A Case Study Groupe Ariel S.A.: Parity Condition and Cross-border Valuation.

Summary

Group Ariel’s Mexican subsidiary wants to purchase and install cost savings equipment in its plant in
Moneterry. For this, Ariel requires a discounted cash flow analysis and an estimate of Net present value
(NPV) for capital expenditure of the size of its subsidiary. One major challenge includes if the NPV should
be calculated in Euro or Pesos.

Question 3a

When parity conditions holds then we assume that Net Present Value (NPV) for both investments should
be approximately the same whilst putting into consideration that both countries have identical
assumptions on inflation rate. This results that we can neglect Fisher’s effect as both investment will
give the same rate of return. If the parity condition does not hold then the NPV from both approaches
will be different; meaning that we would decide for the investment with the higher NPV value. PPP
states that exchange rates between currencies are in equilibrium when their purchasing power is the
same in each of the two countries