100,000 pesos and 30,000 pesos, respectively. The incremental general administrative and selling expenses were quite modest, estimated to be 300,000 a year, as the new product could be sold by Sidral Mundet Sol's current sales force and via existing distribution channels. The accounting department typically charged 1% of sales as overhead costs for any new projects. Glancing back at his notes, Maria started pondering. The market study seemed to indicate sufficient demand for the new product line. What he really feared was that the new zero-calorie carbonates might erode the sales of his existing products-the regular sodas. The market study suggested that potential erosion could cost the firm as much as 800,000 pesos of after-tax cash flows per year. At the new tax rate of 30% for both income and capital gains, could he add value to the firm by taking on this project? Appendix 1. Sidral Mundet Sol-Income Statements for the Year Ending December 31 (thousands of pesos) Income Item 2009 2010 2011 100.0% 832,341 54.5% 456,409 45.5% 375,932 100.0% 54.8% 45.2% 900,101 100.0% 487,020 54.1% 413,081 45.9% Sales 642,400 COGS 349 884 Gross margin 292,516 Marketing & Selling Expenses 120,359 General Administrative Expenses 65,340 EBITDA 106,817 18.7% 10.2% 16.6% 150,322 88,622 136,988 18.1% 10.6% 16.5% 168,330 97,791 146,960 18.7% 10.9% 16.3% Depreciation EBIT 45.046 61,771 70% 9.6% 59.444 77,544 7.1% 9.39 65.985 80,975 7.3% 9.0% Interest EBT 23,120 38,651 3.6% 6,0% 14,088 63,456 1.7% 7.6% 9.340 71,635 1.0% 8.0% Taxes @ 30% Net Income 11,595 27,056 1.8% 4.2% 19.037 44.419 2.3% 5.3% 21,491 50,145 24% 5,6% Dividends Retained Earnings 20,000 7,056 20,000 24.419 20,000 30,145 Appendix 2. Sidral Mundet Sol-Balance Sheet as of December 31 (thousands of pesos) Assets 2009 2010 2011 12,023 61,600 32,592 11.792 118,007 3.1% 36,090 15.7% 75,253 8.3% 45,016 3.0% 20.660 30.1% 177,019 8.9% 18.6% 11.1% SA1% 43.8% 53,020 78,913 60,044 15.117 207,093 14.0% 20.8% 15.8% 4.0% 54.5% Cash Account Receivable Inventory Prepaid Expenses Current Assets Gross fixed assets Accum depreciation Net fixed assets Total Assets 439,230 165.046 274.184 112.0% 42.1% 69.9% 452,020 224.490 227530 111.7% 55.5% 56.2% 463,122 290.475 172.647 122.0% 76.5% 45.5% 392191 100.0% 404,549 100.0% 379 740 100.0% Liabilities & Net Worth Accounts Payable Accrued expenses Short-term debt Current Liabilities Long-term debt Equity 34,509 15.083 70.520 120,112 2009 8.8% 43,765 3.8% 19,087 18.0% 63429 30.6% 126,281 2010 10.8% 4.7% 15.7% 31.2% 48,035 20,493 22.900 91,428 2011 12.6% 5.4% 60% 24.1% 45,023 227,056 11.5% 26,793 $7.9% 251,475 6.6% 62.2% 6,693 281,619 1.8% 74.2% Liabilities & Ner Worth 392,191 100.0% 404,549 100.0% 379,740 100.0% Exhibit 1. Rates of Overweight and Obesity Perosns by Country (2010) Overweight Obesity COM ME thome 30 20 49 60 adult population 10 2010 Sve population The market leaders for carbonated soft drinks in Mexico were Coca-Cola, Pepsi-Cola. Dr. Pepper Snapple, and Grupo Penafiel. Together, they accounted for a combined market share of more than 90% with Coca Cola being the major player. The Mexican soft drink market (Products include bottled water, carbonates, RTD tea/coffee, functional drinks, fruit/vegetable juices, and other soft drinks) had total revenues of $39.2bn in 2011, representing a compound annual growth rate/CAGR) of 6.3% between 2007 and 2011. Market consumption volumes increased with a CAGR of 4.5% between 2007 and 2011, reaching a total of 49.3 billion liters in 2011 Juano thought these popular international brands commanded prices that might be out of reach for the poorer segment of the population. To capture this market, he started the company to offer private-labeled carbonated soft drinks with similar tastes, but at about half the price. His products consisted of regular cola carbonates and non-cola carbonates, such as lemon/lime or orange carbonates. Assignment Questions 1. What are the backgrounds of the investment environment and the soda market in Mexico? 2. What are the relevant cash flows? 3. Should we consider the erosion of the existing product-the regular sodas-in the analysis? Why why not? 4. Calculate the project's NPV, IRR, and payback period. 5. Perform sensitivity analyses and calculate the project's NPV, IRR, and payback period if sales volume increases 4.5% b. unit price increases 20% c. direct labor cost increases 5% d. raw materials increase 5% e.energy cost increases 5% 6. What are the benefits and risks of understanding this project? 