QUESTION FIVE (20 MARKS) a) Assume that Big Inc, a US-based company is considering the establishment of a subsidiary in Malaysia. The initial investment required by the parent is $6,000,000. If the project is undertaken, Big would terminate the project after three years. Geologic's cost of capital is 15%, and the project is of the same risk as its existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows that the Malaysian subsidiary will generate over the project's lifetime in Malaysia ringgit (MYR): Year 2 3 Cash inflow (MYR) 12,000,000 12,000,000 12,000,000 The current exchange rate of the Malaysia ringgit is $0.2436/MYR. Big's exchange rate forecast for the Malaysia ringgit over the project's lifetime is listed below: Year 1 2 3 Exchange rate ($/MYR) 0.2273 0.2326 0.2410 i) Should the Malaysian project be accepted? Calculate the net present value (NPV) in dollar term to justify your answer. (8 marks) ii) Big is uncertain of the cost of capital. Would Big accept the project if the cost of capital is 18%, instead of 15%? (Hint: Use NPV method to make the decision) (6 marks) iii) Assume that MYR6,000,000 of the cash flow in year 3 represents the salvage value. Big is not completely certain that the salvage value will be this amount. Determine the break- even salvage value, assuming that cost of capital is 15%. (6 marks)