NEWSWIRE - Feburary 15, 1999

Topic: Capital Budgeting and Risk Analysis

Source: "Burst Bubbles: Aggressive Push Abroad Dilutes Coke's Strength As Big Markets Stumble," by Nikhil Deogun, Wall Street Journal, Tuesday, February 9, 1999, page A1.

Synopsis of Articles:

The article provides a discussion Coca-Cola's expansion into Russia and Latin America. Coke has invested huge amounts in capital projects in these regions, through foreign direct investment in production and bottling operations. Sales of Coca-Cola products in these regions fueled Coke's strong growth in the 1990s. However, recent events that have led to worsening economic conditions in the regions have reduced Coke's sales and income from them, and pose a risk to future growth. Many analysts are questioning whether Coke has overinvested in these regions. Coke's management and some large investors defend the capital invested in the regions as a viable long-term investment. The article offers a good opportunity to discuss several issues in capital budgeting, including corporate strategy, types of risk (both domestic and international), cash flow estimation bias, and the nature of various capital budgeting decision methods and their implications for short-term versus long-term horizons.

Questions:

1. How does corporate strategy impact the analysis of capital projects? How does this apply to Coca-Cola's capital investment decisions in Russia and Latin America?

2. How do the investments in Russia and Latin America impact the stand alone, firm, and market risks of Coca-Cola?

3. How would using the payback method, versus net present value or internal rate of return, impact the decision to invest in these projects?

4. Did Coca-Cola overinvest in Russia and Latin America?

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