Explain the methodology of both the home and the foreign currency approaches to analyzing the net present value of a project which has cash flows in a foreign currency.

Home currency approach: With the home currency approach, all cash flows are converted to equivalent cash flows in Canadian dollars given the expected exchange rate for each of the various time periods. The Canadian dollar cash flows are then discounted using the applicable Canadian discount rate to compute the NPV of the project.
Foreign currency approach: With the foreign currency approach, the net present value of the foreign cash flows is computed using the applicable foreign discount rate. The net present value is then converted into Canadian dollars using the spot exchange rate. The net present value of the project is the same under either method.