Adjusted present value

All you want to know about Adjusted present value

Adjusted Present Value (APV) is a business valuation method. APV is the net present value of a project if financed solely by ownership equity plus the present value of all the benefits of financing. Firstly, it was studied by Stewart Myers, a professor at the MIT Sloan School of Management and then, in 1973, it was theorized by Lorenzo Peccati. Usually, the main benefit is a tax shield resulted from tax deductibility of interest payments. Another one can be a subsidized borrowing. The APV method is especially effective when an LBO case is considered since the company is loaded with an extreme amount of debt, so the tax shield is substantial.

Technically, an APV valuation model looks pretty much the same as a standard DCF model. However, instead of WACC, cash flows would be discounted at the unlevered cost of equity, and tax shields at the cost of debt. APV and the standard DCF approaches should give the identical result if the capital structure remains stable.

1 APV formula
2 Example
- 2.1 Given data
- 2.2 Calculation

APV formula

APV value = Base-case NPV + PV of financing effect

Example

Given data

Initial investment = 1 000 000
Expected cashflow = 95 000 in perpetuity
Unlevered cost of equity = 10%
Cost of debt = 5%
Actual interest on debt = 5%
Tax rate = 35%
Project is financed with 400 000 of debt and 600 000 of equity; this capital structure is kept in perpetuity