The previous week, Martin had requested additional financial information about an investment proposal from Ariel-Mexico, a wholly owned subsidiary that operated a manufacturing facility and a regional sales office in Monterrey, Mexico. The information had arrived late Friday—too late for Martin to analyze—and was waiting for him Monday morning. As a financial analyst for a global manufacturer of printing and imaging equipment, Martin examined many cross-border projects, particularly since Ariel had accelerated its move into emerging markets several years earlier. The Mexican investment proposal called for the purchase and installation of new automated machinery to recycle and remanufacture toner- and printer cartridges. Many office product retailers operated formal toner cartridge recycling programs, for both the environmental benefits of keeping materials out of landfills and demonstrated cost savings for their customers.
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The value of the Project NPV was equal to the one computed using the spot exchange rate because of the presumption of the PPP equation, 92, Compare the two sets of calculations and the corresponding NPVs. How and why do they differ? In this case, the NPVs that were calculated are the exact same number. Basically, if purchasing power parity holds for the entire period of the investment there will be no difference between either of the approaches. If the PPP assumption would not exist and interest rates stay the same, depending on whether the euro depreciates or appreciates against the peso, the euro value NPV of the project would be greater or respectively less than the peso value.
How does this affect the NPV calculations? Groupe Ariele S. Using the spot exchange rate of MXN Suppose Groupe Ariel expects a significant real depreciation of the peso against the Euro. How should its financial analyst incorporate such an expectation into his NPV analysis? What is the peso depreciation effect on the NPVs under each of the two approaches? Groupe Ariel seems to be expecting a real depreciation of the peso against the Euro, and needs to account for this.
For this case, one would have to know what the peso deprecation effect on the NPVs will be for questions 1 and 2. To calculate the answer, the new cash flows were calculated based on an exchange rate of MXN If the peso realistically depreciates against the Euro in this way, the resulting NPV in euros will be reduced to And as mentioned at the start of this case report, if an NPV is negative, one should not go forward with a project.
Should Groupe Ariel approve the equipment purchase? How should Groupe Ariel finance the project? In pesos or in Euros? Will this affect your conclusions on whether Groupe Ariel should approve the project? The question is whether Groupe Ariel S. To assess this problem, the NPVs of every section were analyezed. In almost every case the NPVs were positive, which means that Groupe Ariel should go ahead with the project.
However, if Groupe Ariel was expecting depreciation of the peso against the euro, the NPV turned negative. If that would be the case, the project should not be undertaken. However, we believe that financing the project is the right way to go because the risk of possible depreciation can be offset by using a hedging option. We now have to decide whether to finance the project in pesos or euros.
To assess this issue, we have taken a look at the volatility of the peso against the euro in the following graph. This shows the value of the peso against the euro for the last 3 years. We also considered the current economic situation in the area that these currencies are used. They currently have issues with refugees, went through a lot of hardship with Greece and are still in doubt how to ensure economic prosperity.
We believe the euro might keep losing value as more and more countries are given bailout packages and countries are considering leaving the EU. For that reason, we believe it might be more interesting to finance the project in pesos. In conclusion, we believe Groupe Ariel S. The currency we decided Groupe Ariel S. Related Interests.
Groupe Ariel S.A.: Parity Conditions and Cross-Border Valuation
LinkedIn Introduction Ariel-Mexico was one of the main wholly owned subsidiary of the company located in Mulhouse, France. Arnaud Martin had requested additional information for one of the investment proposal in which the subsidiary was thinking about to invest into. The Mexican investment proposal was basically a purchase of equipment for the company. This new equipment was basically a new automated machinery and by using this machines the company would be able to achieve a lot of labor and material savings. Currently, the company was using a manual process which was resulting in higher than expected material and labor costs for the company and as a result the net income for the company was dropping significantly. The main business of Ariel was cartridge recycling and this had become the major source of revenue for the company and this segment also offered continued growth opportunities for the company, therefore, it was necessary to make an investment in the new automated machinery to increase the productivity as well as drive down the costs of the business. Problem Statement The subsidiary of the company Groupe Ariel is considering the purchase of a cost saving equipment in Mexico at one of its manufacturing facility at Monterry.
Groupe Ariel S. A. Parity Conditions and Cross Border Valuation Harvard Case Solution & Analysis
The value of the Project NPV was equal to the one computed using the spot exchange rate because of the presumption of the PPP equation, 92, Compare the two sets of calculations and the corresponding NPVs. How and why do they differ? In this case, the NPVs that were calculated are the exact same number. Basically, if purchasing power parity holds for the entire period of the investment there will be no difference between either of the approaches.
Groupe Ariel S.A.: Parity Conditions and Cross-Border Valuation – Case Solution
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 …show more content… The present value of all these cash inflows and outflows can be calculated by discounting them at This rate is calculated by assuming that the purchasing power parity holds in this scenario.
Groupe Ariel Sa Case Analysis Essay