Groupe Ariel SA: Parity Conditions and Cross-Border Valuation
Hints to case study questions: 1. Compute the NPV of Ariel-Mexico's recycling equipment in pesos by discounting incremental peso cash flows at a peso discount rate. How this NPV should be translated into Euros? Assume expected future inflation for France is 3% per year.

1.1. Review principles of estimating project cash flows. Suggested reading: Ch. 9 “Capital Budgeting and Cash Flow Analysis” in “Contemporary Financial Management”, 11th ed. by Moyer, McGuigan, and Kretlow. a. Project Net Investment (NINV):

NINV=Capital Expenditure-ATSVold ,

where ATSVold = After-Tax Salvage Value of the old equipment.

ATSVold=MVold+BVold-MVoldt , where MVold = …show more content…

Use Exhibit 2 of the case. a. Assume materials costs/unit, direct labor costs/unit, overhead costs stay the same in 2009. b. Recalculate materials costs/unit, direct labor costs/unit for 2010-2018.
Example for the manual process:

Materials costs per unit2010=Materials costs per unit2009×1.03=
=1.1387×1.03=1.1729

c. Recalculate total materials costs and total direct costs:
Total materials costs=Materials costs per unit ×Volume
Total direct labor costs=Direct labor costs per unit ×Volume d. Recalculate overhead costs for 2010-2018.
Example for the manual process:
Overhead costs2010=Overhead costs2009×1.03=
=1,680,000×1.03=1,730,400.
e. Do recalculations of materials costs, direct labor costs, and overhead costs for both manual and automated processes. f. Calculate new total costs for both manual and automated processes. g. Calculate new incremental costs savings.

5.4. Recompute the peso discount rate. 5.5. Assume that PPP holds. What will happen to expected peso/euro exchange rates if the inflation rates in both countries are the same?

5. 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? [For simplicity you may continue with the assumption that inflation is expected to be 3% in both