7. Should Sangria Topochico undertake this project? a. 100,000 pesos and 30,000 pesos, respectively. The incremental general administrative and selling expenses were quite modest, estimated to be 300,000 a year, as the new product could be sold by Sidral Mundet Sol's current sales force and via existing distribution channels. The accounting department typically charged 1% of sales as overhead costs for any new projects. Glancing back at his notes, Maria started pondering. The market study seemed to indicate sufficient demand for the new product line. What he really feared was that the new zero-calorie carbonates might erode the sales of his existing products-the regular sodas. The market study suggested that potential erosion could cost the firm as much as 800,000 pesos of after-tax cash flows per year. At the new tax rate of 30% for both income and capital gains, could he add value to the firm by taking on this project? Appendix 1. Sidral Mundet Sol-Income Statements for the Year Ending December 31 (thousands of pesos) Income Item 2009 2010 2011 100.0% 832,341 54.5% 456,409 45.5% 375,932 100.0% 54.8% 45.2% 900,101 100.0% 487,020 54.1% 413,081 45.9% Sales 642,400 COGS 349 884 Gross margin 292,516 Marketing & Selling Expenses 120,359 General Administrative Expenses 65,340 EBITDA 106,817 18.7% 10.2% 16.6% 150,322 88,622 136,988 18.1% 10.6% 16.5% 168,330 97,791 146,960 18.7% 10.9% 16.3% Depreciation EBIT 45.046 61,771 70% 9.6% 59.444 77,544 7.1% 9.39 65.985 80,975 7.3% 9.0% Interest EBT 23,120 38,651 3.6% 6,0% 14,088 63,456 1.7% 7.6% 9.340 71,635 1.0% 8.0% Taxes @ 30% Net Income 11,595 27,056 1.8% 4.2% 19.037 44.419 2.3% 5.3% 21,491 50,145 24% 5,6% Dividends Retained Earnings 20,000 7,056 20,000 24.419 20,000 30,145 Appendix 2. Sidral Mundet Sol-Balance Sheet as of December 31 (thousands of pesos) Assets 2009 2010 2011 12,023 61,600 32,592 11.792 118,007 3.1% 36,090 15.7% 75,253 8.3% 45,016 3.0% 20.660 30.1% 177,019 8.9% 18.6% 11.1% SA1% 43.8% 53,020 78,913 60,044 15.117 207,093 14.0% 20.8% 15.8% 4.0% 54.5% Cash Account Receivable Inventory Prepaid Expenses Current Assets Gross fixed assets Accum depreciation Net fixed assets Total Assets 439,230 165.046 274.184 112.0% 42.1% 69.9% 452,020 224.490 227530 111.7% 55.5% 56.2% 463,122 290.475 172.647 122.0% 76.5% 45.5% 392191 100.0% 404,549 100.0% 379 740 100.0% Liabilities & Net Worth Accounts Payable Accrued expenses Short-term debt Current Liabilities Long-term debt Equity 34,509 15.083 70.520 120,112 2009 8.8% 43,765 3.8% 19,087 18.0% 63429 30.6% 126,281 2010 10.8% 4.7% 15.7% 31.2% 48,035 20,493 22.900 91,428 2011 12.6% 5.4% 60% 24.1% 45,023 227,056 11.5% 26,793 $7.9% 251,475 6.6% 62.2% 6,693 281,619 1.8% 74.2% Liabilities & Ner Worth 392,191 100.0% 404,549 100.0% 379,740 100.0% Exhibit 1. Rates of Overweight and Obesity Perosns by Country (2010) Overweight Obesity COM ME thome 30 20 49 60 adult population 10 2010 Sve population The market leaders for carbonated soft drinks in Mexico were Coca-Cola, Pepsi-Cola. Dr. Pepper Snapple, and Grupo Penafiel. Together, they accounted for a combined market share of more than 90% with Coca Cola being the major player. The Mexican soft drink market (Products include bottled water, carbonates, RTD tea/coffee, functional drinks, fruit/vegetable juices, and other soft drinks) had total revenues of $39.2bn in 2011, representing a compound annual growth rate/CAGR) of 6.3% between 2007 and 2011. Market consumption volumes increased with a CAGR of 4.5% between 2007 and 2011, reaching a total of 49.3 billion liters in 2011 Juano thought these popular international brands commanded prices that might be out of reach for the poorer segment of the population. To capture this market, he started the company to offer private-labeled carbonated soft drinks with similar tastes, but at about half the price. His products consisted of regular cola carbonates and non-cola carbonates, such as lemon/lime or orange carbonates. Assignment Questions 1. What are the backgrounds of the investment environment and the soda market in Mexico? 2. What are the relevant cash flows? 3. Should we consider the erosion of the existing product-the regular sodas-in the analysis? Why why not? 4. Calculate the project's NPV, IRR, and payback period. 5. Perform sensitivity analyses and calculate the project's NPV, IRR, and payback period if sales volume increases 4.5% b. unit price increases 20% c. direct labor cost increases 5% d. raw materials increase 5% e.energy cost increases 5% 6. What are the benefits and risks of understanding this project? 7. Should Sangria Topochico undertake this project? a