budgeting Decision financial analysis as it is an integral part of the Hola-Kola-The Capital Budgeting Decision Case Study Solution. It will help you evaluate the position of Hola-Kola-The Capital Budgeting Decision regarding stability, profitability and liquidity accurately. On the basis of this, you will be able to recommend an appropriate plan of action. To conduct a Hola-Kola-The Capital Budgeting Decision financial analysis in excel,

• Past year financial statements need to be extracted.
• Liquidity and profitability ratios to be calculated from the current financial statements.
• Ratios are compared with the past year Hola-Kola-The Capital Budgeting Decision calculations
• Company’s financial position is evaluated.

Another way how you can do the Hola-Kola-The Capital Budgeting Decision financial analysis is through financial modelling. Financial Analysis through financial modelling is done by:

• Using the current financial statement to produce forecasted financial statements.
• A set of assumptions are made to grow revenue and expenses.
• Value of the company is derived.

Financial Analysis is critical in many aspects:

• Decision Making and Strategy Devising to achieve targeted goals- to determine the future course of action.
• Getting credit from suppliers depending on the leverage position- creditors will be confident to supply on credit if less company debt.
• Influence on Investment Decisions- buying and selling of stock by investors.

Thus, it is a snapshot of the company and helps analysts assess whether the company's performance has improved or deteriorated. It also gives an insight about its expected performance in future- whether it will be going concern or not. Hola-Kola-The Capital Budgeting Decision Financial analysis can, therefore, give you a broader image of the company.

Hola-Kola-The Capital Budgeting Decision NPV

Hola-Kola-The Capital Budgeting Decision's calculations of ratios only are not sufficient to gauge the company performance for investment decisions. Instead, investment appraisal methods should also be considered. Hola-Kola-The Capital Budgeting Decision NPV calculation is a very important one as NPV helps determine whether the investment will lead to a positive value or a negative value. It is the best tool for decision making.

There are many benefits of using NPV:

• It takes into account the future value of money, thereby giving reliable results.
• It considers the cost of capital in its calculations.
• It gives the return in dollar terms simplifying decision making.

The formula that you will use to calculate Hola-Kola-The Capital Budgeting Decision NPV will be as follows:

Present Value of Future Cash Flows minus Initial Investment

Present Value of Future cash flows will be calculated as follows:

PV of CF= CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3 + …CFn/(1+r)^n

where CF = cash flows r = cost of capital n = total number of years.

Cash flows can be uniform or multiple. You can discount them by Hola-Kola-The Capital Budgeting Decision WACC as the discount rate to arrive at the present value figure. You can then use the resulting figure to make your investment decision. The decision criteria would be as follows:

• If Present Value of Cash Flows is greater than Initial Investment, you can accept the project.
• If Present Value of Cash Flows is less than Initial Investment, you can reject the project.

Thus, calculation of Hola-Kola-The Capital Budgeting Decision NPV will give you an insight into the value generated if you invest in Hola-Kola-The Capital Budgeting Decision. It is a very reliable tool to assess the feasibility of an investment as it helps determine whether the cash flows generated will help yield a positive return or not.

However, it would be better if you take various aspects under consideration. Thus, apart from Hola-Kola-The Capital Budgeting Decision’s NPV, you should also consider other capital budgeting techniques like Hola-Kola-The Capital Budgeting Decision’s IRR to evaluate and fine-tune your investment decisions.

Hola-Kola-The Capital Budgeting Decision DCF

Once you are done with calculating the Hola-Kola-The Capital Budgeting Decision NPV for your finance and accounting case study, you can proceed to the next step, which involves calculating the Hola-Kola-The Capital Budgeting Decision DCF. Discounted cash flow (DCF) is a Hola-Kola-The Capital Budgeting Decision valuation method used to estimate the value of an investment based on its future cash flows. For a better presentation of your finance case solution, it is recommended to use Hola-Kola-The Capital Budgeting Decision excel for the DCF analysis.

