Case Study of Bebida Sol

1. Executive summary

The report analyzes the Bebida Sol zero-calorie carbonated soft drink project.

2. Introduction

Bebida Sol is a carbonated soft drink company which mainly focus on relative low-income
customers. The company has changed its boss five years ago and operated by its second owner
Antonio Ortega.

The company run in great performance in the past few years, especially during the financial crisis,
but this trend might not be consisting while the economy becoming better.

The company would like to invest in a new project to produce zero-calorie carbonated soft drink,
and they decide to have a study to decide whether the company should conduct the project.

3. The background of this investment environment

The Mexican market has great demand for carbonated soft drinks, due to the lack of hygienic and
drinkable water.

However, the obesity problem in Mexico is becoming severe over times, and carbonated drinks are
easy to make people obese. The health and consumer group in Mexico is lobbying the government to
impose a higher tax on soft drinks. The Mexico government is also launching media campaigns to
encourage the public to pay attention to obesity.

The original idea of producing zero-calorie carbonated soft drink is to deal with the obesity
problem in Mexico. Besides, Bebida Sol had not introduced a new product for the last five year.

4. The relevant cash flows of the project

600,000 liters per month*5 pesos per liter= 3,000,000per month

Revenue =36,000,000 per year
50,000,000 pesos (straight-line depreciate), after five years the
Machine and installation machines’ value would be 4,000,000 pesos.
The cost of annex 60,000 per year
Working capital 600,000 liters *1.8 pesos per liter=1,080,000
600,000 liters*1.8 pesos per liter=1,080,000 per month=
Material cost 12,960,000 per year
Labor cost 180,000 per month= 2,160,000 per year
Energy cost 50,000 per month= 600,000 per year
Administrative and selling cost 300,000 per year.
Opportunity cost of erosion 800,000
Tax rate 30%
 Discount rate 18.20%
5. Sensitivity analysis of different scenario:

1) The free cash flow of the project in Scenario 1:

Beginning Year1 Year2 Year3 Year4 Year5

-51,080,000 16,144,000 16,144,000 16,144,000 16,144,000 20,024,000
The NPV of the project is 726,626.75, which is positive. Therefore, we can conclude that under
this scenario the investment should be make.

2) The free cash flow of the project in Scenario 2:

Beginning Year1 Year2 Year3 Year4 Year5

-51,080,000 16,090,000 15,537,100 14,956,555 14,346,983 17,885,316
The NPV of the project is -1,850,963.18, which is negative. Therefore, we can conclude that under
this scenario the investment should not be make.

3) The free cash flow of the project in Scenario 3:

Beginning Year1 Year2 Year3 Year4 Year5

-51,080,000 16,090,000 16,267,900 16,439,348 16,603,577 20,938,151
The NPV of the project is 1,448,710.70, which is positive. Therefore, we can conclude that under
this scenario the investment should be make.

4) Conclusion

Comparing with different scenario, it is easy to find that NPV is quite sensitive to changes in
different factors, and the decisions made based on NPV are constantly changing as a result.

The result of sensitivity analysis of NPV suggested that the risk of the project is relatively high.
The decision made base on NPV might be vary if the factors had change.

6. The benefits and risks of this project

Under the circumstances that the government and NGOs are paying more and more attention to
obesity, the project of launching zero-calorie soft drinks gives consumers who pay more and more
attention to obesity an alternative choice, avoiding the loss of consumers, which will help the
company consolidate its current market. In the same time, this investment can also help the company
negotiate with the government to reduce the impact of the potential heavy tax on sugar-sweetened
beverages to the company.

The project will not only help the company consolidate the original consumer group, but also help
the company enter in new consumer markets. The launching of new zero-calorie carbonated
beverages will help attract new consumers, especially those who are sensitive to calories. What’s
more, this might be an opportunity that enable the company to expand its customers from low-income
groups to high-income groups.

Besides, the project can also expand the sales of the company and the scale effect of this project
will allow the company to reduce the cost per unit of the production.

However, the project also contain risk. As the report mentioned above, the NPV of this project is
highly sensitive that the result of the forecasting will be affect by tiny factor change in the simulation.

Second, new products may directly compete with the products from larger companies, which may
have an uncertain impact on product sales. This might have a negative impact on the already sensitive
NPV.

Finally, the zero-calorie soft drink market is still uncertain at this moment. It may grow
explosively, or it may not be accepted by consumers at all. It is also affected by the action taken by
the government and NGO, which may change their original idea in the future.

7. Conclusion and recommendation of the investment.

According to the information given, Bebida Sol should invest in this project.

