Typical textbook advice is that the choice between the home currency and foreign currency approaches is irrelevant in the valuation of an overseas project, and to accept/reject decisions. You will see in this chapter that this advice is based on the implicit assumption that FX rates are correctly valued. That is, the home and foreign currency approaches to cross-border valuation yield consistent results only if the current and forecasted spot FX rates are intrinsic FX rates (consistent with equilibrium).
This chapter also shows that if the time-0 spot FX rate is misvalued, or if FX rate forecasts differ from expected intrinsic spot FX rates, the home and foreign currency approaches result in different valuations ...
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