Hola-Kola – The Capital Budgeting Decision Harvard Case Solution & Analysis

Question 1) what are the relevant cash flows?

Cash flows are the inflows and outflows of economic resources into or out of the business, meanwhile, as a general principal cash flow can be in the form of expenses and revenues generated by the business. However, the relevant cash flows are the cash flows that are related to a specific investment project.Further, in order to be relevant, the cash inflow and cash outflow must arise in the future, additionally; the cash flows must be incremental in order to be relevant to a specific investment decision. Meanwhile, the incremental cash flows mean that they will only be relevant if their inflow or outflow depends on the decision being made.

Question 2) how shall we treat:

Question 2) (a)the consultant’s market study cost?

The consultants cost of market study that they have completed during the two month period before the start of investment projects. However, the market study was necessary cost that was needed to be done in order to establish that, whether the investment project is feasible to be pursued or not. However, since the study have already been completed and the outflow of the cash has taken place, meanwhile, for the purpose of decision making regarding the investment in Hola-Kola project, this market study cost is irrelevant and would not be considered while making this investment decision.

Question 2) (b) the potential rental value of the unoccupied annex?

However, since the unoccupied annex had been built a year ago and was not in any use since then. Meanwhile, the full capacity will be utilized by the new business opportunity Hola-Kola, partly by the new machinery that will used in Hola-Kolaproject and partly the annex will be used for storing the finished goods and raw materials of the new project. Hence, on this basis, thereare no relevant cash flows regarding the use of already built annex in this decision making, however, since Antonio Ortega has an opportunity through which he can let the annex on lease for 60,000 pesos per year, therefore, the opportunity cost of not being able to let the annex to another party and earn rental income on this letting will a relevant cost for the evaluation of the decision regarding the investment in Hola-Kola project.

Question 2) (c) The interest charges?

Meanwhile, the cost of capital, which is also known as the weighted average cost of Capital, Includes the cost of borrowing; hence, the net cash flows do not include any outflow relating to the cash flows. However, because the net cash flows are discounted using the cost of capital, hence, the interest cost is also a relevant cash flow.Hola Kola The Capital Budgeting Decision Case Solution

Question 1) Working capital?

Working capital is an amount required by the business operations in order to finance the additional operations and business growths. However, since the working capital is injected at the beginningof operations and subsequent cash flows required by the business operations are not fully reinvestedin the business, instead the increment amount will be required during the subsequent years. However, because the cash outflow of working capital will only occur if the decision to proceed with the Hola-Kola project has been made, therefore, they are relevant cash flows and they should be included in the cash flows in order to calculate the net present value of the project.

Question 3) should we consider the erosion of the existing product – the regular sodas – in the analysis? Why or why not?

The erosion of the existing sales of regular sodas will only occur if the decision to proceed with the Hola-Kola project is made. Therefore, the net cash flows after tax of the regular soda product should be..................

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