Evaluating International Projects An Adjusted Present Value Approach
Evaluating International Projects An Adjusted Present Value Approach
Donald R Lessard
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This is because they result in changes in the relative prices of inputs or outputs sold or sourced in different countries. Further, the deviations themselves are likely to reflect changes in relative prices within countries, with important implications for cash flows. It is much more likely that firms can forecast trends in relative prices of certain inputs and outputs as opposed to overall deviations from PPP since relative price changes hinge on micro- level changes in productivity, scarcity,... or substitutahLUty — Roll [197 9J, for example, finds no evidence that deviations from PPP persist or can be forecast. 14. of the good or factor in question. Furthermore, given the evidence that PPP holds quite well over the long run, these relative price shifts are likely to result in larger impacts on project values than divergences from PPP. These relative price shifts can be incorporated readily by changing project cash flows in either (9a) or (9b), but (9b) is more transparent since it abstracts from offsetting inflation and exchange rate changes.
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