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1 College of Engineering ENGM 511 Financial Accounting Case Study Assignment Fall 2023/2024 Name & ID: Mahdi Saleh Dashti & F2300114 Karim Saleh Dashti & F2300115 Mohamed Salem Mahroos & F2300142 Turki S Washmi & F2300260 Mohamed Mustafa & F2300116 Date: 1

1 TABLE OF CONTENTS List of Tables ..................................................................................................................................... 1 1.0 CASE STUDY ............................................................................................................................ 2 1.1 The Consultant’s Market Study Cost ............................................................................... 2 1.2 The Potential Rental Value of The Unoccupied Annex ................................................... 2 1.3 Interest Charges ............................................................................................................... 2 1.4 Working Capital ............................................................................................................... 3 2.0 CONSIDERATION OF EROSION ............................................................................................ 3 2.1 Case 1: Erosion cost considered: ............................................................................................ 3 2.2 Case 2: Erosion cost not considered: ...................................................................................... 3 3.0 PROJECT’S NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX ................................................................................................................... 4 4.0 SENSIVITY ANALYSIS ON SALES VOLUME, PRICE, DIRECT LABOR, AND ENERGY COST .............................................................................................................................................. 10 5.0 BENEFITS AND RISKS OF UNDERTAKING THE PROEJCT ............................................ 10 6.0 FINAL OUTCOME IF BEBIDA SHOULD UNDERTAKE THE PROJECT ......................... 11 List of Tables Table 1 NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX .............................................................................................................................................. 4 Table 2 Scenario 2 (-5% Labor Cost) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX ......................................................................................................... 5 Table 3 Scenario 3 (-5% Raw Material Cost) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX ......................................................................................... 6 Table 4 Scenario 4 (-5% Energy Cost) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX ......................................................................................... 7 Table 5 Scenario (+5% Unit sale price) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX ......................................................................................... 8 Table 6 Scenario 6 (Not Considering Erosion) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX ......................................................................................... 9 Table 7 NPV & IRR values when raw materials are reduced ......................................................... 10 1

1.4 Working Capital Incremental working capital incurs for the project; therefore, it is a relevant cash flow. 2.0 CONSIDERATION OF EROSION The conducted market study suggested that Hola Kola potential erosion could cost the company around 800,000 pesos of after-tax cash flow per year. Such a cost can have two outcomes if they are considered or not. 2.1 Case 1: Erosion cost considered: The new project could potentially affect the sales of the existing product, the estimated impact is an erosion of 800,000 pesos/year. As per our analysis we have considered the erosion value in order to be more precise while deciding on the project. 2.2 Case 2: Erosion cost not considered: The estimated erosion value is only an assumption, and it might not happen since the products are meant to target different groups of customers. Moreover, erosion could occur for any reason and not necessarily because of undertaking the new project. In our analysis, we evaluated both scenarios as the estimated erosion value could have a significant impact on the appraisal. 3

3.0 PROJECT’S NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX 4 Table 1 NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX

6 Table 3 Scenario 3 (-5% Raw Material Cost) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX

7 Table 4 Scenario 4 (-5% Energy Cost) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX Table 5 Scenario (+5% Unit sale price) NPV, IRR, PAYBACK PERIOD, DISCOUNTED PERIOD, AND PROFITABILIT INDEX

5.0 BENEFITS AND RISKS OF UNDERTAKING THE PROEJCT 9

Such a project can have risks and benefits specially with all the competitors being available in place such as Coca-Cola, Pepsi-Cola, Dr. pepper snapple, and Grupo Penafiel. The Benefits of undertaking the project are: a) The presence of well-known competitors shows a strong demand for carbonated soft drinks. This can provide opportunities for Hola-Kola to merge into an existing market. b) Consumers are already familiar with the taste and branding soft drink companies. By offering a similar taste, consumers will have more options in choosing the product. c) Distribution networks play a major role that can reach around retailers all over the country. With the right partnerships and distribution agreements with similar networks, it can help the products reach a wide customer base. d) Offering similar taste to popular international brands can position the company as a visible alternative. With the right competitive price, it may attract customers who would prefer Hola-Kola or want more choices. Moreover, Risks are there to undertake the project as per the following: a) The soft drink industry is highly competitive in Mexico with well- established players in the market. Entering such a competitive may require a larger investment in marketing, distribution and product develop to compete effectively. b) Offering a similar taste can attract customers, it may also pose challenges in terms of differentiating Hola-Kola from competitors. Developing a unique selling proposition or a compelling brand will be crucial to stand out in the market. c) Consumer preferences are constantly changing, some are moving towards healthier alternatives to sugary carbonated drinks. This shift may lead to challenges specially since Hola-Kola focuses on traditional soft drinks. 10