Groupe Ariel SA Case
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.
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 …show more content…
We calculated the NPV of the euro investment in two ways. The first was by simply computed by dividing the Peso NPV by the current spot exchange rate. The second method involved using a derivation of the PPP equation to compute the projected future exchange rates. The NPV was calculated after the Cash flows and Net investment were converted to Euros. The value of the Euro Investment was equal in both situations because of the presumption of PPP. NPVEuro = | 92,495.18 € |
Please see appendix B for a complete calculations and cash flows of this problem.
Next, Groupe Ariel needs to understand if, why, and how the NPVs in the two sets of calculations differ.
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
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Based on the table, the largest changes in NPV are due to changes in the annual cost savings. On the surface, the NPV is more sensitive to changes in cost savings than the initial investment based on the assumed range of changes. In fairness, the variation in annual cash flows of 40% is over two times larger than the variation allowed for in the initial investments (15%). A more meaningful comparison could be obtained by adjusting the two factors
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