The cost of replacing the manual printer and toner cartridges with the automated machines was 3,500,000 in pesos and 220,000 in euros, Imprimante-Mexico has anticipated the savings of labor and material immediately. There were minimal expenditures of maintenance and no charges in working capital. The hurdle rate, which is minimum rate of return that the company expects to earn in future, is 8%, it is assumed as cost of equity for adjusted present value modeland furthermore, theexchange rates are also discussed in Appendix A.
The net present value in pesos is calculated taking both discount rates, the initial investment is expected to be 3386250, taking all the considerations has resulted in positive net present value in pesos, the NPV has also been converted from MXN into Euro, the amount was divided with a spot exchange rate of MXN 15.99/EURO, the NPV of the project have resulted in Euro.
All in all, calculating NPV at both discounts rates is positive or greater than 0, which significantly shows that the project would be feasible for the company.
Next of all, the purchasing power parity is calculated in order to have a closer look over theratio of the price incurred while purchasing automated machines from two countries, PPP is calculated to determine inter-country comparison in terms of high or lower prices(Findreng, 2014). In the years 1 and 2, the purchasing power parity is calculated by taking spot rate, forwards exchange rate, domestic inflation rate and foreign inflation rate. The PPP for year 1 is 17.589 and for year 2, is 19.3479, the cost of purchasing automated machines from Mexico will be 3,500,000, on the other hand, purchasing automated machines from France will cost 220,000, the inflation rate in Mexico is 7% while in France, is 3% which shows that the company could purchase goods for 7% less in France due to the high inflation rate and the exchange rate for the currency of Mexicobeing in decline. The results show that the company has to spend 17.589 if it will going to purchase machines from France
Afterwards, the net present value is calculated taking both discount rates in Euros, the results showsthat the NPV is positive for both rates, due to which,the company could pursue such a project. The net present value gives a clear understanding regarding whether to make an investment in the project or not and whether the project will be feasible or not (Riga, 2014).
Later on, the net present value is calculated for different future exchange rates in order to determine the effect of exchange rates on the present values calculating today, the exchange rates are taken from 2009 to 2018 in order to find the effect of exchange rates on present value in the long run. The exchange rates are sometimes volatile and fluctuate over the period of time, so it is important to determine their effects on the cash flows that would be generated from the project in the future.
From 2009 to 2018, the effects of exchange rates on net present values are all positive, so it can be anticipated that they would not negatively affect the net present values of the cash flows generated from the project and the project will be feasible for company, it may also return back the company in terms of positive cash inflows in the forthcoming years……………..
This is just a sample partical work. Please place the order on the website to get your own originally done case solution.