Need to know if can help with a case study:need PPP, IRP, exchange rate, forecast, depreciation and in case company does not purchase the new equipment then rate of the loan. everything from 2008 to 2

1 Source: Novancia, 2015 Assessment Assignment for INTB 693 International Capital Budgeting Analysis Imprimante S.A. Cross -Border Valuation and Parity Conditions On June 23, 2008, a Monday morning, Martin Arnaud arrived at his office in Imprimante S.A. corporate headquarters in St. Ouen , France. The previous week, Arnaud had requested additional financial information about an investment proposal from Imprimante -Mexico, a wholly owned subsidiary that operated a manufacturing facility and a regional sales office in Monterrey, Mexic o. The information had arrived late Friday — too late for Arnaud to analyze — and was waiting for him Monday morning. As a financial analyst for a global manufacturer for printing a n imaging equipment, Arnaud examined many cross -border projects, particularly since Imprimante had accelerated it s move into emerging markets several years earlier. The Mexican investment proposal called for the purchase and installation of new automated machinery to recycle and remanufacture toner and printer cartridges. Cartri dge recycling had become an important part of Imprimante’ s business in many markets and promised continued growth. Many office product retailers operated formal toner cartridge recycling programs, for both the environmental benefits of keeping materials o ut of landfills and demonstrated cost savings for their customers. Writing in a leading trade journal, one analyst predicted, “We are going to see more and more refined approached to recycling and remanufacturing (cartridges) in the coming months and year s…Both corporate and individual consumers are becoming habituated to it. They have simply come to expect recycling as an option, even for smaller cartridges at lower price points.” Imprimante’ s Monterrey plant began its cartridge recycling program in 2005 . The plant’s recycling process consisted of a sequence of operations carried out almost entirely by hand, with the help of hand tools and a simple machine. The investment proposal called for replacing this process with new automated machinery from Germa ny that cost an e stimated MXP3.5 million (approximately EUR220,000) fully installed. As described in the project summary, Imprimante -Mexico expected to realize substantial savings in labor and materials almost immediately. Though the proposed expenditure was relatively small, Imprimante required a discounted cash flow analysis for all such investments in it s newer foreign markets and a review by corporate headquarters in St. Ouen . Arnaud was assigned to perform an analysis of the investment proposal and make an “up or down” recommendation to his superior by Wednesday morning. Imprimante S.A. Imprimante S.A. is a global manufacturer of printers, copiers, fax mac hines, and other documen t production equipment. The company also provided consulting and docume nt outsourcing services , with after -sales service contracts constituting about 18% of overall revenue. Company 2 Source: Novancia, 2015 sales for 2008 were projected to be EUR3.35billion, down from 2007 due to global recession. Operating profit was expected to be EUR61.2million in 2008, and the company projected a small net loss for the year. Exhibit 1 presents selected consolidated financial data for Imprimante . Imprimante ’s low profitability was typical of the industry in 2008; all of its competitors were similarly affected by the recession. One bright spot in the company’s outlook, however, was its growth in several emerging markets, including the so -called BRIC economies of Brazil, Russia, India, and China. Imprimante had been a global firm for years, but did not move aggre ssively into emerging markets until 2003 -04. This was later than some of its competitors. On one hand, this meant Imprimante’ s market share lagged in some markets. On the other