Question

Explain the main differences between estimating the NPVs for a foreign project and pure a domestic project.

Answer 1

Differences between estimation of net present value for foreign project and domestic project should be as follows-

A. Esimation of discounted rate is highly important because discounted rate in foreign cash flows will be adopted with discounting rate of the foreign countries where as discounting rate in the domestic cash flow should be adopted of the interest rate of the domestic countries.

B. Cash flows in the foreign countries will be adjusted after exchange rates fluctuations and cash flows in the domestic countries will not be accounting any kind of foreign exchange fluctuations.

C. Risk adjustment into the discounting rate will also be a major concern in foreign products whereas in domestic products only the domestic risk are to be considered.

so these are the differences when we are valuing a project in accordance with net present value in regard to domestic project and foreign project.