Groupe Ariel Sa Case Analysis Essay

The NPV compares the inflow of cash against the flow of cash to make the investment. With the cash flows occurring over a period of time, NPV also takes into account the cost of capital. The cost of capital or discount rate allows the company to weigh the present value of capital today with the investment capital’s present value. Futronics Inc. investment would have an NPV of $138,642.39. The NPV of this investment would add value to Futronics Inc.’ worth.

Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.

Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.

The third problem required us to compare the corresponding NPV calculated in Problems 1 and 2. If purchasing power parity holds for the entire period of the investment there will be no difference between either of the approaches. In order to look at the impact of a lack of purchasing power parity we ran two additional scenarios where the PPP did not exist. In order to simulate this scenario I increased and decreased each expected exchange rate by 5%. The results can be seen in the [appendix XX] representing problem 3. It is clear that if the interest rates remain, yet the euro appreciated against the peso the NPV will be greater than the peso value (assuming no PPP), and if the euro depreciates against the peso the Euro NPV will be less than the Peso NPV

Deciding on whether to follow through with a project is done by evaluating either the internal rate of return or net present value. According to Investopedia, “All other things being equal, using internal rate of return (IRR) and net present value (NPV) measurements to evaluate

2. Compute the NPV in Euros by translating the project's future peso cash flows into Euros at expected future spot exchange rates. Note that Groupe Ariel's Euro hurdle rate for a project of this type was 8%, assume that inflation rates are expected to be 7% in Mexico and 3% in France.

On the other hand, the peso devaluation will not have that much of a positive effect on Farmington (Antilles) N.V. as the peso depreciates relative to the USD. The result is the subsidiary being negatively impacted as the USD/peso exchange rate is rising, as they convert revenue earned in pesos to USD to deposit into U.S. bank accounts. This facility had almost 4 million MXN receivables at the end of the year. The 1994 average exchange rate is 3.5 MXN/USD, where these 4 million MXNs would equate to approximately 1.14 million USD. When the exchange rate values the devalued peso at 5.0 MXN/USD, these 4 million MXNs are only equal to 0.80 million USDs, showing a loss of more than 300,000 USDs. When the exchange rate changes from 4.0 to 5.0 MXN/USD, we can see the loss the company would experience, and thus the negative impact on this facility.

What is the net present value of a project that contributes $10,000 at the end of the first year and $5,000 at the end of the second year? The initial cost is $8,000 and the appropriate interest rate is 10%.

1. Take the PV of these yen cash flows at 7.1% This equals Yen 24,258,824,814.179

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

This case discusses Cross-Border valuation of projects. This kind of analysis is common for companies that are operating in many countries. Groupe Ariel is one such company that is considering investing in a project in its own subsidiary in Mexico. The company manufactures and sells printers, copiers and other document production equipment in many countries. As far as, expansion into new markets is concerned, company is very slow in taking initiatives as compared to its competitors owing to the recent recession. But the management of the company believes that better durability and lower after-sales service costs of their products enable the company to build customer

Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.

Calculate the net present value (NPV) for the following 20 year projects. Comment on the acceptability of each. Assume that the firm has an opportunity cost of 14%.

2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value.

The valuation method for the project is forecasting the future free cash flows generated from the project and calculating its net present value (NPV). This project has a positive NPV of $936,147, and an