hand, Imprimante avoided some of its competitors’ earlier mistakes. The co mpany’s international operations were conducted primarily through a large network of subsidiaries, which operated mostly medium -sized regional factories in which printers, copiers, and other products were manufactured to suit local taste s. Imprimante cond ucted business in 28 countries around the world, with operations consisting of manufacturing facilities, small research labs, as well as sales and marketing subsidiaries. In 2008, subsidiaries outside the European Union recorded about half of Imprimante ’s sales and generated slightly less than 40% of pretax income. Imprimante competed in a relatively mature market, and its chief competitors were both established multinational companies — some of which had developed their consulting and other after -sales serv ices businesses to a higher level than had Imprimante — as well as smaller players serving niche markets. While Imprimante marketed and sold its products across the full spectrum of industries, it had enjoyed particular success in the financial services, he alth care, and government sectors. Operations i n Monterrey: Imprimante -Mexico According to Imprimante ’s CEO Alain Belmont, “We were attracted to Mexico for the same reason we built operations in Brazil and other emerging markets. We wanted to diversify our operations and believed we needed to establish a strong presence in places besides Europe and the United States.” He added: “Certainly there is risk (in these countries), but their economies are dynamic and Imprimante must be present. You can see ou r competitors feel the same way.” A key characteristic of Imprimante’s printing and imaging products was their durability, which Imprimante ’s execu tives felt conveyed a competitive advantage in emerging economies where Imprimante positioned equipment as of fering a lower total cost of ownership. In particular, the company’s marketing material claimed a working life of 10 months longer than its closest competitor, with 30% lower service costs. CEO Belmont observed: “We demonstrate to our customers that we h ave a local presence and we are the lowest total -cost provider. This creates loyalty and solid market positions in Mexico and other of our newer markets.” 3 Source: Novancia, 2015 The manufacturing facility in Monterrey was located near a small research and design facility, also owned by Imprimante . While many product specifications for Imprimante ’s equipment were formulated at the corporate offices in St Ouen , France, it was customary for regional subsidiaries to conduct fine -tuning research and design activity to tailor the pr oduct more closely to local consumers’ preferences. Thus, it was common for a popular printer or fax machine whose basic design was conceived in St. Ouen to be ”localized” for size, color, weight, and/or range of features by local design staff. Most of t he products produced in the Monterrey plant were sold in Mexico and were distributed through large office -product retailers, department stores, as well as small specialty shops. Manufacturing inputs were source d locally, and virtually all of the plant’s e mployees were Mexican citizens. In the summer of 2008 gross output at Imprimante -Mexico was running at only about 80% of planned capacity. Nevertheless, plant records indicated that there was a sizable increase in demand for recycle d printer and toner ca rtridges. Imprimante -Mexico’s Programa de Reciclaje de Cartuchos (Cartridge Recycling Program) was started in 2005 to provide low -cost recycling services to all its distributors and customers. Under the terms of users’ service contracts, when cartridges r eached the end of their useful lives, the y could be returned to the Imprimante facility in exchange for a significant discount on the purchase of a like number of new cartridges.

