Groupe Ariel is willing to invest in the installation of new automated machinery to recycle and remanufacture toner- and printer cartridges, in one of its wholly owned subsidiary in Monterrey, Mexico.
To assess the impact of this whole project, the cash flows were calculated to determine in what way this project would impact their financials. Incremental cash flows for the next ten years are calculated. In order to calculate the net operating cost, revenue from the sale of old machinery is subtracted the purchase and installation cost of new machinery. Tax is added in the revenue of the old machine because the sale price is lower than the book value of the machine.
For the incremental cash flows from 2009 to 2018, the cost saving due to the replacement is being adjusted by the tax savings on depreciation. The tax savings on depreciation were found, by adding the tax benefits of the new equipment that is being bought, and by subtracting the tax benefits of the old equipment that is being sold.
Discount rate of 12.9 is calculated with the help of the formula.
iMXN= (1+i France) x (1+? Mexico / 1+?France ) – 1
This discount rate is calculated by assuming that the purchasing power parity holds during the whole period. Afterwards, these incremental cash flows were added to the NPV function in Excel using a 12.19% discount rate to arrive at the Project Net Present Value in 1.48 m MXN. Lastly in order to find the find the NPV in euro, this number was divided by the spot exchange rate of MXN 15.99/ EUR, to arrive at the NPV €92,495 for this project in euro.