For the exclusive use of E. SA, 2015. THUNDERBIRD SCHOOL OF BLORAL MANADENENT TB0343 LENA CUA BUTH HOLA-KOLATHE CAPITAL BUDGETING DECISION The consumption of super-sweetened beverages has been hinked to risks for chesin dabetes, cont heart disease, therefore, a compelling crise can be wole for the med for reduced constaption of these beverages Health Policy Report, The New England Journal of Medicine October 15, 2009 Mexico lecxls world in soder consumption, World Health Organization plwing to feel it Carolyn Crist. Obesity Initiative, October 25, 2012 In December 2012. Antonio Ortega, the owner of Bebida Sol, had just finished reading a report done by his general manager, Pedro Cortez, about the possible investment in a new product line, Hola-Kola. The idea of Hola-Kola came about three months earlier when Antonio attended a seminar on youth obesity organized by a local high school that his two children attended. Even though he had often heard of the rising obesity problem in Mexico, Antonio was still very disturbed by the statistics indicating how the obesity rate in Mexico had triplex since 1980, and that 69.5% of the people 15 years and older were either obese or overweight- Even more shocking to Antonio, based on this statistic, Mexico now had the highest overweight rate in the world, surpassing the United States. After the seminar, Antonio discussed the idea of Hola-Kola, a low-price, zero-calorie carbonated soft drink, with Pedir Cortez. Pedro was excited about the idea, and liked the opportunity to launch something new, espe cially given that the company had not introduced a new product in the last five years. However, Pedro thought a market study should be done to gauge the potential demand before the firm undertook the invesunen. Company Background Bebida Sol is a small, privately owned carbonated soft drink company based in Puebla, Mexico. A retired ex- ecutive from a popular fast-food restaurant chain, Roberto Ortega, founded it in 1998. During his career as a restaurant executive, Roberto leamed that Mexicans, regardless of social status, loved their soula pop. Many would drink soda to quench their thirst on a regular basis, due to the lack of hygienic, drinkable water. With the influx of international brands of soda pop, Mexico now had the highest consumption of carbonated soft drinks per capita in the world. The average per capita consumption was 40% higher than the United States, at 163 liters (43 gallons) per year, while the United States consumed 118 liters (31 gallons), according to statistics presented by the international organization Oxfam and the Mexican NGO Consumer's Power. Due to the high obesity problem, health and consumer groups in Mexico had demanded that the government impose a 20% tax on soft drinks, claiming that it would not only reduce consumption, but the tax revenue could also be used to light health problems that soft drinks generated. "The World is Far" by Catherine Rampell, 9/23/2010. http://examix.blogs.times.com/2010/09/23/the world is far! http://pain.fils.usda.gow Recent ZOGAIN20Publications. The 20Mexicano Market for 20 Soft Drinks Mexico 20ATO Mexico 8-20-2009.pdf: Global Agriculture Information Network (GAIN) report MX9326 3 "Mexico, Leader in Soft Drink Consumptiou", July 10, 2012 http://www.mexicanbusinessweb.nex/eng/2012/ mexico-leader in soft drink.consumption Copyright 2013 Thunderbird Schwl of Global Management. All rights reserved this one was prepared by Professor Lena Chus Heath for the purpow of class mom discersione only, and scar to indicate citer effective ineffective management This document is authorised for use only by EU SA in 2015. For the exclusive use of E. SA, 2015. Obesity Exhibit 1. Rates of Overweight and Obesity Persons by Country (2010) Overweight 31 Jupar 2001 psi Slade (2001 ... 