Question 13.5: Suppose Anheuser-Busch InBev Is considering introducing a ne...
Suppose Anheuser-Busch InBev Is considering introducing a new ultra-light beer with zero calories to be called BudZero. The firm believes that the beer’s flavor and appeal to calorie-conscious drinkers will make it a success. The cost of bringing the beer to market is $200 million, but Anheuser-Busch InBev expects first- year incremental free cash flows from BudZero to be $100 million and to grow at 3% per year thereafter. If Anheuser-Busch InBev’s WACC is 5.7%, should it go ahead with the project?
PLAN
We can use the WACC method shown in Eq. 13.9 to value BudZero and then subtract the up-front cost of $200 million. We will need Anheuser-Busch InBev’s WACC, which is 5.7%.
V_0^L=FCF_0+\frac{FCF_1}{1+r_{wacc}} +\frac{FCF_2}{(1+r_{wacc})^2} +\frac{FCF_3}{(1+r_{wacc})^3} +… (13.9)
EXECUTE
The cash flows for BudZero are a growing perpetuity. Applying the growing perpetuity formula with the WACC method, we have
V_0^L=FCF_0+\frac{FCF_1}{r_{wacc}-g}=-\$200 \text{ million} +\frac{\$100 \text{ million}}{0.057-0.03} = $3.503,7 million ( $3.5 billion )
EVALUATE
The BudZero project has a positive NPV because it is expected to generate a return on the $200 million far in excess of Anheuser-Busch InBev’s WACC of 5.7%. As discussed in Chapter 8, taking positive-NPV projects adds value to the firm. Here, we can see that the value is created by exceeding the required return of the firm’s investors.