Problem:
Assume you are recently hired by Coke as a business analyst and your first task is to analyze the merits of a new project as follows: the marketing team would like to launch a new sports drink called Zynergy. It is a drink that will target young to middle aged adults. They are anticipating the following:
· First year sales are expected to be 3 million 12 pack cases with an expected annual growth rate of 10%.
· The expected wholesale price per case is $4.50 and cost of goods will be approximately 65% of the selling price.
· The marketing and advertising budget in the first 3 years of the product launch will be $2.5 million which is expected to be reduced to $1.5 million thereafter.
· Selling and other operating expenses excluding depreciation will be approximately 10% of sales revenue.
· Zynergy is expected to cannibalize sales from the companyâ??s other existing sport drinks by about $500,000 per year.
· The company will have to invest $3.5 million in new equipment with a 10 year MACRS class life that has an expected salvage value of $500k.
· Net working capital will have to be increased by $350K for this new product.
· The product will be re-branded after 8 years which will require an additional $500k in marketing expenditure and will terminate at the end of its 12th year.
· Assume inflation rate is currently at 5% and is expected to remain constant throughout the life of this project.
· Assume the firm uses a 12% cost of capital to evaluate these types of projects.
· Assume the companyâ??s marginal tax rate is 35%.
Your boss has asked you to conduct a capital budget analysis on this proposal and to develop its marketing plan. Your capital budget analyses should address the following:
1. What is the expected simple payback of the project
2. What is the NPV and IRR for the project
3. Conduct sensitivity analyses on the sales volume, selling price, the cost of goods sold and the selling and operating expenses assuming the following: Increases and decreases ranging from 10% to 25% with an increment or decrement of 5%.
Discuss how the marketing dollars should be spent to ensure the product's success and include suggestions for the optimum selling price for this new product.