SECTION B: WRITTEN RESPONSE [70 marks] QUESTION 1 HAS THREE PARTS (A, B, C) FOR A TOTAL OF 30 MARKS. An Australia-based manufacturing firm is considering relocating part of its production lines to Dongguan, China. The expected start-up cost is CNY 25 million and this production facility will cease after 5 years (i.e. zero salvage value at the end of year 5). The projected free cash flows (FCF) generated by the Dongguan facility are given in the table below. As the manager of the Australian firm, you intend to use the DCF method to analyze the feasibility of this project. Exhibit 3: Expected FCF Generated by the Dongguan Facility Year CNY (in millions) 0 -25 1 5.6 2 6.4 3 7.3 4 8.6 5 9.2 Exhibit 4: Additional Data Spot exchange rate (CNY/AUD) Australia's inflation rate (annual) China's inflation rate (annual) Australia's cost of capital 4.6800 1.5% 1.6% 8.0% (1A) Using the Relative PPP method, forecast the future spot exchange rates for CNY/AUD for the next 5 years. (Show all your workings to receive full credit. Write down your answers accurate to 4 decimal places.) [10 marks] (1B) Based on your exchange rate forecasts in question (1A), compute the NPV in AUD. (Show all your workings to receive full credit. Write down your answers accurate to 4 decimal places.) [15 marks] (1C) Given the current uncertainty from the trade war between the US and China, the chief investment officer (CIO) of the Australian firm thinks the economic/political risk needs to be accounted for. Propose a solution to the CIO. [5 marks]