The following questions should support your analysis of the case and help structuring the solution.

Please formulate your solution in up to 8 pages (Times New Roman 12pt, spacing 1.5,
margins 2,5 at all sides). Also be prepared to verbally present your arguments and results in
class and discuss it with the other groups.
There is no unique correct solution. The quality of your solution depends on the depth of your
analysis and the clarity and correctness of your arguments.

Groupe Ariel S.A.: Parity Conditions and Cross-Border Valuation

Questions for Assignment
1. Compute the net present value of Ariel-Mexicos recycling equipment by discounting incremental cash flows. Apply two approaches.
a. Discount peso cash flows at a Peso discount rate and convert the NPV.
b. Translate the projects future Peso cash flows into Euros at expected future exchange rates and discount at a Euro discount rate.
Assume expected future inflation for France is 3% per year and for Mexico is 7% per
year. Explain your cash flows (do not miss the tax effects) and the choice of discount
rates. Compare the two sets of calculations and the corresponding NPVs.
2. Check (as far as possible) to what extent relative purchasing power parity and interest rate
parity is reflected in the historic data given in the case.
3. Explore the relevance and influence of assumptions regarding parity conditions. What is
your result in part 1 if you assume parity conditions to hold? What if you apply alternative
assumptions not consistent with parity? Try different assumptions regarding inflation
rates.
4. Suppose Ariel expects a significant real depreciation of the peso against the Euro. How
should Martin incorporate such an expectation into his NPV analysis? What is its effect on
the concluded NPVs?
5. Should Groupe Ariel approve the equipment purchase? Include hedging and financing
considerations into your discussion and recommendation.
Further information:
Note that Exhibit 2 is stated in pesos, not thousands of pesos!
The actual 1-year and 2-year forward rates at the date of the case were MXN 16.4331/EUR
and MXN 16.9998/EUR, respectively (mid-points between bid and ask). Longer rates were
not available.
Please find the case data in the Excel Sheet GroupeAriel.xls (available in Moodle).