I am in a state of confusion that what are the advantages and disadvantages of using cross database queries within the same SQL Server instance?
One thing I can thin
If you will read article here:https://dba.stackexchange.com/questions/692/sql-server-2008-cross-database-performance-on-same-physical-machine-and-server you will realize that you will not have performance penalty because query optimizer will be only one. Difference will be only if you will be use cross-instance queries.In this case, query will be analyzed by separate query analyzers on both instances.
Possible issues that can be in your case are related to management.Read how to manage cross-database ownership here: http://msdn.microsoft.com/en-us/library/ms188676.aspx
There is no performance penalty.
There are issues around