Imprimante pledged to recycle and remanufacture all returned toner and printer cartridges. Imprimante -Mexico also had voiced its support for political efforts to pass legislation that would mandate recycling of printing cartridges used by most Mexican businesses and government offices. In 2009, the company planned to launch a pilo t program to recycle selected competitors’ cartridges. As the number of cartridges returned for recycling increased, Imprimante -Mexico management needed to hire and train more employees to carry out the hole -piercing, drilling, vacuuming, and toner/ink ev acuation required to recycle cartridges. “It’s taking more and more of my payroll to handle recycling,” said Beatrice Ernesto, the Monterrey plant manager. “We’re happy to see the cartridges coming back in, but the extra volume will become a problem when other operation s return to full capacity.” Cost Savings from the Proposed New Equipment The new equipment could process the Monterrey plant’s projected volume using four employees rather than ten, resulting in savings of both direct labor and training cos ts. Under very favorable circumstances, only three workers would be required. It would also eliminate some human error, which currently resulted in cracked or damaged cartridges which had to be destroyed rather than reused. The new equipment would occup y significantly less space in Monterrey’s over -crowded plant; this space wou ld be freed up for other productive uses. It would also require only minimal maintenance expenditures compared to the equipment it replaced, and no significant change in working c apital. Exhibit 2 compares projected operating data for the existing recycling process and the proposed automated process, assuming future Mexican inflation of 7% per year. The new equipment would have a useful life of 10 years and would be depreciated un der the straight -line method for both tax and financial reporting purposes. Salvage value was likely to 4 Source: Novancia, 2015 equal disposal costs at the end of the useful life. The manual equipment being replaced was very simple and, properly maintained, would last many more years. In June 2008 it had a book value and tax basis of MXP250,000 and three years of straight -line depreciation remaining. However, its market value was thought to be lower, at about MXP 175,000. After considering Imprimante ’s consolidated tax positi on, Arnaud determined that his analysis would use Mexico’s federal corporate ta x rate of 35%. Real GDP growth in Mexico was 4.2% in 2004 — the year in which Imprimante built is Monterrey plant. By 2006, Mexico’s real GDP growth had risen to 5.1%, but subseq uently dropped substantially as the global recession arrived. Other macroeconomic data in Mexico, including bond yields, bank lending rates, and the consumer price index exhibited similar patterns in recent years. Exhibit 3 shows selected macroeconomic and f inancial market data for Mexico. Arnaud had yet to decide whether to perform the discounted cash flow analysis in euros or pesos, or indeed, whether NPV would be affected by the choice of currency. Imprimante ’s euro hurdle rate for such a project, if unde rtaken in France, would be 8%. However, borrowing costs in France and Mexico were clearly different : French banks’ prime rate for euro loans was 4.99%, while the rate in Mexico on short -term peso loans was about 8.10%. Longer -term peso - denominated corpor ate bonds were yielding 9.21%, compared with long -term euro -denominated corporate issues at 4.75%. The spot exchange rate on June 23 was MXP15.99/EUR. Many analysts were on record predicting a real depreciation of the peso against both the USD and the EUR over the next five years. For example, one international business publication noted “(Mexico’s) rising external financing requirement and the fading impact of the US stimulus package can only increase pressure on Mexico’s currency.” The article went on to forecast a rise in the MXP/EUR rate to 20.00 by 2011 and upwards of 25.00 in 2013 -18. Selected macroeconomic and financial market data for France are presented in Exhibit 4. 