Case Study Practice:

Roberto Ortega is CEO and President of Healthy Drinks, which offers a private-labeled carbonated soft drink with similar tastes, but at about half the price. Its products consist of regular cola carbonates and non-cola carbonates (lemon/lime or orange carbonates). While other soft drinks and beverages can be expensive, Ortega uses its cost savings and passes them off to consumers and customers. Healthy Drinks reports that its sustainable production processes allow for 330 grams of carbon dioxide emissions. Ortega wants to do more for the environment and lower-income customers. He recently learned that he can purchase a new piece of equipment, designed by someone he trusts, which will reduce the amount of carbon dioxide emissions to 100 grams.

The equipment broker outlines the project as follows:

The new machine costs $375,000.00 with installation/modification of $81,000.

Net working capital is projected to increase by $55,000 (mainly inventory, spare parts)

The machine is expected to generated $1,000,000 in sales in Year 1 and sales will grow by 10% in Years 2 and 3.

Costs are expected to be 50% of sales

Cannibalization costs of other drinks are expected to be $22,000 per year

Depreciation is reported using the straight-lined method

At the end of three years, the machines salvage value is projected to be $95,000

The tax rate is 35% and the cost of capital is 17%

Use this information and the past three years of financial statements located at the back of this case to answer the following questions:

2. NPV and IRR: Calculate the NPV, Internal Rate of Return (IRR), and the Modified IRR for the sustainable machine. Should Mr. Ortega authorize its purchase? Why or why not?

3. World Bank and NPV: The World Bank advocates for low discount rates (interest rates) when assessing climate change projects. Read the article and summarize the argument in one paragraph. In light of this argument, recalculate NPV using a 5% discount rate. Compare the two NPVs.