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Bebida Sol owner Antonio Ortega is faced with an issue of deciding whether to start producing Hola Kola carbonated no calorie drink. The introduction of the product faces the uncertainty regarding its acceptability in the low end market, and its likelihood of eroding the company’s earnings from its product. The evaluation of the project leads to the recommendation that the company should not undertake the project.
There is a high rate of obesity in Mexico due to high intake of soft drinks where average per capital soft drink consumption in Mexico is 40% than that of the USA. Bebida Sol, which is a soft drink small company founded in 1998 targeting middle to low income customers, want to introduce new product to fight the increasing rate of obesity in the country. As a Mexican based company, Bebida Sol, has been successful in soft drink industry due to its lower priced drinks. With the soft drink consumption volume increasing by 4.5% between 2007 and 2011, Coca Cola, Pepsi Cola, Grupo Penafiel, and Dr. Pepper Snapple takes 90% of the soft drink in the country with the highest carbonated drinks per capita consumption in the world. Bebida Sol, considers introducing Hola Kola, as a low prized, zero calorie carbonated soft drink in order to capitalize on the health soft drink market gap. The company is faced with two main challenges: is there a place in the Mexico soft drink market for Hola Kola? Should the company undertake the project of producing Hola Kola?
The relevant cash flows in making decision regarding the Hola Kola project, the costs that will be considered relevant are those that are specific to the Hola Kola investment, arise in the future, and are incremental. In case the relevant cash flows include expected revenue from the project, interest charges, potential value of the annex that is unoccupied, and the working capital. For the project, the consultants market study cost will be considered irrelevant. This is because the market study have been completed two months prior to the project commencement, and therefore, the company has completed the cash outflow. As such, this cost will not be considered in making the decision. The potential value of the unoccupied annex will be treated as a relevant cost. Antonio Ortega is presented with opportunity of letting out the unoccupied annex for 60000 pesos per year, and as such, the cost represent the opportunity cost of not letting the annex and as such it will be re……………….