“The Last Samurai, Panasonic continues”

Summary of Article

This article is about Japanese tech giant Panasonic’s decision to revamp and refocus its efforts after reports of a 1.5 trillion yen loss in the last two years ending in spring of 2013. As a result of the approximately $14.8 billion loss Chief Executive Officer Kazuhiro Tsuga has planned to trim any unprofitable divisions of the company by March of 2016. With an exponential rise in competition in Asian tech manufacturers especially in China and South Korea, Panasonic was forced to make some drastic changes in efforts to reposition itself ahead of its competitors.

 

The article goes ahead and explains in detail the change in strategy and direction taken by Panasonics management, as well as its recent success. With reallocation of innovative and operational resources Panasonic has taken a greater role in its automotive and industrial systems departments. Tsuga has decided to cut the companies losses by either suspending, trimming or completely shutting down operations in plasma TVs, circuit board manufacturing and smartphone production. As the article explains, Panasonic for a long time has been reliant on a highly competitive consumer electronic market, which is now crowded by companies such as Apple and Samsung. Therefore Tsuga is pointing Panasonic away from consumer electronics and into more stable, longer lasting relationships with other companies such as Tesla Motors. Aside a redirection, Tsuga is also dealing with high production costs in Japan which is causing losses in the semiconductor manufacturing sector or Panasonic as well.

 

Summary of Illustrated Concepts

This article resonates upon several of the concepts covered in class. Aforementioned, Panasonic has been forced to implement new strategy due to the increase in competitors and change in the landscape of the market. In doing so CEO Tsuga, is seeking to take advantage of new market opportunities, bar off future external threats, and remain profitable in the midst of an ever changing industry and economic changes. These changes have allowed for Panasonic to become a nimbler, leaner organization, bail out of unprofitable businesses and take a path to recovery. In order to properly demonstrate these changes I have chosen to highlight external opportunities and threats, as well as Panasonic’s ability recognize its position amongst its industry and competitors.

 

In regards to opportunities & threats; Panasonic, unlike Sony, was able implement a strategy to take advantage of changes in the industry as competition grew exponentially over the last ten years as well as the landscape of the consumer electronic market. These two threats as well as the unprofitable businesses Panasonic was able to recognize it was involved in led to what now Panasonic can consider a recovery from its heavy losses. Had Panasonic not recognized these shifts and made the appropriate changes to these changes early on, they could have ended up where Sony now stands. Instead, they executed two major movements in these areas, which converted threats to opportunities for Panasonic.

 

The changes Panasonic underwent in the past year have repositioned the company. These two changes were not only the slow exit from the consumer electronic market but also the shutdown of unprofitable businesses. Then to address its semiconductor production issue it merged its operations into joint ventures with Fujitsu and Tower Semiconductor Inc., as well as sell three plants to UTAC Manufacturing services. These changes have been the genius of Panasonic’s management and seem to be just the right ones as Panasonic’s numbers are all projected to be favorable in their coming quarters.

 

How the Article Contributes to my Concept Understanding

I found this article actually very interesting. I was not aware that Panasonic and Sony were impacted so much by the rise of Apple and Samsung among many other brands now on the consumer electronics market. However, as a fan of Panasonic it was also interesting and nice to see management recognizing external changes and reacting to them appropriately. I also liked and saw the value in partnerships with Tesla Motors and other industries as they are much better moves than trying to compete with the outrageously advancing speed of the consumer electronics world. With this article I saw not only real life applications and identities to problems that giant multinational companies have but also how to deal with them and find profitable solutions.

 

Additionally, as the sample also concluded, when looking at what elements discussed in class to apply to this case, it was probably the most difficult part due to their interconnectedness. Many of the concepts and elements are very related and tough to easily identify without simply going through all that may possibly apply. Even though I realized this during this assignment, I was not surprised that everything was so connected, simply because one aspect of business always has almost endless effects on the others.

 

 

Works Cited

 

Amano, Takashi. Einhorn, Bruce & Yasu, Mariko (2014, February 13). Panasonic Revives as Other Japansese Tech Giants Falter. Retrieved February 16, 2011, from Bloomberg Businessweek:
http://www.businessweek.com/articles/2014-02-13/panasonic-revives-as-nintendo-sony-falter

All good things must come to an end…

The world is a book and those who do not travel only read one page.
Saint Augustine

A semester abroad…..4 months, 18 weeks, 126 days and a million moments I will never forget.

My Facebook status 4 hours before leaving Florence:
As I spend my last few hours in Florence, I realize how cliche this all is; how students come here step out of their comfort zones, live and fall in love with this city. However, I know one thing and that is that these buildings may or may not last a thousand more years, but the memories and friendships that I’ve made will. Thank you everyone and fly safe. Keep in touch and expect a visit from yours truly. 

