Case Study: Hola-Kola Presentation: Your case analysis should: • include a cover
ID: 2741491 • Letter: C
Question
Case Study: Hola-Kola Presentation:
Your case analysis should: • include a cover page of the report, with an executive summary (one to two paragraphs in length) along with your name. • include numerical analysis (or printouts of your Excel worksheet) as listed in the following guideline. Provide justifications for the assumptions you have made in your analysis. • include page numbers. Analytical guideline: 1. In your review and analysis of the Hola-Kola case, in addition to your own questions and issues, you should also consider the following questions. 2. In evaluating a potential investment project, the first thing is to examine the investment environment of the company? What do you think about the soda market in Mexico? What would be the potential risks and benefits of this investment to Hola-Kola? What are the key factors that could potentially affect the related cash flows and ultimately, the NPV? 3. What are the relevant cash flows? Note: Define working capital requirement as: Receivables [(Sales/365)* average collection period] + Inventories [One month material costs] - Payables [(Material costs/365)*average payment period) 4. Based on your projections of cash flows, compute a net present value (NPV) and internal rate of return (IRR). 5. What is the breakeven point in sales that makes NPV equal to zero? Restore the value of sales after using the “Goal seek” function 6. In addition to the above base case analysis, now conduct a scenario analysis based on the following two conditions. a) Scenario 1: the consultants advised that the energy costs, the labor costs, and the material costs are likely to rise by 5% a year, starting in Year 2. Assume that the company cannot pass the extra cost through to the customer, i.e. the company could not increase the price. b) Scenario 2: the consultants advised that the energy costs, the labor costs, and the material costs are likely to rise by 5% a year, starting in Year 2. Assume that the company can pass the extra cost through by increasing the price per unit by 5%. However, this would lead to a 2% drop in sales volume. What do you observe comparing these two scenarios to the base case? 7. Based on your projections, would you recommend the company to invest in this project? Explain why.
Explanation / Answer
Since, you have not posted the financials for the company as required for computing the NPV, IRR, PI e.t.c which will be required to compute the same.
1. Hola kola is operating in mexico which is the highest market for soft-drink consumption where top companies such as coke, pepsi exist but they are making people obese and are causing them problems but hola kola is introducing the soft-drink which will not make people obese as it has content which is different than the existing players in the market.
2. So, looking as per the enviroment of the company it will be good bet if market of mexico is explored as there are lot of drinkers of soft drinks or company has existing market in the country for which no investment or money is required to be put up as required in the other projects, people can be urged to take care of there and they can define themselves different from other soft drinks as well. Potential risk can be that drink is not accepted among the people in mexico as it should be company may have to withdraw the project. Potiental risk can also be the mode of finance and the companies repaying capacity is not synchronized as per the market or not. But here as seen risk outweight the benefits as extra cost is not required as in the case of new or developing product, Benefit in the form of new product as well as new product categorization is also possible. NPV is affected by sales, variable cost, Fixed cost and earnings potiential that is discount rate if the investment that could generate if the investment was done somewhere else.
3.) Incremental inflows the project can generate without much increase in working capital or at the same working capital level.
4.) since, data is not present NPV ideally above zero or positive is accepted after deducting intial investment form discounted returns on year on year basis and IRR should be above the cost of capital.
Please post question including data as well or link should be provided so that analysis is doable.