Net Present Value and Fiat
Team members: Inaki aizbitarte, Urko Ortega, Davide Rotta, Simone Zou, Pasquale Reitano INTRODUCTION The company that we have decided to consider for this analysis is the Italian factory Fiat spa. Fiat is a global group with a clear focus in the automobile sector. Through its various businesses, it designs, produces and sells automobiles and related components and production systems.
Fiat was one of the founders of the European car industry and today, as a result of its partnership with Chrysler, has a manufacturing and commercial base of sufficient scale to compete as a global automaker. The Fiat group after the entered in the American market with the acquisition of the quota of majority of Crysler is found again of forehead, over that to a new market, also to a new coin with all those that can be the risks over how commercial also those financial. Nevertheless, right now, the exchange rate between these two currencies is 1 euro =1. 118 dollars so in order to make easier the case we will use 1. 31 to round it up. The politics of the Group related to the management of the risk of change foresee, as a rule, the coverage of the future commercial flows that you/they will have bookkeeping demonstration within 12 months and of the orders acquired (or committed in progress) to put aside from their expiration. It is reasonable to believe that the relative effect of coverage suspended in the Reserve of cash flow hedge will primarily be in relief to economic account in the following exercise.
Net Present Value and Fiat Essay Example
The Group is exposed to consequential risks by the variation of the rates of change, that you/they can influence on its economic result and on the value of the clean patrimony. Particularly: Whereas the societies of the Group sustain costs denominated in different currencies by those of denomination of the respective proceeds, the variation of the rates of change can influence the Result operational of such societies. In 2012, the general amount of the commercial flows directly statements to the risk of change you/he/she has been equivalent to 10% around of the billing.
Gives the last budget of Fiat the total billing of 83 billion of euro therefore the figure that we will go to analyze is equal to 830 million of Euro. CASE STUDY The Group, which operates in numerous markets worldwide, is naturally exposed to market risks stemming from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to the difference in geographic location between the Group’s manufacturing activities and its commercial activities, resulting in cash flows from exports denominated in currencies that differ from those associated with production activities.
The Group uses various forms of financing to cover funding requirements for its industrial activities and for financing customers and dealers. Moreover, liquidity for industrial activities was also principally invested in variable-rate or short-term financial instruments. The Financial Services companies normally operate a matching policy to offset the impact of differences in rates of interest on the financed portfolio and related liabilities. Nevertheless, changes in interest rates can result in increases or decreases in revenues, finance costs and margins.
Consistent with its risk management policies, the Group seeks to manage risks associated with fluctuations in currency and interest rates through the use of financial hedging instruments. Despite such hedges being in place, sudden fluctuations in currency or interest rates could have a material adverse effect on the Group’s business prospects, earnings and/or financial position. Our analysis in relation what could be a real need for the company wich we may be faced as being an exporter of products in USA where there is a a different currency than the euro will have to face the uncertainties of the market.
We will simulate three dfferent scenarios where there will be a fluctuation of the exchange tax, after that we will describe what did happen in 2000 when GM acquired 20% ownership of the Italian car manufacturer doing a mistake with the value of NPV. SCENARIOS Here we start to analyze a scenario where the exchange increase of 10%. We have the exchange rates 1,31 dollars/euros for 830 millions of dollars. Here we have an opposite scenarios where the exchange rates decrease of 10%. We have the exchange rates 1,31 dollars/euros for 830 millions of dollars
In these two sceneries we have been able to observe as a small variation of the 10 percent can influence so much a firm that bewitches so many millions of dollars like Fiat. Here in this example we have a simulation of what could happen if Fiat want fix the tax of change for the next 6 months. FIAT use a foreign subsidiary in US that will be sending it 10 million dollars in six months. FIAT will need to swap the dollar for the dollars it will be receiving from the sub. In other words, they have a long dollars and short euros.
It is short euros because it will need to purchase them in the near future. The company can wait six months and see what happens in the currency markets or enter into a currency forward contract. To accomplish this, it can short the forward contract, or dollar, and go long the euro. The company goes to a Bank and receives a quote of 1. 2483 in six months. This allows FIAT to buy euros and sell dollars. Now they will be able to turn its 10 million dollars into 10 million/1. 2483 =8,010,895 euros in six months. Six months from now if rates are at 1. ,FIAT will be ecstatic because it will have realized a higher exchange rate. If the rate has increased to 1. 2, they would still receive the 1. 2483 it originally contracts to receive from THE BANK, but in this case, they will not have received the benefit of a more favorable exchange rate. NET PRESENT VALUE We can define Net Present Value like the difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.
For example, an investment of $1,000 today at 10 percent will yield $1,100 at the end of the year; therefore, the present value of $1,100 at the desired rate of return (10 percent) is $1,000. The amount of investment ($1,000 in this example) is deducted from this figure to arrive at net present value which here is zero ($1,000-$1,000). A zero net present value means the project repays original investment plus the required rate of return. A positive net present value means a better return, and a negative net present value means a worse return, than the return from zero net present value.
It is one of the two discounted cash flow techniques (the other is internal rate of return) used in comparative appraisal of investment proposals where the flow of income varies over time. Connected with Fiat we can do an example of like a uncorrect evaluation of NPV would be able to failed a company. In 2000 General Motors (GM) acquired 20% ownership of the Italian car manufacturer Fiat for a price of $2. 4 billion. As with most acquisitions, the initial outlook painted by the companies was rosy. They formed joint ventures in Europe and Latin America, and these ventures saved the companies a combined $2. billion over the first five years of the agreement. It would seem that, with savings like this, the partnership was working out pretty well, but Fiat began losing money. For example, the company lost about $1. 7 billion in 2002, and $1. 3 billion in 2004. The 2002 losses were particularly hard on Fiat, and the company almost went bankrupt. The Italian Government stepped in and helped Fiat, but GM stayed out. As a result, GM’s stake in Fiat was cut to 10%. In early 2005 GM wrote off its remaining interest in Fiat, meaning that GM put a value of zero on its Fiat investment.
Unfortunately for GM, under the terms of the original deal, Fiat had the option to force GM to buy the remaining 90% of the company. The deal would include Fiat’s $10 billion in debt. If GM valued its 10% stake in Fiat at nothing, how do you think GM’s management felt about buying the other 90%? The answer came in February 2005. GM paid Fiat $2 billion just to avoid having to take over Fiat, thereby giving a whole new meaning to the phrase ‘fiat money’. More recently GM was given assistance by the US Government to save the company from failing.