International Pooch is headquartered in Canada, but is considering the construction of a plant in Japan. If they use the home currency approach to calculating the NPV, they will:
1) Convert all dollar cash flows into yen;
2) Discount the cash flows at the firm's required return for Japanese denominated cash flows;
3) Compute the NPV in yen.

Question

Quizplus · Accepted Answer

The home currency approach involves converting all foreign currency (yen in this case) cash flows into the home currency (Canadian dollars) at the current exchange rate, discounting those cash flows at the firm's required return for home currency denominated cash flows, and computing the NPV in the home currency, not in yen.

International Pooch Is Headquartered in Canada, but Is Considering the Construction