To calculate the Hola-Kola-The Capital Budgeting Decision DCF analysis, the following steps are required:

• Calculate the expected future cash inflows and outflows.
• Set-off inflows and outflows to obtain the net cash flows.
• Find the present value of expected future net cash flows using a discount rate, which is usually the weighted-average cost of capital (WACC).
• If the value calculated through Hola-Kola-The Capital Budgeting Decision DCF is higher than the current cost of the investment, the opportunity should be considered
• If the current cost of the investment is higher than the value calculated through DCF, the opportunity should be rejected

Hola-Kola-The Capital Budgeting Decision DCF can also be calculated using the following formula:

DCF= CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3 + …CFn/(1+r)^n

In the formula:

• CF= Cash flows
• R= discount rate (WACC)

Hola-Kola-The Capital Budgeting Decision WACC

When making different Hola-Kola-The Capital Budgeting Decision's calculations, Hola-Kola-The Capital Budgeting Decision WACC calculation is of great significance. WACC calculation is done by the capital composition of the company. The formula will be as follows:

Weighted Average Cost of Capital = % of Debt * Cost of Debt * (1- tax rate) + % of equity * Cost of Equity

You can compute the debt and equity percentage from the balance sheet figures. For the cost of equity, you can use the CAPM model. Cost of debt is usually given. However, if it isn't mentioned, you can calculate it through market weighted average debt. Hola-Kola-The Capital Budgeting Decision’s WACC will indicate the rate the company should earn to pay its capital suppliers. Hola-Kola-The Capital Budgeting Decision WACC can be analysed in two ways:

• From the company's perspective, it can be analysed as the cost to be paid to the capital providers also known as Cost of Capital
• From an investor' perspective, if the expected return on the investment exceeds Hola-Kola-The Capital Budgeting Decision WACC, the investor will go ahead with the investment as a positive value would be generated.

Hola-Kola-The Capital Budgeting Decision IRR

After calculating the Hola-Kola-The Capital Budgeting Decision WACC, it is necessary to calculate the Hola-Kola-The Capital Budgeting Decision IRR as well, as WACC alone does not say much about the company’s overall situation. Hola-Kola-The Capital Budgeting Decision IRR will add meaning to the finance solution that you are working on. The internal rate of return is a tool used in investment appraisal to calculate the profitability of prospective investments. IRR calculations are dependent on the same formula as Hola-Kola-The Capital Budgeting Decision NPV.

There are two ways to calculate the Hola-Kola-The Capital Budgeting Decision IRR.

• By using a Hola-Kola-The Capital Budgeting Decision Excel Spreadsheet: There are in-built formulae for calculating IRR.

IRR= R + [NPVa / (NPVa - NPVb) x (Rb - Ra)]

In this formula:

• Ra= lower discount rate chosen
• Rb= higher discount rate chosen
• NPVa= NPV at Ra
• NPVb= NPV at Rb

Hola-Kola-The Capital Budgeting Decision IRR impacts your finance case solution in the following ways:

• If IRR>WACC, accept the alternative
• If IRR<WACC, reject the alternative

Hola-Kola-The Capital Budgeting Decision Excel Spreadsheet

All your Hola-Kola-The Capital Budgeting Decision calculations should be done in a Hola-Kola-The Capital Budgeting Decision xls Spreadsheet. A Hola-Kola-The Capital Budgeting Decision excel spreadsheet is the best way to present your finance case solution. The Hola-Kola-The Capital Budgeting Decision Calculations should be presented in Hola-Kola-The Capital Budgeting Decision excel in such a way that the analysis and results can be distinguished to the viewers. The point of Hola-Kola-The Capital Budgeting Decision excel is to present large amounts of data in clear and consumable ways. Presenting your data is also going to make sure that you don't have misinterpretations of the data.

To make your Hola-Kola-The Capital Budgeting Decision calculations sheet more meaningful, you should:

• Think about the order of the Hola-Kola-The Capital Budgeting Decision xls worksheets in your finance case solution
• Use more Hola-Kola-The Capital Budgeting Decision xls worksheets and tables as will divide the data that you are looking at in sections.
• Choose clarity overlooks
• Keep your timeline consistent
• Organise the information flow
• Clarify your sources

The following tips and bits should be kept in mind while preparing your finance case solution in a Hola-Kola-The Capital Budgeting Decision xls spreadsheet:

• Avoid using fixed numbers in formulae
• Avoid hiding data
• Useless and meaningful colours, such as highlighting negative numbers in red
• Label column and rows
• Correct your alignment
• Keep formulae readable
• Strategically freeze header column and row

Hola-Kola-The Capital Budgeting Decision Ratio analysis

After you have your Hola-Kola-The Capital Budgeting Decision calculations in a Hola-Kola-The Capital Budgeting Decision xls spreadsheet, you can move on to the next step which is ratio analysis. Ratio analysis is an analysis of information in the form of figures contained in the financial statements of a company. It will help you evaluate various aspects of a company's operating and financial performance which can be done in Hola-Kola-The Capital Budgeting Decision Excel.