12000 NS NURI Broken Pan 2000 Dista this A la 2004 REST Bun23 Tate PRICE FE Finder OECD Els con Sovet Republic Cross un Hron foder Che exw adalo this Pingom (200m Thi) Pasa in ON ha 29 CW Chapas 1123) 19 Produse E. CAH26) 83 50 40 20 0 0 10 20 30 %of adult population of adult population Source: Word Obesity Scars 2010 and Beyond. Douglas Robb, Sept.27.2010, Health News 40 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.' Roberto 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 other private-labeled carbonated soft drinks with similar tastes, but ar about half the price. His products consisted of regular cola carbonates and non-cola carbonates, such as lemon/lime or orange carbonates. Bebida Sol's products were sold only in small independent grocery stores and convenience stores in Mexico. The firm avoided the supermarkets and hypermarkets because it could not sustain the desired margin in these large stores. Moreover, most of the consumers, especially the middle-to-low income ones, shopped at small, independent grocery stores. To create awareness, the owners of these independent stores were given incentives to personally promote the products. Sales increased dramatically, from 80 million pesos in 1998 to about 900 million pesos in 2011. "Soft Drinks in Mexico," Market Research Report, March 29, 2013. hcp://www.marketrescarch.com/MarketLine-v3883/ Soft Drinks Mexico 7679076). There were about half a million small, independent grocery stores, and more than 8,000 convenience stores throughout Mexico, 2 TB0.343 This document is authorised for use only by EU SA in 2015. For the exclusive use of E. SA, 2015. In 2007. Antonio Ortega, Roberto's only son, took over the business when Roberto unexpectedly passed away. Antonio started working on the sales side of the business two years before his father's death. He had gath- ered a few valuable tips on how to run the business from his father, which had made him a rather conservative businessman. A year after Antonio took over the business, the global financial crisis hit. The economic downturn in Mexico actually benefitted the low-price soda business. Demand increased dramatically as many consumers became price conscious and switched from international brands to private labels. Bebida Sol's sales increased by 60% from 2008 to 2009, and continued to increase without the firm changing any of its business strategy or practices. The company's return on sales (net profit margin) also had been increasing in the last few years. Exhibit 2. Bebida Sol's Sales and Return on Sales $1,000.COC 5.34% 6.00% $900.000 $200,000 SSCO, 101 5.00% 4.21% $8.32,341 $700,000 Amx SWORK $542.400 $500,000 3.00% $400.000 2.00% $300,000 $200,000 1.005 $100,000 0.00% 2009 2010 2011 Sales Return on Sales The Proposal Reading once again the executive summary of the report, Antonio recalled what his father told him several times during the two years he was working with him: "Don't grow the company for the sake of growing. Invest only when you are confident there is sufficient demand for a new product, and also when you have the financial resources." As far as financial resources, Antonio felt the timing could not be better. Due to strong sales and profitability in the last few years, Bebida Sol had accumulated a sizable amount of cash. Wich solid financial performance and steady cash flows, his banker had agreed to extend him a five-year, 16% annual interest term loan to launch Hola-Kola. In the proposal , Pedro Cortez estimated that with 20% of the needed capital borrowed, the 20/80 debt-equiry structure would result in an 18.2% weighted average cost of capital for this project The bigger question lingering in Antonio's mind was whether there would be sufficient demand for this hew, zero-calorie product line. Even though the demand for low-calorie sodas had increased in Mexico, they seemed to be consumed mainly by the middle-to-upper income segment of the population. The majority of the lower-income people still consumed only the regular, high-sugared carbonated soft drinks. It wasn't clear whether this was because the low-income group lacked the awareness of the obesity problem, or because there were not too many low-priced, low-calorie soda options available. If it were the former, the outlook for low- price, low calorie carbonated soft drinks might not be too promising at this time. If it were the latter , it might be the perfect timing for Bebida Sol to introduce Hola Kola Pedro hired a consultant to do a market study right after Antonio discussed the idea of Hola-Kola with him. The consultant estimated that the company could sell a total of 600,000 liters of these 2010-caloric carbonates a month, at a projected price of five pesos a liter. This volume of sales was expected for a period of five years at In an effort to fight the obesity problem, the Mexican government had been