The Achilles Heel

During the hectic month of December 2001, Argentina defaulted. Over that month, the economy was reduced to barter, mobs looted bank buildings, and the country went through five presidents in eleven days. After President Néstor Kirchner took office in 2003, Argentina began renegotiating it’s the debt in Dubai. The Argentines put a unique offer on the table with the conditions that the creditors would forgive past-due interest, and the old bonds would be swapped for new ones worth 35 cents on the dollar.  In exchange, the new bonds would include a GDP “kicker,” pronounced “keek-ker” by the Argentinians. This “kicker” promised the creditors additional payments equal to 1/20th of the dollar value of all GDP growth above an initial threshold of 4.2% per year.

The creditors rejected the offer, preferring a “haircut” of 40% on the face value of the debt, no interest-forgiveness, and none of this “kicker” business.  In response, Kirchner told them, the IMF, and the U.S. Treasury that the bondholders could take his “haircut” or nothing. On March 1st, 2005, the president finally repudiated their bonds. In 1998, Argentina’s debt burden came to 38% of GDP, interest payments on the foreign portion totaled 29% of exports, and the deficit came to 1.2% of GDP.  Yet investors pounded the poor country, taking out their money and rolling over the debt at higher interest rates, in addition to rising interest expenses, leading to bigger deficits and even higher interest expenses.

By pulling the plug on Argentina and rejecting the “haircut,” creditors fanned the flames of anti-market, anti-U.S. sentiment across Latin America, which brought Hugo Chavez to power in Venezuela and led to the failure of the Washington-backed Free Trade Area of the Americas. These long term results, a possible warning to Germany and the EU. However, Greece and Argentina are two different economies. Argentina is a food producer and, therefore, has an inflow of dollars to the country given the state of world affairs. That is not the case for Greece, at this point, which is primarily an import dependent economy.

Despite the differences, Argentina has some lessons for Greek policymakers. Unfortunately, none of them are easy and if Greece decides to exit the Eurozone, it could face some unpopular choices to prevent the collapse of the banking system. With the crisis picking up steam in Argentina, between March 2001 and July 2002, unpopular capital controls that only allowed withdrawals of $1200 to $1500 per month were imposed to keep the financial system solvent. The government went further. Wary of massive personal and corporate bankruptcies, it decided to devalue bank deposits at a rate of ARS 1.4 per dollar while keeping bank debt at 1 to 1 with the US dollar. This transition left banks in a fragile state and forced the government to step in and compensate them with some $8 billion in sovereign bonds.

In the end, long-term confidence in the financial system was lost. If Greece chose the same road, the move would obviously lead to social unrest similar to what was seen in Argentina. The economy would also take a dive, possibly contracting by 7% – 8% in the first few years. Greece is also more exposed to the negative effects of a rapid devaluation than Argentina was before the crisis. “The country is a net importer with more than 30% of its GDP worth of imports compared to only 12% in Argentina in 2001” (Financial Times). The move to devalue could outweigh the benefits of any domestic oriented growth in stark contrast to Argentina that managed to export its way out of its mess.

In addition to a heavy-handed policy to force foreign-owned “strategic” industries into local hands over the last 10 years, the contentious debt restructuring has negatively affected foreign direct investment. “FDI inflows to Argentina dropped to just USD 12bn from 2002 – 2010 from USD 76bn in 1992 – 2001”, according to the World Bank. If Greece decides to re-denominate claims into devalued drachmas, Greece may be able to avoid Argentina’s holdout drama. Most of the country’s debt has been issued under the Greek law. “In Argentina’s case, the bonds were mostly issued under New York, not Argentine, law – a move designed to give comfort to investors and reduce the interest rates demanded – which allowed creditors to sue in the US,” said former Secretary of Finance Marx. Additionally, like Argentina, Greece’s bonds do not have a collective action clause forcing creditors to participate in a restructuring if it is supported by a majority of creditors. However with most of its debt under local law, Athens could change the law forcing any untendered bonds to adhere to a deal supported by a majority.

