American University of Science and Technology

Faculty of Business and Economics

Department of Finance

Case Study
Coca-Cola Inc. featuring Minute Maid Juice

After seeing other competitors’ success with soft drinks, Coca-Cola Inc.
has decided to consider an expansion of its own product line in the fresh
juice business. The product line being considered is fresh fruit juice with
“Minute Maid” as the new brand name. Assume that you were recently
hired as an assistant to the director of capital budgeting, and you must
evaluate the penetration in this new product line. The fresh fruit juice would
be produced in an unused building adjacent to the company’s main Plant in
Lebanon; Coca-Cola Inc. owns the building, which is fully depreciated; but
it has a fair market value of $1,200,000. To start this project, Coca-Cola
Inc. has to incur several capital expenditures as follows:

The latest sophisticated machinery, to produce fruit juice, costs $560,000, plus an additional
$40,000 to be incurred for shipment and installation costs. Moreover, this project necessitates the
acquisition of some new equipment for $400,000. Initially, working capital assets would rise by
$250,000, while working capital liabilities would go up by $50,000. The change in net working
capital is expected to be 10 percent the yearly sales thereafter. According to the local rules and
regulations, the machinery is to be depreciated under the MACRS system as 3-year property. The
applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The building
and equipment are to be depreciated according to the straight-line method with a useful life of 30
and 5 years respectively.

Coca-Cola Inc. is expected to renew its machine by new one, of the same type,
at during year 4. The old machine will have a salvage value of $30,000 whereas
the market value of the new one is $580,000 including all necessary costs to put
this machine into use for the first time. The project is expected to operate for 5
years, at which time it will be terminated. The cash inflows are assumed to begin
one year after the project is undertaken (year one) and to continue out to year 5.
At the end of the project’s life, it is anticipated to liquidate the machinery and
equipment for $600,000. The machinery is expected to sell at a fair market value of $450,000 at
the end of year five. Due to the booming in the Lebanese real estate market, the building is
anticipated to have a salvage value of $1,300,000.

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 American University of Science and Technology
Faculty of Business and Economics
Department of Finance

Coca-Cola Inc. expects to sell a total 2,000,000 bottles for

the first year at an expected sales price of $2.00 per bottle.
Unit Sales are expected to grow by 20 percent in years 2
and 3, due to the increase in the brand’s market share, and
to slow down to a 10 percent growth thereafter. The cost
control department anticipates an increase of 10 percent per
year in the sales price per bottle starting the beginning of
year 3. Cash operating costs for the project are expected to
total 50 percent of dollar sales throughout the life of the project. Coca-Cola Inc. is subject to a
marginal tax rate of 15 percent applied to all corporate profits and a tax rate of 10 percent to be
applied to capital gain/loss transactions.

Tentatively, the Minute Maid project is assumed to have a different risk than Coca-Cola Inc; so
the project’s cost of capital is 12 percent.

You have been asked by the director of capital budgeting to evaluate the project and to make a
recommendation as to whether it should be accepted or rejected.

Instructions:

1) Prepare a schedule to calculate the free cash flows of the apple juice project for Delicious Juice
Inc.
2) Evaluate the feasibility of the above project using the net present value (NPV) and internal rate
of return (IRR) technique.