launching media campaigns to encourage the public to participate in weight loss programs in recent years. Drastic measures were also taken to ban high-far, high-sugar food and drinks in schools, and to add more physical education in the school curriculum. TB0343 3 This document is authorized for use only by EU SA 2015. For the exclusive use of E. SA, 2015. the same price. The market study took about two months to complete and cost the company five million pesos, which Pedro had paid shortly after its completion Since the existing bottling plant was running at 100% capacity producing regular sodas, the proposal called for alleet of new, semi-automated botuling and keyging machines designed for long, high-quality runs. The total cost of these machines, including installation, was estimated to be 50 million pesos. This amount could be fully depreciated on a straight-line basis over a period of five years. Pedro believed that the purchase of these machines would enable Bebida Sol to reduce its cost of labor I therefore the price to the customers, putting the firm in a more competitive position. With proper maintenance, these machines could produce at least 600,000 liters of carbonated drinks per month. Pedro also estimated that these machines would have a resale value of four million peus in five years' time, if the company were to either shut down the production of Hola Kola, or replace these machines with fully automated ones at that time. The new machines would be housed in an unoccupied annex by the main production facility of Bebida Sol. The annex was also large enough to store the finished products before they were shipped out to grocery stores Antonio's father built the annex years ago when he planned to venture into the mineral water business. He died before he could execute his plan. The annex had been vacant ever since, even though Antonio recently received an offer to leave out the space for 60,000 pesos a year. Pedro determined that additional working capical was needed to ensure smooth production and sales of this new product line. He proposed keeping raw materials inventory at a level equal to one month of produc- tion. To encourage the independeat grocery stores to carry the new product line, he proposed offering a longer collection period, letting the grocers pay in 45 days, instead of the normal 30 days. As far as accounts payable, he would follow the company's normal policy, and se sertle the accounts in 36 days, The proposal also outlined the various estimates of production and owerhead costs, and selling ex g expenses Raw materials needed to produce che sodas were estimated to be 1.8 pesos per liter, while labor costs and energy costs per month were estimated to be 180,000 pesos and 50,000 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 Bebida 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, Antonio 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 productsthe 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 be add value to the firm by taking on this project! TB0.343 This document is authorized or use only by EU SA r 2015. For the exclusive use of E. SA, 2015. Appendix 1. Bebida Sol-Income Statements for the Year Ending December 31 (thousands of pesos) ) Irelle lieu Sales COGS Gross margin Marketing & Selling Expenses General Administrative Expenses EBITDA 2009 642.400 100.0% 3:49.884 $4.50 292,516 45.5% 2010 832,341 100.0% 456.409 54.8.6. 575,932 45.29% 2011 900,101 100.046 487.0 51.1 413,081 45.996 120,359 18.79 65.340 0.206 106,817 16.6% 150.322 88.622 136,988 18.1% 10.00 16.5% 16833) 18.706 97479110.94 146,960 16,396 Depreciation EBIT 45,046 61,771 2.00% 2 9.6% 77.544 9.39% % 65.985 80,975 2.3% 9.0% Interest EBT 23.120 38,651 2.6% 6.090 14.088 63,456 1.79 7.6% -93460 71.635 8.00 23 Taxes 31% Ner Income 11.59 27.056 1.8. 4.2% 10032 44,419 5.296 21.491 50.145 % 9.60 Dividends Retained Earnings 20,00D 7,056 20.000 24,419 20.000 30.145 Appendix 2. Bebida Sol-Balance Sheet as of December 31 thousands of pesos) Assets 2009 2010 Cash 12.02.3 3.1% 36,090 8.996 Accounts Receivable 61,600 15.796 75,253 18.6% Inventory 32.592 8.3% 15.016 11.1% Prepaid Expenses 1.792 3.0% 20,660 5.1 % Current Assets 118,007 30.19 177,019 43.8% 2011 53,020 14.09% 78,913 2.896 60,044 15.8% 15.117 40M 207,093 54.596 Gross fixed assets Acum depreciation Net fixed assets 439,230 112.0% 165 M6 12.1% 274.184 69.99 452,020 111.7% 221,190 55.5 227.530 5.6.29% 463,122 122.09 290,475 76.5% 172,647 15.5% 392.191 100.0% 404.549 10X1.0% 379.74 10X1.09% Total Assets Liabilities & Net Worth Accounts Payable Accrued expenses Short-cun debe Current Liabilities 2009 34.509 8.8% 15.083 3.8% 70.520 18.00 120,112 30.6% 2010 43.765 19,087 63.429 126.281 10.8% 4.79 15.ZUN 31.2% 2011 48,035 12.6% 20,193 5.49 22.900 6. 