HOLA-KOLA THE CAPITAL BUDGETING DECISION Harvard Case Solution & Analysis

HOLA-KOLA THE CAPITAL BUDGETING DECISION Case Solution 

INTRODUCTION

BEBIDA SOL

Bebida Sol is a private company was found by Roberta Ortega in the year 1998. The company is based in Puebla, Mexico.Mr. Roberta, by doing extensive analysis of demographic structure of his targeted customers, analyzed that the Mexicans irrespective of their social status and also due to lack of pure, hygienic water supply love to have soda pop.The company provides carbonated soft drink cola relatively at a lower cost than the international brands.The company is customers oriented and it is targeted towards middle to lower income individuals. The products are sold in small, independent and convenient grocery stores.

INDUSTRY

Mexico has the highest consumption of carbonated drinks per capital in the world. The average per capita consumption was 40% higher than the United States, at 163 liters (43 gallons) per year, while United States consumed 118 liters (31 gallons) per year.

Market leaders 

  • Coca Cola
  • Pepsi Cola
  • Dr. Pepper Snapple
  • Grupo Penafiel

The combined market structure is more than 90%. The market consumption volume increased by 4.5% from 2007-2011.

ANALYSIS OF PROBLEM

Mexicans due to the high rate of consumption of carbonated soft drinks face issues related to Overweight Problem and Obesity Problem. According to the recent statistics which cover almost all the countries of the world, Mexico has the highest value in the rates of Overweight and Obesity person by country.

The second issue is the increased prices of the international brands of carbonated soft drinks. As stated above that Mexicans love drinking soft drinks however,due to the high prices of the international brands, a lower income based individual does not even think to go to a super grocery store.

MARKET OPPORTUNITY IN THE NAME OF HOLA-KOLA

In the period of Antonio Ortega, the only son of Mr. Roberto Ortega analyzed the market opportunity in the name of Hola-Kola in December 2012, which provided the solution for both the problems of Mexicans.Hola-Kola is a zero calorie-carbonated soft drink, which is available in low price. The product is developed by keeping the needs of the customers and by focusing on the lower income group that is not able to have a soft drink.

HOLA-KOLA ANALYSIS:

RELEVANT COST&IRRELEVANT COST

This new market opportunity requires heavy initial investment from Mr. Antonio Ortega in order to purchase the machine which costs 50 million pesos. The consultant market study cost is 50 million pesos but they are irrelevant. Potential rental value of an unoccupied annex is 60,000pesos a year.Interest charges are16% on annual interest term loan whereas, cost of capital(WACC) for the project is 18.5%.

EROSION COST

Erosion cost will have a serious negative effect on the project as the costs are substantial, which are 800,000,and it will affect the NPV...................

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