I didn’t think this status was that good. But as the likes accumulated and comments came I guess it was pretty good. These last few months have been more than extraordinary. The people I met and the sites I saw will forever be ingrained into my mind. The utter grandeur and amazing people I met will walk with me for a long time if not forever. Going abroad is such a temporary “thing” with such a lifelong impact. It’s kind of crazy. My status in retrospect is perfect in explaining it. Living in a foreign or at least my case, barely foreign place, alone, forces you to step out, forces you to do things you usually don’t. It makes you take initiative. Mom isn’t there to wash your clothes or make your bed or feed you or do groceries or anything. You have you, yourself and the people you meet. I’ve been trying and trying to grasp or put my finger on what it is that could, in one simple thought, describe studying abroad in its entirety and I just can’t.

I think the sites and images in your mind eventually disappear. Everything you saw, smelled and heard. All that fades away, hence why pictures are seen as so essential sometimes even though they never do the scene justice. But what doesn’t fade are the people. The people you meet abroad, whether local or other students, are literally growing as you are. The moments lived with them….will change you. Knowing all these people abroad and all over the US now, opens so many windows. Oh I’m in California, let me see what ______ is up to or hey I’m in Baltimore, I wonder if _______ wants to grab lunch or dinner. Even better, hey I’m going to visit ______ down in Charleston or the Cape for the weekend, ciao! I don’t know what you think but that’s awesome.

I mean, I’ve never been the type to get soft and sappy over things like this because people come and go in your life but this was different. It was so cliche and everyone saw it coming everyone knew it was going to happen. Millions of students that go abroad experience this but it happens anyways. I don’t know, maybe I am overdoing this but, who knows.

All I have to say is I’m more than grateful to have been given the opportunity to study abroad. More than grateful to have met the people I have met, do the things I’ve done and experienced what I’ve experienced. I wouldn’t have changed a thing. And I promise you I’ll be back. AND you best believe I’m planning some type of reunion. Already have a standing agreement with some of the boys that if one of us makes it one day we’ll reunite and buy a place out in Tuscany and open a club in Florence and put all the others out of business. Haha….one day. Nonetheless, I’m almost at a loss for words becuase it hasn’t all happened  or set in yet. Maybe there will be a part II of this post. Anyways, thank you for reading.

Alla prossima.

Ciao

M

The Role of Italian Grandparents

“Quando niente sta andando bene, chiama la Nonna”
Italian Proverb

When it comes to Italian culture, there is something truly special about the role that grandparents, or Nonni, play. The Nonni are looked to for anything and everything. As the quote translates above, “When nothing is going well, call Nonna,” is the mentality of many kids today in Italian society.   Unlike many cultures, where a grandparent’s involvement in both their child’s and grandchildren’s lives decreases as they age, the presence of Italian grandparents in a family tends to be seemingly limitless.  In fact, in many cases, grandparents provide significant aid to their own children when it comes time to raise the newest generation of the family.  This aid often comes in many forms, whether it be contribution of time and experience, financial support, or a sense of emotional support and love, it seems as though Italian grandparents are constantly working to better their families.

One may wonder how it is that Italian grandparents are capable of being so involved in the lives of their children and grandchildren.  That being said, in most Western cultures, it is uncommon for three generations to live under one roof, however it is considered a cultural norm amongst Italians.  More often than not a grandparent will either live with their son, daughter, or grandchild. This “extended family,” as anyone with parents can imagine, this sense of constant “togetherness” can be seen as both a blessing and a burden. When it comes to the constant influx of help with child rearing, housework, and general familial connection, live in grandparents are certainly a blessing.  That being said, when an adult feels as though they cannot escape their own parents or embrace a sense of independence, the feeling of burden can begin to weigh heavy on the adults shoulders.  Nonetheless, the positives generally outweigh the negatives, especially when it comes to the ways in which the grandchildren benefit.

In the last forty years, dynamics of Italian families and the roles that different individuals play within them, have changed drastically. Many attribute this to the ever-changing gender roles within Italian society.  Up until the second half of the 1900s, Italian women, as well as the majority of women from other cultures, were seen through a purely domestic lens.  Their responsibilities revolved around their children and the importance of maintaining a well-functioning home and marriage.  While these are still highly important aspects of an Italian woman’s life, the past few decades have shown a drastic broadening of options when it comes to the complex role that women play.  The recent evolution of the female gender role in Italian culture has allowed for an increased acceptance of women in the workforce; whereas prior to this, women were forced to choose only one path.  This exciting shift often forces women to split their focus between the importance of motherhood and a successful career. While this is a highly difficult task for any parent, the ability to find a positive balance becomes possible with the help of grandparents and other familial outlets.  Due to the change and advancement in roles in Italian society, the emphasis on grandparents being highly involved in family life has increased dramatically.

