Groupe Ariel SA of France is considering a project in Mexico. They need to analyze the net present value of the project, keeping in mind the exchange rates between Mexican Pesos and Euros in order to maximize their return. They also need to keep in mind the inflation rates over time and the risks involved with this type of investment. Analysis
Groupe Ariel is recycling old equipment in Mexico. They will need to use pesos to calculate their cash flows to see how this part of their project will impact their finances. They also need to convert this peso amount into Euros. We began the analysis by computing the Net Present Value (NPV) of Ariel-Mexico’s recycling equipment. This was done by first taking the incremental peso cash flow rate by subtracting the cost of the old manual equipment, from the cost of the new equipment. As is displayed in [exhibit XX] the incremental cash flow is represented as positive numbers because the reduced cost is equal to cash flow. Next the depreciation costs were subtracted from the incremental cost totals. The first three years of depreciation included depreciation from the new equipment and the remaining scheduled depreciation of the old equipment. After tax of 35% was deducted from the cash flow the depreciation was added back to represent the tax shield.
The NPV was calculated using the NPV function on Microsoft Excel. The discount rate that was used for the Peso NPV was calculated using the equation for the International Fisher Effect and as can be seen in the answer to Problem 1 [exhibit XX] which was equal to approximately 12.2%. The final project NPV was equal to the Present value of the Net Cash Flows, less the Project Net investment NPVMXN = | MXN 1,478,998.01 |
NPVEuro = | 92,495.18 €|
Please see appendix A for the complete calculations of this problem. Number 2.
Groupe Ariel now needs to compute the project's net present value in Euros. However, the...