One area where Greece trumps Argentina is the spillover impact of a crisis on its neighbors. When Argentina went through its crisis, the only countries affected were major trading partner Brazil and Uruguay. Rather than being chaotic for Greece alone, a default would affect the Eurozone, challenging the solvency of the regions banks. “Banks are not only exposed directly to the peripheral Eurozone countries such as Greece, but also indirectly via their lending to banks that hold significant peripheral claims,” said Richard McGuire, a senior fixed income strategist at Rabobank.

The quality of the crisis and supports the notion that for all the logical arguments in favor of a Greek exit, the repercussions of such a development will be felt throughout the system in ways likely to be as painful as they are hard to determine. Lastly, one can only hope Greece has leaders who look beyond short-term political costs and decide what is truly best for society.





Work Cited

Agustoni, Clara, and Christopher De Vrieze. “Latin Lessons: What Greece Can Learn from             Argentina.” Financial Times. Debtwire, 8 Dec. 2011. Web. 25 Mar. 2013.

Brazil: Leading the BRICs?

The longtime football powerhouse may soon be known for more than just its football. Brazil’s triumph in World Trade Organization has put it at the forefront of powerful developing economies. Between their victories using the World Trade Organization compulsory licensing to break patents, fighting agricultural subsidies in more developed countries, and its diplomatic negations with Iran, Brazil has proven itself to no longer be a country to be slept on. However the underlying question remains as to whether these developments will prove to be beneficial in their long term economy. Some of these developments however, have antagonized the United States and European Union along with potentially scaring away future businesses. That being said, although the success has put them on many countries radars, being on the bad side of the US and European Union can make things very difficult. In addition, using the WTO compulsory licensing due to a trivial price difference will have deterred companies from wanting to invest in Brazil with the fear that they may end up like Merck Pharmaceuticals.

Financially and from a business perspective, Merck was making a financially sound decision in asking a higher price from a country that was more financially capable. In addition, Brazil’s tariffs were much higher thus forcing Merck to offer a higher price. However, Merck was selling to other developing countries for less such as Thailand for 65 cents and to Brazil for $1.10, double. In 2007, Brazil offered that a single annual purchase as a compromise to save some of the company’s marketing expenses but Merck refused to retain higher profit margins. Therefore not only was Merck Pharmaceuticals offering deceptive pricing but also bringing a question of ethics to the table. This enraged Brazilian President Lula to the point where he announced that “From an ethical point of view the price difference is grotesque, and from a political point of view, it represents a lack of respect, as though a sick Brazilian is inferior.” This strong statement perfectly represented the Brazilian government’s point of view. It also showed that Brazil was not going to be pushed around by some foreign pharmaceutical company and that it held its people to a higher priority even though Merck had a large amount invested in Brazil. Therefore even though it may have hurt its reputation among potentially interested investors, many companies will overlook the quarrel with Merck because of what Brazil’s economy has to offer. Additionally, Brazil’s actions will be seen lesser because it was compulsory and an extreme case. Although the financial aspect and numbers being argued were in the bigger scheme, trivial, Brazil’s actions were more motivated more by principle and nationalism rather than simply breaking a patent for a drug they could afford. I believe Brazil made the right decision in the greater picture as Merck’s pricing was to a certain extent discriminatory towards Brazilians.

Brazil’s capitalism is a very controlled capitalism. The government holds a key role not only by owning many of the larger firms but serves as the primary source of capital, thus making it extremely influential in its economy’s direction. A key component of Brazil’s success has been its political and macroeconomic stability. Sizeable improvements in their public debt, reduction of poverty, rising standard of living, and industrial policies have brought it the success it holds today. These advancements have made Brazil an agricultural powerhouse and have been supplying commodities to China since 2003. Brazil’s weaknesses only lie in its infrastructure, as high interest rates bar entrepreneurial Brazilians from economic opportunity. Additionally Brazil has been labeled as on of the harder countries between the BRICs to work in due to all the red tape foreign and domestic companies need to cross to bring business to Brazil. These issues are issues found in any developing country and can be fixed with the right leadership.

