Pepsico Changchun Joint Venture
Pepsico Changchun Joint Venture
Capital Expenditure Analysis
About the case
• In mid 1994, Andre Hawaux, vice-president for
PepsiCo East Asia (PepsiCo), was putting together the information he had collected on the proposed Changchun Bottling joint venture
• in order to analyze the financial profitability ( capital expenditure analysis) of the project using net present value (NPV) and internal rate of return (IRR).
Joint Ventures in China
• Before 1993,
– “cooperative joint venture”(CJV): the amount of capital injected in to the business did not necessarily equal the amount of profit-sharing
• After 1993:
• “Equity joint venture”: The profit would be distributed in line with the ratio of capital injected
(Pepsico 57.5%; The Second Food Factory
Changchun:37.5%, Beijing Chong Yin Industrial &
Trading Company:5%)
NPV
• How much value is created from undertaking an investment? The first step is to estimate the expected future cash flows.
• The second step is to estimate the required return for projects of this risk level.
• The third step is to find the present value of the cash flows and subtract the initial investment.
NPV decision
• If the NPV is positive, accept the project
• A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners.
• Using the formulas
• NPV = 63,120/(1.12) + 70,800/(1.12)2+
91,080/(1.12)3–165,000 = 12,627.42
• Do we accept or reject this project?
Internal Rate of return
• You can think of IRR as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth.
Rule
• Accept the project if the IRR is greater than the discount rate. Reject the project if the IRR is less than the discount rate
• When IRR = Discount Rate NPV is 0
Capital Expenditure Analysis
About the case
• In mid 1994, Andre Hawaux, vice-president for
PepsiCo East Asia (PepsiCo), was putting together the information he had collected on the proposed Changchun Bottling joint venture
• in order to analyze the financial profitability ( capital expenditure analysis) of the project using net present value (NPV) and internal rate of return (IRR).
Joint Ventures in China
• Before 1993,
– “cooperative joint venture”(CJV): the amount of capital injected in to the business did not necessarily equal the amount of profit-sharing
• After 1993:
• “Equity joint venture”: The profit would be distributed in line with the ratio of capital injected
(Pepsico 57.5%; The Second Food Factory
Changchun:37.5%, Beijing Chong Yin Industrial &
Trading Company:5%)
NPV
• How much value is created from undertaking an investment? The first step is to estimate the expected future cash flows.
• The second step is to estimate the required return for projects of this risk level.
• The third step is to find the present value of the cash flows and subtract the initial investment.
NPV decision
• If the NPV is positive, accept the project
• A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners.
• Using the formulas
• NPV = 63,120/(1.12) + 70,800/(1.12)2+
91,080/(1.12)3–165,000 = 12,627.42
• Do we accept or reject this project?
Internal Rate of return
• You can think of IRR as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth.
Rule
• Accept the project if the IRR is greater than the discount rate. Reject the project if the IRR is less than the discount rate
• When IRR = Discount Rate NPV is 0