NET PRESENT VALUE AND DISCOUNTED CASH FLOW.

NET PRESENT VALUE AND DISCOUNTED CASH FLOW
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NET PRESENT VALUE AND DISCOUNTED CASH FLOW
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EXECUTIVE SUMMARY.
The purpose of this research is to find a solution on whether Groupe Ariel Company should get
rid of the simple equipment with brand sophisticated machinery which will require minimum
labor and less material. The appropriate way of financing the proposed investment is by
conducting global valuations using Pesos and Euros. present values of the loss or profit of the
investment is calculated using the Net Present Value (NPV). the two Net Present Values of
investment will then be compared using Pesos and Euros and then the computation is changed to
one currency for clear basis of comparison. For proper comparison, interest rate, tax rate and
depreciation rate are taken into account. The NPV for Pesos is slightly higher compared to NPV
in Euros and for this reason, the business in Ariel Mexico which is a subsidiary company will
have more returns than the parent company in Mulhouse, France. fluctuations in the currency
value and the rate of inflation will have impact on our conclusion. from the analysis, if Mexico’s
interest rate declines, Peso will rise and the exchange rate will go down and as a result the cash
inflow in Euro will increase. On another hand, if the inflation rate appreciates in Mexico, the
exchange rate too will raise hence causing decrease of NPV in Euros. From this analysis, Arnaud
Martin should mitigate the company’s risks through forward contracts to avoid any losses from
currency value fluctuations. With the expected rise in inflation rate in Mexico, this proposal
ought to be commended considering Pesos’ discounted cash flow analysis (Schauten, Stegink &
Graaff, 2010, pg. 800).
This report provides the possibility of opportunities and risks involved in setting up the new
equipment. Risks can be analyzed by considering several economic factors to be taken into
account like change in exchange rate, fluctuations in inflation rate, tax rates, tariffs and subsidy.
opportunities associated with installation of the new equipment include decline in directs costs
like cost incurred on training, labor cost, maintenance costs and increase in efficiency of
production, utility of the available plant and quality of products. The aim of Ariel is to diversify
and venture in emerging markets and for growth and expansion localization should be considered
to boost customers’ loyalty and brand. In addition, the brand automated machine will provide
opportunities for discovery and research.

NET PRESENT VALUE AND DISCOUNTED CASH FLOW
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Table of Contents
INTRODUCTION............................................................................................................ 4
CALCULATION OF NET PRESENT VALUE UNDER PESO...................................................4
CALCULATION OF NET PRESENT VALUE UNDER EURO.................................................5
ANALYSIS AND INTERPRETATION................................................................................ 5
ESTIMATING COST OF CAPITAL................................................................................... 6
MINIMIZING CURRENCY RISK....................................................................................... 6
RISK AND OPPORTUNITIES........................................................................................... 6
BENEFITS OF REPLACING THE MANUAL MACHINE........................................................7
CONCLUSION............................................................................................................... 8
REFERENCES................................................................................................................ 8
APPENDICES................................................................................................................ 9
APPENDIX I: COMPUTATION OF NET PRESENT VALUE IN PESOS AND TRANSLATION....9
APPENDIX II: COMPUTATION OF NET PRESENT VALUE IN EUROS THROUGH
TRANSLATION OF FUTURE CASH FLOW TO EURO AT THE EXPECTED FUTURE SPOT
EXCHANGE RATE.................................................................................................... 10
INTRODUCTION.
Groupe Ariel is a firm based in Mulhouse, France and Arnaud is The Global financial analyst of
the firm. He has the responsibility of analyzing a proposed investment of a machine used for