1. **State the problem:** Calculate the total Australian dollar (A$) cash flow for year-two from subsidiaries in China, India, and Malaysia after investments and currency adjustments. 2. **Given data:** - Year-one income increase: 5.46% (so year-two income = year-one income \times 1.0546) - Nominal interest rates: Australia = 5.44%, China = 7.75%, India = 13.08%, Malaysia = 10.43% - Real interest rates: 2.11% for all countries - Investment proportions: China = 26%, India = 51%, Malaysia = 39% - Remaining income remitted to Australia = (1 - investment proportion) 3. **Use the International Fisher Effect (IFE) formula to find expected exchange rate change:** $$\frac{E_{t+1}}{E_t} = \frac{1 + i_{foreign}}{1 + i_{home}}$$ where $i_{foreign}$ and $i_{home}$ are nominal interest rates of foreign country and Australia respectively. 4. **Calculate expected exchange rate changes:** - For China: $$\frac{E_{CNY}}{E_{AUD}} = \frac{1 + 0.0775}{1 + 0.0544} = \frac{1.0775}{1.0544} \approx 1.0217$$ - For India: $$\frac{E_{INR}}{E_{AUD}} = \frac{1 + 0.1308}{1 + 0.0544} = \frac{1.1308}{1.0544} \approx 1.0729$$ - For Malaysia: $$\frac{E_{MYR}}{E_{AUD}} = \frac{1 + 0.1043}{1 + 0.0544} = \frac{1.1043}{1.0544} \approx 1.0473$$ 5. **Calculate year-two income for each subsidiary (assuming year-one income = 1 unit for simplicity):** $$Income_{year2} = 1 \times 1.0546 = 1.0546$$ 6. **Calculate remitted income in foreign currency after investment:** - China: $1.0546 \times (1 - 0.26) = 1.0546 \times 0.74 = 0.7804$ - India: $1.0546 \times (1 - 0.51) = 1.0546 \times 0.49 = 0.5168$ - Malaysia: $1.0546 \times (1 - 0.39) = 1.0546 \times 0.61 = 0.6433$ 7. **Convert remitted income to Australian dollars using expected exchange rates:** - China: $0.7804 \div 1.0217 = 0.7639$ - India: $0.5168 \div 1.0729 = 0.4817$ - Malaysia: $0.6433 \div 1.0473 = 0.6144$ 8. **Calculate total Australian dollar cash flow:** $$Total = 0.7639 + 0.4817 + 0.6144 = 1.8600$$ 9. **Final answer:** The total Australian dollar cash flow for year-two is approximately **2** (rounded whole number).