Question

During week 6 we develop the theory and application of capital budget analysis. The theory was robust, the calculations mathematically and logically defined, and many of the real-world problems, likely to be encountered, were addressed. As capital budgeting essentially re-invents the company through major long-term expenditures it is arguably one of the most critical functions that financial management performs. However, based on my personal experiences, extensive empirical data, and antidotal data - many firms routinely experience significant failures in their selection of capital projects. The assignment for this topic consists if two parts:

1) For your first topic in this conference I would like for you to briefly review either your personal experiences and/or the financial literature to identify and present a description of one actual capital project/product failure and the reasons attributed to the failure. Remember this is a one to two paragraph exercise - do not go overboard - a few hours research and summation is all that’s required. I am interested only in your short, concise description of the project and the major reasons you believe it failed. In your response please provide financial information regarding the project (what is available): initial outlay, projected cash flows, final dollar losses.

2) Synthesize your one-paragraph position on what 3-5 specific factors you believe most likely to contribute to capital project analysis failure.

3) Reflection – the students also should include a paragraph in the initial response in their own words reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace.

Answer 1

Capital budgeting is a useful technique which has helped various companies to make decisions regarding the investment in the projects and have yielded profits which are immense on the basis of their right choice with respect to the selection of the projects. This has yielded best results because the companies have analyzed various factors which are most crucial for the companies. But there are always exceptions which have resulted in failure despite proper analysis of factors. And New coke is a similar case of Coca-Cola.

In 1985, coke decided to replace its existing coca cola with new flavor and named it new coke. The decision was made after the analysis of situation that the company was losing market share to coca cola seeing the people preferring taste of Pepsi. The coca cola’s market share was at all-time low of 24%. The coke thought that the problem was with flavor after Pepsi’s challenge regarding the taste.

Now, the various factors that contributed to the failure of New Coke were:

It thought that New Coke and Coca cola would impact each other’s sales and hence they removed Coca cola from shelf. This was one capital decision which went against them, the total benefit of keeping them together would have yielded more income than removing coke from shelves.
The company didn’t analyze its brand power properly, since the people were more attached to the classic coke and hence the sales analysis was not correct and hence led to failure.
The major problem was that Coke considered that there was some problem with its formula but actually there was none, so that factor analysis was also not done properly.
Hope it helps! Please rate the answer positively! Thanks in Advance!