With 40% of Italians between the ages of 18 and 28 unemployed, Italy is facing one of the worst economic job climates in its history.  That being said, as the job market continues to deteriorate, having a family with only one source of income is quickly becoming a disappearing luxury in Italy.  There is no doubt that as a result of the economic crisis and the change in the traditional role of women as the faithful housewife, the average Italian family is experiencing a cultural reshaping.  Furthermore, grandparents are quickly becoming the cornerstone of the family.  It is the involvement of grandparents that allows both halves of couples to simultaneous work and raise their children in a comfortable manner. According to a study cited by Cecilia Tomassini and Karen Glaser, “In Italy, as in other Southern European countries, around 40 percent of grandparents provide regular childcare for their grandchildren compared with less than 20 per cent in the Nord European countries” (Tomassini, Glaser). These numbers demonstrate that Italy is not alone in the rising trend that shows an enormous percentage of grandparents regularly providing childcare.  By not having to pay for childcare, Italian families witness intense financial benefits. While these saving are helpful for individual families, grandparent provided child care also factors into the struggling economic situation. A 2009 study conducted by the Milan Chamber of Commerce calculated, “ savings of 50 billion euros, supposedly based on how much it would cost Italian families to find babysitters and/or housekeepers for all Italian children under the age of 14” (Gilbert, Stranitalia). The benefits that families experience with grandparents living in an extended family, only bolsters this growing trend.

Due to these factors, Italian grandparents have had to take on a much more active role in their families. This role sometimes forces the grandparents to take care of their grandchildren more than their actual parents.  In some cases as well, the grandparents are sometimes seen as a haven from the parents due to their more patient and “spoiling’ nature typical Italian grandparents have. Another rising trend to keep in mind is the slowly rising number of divorces in the once catholically fortified Italy. In a 2003 national survey conducted by the Italian Statistical Office found that, “new generations of grandparents are more likely to experience divorce,” indicating that now more than ever, grandparents are faced with the fact that their children are divorcing, with and without children, thus leaving both their children and their grandchildren in their hands (Tomassini, Glaser). This survey was called the “Indagine Multiscopo sulle Famiglie e Soggetti Sociali,” which is explained by Tomassini and Glaser to be a survey of “over 60,000 people with the response rate well above 90%, though is lower for very old people. A section of the questionnaire is devoted to analysis of the structure and the exchanges within family members. Information on presence, proximity, and contact with grandchildren are included” (Tomassini, Glaser). Therefore, with splitting households, grandparents are exponentially becoming more of a refuge for the children experiencing the divorce of their parents. Having a stabile home or another source of parenting becomes more familiar and comforting than that of their parents. As King also reinforced in his article Consequences for ties between Grandparents and Grandchildren, “Grandparents step in children’s family breakdowns. They are often seen as the next level of parenting or nurturing that the child identifies with.” Italian children today are not only raised by their mother and father. Every child either has their mother’s or father’s parents as well that act as parents in their everyday lives. It will be an interesting phenomenon, how these children today will grow up to be due to these circumstances.

The Nonni of today’s Italy have taken a gigantic role in today’s Italian family. Without many of the grandparents of today, many families would not be able to survive the economic climate. In addition, the empowerment of women and the progress women’s rights have experienced in the last 40 years would also be at risk if it were not for the willing grandparents in Italian society. Without someone to take care of the kids, whether it is while going to work or during divorce, the Italian woman would be seriously disadvantaged without the convenience of someone to take care of their children. Without i Nonni, it would also be extremely difficult for single mothers and mothers in general to pursue careers. In the Italian culture there truly is something different about grandparents. The roles of Italian grandparents go far beyond the expected. From essentially raising their grandchildren, to being the last minute babysitter to even providing financial help. Italian grandparents live for their grandchildren, have been the glue of Italian families for the last 40 years and very well may become more and more needed as time continues.

Works Cited

King, V. (2003) The legacy of a grandparent’s divorce: Consequences for ties         between Grandparents and Grandchildren, Journal of Marriage and Family,       65, 170-183. Print.

DC Reitzes, EJ Mutran (2004) Grandparenthood: Factors influencing frequency of            grandparent–grandchildren contact and grandparent role satisfaction,       Journals of Gerontology. Print.

Glaser, Karen, Dr. “Grandparenting in Europe Project.” Grandparents Plus.            Krystal, 28 June 2012. Web. 11 Nov. 2013.      <http://www.grandparentsplus.org.uk/grandparenting-in-europe-project&gt;.

 

Gilbert, Sari. “Grandparents Supposedly Saving Italian Families      Millions.” Stranitalia. Petar.org, 20 Aug. 2009. Web. 12 Nov. 2013.    <http://www.stranitalia.com/home/index.php?option=com_content&task=vi            ew&id=237&Itemid=1>.

“Report – Italian Families – FCE Preparation.” Lang-8. Lang-8.com, 9 Apr. 2012.   Web. 11 Nov. 2013.

<http://lang-8.com/371812/journals/1412789&gt;.
Tomassini, Cecilia, and Karen Glaser. “Unmarried Grandparents Providing Child   Care in Italy and England: A Life – Course Approach.” EPC 2012.         Princeton.edu, n.d. Web. 12 Nov. 2013.

<http://epc2012.princeton.edu/papers/120948&gt;.

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.

Novartis

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.