Compute the NPV of Ariel-Mexico’s recycling equipment in pesos
Compute the NPV of Ariel-Mexico’s recycling equipment in pesos by discounting the incremental peso cash flows at the peso discount rate. Translate this NPV into euros.
Compute the NPV of Ariel-Mexico’s recycling equipment in pesos
Assume the expected future inflation in France is three percent and in Mexico, it is seven percent.
The euro cost of capital is eight percent.
Compute the NPV of Ariel-Mexico’s recycling equipment in pesos by discounting the incremental peso cash flows at the peso discount rate.
Translate this NPV into euros.
Compute the NPV in euros by converting the future incremental peso cash flows into euros at the expected future spot exchange rates.
Compare these two NPV calculations.
Suppose expected future inflation in Mexico is now three percent.
Re-compute the NPV in pesos and in euros.
Is this what you expected to find?
Please upload the spreadsheet when you’re done.
More Details:
In addition, as an organization expands, it needs to take important decisions which involve immense capital investment.
An organization must take the decisions regarding the expansion of business and investment very wisely.
In such cases, the organization will take assistance of Capital Budgeting tools, one of the most popular NPV method and take a call on the most profitable investment.
More so, Net present value is a tool of Capital budgeting to analyze the profitability of a project or investment.
It is calculate d by taking the difference between the present value of cash inflows
and present value of cash outflows over a period of time.
As the name suggests, net present value is nothing but net off of the present value of cash inflows and outflows by discounting the flows at a specified rate.
Lastly, as seen in the formula – To derive the present value of the cash flows we need to discount them at a particular rate.