Essay for applic

•Study questions: 1.Compute the NPV of Ariel-Mexico in pesos. How should this NPV be translated into Euros? Assume expected future inflation for France is 3% pa. 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 Ariel’s Euro hurdle rate for a project of this type was 8%. Again, assume that annual inflation rates are expected to be 7% in Mexico and 3% in France. 3.Compare the two sets of calculations and the corresponding NPVs. How and why do they differ? Which approach should Arnaud Martin use? 4.Suppose Mexican inflation is projected at3% (assume French inflation remains at 3%). How does this affect the NPV calculations? 5.Suppose Ariel expects a significant real depreciation of the peso against the Euro. How should Martin incorporate such an expectation into his NPV analysis? What is its effect of the concluded NPV under each of the approaches in questions 1 and 2? 6.Should Grouppe Ariel approve the equipment purchase?

1. NPV (Net present value) is a tool of analyzing the profitability of the investment. Calculating NPV can be made in Excel NPV function by subtracting old equipment costs from new equipment costs, and then we have the result of peso cash flow rate. Then depreciation costs and tax of 35 % will be subtracted from incremental total costs and then depreciation will be added again.
NPV in pasos is hereby 1 478 998.

2.

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