Analysis of Group Ariel of France - Essay Example

The Group Ariel Company is recycling old equipment situated in Mexico. The management will need to apply the pesos to compute the company’s cash flows to ensure that they comprehend how the intended project will affect their finances. Additionally for easy computation, the pesos should be converted into Euros. This study analyzed the NPV of Ariel Mexico by deducting the value of the manual machine from the value of the new machine (LAAN, & TAUNTER, 2000). Then the incremental cash flow will be represented as positive figures since the reduced value is equivalent to the cash flow.

The next step was the deduction of the depreciation costs from the incremental sum costs. It is imperative to note that the first initial three years of depreciation involved depreciation from the new machine and the remainder listed depreciation of the old machine. A deduction of 35% tax was done from the cash flow, and then the depreciation was added to signify the tax shield. For the company to calculate the project’s NPV in Euros, there is a need to apply future spot exchange rates.

This can be done by dividing the peso NPV by the present spot exchange rate. Since the cash flows are discounted differently from 2008 up to 2011, then the rate of 8% of 2011 can be used to discount since it forms an average of the fours year period. It is imperative to note that computation of the present values of projects such as the Ariel Mexico can take two different ways which consider the variation of rate and risk attributed to the foreign currency. The significance of computing the NPV is to analyze the project managers or investors foresee great variations in the currency. 

In essence, Group Ariel should discount the cash flows by using the foreign cost capital if the value of capital is valued rationally.