With the World Cup coming in 2014 and the Olympics in 2016 Brazil’s future has only been looking brighter. With victories not only on the international economic podium but also politically, Brazil has put itself at the forefront of the BRICs. With the right leadership, and the right direction, Brazil has the opportunity to have the brightest future among the four biggest developing economies.




Work Cited

Daemmrich, Arthur A., and Aldo Musacchio. Brazil: Leading the BRICs? Boston: Harvard

Business School, 2011. Print.



The Southern Common Market

Mercosur also known as Mercosul, or in English, “southern common market” like the European Union and other commercial pacts or agreements, has had an immensely positive influence on the South American economies. From domestic increases in trade within South America to increasing overall employment between member nations and educational integration, Mercosur undoubtedly impacted South American economies for the better. Politically, it has also proved to be an asset for all South American nations as a medium of exerting political pressure.

Economically, Mercosur has been an enormous helper in spurring internal trade between South American countries. Merchandise trade in Mercosur member countries grew from $10 billion at the cusp of the bloc’s beginning in 1991 to $88 billion in 2010 (Eurostat, PDF). In 2010, Eurostat also reported that Mercosur accounted for 16% of the member’s trade. Exports from the bloc are very diverse, and include a variety from agricultural and industrial to energy. The trade agreements allow access to goods that may be rich in another countries but lacking in theirs. As an example, Venezuela’s introduction to the bloc allowed to buy cheaper foods in exchange for its oil. Another method by which the trade bloc has benefitted its members is by its lending and debt management. During Paraguay’s crisis, Brazil and Argentina offered to relieve its debt by renegotiating its terms. It would be undermining to say that the trade bloc is irrelevant due to its incentives to trade locally in South America. However, although it is irrefutable that the agreement has increased internal economic fluidity, South American exports continue to be the money maker among all South American countries. Nonetheless this claim does not disapprove the fact that intra-Mercosur trade accounted for approximately 16% of its member countries trade.

Where there is economic power, there is political power as well. As a unified economic zone, the South American member countries can dictate as a whole who they offer incentives to. In its recent history Mercosur has denied the United States free trade incentives. Whereas, during the same time engaged in economic talks with China for incentives and tariff breaks. This is a powerful bargaining chip especially when Mercosur includes some of the world’s largest emerging markets. Mercosur also led to the failure of the U.S. led Free Trade Agreement of the Americas which would have united the entire region under one economic agreement and granting the U.S. special deals with South American resources. In this respect, Mercosur is again undoubtedly relevant as an economic agreement. Amongst its economic power it has also been a vessel for other dimensions of politics. In 2007, the Mercosur members pledged to increase focus on human rights and democracy during a summit. American political scientist Riordan Roett, professor and Director of the Western Hemisphere Program at Johns Hopkins University was quoted saying that since Venezuela signed the Protocol of Adhesion in 2006. “Mercosur is no longer about trade” (Mercosur: South America’s Fractious Trade Bloc, Klonsky).

An agreement that spurs economic growth, power and overall advancement is in no way irrelevant. It’s only potential soft spot is that it does not account for as much of South America’s economic activity in the same manner that South Americas exports do. Nonetheless, it does account for 16% which is a considerable amount. In an area with so much potential, not having such an agreement would be illogical. It would hinder the growth of not only the more powerful economies but also the lesser.







Works Cited


Klonsky, Joanna. “Mercosur: South America’s Fractious Trade Bloc.” Council on Foreign Relations. Ed. Stephanie Hanson and Brianna Lee. Council on Foreign Relations, 31 July      2012. Web. 04 Mar.2013.


