Libby Flannery, the regional manager of Ecsy-Cola, theinternational soft drinks empire, was reviewing her investmentplans for Central Asia. She had contemplated launching Ecsy-Cola inthe ex-Soviet republic of Inglistan in 2019. This would involve acapital outlay of $20 million in 2018 to build a bottling plant andset up a distribution system there. Fixed costs (for manufacturing,distribution, and marketing) would then be $3 million per year from2018 onward. This would be sufficient to make and sell 200 millionliters per year—enough for every man, woman, and child in Inglistanto drink four bottles per week! But there would be few savings frombuilding a smaller plant, and import tariffs and transport costs inthe region would keep all production
within national borders.

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

Bottling plants last almost forever, and all unit costs andrevenues were expected to remain constant in nominal terms. Taxwould be payable at a rate of 30%, and under the Inglistancorporate tax code, capital expenditures can be written off on astraight-line basis over four years.

All these inputs were reasonably clear. But Ms. Flannery rackedher brain trying to forecast sales. Ecsy-Cola found that the“1–2–4” rule works in most new markets. Sales typically double inthe second year, double again in the third year, and after thatremain roughly constant. Libby’s best guess was that, if she wentahead immediately, initial sales in Inglistan would be 12.5 millionliters in 2020, ramping up to 50 million in 2022 and onward.

Ms. Flannery also worried whether it would be better to wait ayear. The soft drink market was eveloping rapidly in neighboringcountries, and in a year’s time she should have a much better ideawhether Ecsy-Cola would be likely to catch on in Inglistan. If itdidn’t catch on and sales stalled below 20 million liters, a largeinvestment probably would not be justified.
Ms. Flannery had assumed that Ecsy-Cola’s keen rival, Sparky-Cola,would not also enter the market. But last week she received a shockwhen in the lobby of the Kapitaliste Hotel she bumped into heropposite number at Sparky-Cola. Sparky-Cola would face costssimilar to Ecsy-Cola. How would Sparky-Cola respond if Ecsy-Colaentered the market? Would it decide to enter also? If so, how wouldthat affect the profitability of Ecsy-Cola’s project?

Ms. Flannery thought again about postponing investment for ayear. Suppose Sparky-Cola were interested in the Inglistan market.Would that favor delay or immediate action?
Maybe Ecsy-Cola should announce its plans before Sparky-Cola had achance to develop its own proposals. It seemed that the Inglistanproject was becoming more complicated by the day.

Question: Calculate the NPV of the proposed investment, usingthe inputs suggested in this case. How sensitive is this NPV tofuture sales volume?

Specific calculation steps requiredplease.