91,428 24.1 45,023 11.5% 227.056 57.9% 26,793 251.475 6.6% 62.29% 6,693 1.8% 281.619 Z4.22 Long-term debt Fquiry Liabilisie o Net Worth 392.191 100.0% 404,542 100.0% 379,740 100.0% TB0343 5 This document is authorised for use only by EU SA in 2015. Expansion Project - 5 years 2013 2014 2015 2015 2017 2018 I. Initial Investment Outlay Coat of new asset Shipping & Installation Incr. inne. Working capital (See schedule below) Initial Investiment 0 0 II. Supplemental Operating Cash Flow Sales Revenues Sales 0 0 0 0 0 0 0 0 0 U Overhead Expenses Sales Depreciation (See depr schedule! Earnings before taxes (LBT) Income Taxes (EBT Net income Add back depreciation After-tax adjustment Supplemenal operating cash low 0 0 0 0 0 0 - Tax Hate 0 U 4 0 o 0 0 0 5 III. Terminal Cash Flow 0 Return of not working capital Ne salvage value (See salvage val schedule) Terminal cash flow IV. Incremental Cash Flows Total Incremental cash flow per period 0 U 0 IRR= MIRR= P.J= NPV= Required Recurrir Trad. Payback Dise. Payback Depreciation Schedule Salvare Value Schedule 0 0 I. Depreciable bois calculation Asset purchase price Shipping & Installation Other capitalizable Depreciable basis 0 0 0 0 I Boak value 2018 Asset purchase price Shipping & Installation Other capitalizable Depreciable basis Accumulated Depr 2014 Hook Value 2018 0 0 0 0 1. Tax Depreciation Schedule MACRS Year 1 Year 2 Year 3 Year 4 Year 5 II. Tax Cllectol Sale Selling price classe. 2018 Book value 2018 Gain (lossi Income Taxes 0 0 0 0 III. Ne: Salvage Value Cash flow from sale Tax effect of sale Net cash flow from salvace 0 0 Incremental Net Working Capital Schedule (Receivables: (Inventory) Payables Net Cash Enter as negative Enter as negative Enter as positive 0 For the exclusive use of E. SA, 2015. THUNDERBIRD SCHOOL OF BLORAL MANADENENT TB0343 LENA CUA BUTH HOLA-KOLATHE CAPITAL BUDGETING DECISION The consumption of super-sweetened beverages has been hinked to risks for chesin dabetes, cont heart disease, therefore, a compelling crise can be wole for the med for reduced constaption of these beverages Health Policy Report, The New England Journal of Medicine October 15, 2009 Mexico lecxls world in soder consumption, World Health Organization plwing to feel it Carolyn Crist. Obesity Initiative, October 25, 2012 In December 2012. Antonio Ortega, the owner of Bebida Sol, had just finished reading a report done by his general manager, Pedro Cortez, about the possible investment in a new product line, Hola-Kola. The idea of Hola-Kola came about three months earlier when Antonio attended a seminar on youth obesity organized by a local high school that his two children attended. Even though he had often heard of the rising obesity problem in Mexico, Antonio was still very disturbed by the statistics indicating how the obesity rate in Mexico had triplex since 1980, and that 69.5% of the people 15 years and older were either obese or overweight- Even more shocking to Antonio, based on this statistic, Mexico now had the highest overweight rate in the world, surpassing the United States. After the seminar, Antonio discussed the idea of Hola-Kola, a low-price, zero-calorie carbonated soft drink, with Pedir Cortez. Pedro was excited about the idea, and liked the opportunity to launch something new, espe cially given that the company had not introduced a new product in the last five years. However, Pedro thought a market study should be done to gauge the potential demand before the firm undertook the invesunen. Company Background Bebida Sol is a small, privately owned carbonated soft drink company based in Puebla, Mexico. A retired ex- ecutive from a popular fast-food restaurant chain, Roberto Ortega, founded it in 1998. During his career as a restaurant executive, Roberto leamed that Mexicans, regardless of social status, loved their soula pop. Many would drink soda to quench their thirst on a regular basis, due