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Chapter 11

Ecsy-Cola[1]

Libby Flannery, the Regional Manager of Ecsy-Cola, the international soft drinks empire, was reviewing her investment plans for Central Asia. She had contemplated launching Ecsy-Cola in the ex-Soviet republic of Inglistan in 2004. This would involve a capital outlay of ＄20 million in 2004 to build a bottling plant and set up a distribution system three. Fixed costs (for manufacturing, distribution, and marketing) would then be ＄3 million per year from 2003 onward. This would be sufficient to make and sell 200 million liters per year-enough for every man, women, and child in Inglistan to drink 4 bottles to per week! But there would be few savings form building a smaller plant, and import tariffs and transport and costs in the region would keep all production within national borders.

The variable costs of production and distribution would be 12 cents per liter. Company policy requires a rate of return of 25 percent in nominal dollar terms, after local taxes but before deducting any costs financing. The sales revenue is forecasted to be 35 cents/liter.

Bottling plants last almost forever, and all unit costs and revenues were expected to remain constant in nominal terms. Tax would be payable at a rate of 30 percent, and under the Inglistan corporate tax code, capital expenditures can be written off on a straight-line basis over four years.

All these inputs were reasonable clear. But Mrs. Flannery racked her brain trying to forecast sales. Ecsy-Cola found that “1-2-4” rule works in most new markets. Sales typically double in the second year, double again in the third year, and after that remain roughly constant. Libby’s best guess was that, if she went ahead immediately, initial sales in Inglistan would be 12.5 million liters in 2005, ramping up to 50 million in 2007 and onward.

Ms. Flannery also worried whether it would be better to wait a year. The soft drinks market was developing rapidly in neighboring countries, and in a...