International Finance
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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?
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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 ...
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