to the lack of hygienic, drinkable water. With the influx of international brands of soda pop, Mexico now had the highest consumption of carbonated soft drinks per capita in the world. The average per capita consumption was 40% higher than the United States, at 163 liters (43 gallons) per year, while the United States consumed 118 liters (31 gallons), according to statistics presented by the international organization Oxfam and the Mexican NGO Consumer's Power. Due to the high obesity problem, health and consumer groups in Mexico had demanded that the government impose a 20% tax on soft drinks, claiming that it would not only reduce consumption, but the tax revenue could also be used to light health problems that soft drinks generated. "The World is Far" by Catherine Rampell, 9/23/2010. http://examix.blogs.times.com/2010/09/23/the world is far! http://pain.fils.usda.gow Recent ZOGAIN20Publications. The 20Mexicano Market for 20 Soft Drinks Mexico 20ATO Mexico 8-20-2009.pdf: Global Agriculture Information Network (GAIN) report MX9326 3 "Mexico, Leader in Soft Drink Consumptiou", July 10, 2012 http://www.mexicanbusinessweb.nex/eng/2012/ mexico-leader in soft drink.consumption Copyright 2013 Thunderbird Schwl of Global Management. All rights reserved this one was prepared by Professor Lena Chus Heath for the purpow of class mom discersione only, and scar to indicate citer effective ineffective management This document is authorised for use only by EU SA in 2015. For the exclusive use of E. SA, 2015. Obesity Exhibit 1. Rates of Overweight and Obesity Persons by Country (2010) Overweight 31 Jupar 2001 psi Slade (2001 ... 12000 NS NURI Broken Pan 2000 Dista this A la 2004 REST Bun23 Tate PRICE FE Finder OECD Els con Sovet Republic Cross un Hron foder Che exw adalo this Pingom (200m Thi) Pasa in ON ha 29 CW Chapas 1123) 19 Produse E. CAH26) 83 50 40 20 0 0 10 20 30 %of adult population of adult population Source: Word Obesity Scars 2010 and Beyond. Douglas Robb, Sept.27.2010, Health News 40 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.' Roberto 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 other private-labeled carbonated soft drinks with similar tastes, but ar about half the price. His products consisted of regular cola carbonates and non-cola carbonates, such as lemon/lime or orange carbonates. Bebida Sol's products were sold only in small independent grocery stores and convenience stores in Mexico. The firm avoided the supermarkets and hypermarkets because it could not sustain the desired margin in these large stores. Moreover, most of the consumers, especially the middle-to-low income ones, shopped at small, independent grocery stores. To create awareness, the owners of these independent stores were given incentives to personally promote the products. Sales increased dramatically, from 80 million pesos in 1998 to about 900 million pesos in 2011. "Soft Drinks in Mexico," Market Research Report, March 29, 2013. hcp://www.marketrescarch.com/MarketLine-v3883/ Soft Drinks Mexico 7679076). There were about half a million small, independent grocery stores, and more than 8,000 convenience stores throughout Mexico, 2 TB0.343 This document is authorised for use only by EU SA in 2015. For the exclusive use of E. SA, 2015. In 2007. Antonio Ortega, Roberto's only son, took over the business when Roberto unexpectedly passed away. Antonio started working on the sales side of the business two years before his father's death. He had gath- ered a few valuable tips on how to run the business from his father, which had made him a rather conservative businessman. A year after Antonio took over the business, the global financial crisis hit. The economic downturn in Mexico actually benefitted the low-price soda business. Demand increased dramatically as many consumers became price conscious and switched from international brands to private labels. Bebida Sol's sales increased by 60% from 2008 to 2009, and continued to increase without the firm changing any of its business strategy or practices. The company's return on sales (net profit margin) also had been increasing in the last few years. Exhibit 2. Bebida Sol's Sales and Return on Sales $1,000.COC 5.34% 6.00% $900.000 $200,000 SSCO, 101 5.00% 4.21% $8.32,341 $700,000 Amx SWORK $542.400 $500,000 3.00% $400.000 2.00% $300,000 $200,000 1.005 $100,000 0.00% 2009 2010 2011 Sales Return on Sales The Proposal Reading once again the executive summary of the report, Antonio recalled what his father told him several times during the two years he was working with him: "Don't grow the company for the sake of growing. Invest only when you are confident there is sufficient demand for a new product, and also when you have the financial resources." As far as financial resources, Antonio felt the timing could not be better. Due to strong sales and profitability in the last few years, Bebida Sol had accumulated a sizable amount of cash. Wich solid financial performance and steady cash flows, his banker had agreed to extend him a five-year, 16% annual interest term loan to launch Hola-Kola. In the proposal , Pedro Cortez estimated that with 20% of the needed capital borrowed, the 20/80 debt-equiry structure would result in an 18.2% weighted average cost of capital for this project The bigger question lingering in Antonio's mind was whether there would be sufficient demand for this hew, zero-calorie product line. Even though the demand for low-calorie sodas had increased in Mexico, they seemed to be consumed mainly by the middle-to-upper income segment of the population. The majority of the lower-income people still consumed only the regular, high-sugared carbonated soft drinks. It wasn't clear whether this was because the low-income group lacked the awareness of the obesity problem, or because there were not too many low-priced, low-calorie soda options available. If it were the former, the outlook for low- price, low calorie carbonated soft drinks might not be too promising at this time. If it were the latter , it might be the perfect timing for Bebida Sol to introduce Hola Kola Pedro hired a consultant to do a market study right after Antonio discussed the idea of Hola-Kola with him. The consultant estimated that the company could sell a total of 600,000 liters of these 2010-caloric carbonates a month, at a projected price of five pesos a liter. This volume of sales was expected for a period of five years at In an effort to fight the obesity problem, the Mexican government had been launching media campaigns to encourage the public to participate in weight loss programs in recent years. Drastic measures were also taken to ban high-far, high-sugar food and drinks in schools, and to add more physical education in the school curriculum. TB0343 3 This document is authorized for use only by EU SA 2015. For the exclusive use of E. SA, 2015. the same price. The market study took about two months to complete and cost the company five million pesos, which Pedro had paid shortly after its completion Since the existing bottling plant was running at 100% capacity producing regular sodas, the proposal called for alleet of new, semi-automated botuling and keyging machines designed for long, high-quality runs. The total cost of these machines, including installation, was estimated to be 50 million pesos. This amount could be fully depreciated on a straight-line basis over a period of five years. Pedro believed that the purchase of these machines would enable Bebida Sol to reduce its cost of labor I therefore the price to the customers, putting the firm in a more competitive position. With proper maintenance, these machines could produce at least 600,000 liters of carbonated drinks per month. Pedro also estimated that these machines would have a resale value of four million peus in five years' time, if the company were to either shut down the production of Hola Kola, or replace these machines with fully automated ones at that time. The new machines would be housed in an unoccupied annex by the main production facility of Bebida Sol. The annex was also large enough to store the finished products before they were shipped out to grocery stores Antonio's father built the annex years ago when he planned to venture into the mineral water business. He died before he could execute his plan. The annex had been vacant ever since, even though Antonio recently received an offer to leave out the space for 60,000 pesos a year. Pedro determined that additional working capical was needed to ensure smooth production and sales of this new product line. He proposed keeping raw materials inventory at a level equal to one month of produc- tion. To