An american hotel builds a small hotel in Mexico. The investment represents the costs of the building and furnishings. We also needs to assume that:
- The exchange rate at time of investment on Dec 31, 2016, is 10 pesos = $1.
- Peso suffers a steady decline in value. The average exchange rate during 2017 is 12.5 pesos = $1.
- The investment (total assets) in the hotel is 30,000,000 pesos.
- The operating income of the hotel in 2017 is 6,000,000 pesos.
- Management wants to compare ROI of Mexico to U.S.A. (ROI = 17%). There is no depreciation.
Q1) What is the ROI in pesos?
Q2) What is the ROI in U.S. dollars? Which exchange rates should be used in the calculation?