Latin America & Cotton Subsidies

The 2002 World Trade Organization cotton dispute case initiated by Brazil targeted six commitments made by the United States in the Agreement on Subsidies and Countervailing Measures. Brazil argued that the US and European Union were exploiting loopholes and bookkeeping methods to remain competitive and hurt developing markets. Through these loopholes they claimed the US was providing illegal subsidies and distorting trade.

In Brazil’s defense lays many agreements, provisions, measures set in place and agreed upon by the United States and other countries. More specifically, the laws applied were those from the SCM Agreement of the Agreement on Subsidies and Countervailing Measures which the World Trade Organization then used in its decision in the dispute.

According to the Congressional Research Service (CRS), over the past ten years the United States has given about 24 billion dollars’ worth of cotton subsidies despite the fact that the World Trade Organization (WTO) ruled that United States cotton subsidies are illegal.” (Illinois College of Law)

The distorting effects that American subsidies to cotton farmers have on the global market, are what triggered the WTO to formally step in after Brazil’s claims. By encouraging the production of cotton through subsidizing, American cotton farmers were flooding the markets with cotton and therefore bringing the price down. This offset the equilibrium and caused the US to dump its surplus cotton into foreign markets and thus making it almost impossible for unsubsidized farmers to compete. The dumping and American subsidies to cotton farmers were deemed illegal by the WTO. Brazil was given the go ahead to cross-retaliate if the US did not cooperate. This cross-retaliation allows Brazil to seek damages in other methods aside from import, export tariffs. Cross-retaliation allows Brazil to break any media or pharmaceutical patents which could add up to approximately 829 million dollars’ worth of indirect compensation for their losses in cotton exports.

  • However, in response to Brazil’s complaints the US brought to attention both legal and technical rebuttals. For one the United States highlighted the fact that the agreement granted countries involved until 2004 to phase out the forbidden subsidies and export incentives.
  • In addition, the US also showed that many of the claimed illegal programs had expired by the time the WTO formally initiated the process. Therefore excluding many of the claims put forth by the Brazilian foreign affair ministry.
  •  The US government also argued that a select number of subsidies were also permissible under the Agreement of Agriculture. Seeing the WTO case, American cotton farmers also expressed their concern with the stability of the cotton market without subsidies and its impact on prices and consumers. An interesting comment from Charles Stenholm, a Texas cotton farmer also claimed that despite Brazil’s high standing among global economies it still claims itself as a developing economy.
  •  In addition, these subsidies are simply keeping the US competitive and cotton prices down; simply because Brazil cannot do the same does not mean it is wrong. Some US officials have said Brazil’s litigation instead of negotiation has led people to think it is out to eradicate competition instead of competing naturally. However, in reality this seems to be the other way around.
  •  If the subsidies were to be stripped, the US cotton industry would fall flat on its face and thousands of jobs would be lost. It would be nearly impossible to replace those jobs in any timely fashion, and it is hard enough as it is to keep jobs in the US with all the outsourcing that goes on today. As the world’s third leading cotton producer, we are also the world’s number one exporter of cotton, as annual exports exceed $3 billion.
  •  78% of the US subsidies for cotton went to only 10% of the cotton farmers ‘about 2000 farmers.
  •  Before NAFTA there were 40,000 cotton farms, today, there are only 20,000 left.
  •  Only 36% of the US farmers receive all of the crop subsidies. 64% of US farmers receive none. Only 3.6% of the US farmers received 71% of all the government payments. The next 3.6% got 15%, which means that 7.2% of the farms received 86% of all the US subsidy payments.

United States cotton subsidies are not fair and have been distorting the market. Why has the US not taken the proper steps in finding an alternative or solution and have stalled it for so long is a question worth asking. However, in the greater scheme of the global economy, American subsidizing has been hurting foreign cotton farmers by undercutting them and not allowing them to make the profits they should be making.


