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When you invest in different projects in different countries, estimated cash flows are definitely in different currencies. Do we use different discount rates for discounting cash flows denominated in different currencies? State "Yes/No" with reason.
There are two ways in which we can handle this situation.
1)Convert the all cashflows into home currency using exchange rate calculated by purchasing power parity or interest rate parity formulas and use the risk adjusted discount rate which we use to evaluate project in home country.
2)Use the discount rate for the project of foreign country for evaluation of the specific project and after that converts the cashflow using spot rate..
The two will give nearly same answer exept for some basis points difference..
I agree with the answer of Mr Mohammad Iqbal Abubaker. Answer has covered all aspects of NPV for international projects. Thank You!
