Statement of job:
1. First of all Martin have to happen out if the company should better the equipment. 2. If they decide to better. so. which currency should they do the purchase in? 3. How can they cipher what their expected rate of return at the most certainty? Analysis:
The general inquiry is if the company should do the betterment or non. and if they do ( presuming the undertaking is good ) which currency will give the highest net income? Since it is calculated that the cost will drop when implementing the new equipment. we assumed that the hard currency flow equals the difference between the two figures. The NVP is 2. 960. 532 pesos. but Martin wanted to cognize whether to do the investing in Euros or Pesos. When we calculated the NPV in euros we can utilize two different attacks. You can happen the NPV ( Euro ) by either translate NPV ( Peso ) by spliting it by 15. 99.
However. the better solution is to utilize the expected future topographic point rate on every hard currency flow. because this estimation is more accurate. Inflation rate is of import to look at because. if the rising prices rate alterations. the NPV besides changes and that will consequence their determination. So. they have to see the hazard of rising prices alterations. If the rising prices rate beads to 3 % in Mexico. the purchase in Euros is more profitable. because the Peso is strengthened. Another variable to see when make up one’s minding between Euros and Pesos is the hazards refering anticipation of future currency rates. The short-run exposure. long-run exposure. the political hazard and interlingual rendition exposure could all impact the rising prices. Recomendations:
The company should travel through with the undertaking. because the net present value is positive. However. they should take which currency to buy the equipment in carefully. due to the uncertainness of the exchange anticipations. They need to take all the hazards into history.