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A Case Study OnPEPSICO CHANGCHUN JOINT VENTURE: CAPITAL EXPENDITURE ANALYSIS

NameRollFakrul Islam15-848Masum Ahmed Babu15-816

Mohammad Al-Mamun15-664

ContentsCompany OverviewSwot AnalysisPestel AnalysisIndustry AnalysisPorter Five FactorsProblem StatementDeveloping AlternativesRecommendation

Company Overview:In the 90s, China was one of the growing markets for CSD firms.

The business model of the CSD industry is to establish strategic bottling plants to serve industrial reginioal market.

Chanchun, one of the PepsiCos Mou Cities, was considered to be an ideal location by the company to gain a lead over rival CocaCola.

PepsiCo will hold the majority and assume operational responsibilities, while the chinese partners were expected to bring to the JV experience of the local market and established distribution work.

SWOT ANALYSIS: experienced management teama competitive product linea global marketing realmStrengthsWeaknessescould possibly lose focus internal conflict problemsOpportunitiesgrowing markets for specialized ethnic foods and healthier food products.income of consumers is high enabling them to be less price sensitiveThreatsPricingquickness of technological advances

Pestel AnalysisPolitical Factors: Those Non- Alcoholic Beverages like; PEPSI, are within the food category, under the FDA (Food and Drug Administration). The government has control over the manufacturing procedure of these products in terms of regulations. Economic FactorsBy researching for new products is cost effective, the company could sell its products at a lower price, so its cutomers would purchase more PEPSICO products at a lower price. Sociological FactorsWhile many cutomers are getting at older ages in life, they are more concerned in long term increasing their permanence. That will continue to affect the non-alcoholic beverage sector, by increasing the demand, in healthier and other beverages.

Technological FactorsThe efficiency of company's advertising, marketing and promotional programs, The new technology advances of television and internet that use incomparable effects for advertising through the use of media.

Legal FactorsThere are a multitude of regulatory issues involved in CSD Industry that can dramatically affect the cost for such projects.

Environmental FactorsThe environment factors are key issue for CSDindustry. This industry has developed a lot.

Porters five factor (TRX) Industry Rivalry: Medium to HighThreat of Substitutes: Low to MediumBuyer Power: Medium to HighSupplier Power: Medium to High

Threat of New Entry: Low to Medium

Problem Statement:

PEPSI COS STRATEGIC GOALS Changchun was one of their prime target for expansion.

The proposal was for PEPSICO to control a 57.5% interest in JV, 37.5%by the Second Food Factory AND Beijing Chong Yin would hold the remaining five percent.

Base CaseAssumption:Output:

Discount rate17%Terminal growth rate4%Tax( from 3rd to 5th years)8.50%Tax( after onwards)20%Withhold tax7%Statutory reserve17%

NPV9844IRR19%MIRR18.92%

Profitability index:PV of Cash inflowsPV of Cash outflows11698Profitability index0.54853856

Best CaseAssumption:Output:

Discount rate11%Terminal growth rate4%Tax( from 3rd to 5th years)8.50%Tax( after onwards)20%Withhold tax7%Statutory reserve17%Revenues are assumed to increase by 12%Revenues are assumed to decrease by 6%



Simulation(Best Case)

Statistics:Forecast valuesTrials10,000Base Case140115Mean127060Median125965Mode---Standard Deviation39885Variance1590835559Skewness0.1603Kurtosis2.84Coeff. of Variability0.3139Minimum5031Maximum275216Range Width270185Mean Std. Error399

Above Average CaseAssumption:Output:

Discount rate15%Terminal growth rate4%Tax( from 3rd to 5th years)8.50%Tax( after onwards)20%Withhold tax7%Statutory reserve17%Revenues are assumed to increase by 6%Revenues are assumed to decrease by 2%



Worst caseAssumption:Output:

Discount rate18%Terminal growth rate2%Tax( from 3rd to 5th years)8.50%Tax( after onwards)20%Withhold tax7%Statutory reserve17%Revenues are assumed to increase by -8%Revenues are assumed to increase by -3%

NPV-10628IRR12%MIRR13.24%


Simulation(Worst Case)

Statistics:Forecast valuesTrials10,000Base Case-10628Mean-11971Median-12101Mode---Standard Deviation4246Variance18027308Skewness0.2438Kurtosis2.87Coeff. of Variability-0.3547Minimum-22477Maximum8467Range Width30944Mean Std. Error42

PCI CaseAssumption:Output:

Discount rate15%Terminal growth rate4%Tax( from 3rd to 5th years)8.50%Tax( after onwards)20%Withhold tax7%Statutory reserve17%Profit in transfer price18%Parent' proportion57.50%



Expected NPV & IRR Calculation

Expected CaseAssumed probabilityNPV IRRBase 35%984412%Best15%14011522%Above Average10%371660%Worst 15%-1062819%PCI20%13736Expected NPV26584.87909Expected IRR10.29%

Recommendation:

The Project is not acceptable though the NPV is positive. On the other hand, the IRR is less than 20% what the Chinese partners targeted for return and the Chinese partners would prefer immediate financial returns from the JV.

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