Case $6$: Discussion Questions for Hola$-$Kola$$The Capital Budgeting Decision

$1.$ What are the relevant cash flows? In the capital budgeting analysis of this low$-$price, low$-$calorie soda project, 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?

$2.$ Should we consider the erosion of the existing product$$the regular sodas$$in the analysis?

Why or why not?

$3.$ Calculate the project$$s NPV$,$ IRR, payback period, discounted payback, and profitability

index.

$4.$ Perform sensitivity analyses on sales volume, price, direct labor, materials, and energy cost. Also, complete the Tornado analysis, break$-$even analysis, and scenario analyses. The three scenarios you will consider are:

$$ Scenario $1$: Perform a capital budgeting analysis with the information provided in the case.

$$ Scenario $2$: You have been advised by the consultants that the energy costs, the

labor costs and material costs are likely to rise by $5\%$ a year, starting in Year $2.$

The consultants do not think that you can pass the extra cost through. What do you

observe?

$$ Scenario $3$: You have been advised by the consultants that the energy costs, the

labor costs and material costs are likely to rise by $5\%$ a year, starting in Year $2.$

The consultants think that you can pass part of the extra cost through. You should be able to increase the price per unit by $5\%,$ but the volume would decrease by $2\%.$

What do you observe?

$5.$ What are the benefits and risks of undertaking this project?

$6.$ Should Bebida Sol undertake this project?