Work Cited

Daemmrich, Arthur A., and Aldo Musacchio. Brazil: Leading the BRICs? Boston: Harvard

Business School, 2011. Print.

Sunshine, Benjamin. “United States’ Last Chance to Save Cotton Subsidies?” College of Law.      Illinois Business Law Journal, 02 Feb. 2012. Web. 04 Fe

The Cartel

There is no doubt that the Mexican drug cartels are hurting the Mexican economy. Cartel violence and notoriety have hindered tourism, foreign direct investment and global reputation of Mexico.

With its manufacturing might and numbers, a GDP of 4% in 2011, low inflation (3%) and developing middle class Mexico seems to resemble the US in the 1950s. However, with so much potential, the drug problem has severely cast a shadow over Mexico’s economy. Mexico’s fourth biggest source of revenue and approximately 8% of its GDP, is tourism. The problem is, popular destinations for tourists such as Acapulco have been huge sources of cartel violence. Although not the most violent area, Acapulco has been the home of some very horrific violence. One instance was in August of 2011 where officials found two decapitated corpses, dismembered into 20 pieces in a parking lot of a Sam’s Club wholesale store. The two body’s scalps and facial skin were later found in a patron’s purse. Violent stories vary from mass kidnappings, shootouts with Mexican federal agents and extortion. This violence does not discriminate either. From the U.S. alone, 100 U.S. touring citizens were murdered in Mexico in 2010. (IBTimes) In April of 2011 the U.S. State Department actually issued a long-term travel warning to U.S. Citizens in regards to travels in Mexico. Similar warnings in the past by the U.S. State Department have put Mexico on a list with dangerous destinations such as North Korea, Yemen, The Democratic Republic of Congo and Afghanistan.

Factors like this severely influence tourism in Mexico and are detrimental to its progress as a developing economy. After having to deploy thousands of additional military police to patrol cartel hotbeds in the wake of heightened violence, Mexican Finance Minister Agustin Carstens said in a recent press release that, “The issue of security has effected economic growth in Mexico,” and later added that “If we could resolve this issue it could give the economy an extra shine of at least 1 percent.” Local businesses are also directly being financially burdened by the cartels because in addition to the loss in business they are forced to pay protection money to the gangs. To many small business owners, among the everyday fear of violence, paying the gangs is like paying taxes twice. Reuters estimated that at least “4,500 businesses closed down in Mexico’s Chihuahua state last year as a result of drug cartel extortions pushing them into bankruptcy” (Reuters) The businesses ranged from law firms to pharmaceutical chains. Aside from this, foreign investors are being almost literally scared away. Investors now fear the countries instability after anti criminal forces had to be reinforced by military personnel. To many investors, between the red tape, average infrastructure and normal risks in entering a new country, the fear of violence and gangs is just a risk they do not see worth taking. In cities closer to the U.S. – Mexico border, the tourism has been harshly impacted as hotel occupancies are below 50 percent (Reuters).

Are Mexican drug cartels hurting the Mexican economy? Absolutely; violence, extortion and high-risk, are all words that are used to explain what is going between Mexico and its drug problem. None of these words are words investors or tourists want to hear. Will that completely stop gambling investors or well-versed tourists? No, there are always exceptions but has it potentially hurt and hindered Mexico’s potential thus far as an emerging economy, there is no doubt.





Works Cited

Emmott, Robin. “Drug War Hits Mexican Economy in Crisis.” Reuters. Thomson Reuters, 03        Apr. 2009. Web. 11 Feb. 2013.



Forbes, Miguel. “For Mexican Economy, Drugs Not The Whole Story.” Forbes. Forbes     Magazine, 04 Oct. 2012. Web. 11 Feb. 2013.



Tovrov, Daniel. “Is Mexico’s Drug War Hurting Tourism?” International Business Times. The        International Business Times Inc., 20 Jan. 2012. Web. 11 Feb. 2013.