To conduct a ratio analysis that covers all financial aspects, divide the analysis as follows:

• Liquidity Ratios: Liquidity ratios gauge a company's ability to pay off its short-term debt. These include the current ratio, quick ratio, and working capital ratio.
• Solvency ratios: Solvency ratios match a company's debt levels with its assets, equity, and earnings. These include the debt-equity ratio, debt-assets ratio, and interest coverage ratio.
• Profitability Ratios: These show how effectively a company can generate profits through its operations. Profit margin, return on assets, return on equity, return on capital employed, and gross margin ratio is examples of profitability ratios.
• Efficiency ratios: Efficiency ratios analyse how efficiently a company uses its assets and liabilities to boost sales and increase profits.
• Coverage Ratios: These ratios measure a company's ability to make the interest payments and other obligations associated with its debts. Examples include times interest earned ratio and debt-service coverage ratio.
• Market Prospect Ratios: These include dividend yield, P/E ratio, earnings per share, and dividend payout ratio.

Hola-Kola-The Capital Budgeting Decision Valuation

Hola-Kola-The Capital Budgeting Decision Valuation is a very fundamental requirement if you want to work out your Harvard Business Case Solution. Hola-Kola-The Capital Budgeting Decision Valuation includes a critical analysis of the company's capital structure – the composition of debt and equity in it, and the fair value of its assets. Common approaches to Hola-Kola-The Capital Budgeting Decision valuation include

• DDM is an appropriate method if dividends are being paid to shareholders and the dividends paid are in line with the earnings of the company.
• FCFF is used when the company has a combination of debt and equity financing.
• FCFE, on the other hand, shows the cash flow available to equity holders only.

These three methods explained above are very commonly used to calculate the value of the firm. Investment decisions are undertaken by the value derived.

Hola-Kola-The Capital Budgeting Decision calculations for projected cash flows and growth rates are taken under consideration to come up with the value of firm and value of equity. These figures are used to determine the net worth of the business. Net worth is a very important concept when solving any finance and accounting case study as it gives a deep insight into the company's potential to perform in future.

Alternative Solutions

After doing your case study analysis, you move to the next step, which is identifying alternative solutions. These will be other possibilities of Harvard Business case solutions that you can choose from. For this, you must look at the Hola-Kola-The Capital Budgeting Decision case analysis in different ways and find a new perspective that you haven't thought of before.

Once you have listed or mapped alternatives, be open to their possibilities. Work on those that:

• need additional information
• are new solutions
• can be combined or eliminated

After listing possible options, evaluate them without prejudice, and check if enough resources are available for implementation and if the company workforce would accept it.

For ease of deciding the best Hola-Kola-The Capital Budgeting Decision case solution, you can rate them on numerous aspects, such as:

• Feasibility
• Suitability
• Flexibility

Implementation

Once you have read the Hola-Kola-The Capital Budgeting Decision HBR case study and have started working your way towards Hola-Kola-The Capital Budgeting Decision Case Solution, you need to be clear about different financial concepts. Your Mondavi case answers should reflect your understanding of the Hola-Kola-The Capital Budgeting Decision Case Study.

You should be clear about the advantages, disadvantages and method of each financial analysis technique. Knowing formulas is also very essential or else you will mess up with your analysis. Therefore, you need to be mindful of the financial analysis method you are implementing to write your Hola-Kola-The Capital Budgeting Decision case study solution. It should closely align with the business structure and the financials as mentioned in the Hola-Kola-The Capital Budgeting Decision case memo.

You can also refer to Hola-Kola-The Capital Budgeting Decision Harvard case to have a better understanding and a clearer picture so that you implement the best strategy. There are a number of benefits if you keep a wide range of financial analysis tools at your fingertips.

• Your Hola-Kola-The Capital Budgeting Decision HBR Case Solution would be quite accurate
• You will have an option to choose from different methods, thus helping you choose the best strategy.

Recommendation and Action Plan

Once you have successfully worked out your financial analysis using the most appropriate method and come up with Hola-Kola-The Capital Budgeting Decision HBR Case Solution, you need to give the final finishing by adding a recommendation and an action plan to be followed. The recommendation can be based on the current financial analysis. When making a recommendation,

• You need to make sure that it is not generic and it will help in increasing company value
• It is in line with the case study analysis you have conducted
• The Hola-Kola-The Capital Budgeting Decision calculations you have done support what you are recommending
• It should be clear, concise and free of complexities

Also, adding an action plan for your recommendation further strengthens your Hola-Kola-The Capital Budgeting Decision HBR case study argument. Thus, your action plan should be consistent with the recommendation you are giving to support your Hola-Kola-The Capital Budgeting Decision financial analysis. It is essential to have all these three things correlated to have a better coherence in your argument presented in your case study analysis and solution which will be a part of Hola-Kola-The Capital Budgeting Decision Case Answer.

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