Wednesday, April 2, 2008

Case: Pepsico Chanchun Joint Venture

Date: February 2, 2006

Student Name: Pham Thi Thuy Ha Student ID: 2A5026

In considering Chinese’s positive political and economic outlook and continued commitment to economic reforms, Pepsico, a leading soft drink manufacturer in the world, decided to develop its market in China by signing a $10-million-agreement with the Chinese government. Among this money, Pepsico spends $4 million in investment in joint-ventures. Pepsico forecasts that the soft drink would grow at 12%/year through 2000 and sees a very potential growth in China. Its strategic goals are to close gap with Coca Cola and before 20th century and to leverage this into industry leadership beyond 2005. To this end, Pepsico developed a Joint Venture (JV) with 2 Chinese partners: The Second Food Factory Chanchun and Beijing Chon Yin Industrial & Trading Company where Pepsico controlled 57.5% interest in the JV, Second Food Factory held 37.5% and Beijing Chon Yin held 5%. Pepsico will sell concentrate to the JV and the JV will bottle and distribute final products.

The project was examined by calculating net present value (NPV) and internal rate of return (IRR) of this project in the view of Pepsico (with concentrate sales) and JV (without concentrate sales). For Pepsico, the net cash flow (NCF) is discounted at U.S. inflation rate. For JV, NCF is in RMB and discounted at Chinese inflation rate. The detail calculation is shown on the attached sheet.

Name

NPV

IRR

In case including concentrate sales (for Pepsico) (million USD)

14,090

8.4%

In case without concentrate sale (for JV) (million RMB)

(14,030)

NA

Based on this result we can see that in this case, the IRR rule is not applicable because the IRR of JV does not exist and Pepsico should reject the project since IRR = 8.4% is less than its huddle rate = 13%. However, according to the NPV rule, Pepciso should accept the project because the NPV is $14,090 million and JV should reject the project because it has negative NPV (-RMB 14,030).

In conclusion, the NPV method should be used to evaluate the project since this method uses cash flow and discounts cash flow properly. According to this method, Pepsico should accept the project because it has positive NPV and JV should reject this project since it gets loss (negative NPV).

1 comment:

Rohan said...

Hello,

I have this case in my Financial decision making class this semester, would you mind sharing your spreadsheet with me? I am completely lost!

rohanverma3 at gmail

Regards
Rohan