Pepsico changchun joint venture analysis
Case 20: PEPSICO CHANGCHUN
JOINT VENTURE
Capital Expenditure Analysis
Study Questions
Q1. Use the information in the case to construct two sets of NPV and IRR analysis from joint venture view and
Pepsico. Based on the results, what would be your decision on the proposed Changchun joint venture?
Q2. Comment on the financial projections that PepsiCo used in its capital budgeting exercise, especially the
NOPBT Cap, foreign exchange rate projection and the discount rate.
Q3. What differences might there be as to how the PRC partners do the analysis (or look at the future cash flows) versus PepsiCo?
Case Summary（案例）
In mid-June 1994, Andre Hawaux, vice-president finance for PepsiCo East Asia (PepsiCo), was about to put together the information he had collected on the proposed Changchun bottling joint venture (JV) in order to analyze the financial profitability of the project using net present value (NPV) and internal rate of return (IRR).
Joint Venture
• Before 1993,
-“cooperative joint venture”(CJV): a foreign company with a local Chinese firm
- 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.
Introduction to NPV and IRR
Net Present Value(净现值法）
• The difference between the market value of a project and its cost
• 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 Rule
• 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.
• Since our goal is to increase owner wealth,
NPV is a direct measure of how well
JOINT VENTURE
Capital Expenditure Analysis
Study Questions
Q1. Use the information in the case to construct two sets of NPV and IRR analysis from joint venture view and
Pepsico. Based on the results, what would be your decision on the proposed Changchun joint venture?
Q2. Comment on the financial projections that PepsiCo used in its capital budgeting exercise, especially the
NOPBT Cap, foreign exchange rate projection and the discount rate.
Q3. What differences might there be as to how the PRC partners do the analysis (or look at the future cash flows) versus PepsiCo?
Case Summary（案例）
In mid-June 1994, Andre Hawaux, vice-president finance for PepsiCo East Asia (PepsiCo), was about to put together the information he had collected on the proposed Changchun bottling joint venture (JV) in order to analyze the financial profitability of the project using net present value (NPV) and internal rate of return (IRR).
Joint Venture
• Before 1993,
-“cooperative joint venture”(CJV): a foreign company with a local Chinese firm
- 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.
Introduction to NPV and IRR
Net Present Value(净现值法）
• The difference between the market value of a project and its cost
• 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 Rule
• 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.
• Since our goal is to increase owner wealth,
NPV is a direct measure of how well