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

Groupe Ariel SA Parity Conditions and Cross Border Valuation Case Solution

Solution ID: 12174     Words: 1596

Groupe Ariel SA Case Solution Abstract

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. 

Groupe Ariel SA Case Excel Calculations

NPV Analysis (Peso)

Hurdle rate for Peso

Tax rate

TimeCost of purchasing the equipment

After tax Cash inflow from the sale of Manual equipment

After tax depreciation DepreciationCost 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 EUROSTotal cash flows

PV OF CASH FLOWS

NPV IN EUROS

Groupe Ariel SA Case Questions Answers

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?