Wiley International

Wiley International is considering investing in Brazil for many reasons. Brazil is forecasted to be the sixth largest economy in the world by the end of 2015. In addition to being the second largest United States trading partner in the hemisphere. Brazil’s ability to control inflation over the past five years has renewed confidence in the Brazilian economy and financial markets, making it a large potential emerging market. Another reason Brazil is appealing to Wiley, is because of its workforce who are known to be very technically advanced and flexible, which would facilitate Wiley’s ambitions in the manufacturing industry. Currently, Brazil’s person per car ratio is 9 to 1, in comparison to developed countries 2 to 1 ratio this is not good for automobile manufacturers as they want more people in their cars. However, with such a growing economy and foreign auto import taxes circa 70%, domestic car manufacturing is most likely to boom in the next few years due to these factors.

Advantages to operating in Brazil vary. An advantage would be having a manufacturing foothold in one of the world biggest emerging markets. In addition to its skilled and flexible workforce, Wiley’s Brazilian branch sees a large need for fractional horsepower engines from Brazilian auto makers. The problems with this project however lie in the rates and finances of this project. The internal rate of return is being calculated using Brazilian Reals when applied to the cash flows. Additionally, the inflation rate being used was also the Brazilian inflation rate of 8%. All in all, the controls being used were all in terms of the Brazilian economy. Therefore any profits would be subject to tax and currency exchange once repatriated to the United States if Wiley decided to do so. A questionable move was that of using the 40% United States tax rate over the 20% Brazilian rate because Wiley would need to find out if its profits would be taxed twice, once by the Brazilian government and then again by the United States if the profits were to be repatriated to the US. The double taxation would leave them with a different figure than that of just picking the higher tax to play it safe.

The five year life span of this project for Wiley in my opinion does not look attractive. If there were better financial plans set into place the proposal would be much more appealing. But as Esposito has his concerns, so do I. There seems to be way too many potential implications and miscalculations. Internal rates of return can be misleading and should not be used to rate mutually exclusive projects. Additionally, without a clear indication of which discount rate should be used, this project may be a complete bust without management knowing. The internal rate of return assumes that there will be a reinvestment of short-term cash flows in projects with equal rates of return. Therefore without this reinvestment, the internal rate of return overstates the annual corresponding rate of return for a project whose temporary cash flows are reinvested at a rate lower than the calculated internal rate of return figure. This presents a huge issue, especially for projects with large rates of return, since there is frequently, like in this case, not another project available in the following term that can earn the same rate of return as the first project. In addition, the internal rate of return does not consider the cost of capital, unlike the Modified Internal Rate of Return. Therefore, without evidence of all these issues taken into consideration, I suspect there are huge holes in the calculation of this project which may lead Wiley down a bad road in Brazil. Lastly, this project is only projected to be profitable for 5 years. This is also not good because after five years all the equipment and facilities will be deemed obsolete. If this is the case Wiley may become obsolete during the automobile boom that firms are expecting and potentially miss out on their anticipated gold rush.

I would use the US 9%, discounted rate as there are less to no foreign exchange risks and political risks associated with that rate whereas the foreign-based rates may not include all non-quantifiable threatening factors. Even after taking this into account, I still feel it does not adequately capture the risk being taken by investing in this project in Brazil. The Japanese supplier I believe definitely makes the viability of the project much easier as they are offering a lower interest rate and thus a lower cost of capital.

As Esposito, I would not accept this project. I would push for further, clearer and more dependable calculations to be made. The internal rate of return calculation simply is not enough for the approval of a project like this where there are numerous variables unaccounted for. Although lucrative, with the data given, as Esposito I would not feel comfortable approving this project.




Works Cited

Higgins, Robert. Wiley International – Richard Ivey School of Business University of Western Ontario. Ed. Paul Bishop and Stephen Sapp. London Ontario: Ivey Management Services,     2005. Print.