The result of not investing in the project might be losing the current market and reduced company
size, which might not be acceptable by the owner. Increasing consumers, expanding the sales scale,
and potentially saving taxes are obvious advantages which comes from the project.

For the potential negative impact from the project, there are some recommendations. First, the cost
of the project must be carefully controlled. For example, as the company grows, its bargaining power
with suppliers also increases and it should help the company to reduce the cost. It is important to
make good use of the power to counter the sensitivity of the project’s NPV.

Second, the companies can set up new sub-brands to face the competition from major international
companies. It can enable the company to get rid of original low-end image comparing to the
international companies and expand the consumer base.

Third, the company should lobby the government for more policy support. Cooperation with
NGOs is also a plan that can be considered.
8. Appendices

Scenario 1

0 1 2 3 4 5
Revenue 36,000,000 36,000,000 36,000,000 36,000,000 36,000,000
cost of
material -12,960,000 -12,960,000 -12,960,000 -12,960,000 -12,960,000
cost of annex -60,000 -60,000 -60,000 -60,000 -60,000
cost of Labor -2,160,000 -2,160,000 -2,160,000 -2,160,000 -2,160,000
cost of
energy -600,000 -600,000 -600,000 -600,000 -600,000
Depreciation -10,000,000 -10,000,000 -10,000,000 -10,000,000 -10,000,000
Administrati
ve and
selling cost -300,000 -300,000 -300,000 -300,000 -300,000
EBIT 9,920,000 9,920,000 9,920,000 9,920,000 9,920,000
tax 30% 2,976,000 2,976,000 2,976,000 2,976,000 2,976,000
Net profit 6,944,000 6,944,000 6,944,000 6,944,000 6,944,000
working
capital -1,080,000 1,080,000
depreciation 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
capital
expenditure -50,000,000 2,800,000
opportunity
cost of
erosion -800,000 -800,000 -800,000 -800,000 -800,000
free cash
flow -51,080,000 16,144,000 16,144,000 16,144,000 16,144,000 20,024,000

Discount
rate 18.20% NPV 726,626.75

Scenario 2

0 1 2 3 4 5
Revenue 36,000,000 36,000,000 36,000,000 36,000,000 36,000,000
cost of -
material 12,960,000 -13,608,000 -14,288,400 -15,002,820 -15,752,961
cost of annex -60,000 -60,000 -60,000 -60,000 -60,000
cost of Labor -2,160,000 -2,268,000 -2,381,400 -2,500,470 -2,625,494
cost of energy -600,000 -630,000 -661,500 -694,575 -729,304
-
Depreciation 10,000,000 -10,000,000 -10,000,000 -10,000,000 -10,000,000
Administrative
and selling
cost -300,000 -300,000 -300,000 -300,000 -300,000
EBIT 9,920,000 9,134,000 8,308,700 7,442,135 6,532,242
tax 30% 2,976,000 2,740,200 2,492,610 2,232,641 1,959,673
Net profit 6,944,000 6,393,800 5,816,090 5,209,495 4,572,569
working -1,080,000 -54,000 -56,700 -59,535 -62,512 1,312,747
capital
depreciation 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
capital
expenditure -50,000,000 2,800,000
opportunity
cost of erosion -800,000 -800,000 -800,000 -800,000 -800,000
free cash flow -51,080,000 16,090,000 15,537,100 14,956,555 14,346,983 17,885,316

Discount
rate 0.18 NPV -1,850,963.18

Scenario 3

0 1 2 3 4 5
Liter of sales
per year 7200000 7056000 6914880 6776582 6641051
Price of sales 5 5 6 6 6
Revenue 36000000 37044000 38118276 39223706 40361193
cost of
material -12960000 -13608000 -14288400 -15002820 -15752961
cost of annex -60000 -60000 -60000 -60000 -60000
cost of Labor -2160000 -2268000 -2381400 -2500470 -2625494
cost of energy -600000 -630000 -661500 -694575 -729304
Depreciation -10000000 -10000000 -10000000 -10000000 -10000000
Administrative
and selling
cost -300000 -300000 -300000 -300000 -300000
EBIT 9920000 10178000 10426976 10665841 10893435
tax 30% 2976000 3053400 3128093 3199752 3268031
Net profit 6944000 7124600 7298883 7466089 7625405
working
capital -1080000 -54000 -56700 -59535 -62512 1312747
depreciation 10000000 10000000 10000000 10000000 10000000
capital
expenditure -50000000 2800000
opportunity
cost of erosion -800000 -800000 -800000 -800000 -800000
free cash flow -51080000 16090000 16267900 16439348 16603577 20938151

Discount
rate 0.18 NPV 1,448,710.7