International Financial Management For Net Present Value: Groupe Ariel Case Analysis

Background of Groupe Ariel S.A.

Groupe Ariel is a worldwide manufacturer of many equipment like printer, copies, fax, machines, and other equipment producing document. Groupe Ariel also provides various consulting services to outside people. The company after sales service revenue forms a big portion and near to almost 18 percent of the total revenue. In 2008 the company did witness low profitability and sales due to worldwide recession and it similar situation was prevalent all over the industry, but the main advantage point of the company is its growth comparison to several emerging market like that of Russia, china and India. The company had been a global firm for years but did not grow violently into the emerging market. The company captured the international market through its subsidiaries which generally ran medium sized factories in which generally printers, copiers and other products were manufactured to suit the local need of the people around. The company conducted its business in 28 different countries around the globe with operations such as manufacturing, small research labs, as well as engaged in sales and other activities. The Company subsidiaries had recorded half of the Ariel sales and had earned slightly less than 40 percent of the pre-tax income.

Ariel always competed in a strong market and mostly competitors of the company is the multinational company  and few have even developed there after sales service higher the level compared to Ariel business.

In the present context, Groupe Ariel S.A., an entity headquartered in Mulhouse, France is planning to expand its operations by setting up a new plant which shall be automated and shall be used to recycle and re manufacture toner. The cost of the plant is estimated at 3.5 Million Pesos or Euro 2,20,000. The company wishes to analyse the feasibility of the present project based on the details provided and the assumptions undertaken few are like the cost of Machinery for the purpose of analysis has been taken at 3.5 Mio Peso, the residual value of machinery has been assumed at Nil, the project has been funded by debt and equity in equal proportion, relative Purchasing Power Parity holds good, Cost of equity is consistent for both in Euro and in Pes, Machinery is disposed of at year Zero, Tax loss on disposal of machinery shall be set off against other business of Ariel,Inflation in Mexico has been assumed at 7%.

On the basis of above analysis, the discounting factor has been arrived at 9.45%. The computation of the same has been detailed here-in-below:

Further, the analysis has been carried out on the basis of incremental cash flows whereby the difference between the existing cash flow and the new cash flows on account of execution of the said project shall be taken into consideration. On the basis of  the same, a detailed simulation has been presented here-in-below-

On perusal of the above, it can be inferred that Net Present Value has been computed at Peso 22,28,740/-. Thus, the project is feasible and shall be accepted. The basis of Computation is annexed in Appendix-1. Further, by considering the inflation rate in France is 3% and the rate of inflation in Peso is 7% and the relative purchasing parity holds good. The exchange rate shall be determined by using the formulas of Exchange rate * inflation in Mexico/ Inflation in Euro.  

Expansion Plans to Recycle and Remanufacture Toner

On perusal of the above, it can be inferred that the Net Present Value of the project is positive and thus the project shall be accepted. The conversion has been carried out on the basis of converting the net cash flow from Peso to Euro and then discounting the same using the hurdle rate. 

In the present context, Groupe Ariel S.A., an entity headquartered in Mulhouse, France is planning to expand its operations by setting up a new plant which shall be automated and shall be used to recycle and re manufacture toner. The cost of the plant is estimated at 3.5 Million Pesos or Euro 2,20,000. The company wishes to analyse the feasibility of the present project based on the details provided and the assumptions undertaken are listed as, The cost of Machinery for the purpose of analysis has been taken at Euro 2,20,000, The residual value of machinery has been assumed at Nil; The project has been funded by debt and equity in equal proportion; Relative Purchasing Power Parity holds good; Cost of equity is consistent for both in Euro and in Peso, Machinery is disposed of at year Zero; Tax loss on disposal of machinery shall be set off against other business of Ariel; Inflation in Mexico has been assumed at 7% and in France at 3%. 

The computation of the same has been detailed here-in-below:

On perusal of the above, it can be inferred that the Net Present Value of the project is positive and thus the project shall be accepted. The conversion has been carried out on the basis of converting the each and every cash inflow and outflow from Peso to Euro and then discounting the same using the hurdle rate. The basis of Computation is annexed in Appendix-1

The Net Present Value under both the solutions differ on account of the following reasons like under the first solution only the net cash flow has been converted from Peso and Euro while under second solution all the cash flows have been converted from Peso to Euro., The rate of Discounting used under solution 1 is 9.45% and the rate of discounting used in solution 2 is 8% on account of difference in rate of debt under both the solution; The cost of machinery is different under both the scenario. 

Arnaud Martin should rely on Model 1 as the project shall be commission in Mexico and thus, he shall initially focus on the profitability or feasibility of the project under the Mexican Currency i.e. Peso. Thus, Mr. Martin shall rely on Peso data and compute the Net Present Value on the basis of same and convert net cash flows on the basis of forecasted currency assuming relative purchasing parity holds good as provided in Solution above. Further, the Mr. Martin as an alternative discount the converted cash flows with Euro hurdle rate instead of computed peso rate.   

In the present context, Groupe Ariel S.A., an entity headquartered in Mulhouse, France is planning to expand its operations by setting up a new plant which shall be automated and shall be used to recycle and re manufacture toner. The cost of the plant is estimated at 3.5 Million Pesos or Euro 2,20,000. The company wishes to analyse the feasibility of the present project based on the details provided and the assumptions undertaken are like the cost of Machinery for the purpose of analysis has been taken at 3.5 Mio Peso,the residual value of machinery has been assumed at Nil, the project has been funded by debt and equity in equal proportion, Relative Purchasing Power Parity holds good; Cost of equity is consistent for both in Euro and in Peso, Machinery is disposed of at year Zero, Tax loss on disposal of machinery shall be set off against other business of Ariel;, Inflation in Mexico has been assumed at 3% and in France at 3%.

On the basis of above analysis, the discounting factor has been arrived at 9.45%. The computation of the same has been detailed here-in-below: 

Further, the analysis has been carried out on the basis of incremental cash flows whereby the difference between the existing cash flow and the new cash flows on account of execution of the said project shall be taken into consideration. On the basis of the same, a detailed simulation has been presented here-in-below- 

The NPV calculation has been impacted Euro 62,630 on account of the said change when discounted at 9.45%. 

If Ariel expects a significant decline in Peso against Euro, he can undertake the following measures while computing the Net Present Value like Ariel can hedge future cash flows and incorporate the cost of the same in the projected cash flows, Ariel can enter into forward, swap contracts to neutralise the impact; Ariel can carry out a probability analysis and incorporate probability of different currency figure under different situation, Ariel can make an estimation of fluctuation and incorporate the same as cost in the analysis for computing NPV. 

Groupe Ariel S.A. shall approve the project as Net Present Value of the project is positive based on the aforesaid calculation. The answer may differ if qualitative factors are taken into consideration.