Try not to become a man of success. Rather become a man of value.

Albert Einstein

In the Novartis Consumer Health Businesses case, three CFOs are presented and assessed for what they’ve accomplished under what circumstances in an effort for Simeon Bolan, the finance head, to allocate and develop the finance talent within the company. Out of these assessments, certain managers have attributes that others don’t, but the question remains if one’s attributes outweigh all the others’. It is these attributes or strengths and weaknesses that have allowed these managers to be so successful.

The first is Remi Escurel, the regional CFO for their Asian Pacific region. Remi seems to have been successful because she has taken a very organized approach to solving problems. Her organization proves that she knows what she is doing and she is dedicated to thoroughly solving the problem.  Remi was also successful because she allows input from all areas of the company; this builds a good relationship in the company and makes sure that lines of communication are open. Moreover Remi was successful because she made sure that everything was planned. She seemed to always keep everything in perspective to plan her daily activities. Her challenges consisted of company-wide compliance issues, inaccurate forecasting and the lack of financial involvement in the company. When faced with such challenges, Remi executed her structured procedure approach until a solution was found.

Next is Tanya Ferretto. Tanya worked as both CFO and GM, spearheading the Animal Health in Japan. Tanya was successful because she knew what her group must do and how her group could help in the success of the company. Tanya seemed to have a clear understanding of their roles and how each individual member’s skills could contribute to the success of the company. Tanya was successful because she carefully used strategies so that Novartis AH in Japan would grow. These strategies helped in lessening Japan’s resistance to change. These strategies also helped Novartis AH establish itself in the Japan market. Tanya’s challenges consisted of implementing new growth strategies in a new market, and tapping into market information with no experience in the region such as sales trends.

Lastly is Jaime Maturana. Jaime “filled the BPA role” and ran the business, planned the business and analyzed the business. Jaime was successful because, like Remi, he made sure that the line of communication between him and his employees or managers were always open. Jaime often met with managers from other departments and tried to give them the assurance that the finance group was their partner in achieving Novartis’ goals. Jaime was also successful because he made sure that all processes were constantly reviewed and changed to meet the goals of efficiency. He changed processes so that they would perform better and prove their value to the firm. Jaime’s challenges included improving inefficient processes and constantly working with a volatile environment.

Out of these financial heads I would pick Jamie to work for me and to work for. I feel he handled his challenges to the best degree. I would also pick him because I really liked and agree with how he saw logistics and finance very closely related. He made himself readily available to the whole company and was completely involved in his work, unlike many stereotypical management offices. He emphasized team work and communication and with the environment he worked in probably dealt with every type of external issue.

A skill I found common between all three CFOs was their dedication; their dedication to their job and success of their group. This dedication entailed them to be prepared to do anything appropriate and logical for the company. Dedication also assures the firm that the CFO would not commit acts that will hinder the organization.

Out of all the skills exhibited by these workers, I believe dedication to not only the company but to its people, attention to detail, and efficaciousness are three essential qualities that are necessary to succeed and have led these three managers to their success. Dedication is important in every aspect. It assures the firm loyalty, that operations are done right and that they are done wholeheartedly. This means getting your hands dirty when you have to and standing behind your work. Attention to detail is also vital. A leader who pays attention to detail will stand out amongst the rest and be able to identify problems and advantages. Lastly is efficaciousness. If a leader is not an effective leader, then they are simply spinning their wheels. An effective leader communicates clearly and correctly, wastes no time and gets the job done. Being ineffective means nothing will get done and lots of company dollars down the train. As exhibited by Remi, Tanya and Jaime, these are skills that are necessary in leaders because they are what make leaders successful.

To buy or not to buy that is the question.

