Refer to the Case on Ariel S.A.

timer Asked: Apr 6th, 2016

Question description

Refer to the Case on Ariel S.A.


1.  Compute the NPV of the Recycling Equipment in Pesos and then translate the same to Euros. Assume expected future inflation rate in France is 3% per year.

2.  Compute the NPV in Euro by translating the cash flows from pesos to Euros at the expected future spot exchange rates. Note that the Ariel’s Euro hurdle rate is 8% for a project of this type. Assume inflation in Mexico and France to be 7% and 3% respectively

3.  Compare the two sets of NPV as calculated in 1) and 2) above and explain why they are different. Which approach should Arnaud Martin use?

4.  Suppose Mexico’s inflation is projected at 3% instead of 7% (France remaining the same as 3%), how does this affect your NPV calculations?

5.  Suppose Martin expects a significant real depreciation of the Peso against the Euro. How should Martin incorporate such expectations into his NPV calculation? (Assume inflation rate will be 3% in both countries). What is the effect on the NPV under each of the approaches in questions 1 and 2?

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