What factors are relevant in evaluating this investment?
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 10 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 10 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 10 years ahead?