Pepsico Case

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(Group-26)

A Case Study On

PEPSICO CHANGCHUN JOINT VENTURE: CAPITAL EXPENDITURE ANALYSIS

Name Roll

Fakrul Islam 15-848

Masum Ahmed Babu 15-816

Mohammad Al-Mamun 15-664

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 PepsiCo’s 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 realm

Strengths Weaknesses

could possibly lose focus internal conflict problems

Opportunities

growing markets for specialized ethnic foods and healthier food products.income of consumers is high enabling them to be less price sensitive

ThreatsPricingquickness 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 High

Threat of Substitutes: Low to Medium

Buyer Power: Medium to High

Supplier Power: Medium to High

Threat of New Entry: Low to Medium

Problem Statement:

PEPSI CO’S 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 Case

Assumption:

Discount rate 17%Terminal growth rate 4%Tax( from 3rd to 5th years) 8.50%Tax( after onwards) 20%Withhold tax 7%Statutory reserve 17%

NPV 9844IRR 19%MIRR 18.92%

Profitability index:PV of Cash inflowsPV of Cash outflows 11698

Profitability index 0.54853856

Output:

Best CaseAssumption:Discount rate 11%Terminal growth rate 4%Tax( from 3rd to 5th years) 8.50%Tax( after onwards) 20%Withhold tax 7%Statutory reserve 17%Revenues are assumed to increase by 12%Revenues are assumed to decrease by 6%

Output:

NPV 140115IRR 29%MIRR 27.01%



Simulation(Best Case)

Statistics:Forecast

valuesTrials 10,000Base Case 140115Mean 127060Median 125965Mode ---Standard Deviation 39885Variance 1590835559Skewness 0.1603Kurtosis 2.84Coeff. of Variability 0.3139Minimum 5031Maximum 275216Range Width 270185Mean Std. Error 399

Above Average Case

Discount rate 15%Terminal growth rate 4%Tax( from 3rd to 5th years) 8.50%Tax( after onwards) 20%Withhold tax 7%Statutory reserve 17%Revenues are assumed to increase by 6%Revenues are assumed to decrease by 2%

Assumption:

NPV 37166IRR 23%MIRR 22.11%



Output:

Worst case

Discount rate 18%Terminal growth rate 2%

Tax( from 3rd to 5th years) 8.50%Tax( after onwards) 20%Withhold tax 7%Statutory reserve 17%Revenues are assumed to increase by -8%Revenues are assumed to increase by -3%

Assumption:

Output:

NPV -10628IRR 12%MIRR 13.24%



Simulation(Worst Case)

Statistics:Forecast

valuesTrials 10,000Base Case -10628Mean -11971Median -12101Mode ---Standard Deviation 4246Variance 18027308Skewness 0.2438Kurtosis 2.87Coeff. of Variability -0.3547Minimum -22477Maximum 8467Range Width 30944Mean Std. Error 42

PCI CaseDiscount rate 15%Terminal growth rate 4%Tax( from 3rd to 5th years) 8.50%Tax( after onwards) 20%Withhold tax 7%Statutory reserve 17%Profit in transfer price 18%Parent' proportion 57.50%

Assumption:

Output:

NPV 13736

IRR 20%

MIRR 19.88%

Profitability index:

PV of Cash inflows

PV of Cash outflows 6726


Expected NPV & IRR Calculation

Expected Case

Assumed probability

NPV IRR

Base 35% 9844 12%

Best 15% 140115 22%

Above Average 10% 37166 0%

Worst 15% -10628 19%

PCI 20% 13736

Expected NPV 26584.87909

Expected IRR 10.29%

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.

Any Question?

Pepsico Case

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