5 Source: Novancia, 2015 Exhibit 1 - Imprimante SA - Selected Consolidated Financial Data (millions of EUR, except as noted) 2008 2007 2006 2005 2004 Sales 3,345.3 3,561.8 3,576.9 3,078.9 3,050.3 Operating income 61.2 189.2 172.9 163.5 149.9 Net income (0.7) 85.7 61.2 88.2 85.7 Total assets 2,809.3 2,764.9 2,899.6 3,129.0 2,445.5 Total debt 660.6 616.0 613.0 578.4 504.2 Equity 782.6 819.5 829.7 941.0 865.1 Capital expenditures 87.6 100.0 95.1 240.9 234.1 Depreciation 195.0 209. 4 214.0 152.9 155.0 R&D expenditures 17.5 20.0 19.0 48.2 46.8 Earnings/share (euros) (0.0) 1.0 0.7 1.1 1.0 Dividend/share (euros) 0.7 0.7 0.7 0.7 0.7 Return on sales (%) 0.0% 2.4% 1.7% 2.9% 2.8% Return on equity (%) -0.1% 10.5% 7.4% 9.4% 9.9% 6 Source: Novancia, 2015 Exhibit 2 - Comparison of Projected Operating Data for Different Recycling Processes (thousands of MXP, except as noted) Assumes 7% Inflation in Mexico Tax Rate: 0.35 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Projected Operating Costs, Ma nual Process Unit volume (000s) 496 546 600 660 660 660 660 660 660 660 Materials 564,816 664,788 782,456 920,951 985,417 1,054,396 1,128,204 1,207,178 1,291,681 1,382,099 Direct Labor 1,115,184 1,312,572 1,544,897 1,818,343 1,945,627 2,081,821 2,227,549 2,383,477 2,550,321 2,728,843 Overhead 1,680,000 1,797,600 1,923,432 2,058,072 2,202,137 2,356,287 2,521,227 2,697,713 2,886,553 3,088,611 Total 3,36 0,000 3,774,960 4,250,785 4,797,366 5,133,181 5,492,504 5,876,980 6,288,368 6,728,555 7,199,553 Materials/unit 1.1387 1.2 176 1.3041 1.3954 1.4931 1.5976 1.7094 1.8291 1.9571 2.0941 Direct labor/unit 2.2484 2.4040 2.5748 2.7551 2.9479 3.1543 3.3751 3.6113 3.8641 4.1346 Projected Operating Costs, New Automatic Process Unit vo lume (000s) 496 546 600 660 660 660 660 660 660 660 Materials 542,223 638,197 751,158 884,113 946,001 1,012,221 1,083,076 1,158,891 1,240,014 1,326,815 Direct Labor 524,136 616,909 726,101 854,621 914,445 978,456 1,046,948 1,120,234 1,198,651 1,282,556 Overhead 1,566,211 1,675,846 1,793,155 1,918,676 2,052,983 2,196,691 2,350,460 2,514,993 2,691,042 2,879,415 Total 2,632,570 2,9 30,952 3,270,414 3,657,410 3,913,429 4,187,368 4,480,484 4,794,118 5,129,707 5,488,786 Materials/unit 1.0932 1.1689 1.2519 1.3396 1.4333 1.5337 1.6410 1.7559 1.8788 2.0103 Direct labor/unit 1.0567 1.1299 1.210 2 1.2949 1.3855 1.4825 1.5863 1.6973 1.8161 1.9433 7 Source: Novancia, 2015 Exhibit 3 - Selected Macroeconomic and Financial Market Data for Mexico Year Consumer Pric e Inflation (%) Real GDP Growth (%) Year -end Spot Exchange Rate (MXP/EUR) 2000 9.5% 6.6% 9.4 2001 6.4% -0.3% 9.5 2002 5.0% 0.9% 10.4 2003 4.3% 1.4% 12.9 2004 4.7% 4.2% 15.3 2005 3.3% 3.2% 13.3 2006 4.1% 5.1% 14.4 2007 3.8% 3.3% 16. 2 Source: Mexico Country Reports, EIU Date Short -term Bank Lending Rate JPMorgan Mexico 7 -10 Year Corporate Bonds 10-year Government Bonds 31-Mar -06 7.78% 8.20% 8.47% 30-Jun -06 7.68% 9.35% 9.06% 30-Sep -06 7.50% 8.22% 8.24% 31-Dec -06 7.60% 7.42% 7.42% 31-Mar -07 7.68% 7.50% 7.58% 30-Jun -07 7.82% 7.68% 7.19% 30-Sep -07 7.77% 7.86% 7.82% 31-Dec -07 8.00% 8.17% 8.08% 31-Mar -08 7.94% 7.42% 7.49% 30-Jun -08 8.10% 9.21% 9.12% Sources: Bank of Mexico, Thomson Datas tream, Global Financial Data 8 Source: Novancia, 2015 Exhibit 4 - Selected Macroeconomic and Financial Market Data for France Year Consumer Price Inflation (%) Real GDP Growth (%) Year -end Spot Exchange Rate (MXP/EUR) 2000 1.7% 4.2% 9.4 2001 1.6% 2.1% 9.5 2002 1.9% 1.1% 10.4 2003 2.1% 0.5% 12.9 2004 2.3% 2.3% 15.3 2005 1.7% 1.9% 13.3 2006 1.7% 2.4% 14.4 2007 1.5% 2.3% 16.2 Source: France Country Reports, EIU Date Short -term Bank Lending Rate JPMorgan France 7 -10 Year Corpo rate Bonds 10-year Government Bonds 31-Mar -06 3.08% 3.73% 3.79% 30-Jun -06 3.27% 4.03% 4.08% 30-Sep -06 3.63% 3.69% 3.72% 31-Dec -06 4.07% 3.96% 3.98% 31-Mar -07 4.42% 4.08% 4.11% 30-Jun -07 4.69% 4.60% 4.62% 30-Sep -07 4.91% 4.36% 4.41% 31-Dec -07 5.13% 4.34% 4.42% 31-Mar -08 4.81% 4.00% 4.11% 30-Jun -08 4.99% 4.75% 4.81% Sources: Thomson Datastream, CEIC, Global Financial Data