Adjusted present value

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The Adjusted Present Value (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 of business valuation is especially effective when an LBO case is considered since the company is loaded with an extreme amount of debt, so tax shield is substantial.

Technically, an APV valuation model would look pretty much the same as a standard DCF model. However, instead of WACC, cash flows would be discounted at the cost of assets, 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.

APV definition:

Base-case NPV + Sum of PV of financing side effects

Example:

Initial Investment = 1'000'000

Expected Cashflow = 95'000 (Perpetuity)

Opportunity cost of capital: 10%

t=35%

project partly financed by 400'000

NPV = -1'000'000 + 95'000/0,10 = -50'000

PV (Tax Shield) = .35 x 400'000 = 140'000

APV = -50'000 + 140'000 = 90'000

[edit] See also

• Discounted cash flow
• Weighted Average Cost of Capital