Question

Perth International Co., an Australian multinational company, forecasts 67 million Australian dollars (A$) earnings next year (i.e., year-one). It expects 56 million Chinese yuan (CNY), 43 million Indian rupees (INR) and 35 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.2527/CNY, A$0.0389/INR and A$0.6307/MYR.

Perth International anticipates a 5.70 per cent increase in the year-one income of its subsidiaries in year-two. It has information that the current 5.74 per cent, 7.10 per cent, 13.69 per cent and 11.85 per cent nominal interest rate in Australia, China, India and Malaysia, respectively, will remain the same in the next three years. Due to foreign currency higher nominal interest rate, subsidiaries will invest 27 per cent, 58 per cent and 45 per cent of their year-two earnings in China, India and Malaysia, respectively, for next year. Subsidiaries will remit their remaining incomes (i.e., after investment) to the Australian parent. Perth International believes in the Purchasing Power parity with considering a 2.07 per cent real interest in Australia, China, India and Malaysia to calculate the expected foreign currency value against the Australian dollar for year-two based on the year-one exchange rates A$/CNY, A$/INR, and A$/MYR.

What is the total Australian dollar (A$) cash flow for year-two? (enter the whole number with no sign or symbol)

Answer 1

Hence, the final cash flow in year 2 is 765 million australian dollars - The amount mentioned in excel are in millions.

Kindly comment is the question is to be solved with exchange rate on year 2 using purchase parity theory (Formula is;

Real exchange rate = Nominal interest rate * (Foregin currency / Home currency)