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Groupe Ariel Analysis

Notes:

After-tax Salvage Value Market Salvage Value Tax Rate Gain on Sale
Depreciation Tax Shield Tax Rate Depreciation
Free Cash Flow Operating Cash Flow NWC CAPX After-tax Salvage Value where:
NWC = year-over-year change in net working capital (where net working capital is current assets minus current liabilities);
Operating Cash Flow EBIT 1 Tax Rate Depreciation
.
EBITDA 1 Tax Rate Deprecation Tax Rate .
For the Groupe Ariel case, EBITDA in the operating cash flow formula above corresponds to pre-tax cost savings.
Interest rate parity a la the Fischer effect:

Foreign Discount Rate


1 Domestic Discount Rate 1 Foreign Inflation 1
1 Domestic Inflation
Domestic Discount Rate Foreign Inflation Domestic Inflation

France Inflation 3.0%


Mexico Inflation 7.0%
Cost of Capital , 8.0%
A. Compute Project Cash Flows in Pesos
Year
0 1 2 3 4 5 6 7 8 9 10
Expenditure (3,500,000)
After-tax salvage value, old equipment 201,250
Incremental cost savings, after tax 472,829 548,606 637,241 740,972 792,840 848,339 907,722 971,263 1,039,251 1,111,999
Lose depreciation tax shields, old equipment (29,167) (29,167) (29,167)
Gain depreciation tax shields, new equipment 122,500 122,500 122,500 122,500 122,500 122,500 122,500 122,500 122,500 122,500
Total peso cash flows (3,298,750) 566,162 641,939 730,574 863,472 915,340 970,839 1,030,222 1,093,763 1,161,751 1,234,499

B. Approach #1: Discount Peso Cash Flows at Peso Discount Rate


Year
0 1 2 3 4 5 6 7 8 9 10
Total peso cash flows (3,298,750) 566,162 641,939 730,574 863,472 915,340 970,839 1,030,222 1,093,763 1,161,751 1,234,499
Cost of capital, pesos 0.1219 0.1219 0.1219 0.1219 0.1219 0.1219 0.1219 0.1219 0.1219 0.1219 0.1219
Discount factor, pesos 1.000 0.891 0.794 0.708 0.631 0.563 0.501 0.447 0.398 0.355 0.316
Present value, pesos (3,298,750) 504,627 509,980 517,313 544,963 514,909 486,772 460,404 435,673 412,459 390,650
Net present value, pesos 1,478,999