Explore BrainMass
Share

International Finance

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

1. Hilton International is considering investing in a new Swiss hotel. The required initial investment is $1.5 million (or SFr 2.38 million at the current exchange rate of $0.63 = SFr 1). Profits for the first ten years will be reinvested, at which time Hilton will sell out to its partner. Based on projected earnings, Hilton's share of this hotel will be worth SFr 3.88 million in ten years.

a. What factors are relevant in evaluating this investment?

b. How will fluctuations in the value of the Swiss franc affect this investment?

c. How would you forecast the $:SFr exchange rate ten years ahead?

© BrainMass Inc. brainmass.com October 16, 2018, 9:11 pm ad1c9bdddf
https://brainmass.com/business/foreign-exchange-rates/international-finance-175263

Solution Preview

a. What factors are relevant in evaluating this investment?

ANSWER. Hilton should focus on the real dollar value of future cash flows, or

3,880,000e10/[(1+k)(1+ius)]^10

where e10 is the nominal dollar value of the Swiss franc in ten years, ius is the average annual rate of U.S. inflation over the next ten years, and k is Hilton's real required return for this project. That is, the SFr 3.88 million expected to be received in ten years should first be converted to nominal dollars, then into real dollars, and finally discounted at the real required return. This present ...

Solution Summary

This posting provides a detailed solution to the student's question.

$2.19
Similar Posting

International Finance and Transactional Exposure.

Can someone help me out with two questions that I am struggling with comprehending. Can you provide in layman's term:

1) How does hedging help in limiting a company's transactional exposure?

2) How does a currency swap help in limiting transactional exposure?

View Full Posting Details