Suppose that Ariel expects a significant real depreciation of MXN against EUR; specifically, the exchange rate is expected go from MXN 15.99/EUR in Year 0 to MXN 22/ EUR in Year 1 and MXN 25/ EUR in Year 2. The exchange rate is then expected to stay at MXN 25/ EUR afterwards. For simplicity, assume that the expected inflation rates are 3% in both MXN and EUR. 

What is the effect of this real depreciation of MXN on the calculated NPV under the two approaches? Do the two approaches still give the same answer? Why or why not?

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The real depreciation of MXN against EUR will have an impact on the calculation of the net present v... View the full answer