# Refer to the Case on Ariel S.A.

*label*Business

*timer*Asked: Apr 6th, 2016

**Question description**

Refer to the Case on Ariel S.A.

Required:

**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?**