encourage the independeat grocery stores to carry the new product line, he proposed offering a longer collection period, letting the grocers pay in 45 days, instead of the normal 30 days. As far as accounts payable, he would follow the company's normal policy, and se sertle the accounts in 36 days, The proposal also outlined the various estimates of production and owerhead costs, and selling ex g expenses Raw materials needed to produce che sodas were estimated to be 1.8 pesos per liter, while labor costs and energy costs per month were estimated to be 180,000 pesos and 50,000 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 Bebida 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, Antonio 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 productsthe 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 be add value to the firm by taking on this project! TB0.343 This document is authorized or use only by EU SA r 2015. For the exclusive use of E. SA, 2015. Appendix 1. Bebida Sol-Income Statements for the Year Ending December 31 (thousands of pesos) ) Irelle lieu Sales COGS Gross margin Marketing & Selling Expenses General Administrative Expenses EBITDA 2009 642.400 100.0% 3:49.884 $4.50 292,516 45.5% 2010 832,341 100.0% 456.409 54.8.6. 575,932 45.29% 2011 900,101 100.046 487.0 51.1 413,081 45.996 120,359 18.79 65.340 0.206 106,817 16.6% 150.322 88.622 136,988 18.1% 10.00 16.5% 16833) 18.706 97479110.94 146,960 16,396 Depreciation EBIT 45,046 61,771 2.00% 2 9.6% 77.544 9.39% % 65.985 80,975 2.3% 9.0% Interest EBT 23.120 38,651 2.6% 6.090 14.088 63,456 1.79 7.6% -93460 71.635 8.00 23 Taxes 31% Ner Income 11.59 27.056 1.8. 4.2% 10032 44,419 5.296 21.491 50.145 % 9.60 Dividends Retained Earnings 20,00D 7,056 20.000 24,419 20.000 30.145 Appendix 2. Bebida Sol-Balance Sheet as of December 31 thousands of pesos) Assets 2009 2010 Cash 12.02.3 3.1% 36,090 8.996 Accounts Receivable 61,600 15.796 75,253 18.6% Inventory 32.592 8.3% 15.016 11.1% Prepaid Expenses 1.792 3.0% 20,660 5.1 % Current Assets 118,007 30.19 177,019 43.8% 2011 53,020 14.09% 78,913 2.896 60,044 15.8% 15.117 40M 207,093 54.596 Gross fixed assets Acum depreciation Net fixed assets 439,230 112.0% 165 M6 12.1% 274.184 69.99 452,020 111.7% 221,190 55.5 227.530 5.6.29% 463,122 122.09 290,475 76.5% 172,647 15.5% 392.191 100.0% 404.549 10X1.0% 379.74 10X1.09% Total Assets Liabilities & Net Worth Accounts Payable Accrued expenses Short-cun debe Current Liabilities 2009 34.509 8.8% 15.083 3.8% 70.520 18.00 120,112 30.6% 2010 43.765 19,087 63.429 126.281 10.8% 4.79 15.ZUN 31.2% 2011 48,035 12.6% 20,193 5.49 22.900 6. 91,428 24.1 45,023 11.5% 227.056 57.9% 26,793 251.475 6.6% 62.29% 6,693 1.8% 281.619 Z4.22 Long-term debt Fquiry Liabilisie o Net Worth 392.191 100.0% 404,542 100.0% 379,740 100.0% TB0343 5 This document is authorised for use only by EU SA in 2015. Expansion Project - 5 years 2013 2014 2015 2015 2017 2018 I. Initial Investment Outlay Coat of new asset Shipping & Installation Incr. inne. Working capital (See schedule below) Initial Investiment 0 0 II. Supplemental Operating Cash Flow Sales Revenues Sales 0 0 0 0 0 0 0 0 0 U Overhead Expenses Sales Depreciation (See depr schedule! Earnings before taxes (LBT) Income Taxes (EBT Net income Add back depreciation After-tax adjustment Supplemenal operating cash low 0 0 0 0 0 0 - Tax Hate 0 U 4 0 o 0 0 0 5 III. Terminal Cash Flow 0 Return of not working capital Ne salvage value (See salvage val schedule) Terminal cash flow IV. Incremental Cash Flows Total Incremental cash flow per period 0 U 0 IRR= MIRR= P.J= NPV= Required Recurrir Trad. Payback Dise. Payback Depreciation Schedule Salvare Value Schedule 0 0 I. Depreciable bois calculation Asset purchase price Shipping & Installation Other capitalizable Depreciable basis 0 0 0 0 I Boak value 2018 Asset purchase price Shipping & Installation Other capitalizable Depreciable basis Accumulated Depr 2014 Hook Value 2018 0 0 0 0 1. Tax Depreciation Schedule MACRS Year 1 Year 2 Year 3 Year 4 Year 5 II. Tax Cllectol Sale Selling price classe. 2018 Book value 2018 Gain (lossi Income Taxes 0 0 0 0 III. Ne: Salvage Value Cash flow from sale Tax effect of sale Net cash flow from salvace 0 0 Incremental Net Working Capital Schedule (Receivables: (Inventory) Payables Net Cash Enter as negative Enter as negative Enter as positive 0