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    Economics of Strategy: Pepsico Changchun Joint Venture

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    Banuchandar Balakrishnan
    - PepsiCo was proposing a new equity joint venture in Changchun, China where it would control 57.5% of the venture and have control over the board and management. - The vice president of finance was analyzing the proposal using tools like NPV and IRR to determine if it would meet PepsiCo's required return on investment. - Calculating the NPV without including sales of PepsiCo's concentrate product showed negative cash flows for the first three years and a negative NPV, meaning it did not meet the required return.

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    Economics of Strategy: Pepsico Changchun Joint Venture

    Uploaded by

    Banuchandar Balakrishnan
    96 views6 pages
    - PepsiCo was proposing a new equity joint venture in Changchun, China where it would control 57.5% of the venture and have control over the board and management. - The vice president of finance was analyzing the proposal using tools like NPV and IRR to determine if it would meet PepsiCo's required return on investment. - Calculating the NPV without including sales of PepsiCo's concentrate product showed negative cash flows for the first three years and a negative NPV, meaning it did not meet the required return.

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    Team Spartans Pepsico

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    - PepsiCo was proposing a new equity joint venture in Changchun, China where it would control 57.5% of the venture and have control over the board and management. - The vice president of finance was analyzing the proposal using tools like NPV and IRR to determine if it would meet PepsiCo's required return on investment. - Calculating the NPV without including sales of PepsiCo's concentrate product showed negative cash flows for the first three years and a negative NPV, meaning it did not meet the required return.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    96 views6 pages

    Economics of Strategy: Pepsico Changchun Joint Venture

    Uploaded by

    Banuchandar Balakrishnan
    - PepsiCo was proposing a new equity joint venture in Changchun, China where it would control 57.5% of the venture and have control over the board and management. - The vice president of finance was analyzing the proposal using tools like NPV and IRR to determine if it would meet PepsiCo's required return on investment. - Calculating the NPV without including sales of PepsiCo's concentrate product showed negative cash flows for the first three years and a negative NPV, meaning it did not meet the required return.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 6

    PEPSICO

    CHANGCHUN
    JOINT VENTURE

    Spartans
    - Raasesh
    - Anjana

    Economics
    - Banu Chander
    - Jose
    - Sabreena

    of Strategy
    • PepsiCo Inc spanned more than 190 countries and accounted for
    approximately one-quarter of the world's soft drinks.
    • The vice-president of finance for PepsiCo East Asia had been
    collecting data on the firm's proposed equity joint venture in
    Changchun, People's Republic of China (PRC).
    • While PepsiCo was already involved in seven joint ventures in
    the PRC, this proposal would be one of the first two green-field
    equity joint ventures with PepsiCo control over both the board

    Case Summary and day-to-day management.


    • Every investment project at PepsiCo had to go through a
    systematic evaluation process that involved using capital
    budgeting tools such as new present value (NPV) and internal
    rate of return (IRR).
    • He needed to decide if the proposed Changchun joint venture
    would meet PepsiCo's required return on investment.
    • He was also concerned what the local partners would think of
    the project.
    • The final decision would be made after a presentation to the
    president of PepsiCo Asia-Pacific.
    • As per the new PRC regulations on joint ventures, PCI would
    enter an equity joint venture, this time with two SOEs which had
    tentatively been selected by the PRC government as The Second
    Food Factory Changchun and Beijing Chong Yin Industrial &
    Trading Company.

    • The proposal was for PepsiCo to control a 57.5 per cent interest

    Proposed Joint in the JV, which would be named Changchun Pepsi-Cola


    Beverage Company Limited.

    Venture • The Second Food Factory would hold 37.5 per cent.

    • Beijing Chong Yin would hold the remaining five per cent.

    • The agreement would span 50 years, the maximum allowable


    under Chinese law.
    • The analysis and calculations show that PepsiCo is generating
    negative cash flows for the first three years before it reports a
    positive cash flow.

    • The company only starts to make profits from the third year into
    the joint venture project.
    NPV Exclusive • Moreover, the negative net present value means that the joint

    of concentrate venture’s return is far less than the discount rate applied to
    calculate the feasibility of the project.

    sales • This shows that if PepsiCo does not incorporate the concentrate
    sales, it is hardly able to achieve the minimum level of the
    required rate of return, which is necessary to cover the costs
    associated with this joint venture project.
    • The positive net present value of the project shows that the
    rate of return provided by the joint venture project is higher
    than the discount rate opted for the calculations.

    • Therefore, it will be easier for PepsiCo to fulfil all the


    requirement of the joint venture demanded by the other
    NPV Inclusive companies.

    of concentrate • PepsiCo will be able to provide short term dividends to the


    shareholders, as well.

    sales • This would enable PepsiCo to expand its business quickly into
    the Chinese market along with increasing its market share in
    the carbonated soft drink industry of China.

    • Under the light of this analysis, it is recommended that the


    PepsiCo should undertake the joint venture project as it
    provides the highest returns with least possible risk prospects
    associated.
    Thank you!!!

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