Adjusted present value

[swatiraohnlu]

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. It was first studied by Stewart Myers, a professor at the MIT Sloan School of Management and later theorized by Lorenzo Peccati, professor at the Bocconi University, in 1973.

The method is to calculate the NPV of the project as if it is all-equity financed (so called base case). Then the base-case NPV is adjusted for the benefits of financing. Usually, the main benefit is a tax shield resulted from tax deductibility of interest payments. Another benefit can be a subsidized borrowing at sub-market rates. The APV method is especially effective when a leveraged buyout case is considered since the company is loaded with an extreme amount of debt, so the tax shield is substantial.

 

[swatiraohnlu]

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 either the cost of debt(Myers) or following later academics also with the unlevered cost of equity.

 

[dimpy.handa]

Adjusted present value (APV) is similar to NPV. The difference is that is uses the cost of equity as the discount rate (rather than WACC). Separate adjustments are made for the effects financing (e.g. the tax advantages of debt).

As usual with DCF models of this sort, the calculation of adjusted present value is straightforward but tedious.