To provide Groupo Ariel proper consultation on the purchase of recycling equipment, a future cash flow projection calculation when inflation of two countries is different and identified. Therefore the project must be calculated using the net present value of the program both in euros and pesos based on the assumption that purchasing power parity and uncovered interest parity remain constant. In my analysis I further analyze net present value when purchasing power parity does not remain constant.

The first step in analyzing Groupo Ariel’s options is to check out their cash flows. To calculate the net present value of Groupo Ariel’s Mexican subsidiary’s recycling equipment to get the incremental cash flow of the replacement of equipment. For 2008, beginning with revenue from sale of the old machine, tax is added from the sale since the actual sale price is lower than the book value of it, then the initial investment is subtracted which includes the purchase and installment cost. For the incremental cash flows from 2009 to 2018, the cost saving due to the replacement should be adjusted by the tax savings on depreciation. The tax savings on depreciation are found by subtracting the tax benefits of the old equipment that is being sold, and adding the tax benefits of the new equipment that is being bought. The cost savings is influenced by inflation, therefore cash flow changes when inflation fluctuates as well. Secondly are the exchange rates. The single exchange rate that can be used is the spot rate 15.99 in 2008. However it can also be converted from Pesos into Euro-dollars each period using forward exchange rates. When purchasing power parity and uncovered interest parity remain constant, the

forward exchange rate is calculated normally. But when the purchasing power parity and uncovered interest parity change, the forward rate is assumes that the exchange between MXN and EUR will increase from 15.99 to 20.00 by the time 2011 comes and up to 25.00 by 2018. Next, is the hurdle rate. The hurdle rate is basically the minimum rate of return on the project in regards to the same project in France. The hurdle rate in France is 8% for the same project. This must also be taken into consideration when calculating the exchange rates with the power parity holding and with it changing. Lastly is tax and inflation. Initially the cash flows are all in pesos therefore Mexico’s tax rate of 35% must be used. However, in terms of inflation, in Mexico the inflation rate is 7% and only 3% in France. By using the second scenario with RPPP and UIP changing, both countries find themselves with equal rates at 3%.

After computing the NPV in the first scenario with power parity and uncovered interest parity holding, the net present value is 1,478,998.83 pesos which translates to 92,495.24 Euro at the spot rate of 15.99. In the second scenario with the exchange rate being calculated as 1.04(1+7%/1+3%), the net present value is the same at 92,495.24 Euro. Next are the inflation rates. Again, when the power parity and uncovered interest parity hold the rates are both 3%. After you repeat the net present value calculation the new number for the equipment project is 869,716 pesos or 54391.24 Euros.

In the second scenario, with changes in purchasing power parity and uncovered interest parity, the inflation rate is still 3% in both France and Mexico. Frances new hurdle rate however is adjusted by the future exchange rate. Therefore from 2008-2011 it is 17.03%, 2011-2013 it is 20.00% and from 2013-2018, 8% because the cash flows are discounted at different rates. This way, by repeating the NPV calculation under the first scenario totals to 314909.29 pesos or 19,694.14 Euros. However under the second scenario we assume the MXN to EUR exchange rate increases from 15.99 to 20.00 and again to 25.00. Therefore you convert the cash flows at those rates and discount the cash flows by France’s 8% hurdle rate. This leaves a net present value of 335,479.38 pesos or 20,980.57 Euros. After seeing all these calculations it is clear that the numbers are different.

Calculating these present values takes two different approaches. They both take the rate of change and risk in foreign currency into different considerations. The second scenario takes the forecasted rates directly from the differences in inflation rates; whereas the first scenario took into consideration, the cost of capital using the same inflation differences. But now in the second scenario the net present values change because the changes in inflation can’t be influenced by the changes in the currencies. Therefore if the project foresees huge changes in currency then it is better to translate the figures into the domestic currency rather than where the project is being proposed. However, if the cost of capital is valued rationally the company should discount the cash flows with the foreign cost of capital. I believe Groupo Ariel should purchase the equipment because if the forecasted rates are correct the purchase seems very profitable.