Corp Fin free essay sample

Groupe Ariel S.A. : Parity Conditions and Cross-Border Valuation Question 1 There are two ways to compute the projects NPV. The first approach is to calculate it in Mexican Pesos and then change the resulting figure into Euros at the spot rate of MXN15.99/EUR. Note that the discount rate that we have used was the yield on the long-term peso-denominated corporate bonds. Below is the screenshot showing how we have done this. Computing NPV in Mexican Pesos (resulting NPV in Euros is 138,902) Question 2 The second approach is to transfer each cash flow from Mexican Pesos into Euros using the future rates (e.g. in year 5 we use the rate for this particular year rather than the spot rate). Note that the discount rate that we have used was the yield on the French 10-year government bonds. Once again, below you will find a screenshot. Computing NPV in Euros (resulting NPV in Euros is 144,633) In case the required rate of return on the project is higher than that on the 10-year government bonds (for instance, 8%), the resulting NPV will be lower than the one we received in our previous calculations. We will write a custom essay sample on Corp Fin or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Nonetheless, it is still positive so the project is worth investing in. Computing NPV in Euros (resulting NPV in Euros is 92,495, assuming that the project’s hurdle rate is 8%) Question 3 In the first set of calculations we got the NPV calculated in Mexican Pesos was slightly lower than that computed in Euros (138,902 compared to 144,663). This did not, however, have any effect on the decision whether to accept the project or not. When the discount rate was raised to 8%, the NPV in Euros became lower than the one computed in Pesos, but, once again, the resulting NPV was positive. We believe that the second approach (computing NPV in Euros) is more accurate because we used the appropriate exchange rates when transferring cash flows from Pesos into Euros thus taking into account the possible economic changes in the upcoming years. Question 4 If we assume that Mexican inflation rate is 3% instead of the projected 7% and calculate NPV in Euros, the result will remain the same (144,663). The exchange rate remains equal to the spot MXN Peso/Euro rate of 15.99, which is in turn offset by lower cash flows in Pesos so that the resulting NPV is not affected in any way. In general, NPV will always remain the same, no matter what the Mexican inflation, as long as the future exchange rate calculation takes inflation into account. (This is not true for French inflation though, because if it changes, the hurdle rate would have to be altered as well). Question 5 The more Mexican Peso depreciates, the lower the NPV. If, for instance, the annual depreciation rate is expected to be 11.94%, than the projected spot rates would look like this: NPV in this case equals 9: Therefore, it is obvious that if the expected annual peso depreciation rate against the Euro is 11.95% or higher, the project should be abandoned. Question 6 With the given expectations, Groupe Ariel S.A. should definitely approve the equipment purchase because the NPV for this project is positive with a high margin.