Case ID: 4194
Author: William Jake
Subject: Finance
Price $ 75

Solution ID: 12174
Words: 1596

An English-language PDF of this
Brief Case with supporting materials will enable the undergraduates/graduates
with the chance to purchase a sound structure as well. Groupe Ariel is thinking about an idea from
its Mexican subsidiary to purchase and actualize a practical device at a
generation unit in Monterrey. The upgrades will empower the office to motorize
the recycling and proliferation of toner and printer cases, which is a huge
augmentation of Ariel's exchange in various markets. Ariel's organization
approach requires a limited income (DCF) assessment and a rough for the net
present worth (NPV) for capital costs in worldwide roads of activities and
deals. An essential worry for the assessment is deciding the money that will be
utilized, the Euro or the peso. The case exposes the techniques for limited
capital valuation appraisal in a setting that uses numerous monetary forms and
can be incorporated into the course to convey learning relating to the major
worldwide equality circumstances in respect with the estimation of the working
money streams. Themes of intrigue include Project Evaluation, Cross-Border,
Capital Budgeting, Net Present Value, Foreign Exchange, Securities Analysis,
Parity Condition, DCF Valuation, and Exchange Rate.

**NPV Analysis (Peso)**

*Hurdle rate for Peso*

*Tax rate*

*Time**Cost of purchasing the equipment*

*After tax Cash inflow from the sale of Manual equipment*

*After tax depreciation Depreciation**Cost savings from New equipmentTotal Cash flows*

*PV of cash flows*

*NPV*

* *

*NPV Analysis (Euros)*

*Discount rate in France*

*Expected Inflation in France*

*Expected Inflation in Mexico *

*Forward rate*

*Time*

*Year*

*MXN/EURO*

*Time*

*Year*

**Total Cash flows in Euros**

*PV OF CASH FLOWS*

*NPV IN EUROS**Total cash flows*

*PV OF CASH FLOWS*

*NPV IN EUROS*

Compute the NPV of Ariel-Mexico’s recycling equipment by counting incremental peso cash flows at a peso interest rate. How should this NPV be translated into Euros? Assume expected future inflation for France is 3% per year.

Compute the NPV in €s by translating future peso cash flows into €s at expected future spot rates. Note Ariel’s € hurdle rate for this asset class was 8%. Annual inflation rates are expected to be 7% in Mexico and 3% in France.

Compare the two sets of calculations and the corresponding NPVs. How and why do they differ? Which approach should Arno Martin use? Relate your answer to the textbook’s treatment of parity disequilibria in capital budgeting.

Suppose Mexican inflation is projected at 3% instead of 7% per year. Assume French inflation remains at 3%. How does this affect the NPV calculations?5. Suppose Ariel expects a significant real depreciation of the peso against the Euro. How should Martin incorporate this expectation into his NPV analysis? For simplicity, assume inflation is expected to be 3% in each country. What is its affect on NPV under each of the approaches in questions 1 and 2?6. Firms can face violations of the parity conditions in addition to the parity violation in Question

What might these violations be, and what might be their consequences?

Are there any real options embedded in Ariel’s decision? What is a real option, anyway?

Should Group Ariel approve the equipment to purchase?