Problem 3
Now I will explain why the NPVs of these two approaches are different. For Approach A, NPV is calculated using cash flows denoted in Peso and interest rate in Mexico and then transferred into Euro at the lowest exchange rate in 2008, which is 15.99 MXN/EUR. This is equivalent to using a constant exchange rate of 15.99 to transfer Peso into Euro every year.
On the other hand, for approach B, cash flows are transferred into Euro every year and NPV is calculated using cash flows denoted in Euro and interest rate in France.
Since Peso is depreciating across time, cash flows are transferred into Euro using a series of increasing exchange rates. Cash flows in Approach B are lower than those in Approach A. Therefore, NPV denoted in Euro for Approach B is higher than that for Approach A.
Problem 4
If the inflation in Mexico is 3%, which is the same as that in France, the nominal interest rate in Mexico will be the same as that in France according to International Fisher Effect. So the discount rate will be the same.
According to the Interest Rate Parity, the exchange rate between these two currencies will stay the same due to the same nominal interest rate. Thus, the cash flows denoted in Euro for these two approaches will be same.
Since both cash flows and discount rate are the same for these two approaches, NPV will be the same. You can see the calculations in this spread sheet. Both approaches give you the same NPV if both countries have the same inflation rate.
Problem 5
If Peso depreciates, we should definitely take this into consideration. As you can see from what Hongchen mentioned and the result of problem 3, if peso drops in value, the NPV obtained from these two approaches will differ.
Addition Thought
Since the change of the exchange rate will affect the valuation of a foreign investment, we want to find a way to lock our profit. One method