Adjusted Present Value

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Definition: Adjusted Present Value

Adjusted Present Value is a slight variation of the NPV approach for valuation. NPV approach has an inherent assumption that the project/business is financed solely through equity while the APV approach considers the impact of debt such as the tax shield that it provides.

It adds to the NPV, the PV of the tax shield that would be obtained by the debt financing.

APV = NPV + PV of financing benefit

In this approach the NPV is calculated by discounting at the Cost of equity while the financing benefit is discounted at the cost of debt.


Consider a project with perpetual cash flows

Investment = Rs. 200,000

Cash flow each year = Rs. 19,000

Cost of Equity = 10%

Cost of Debt = 5%

Interest on Debt = 5%

Tax Rate = 40%

NPV = -200,000 + (19,000/10%) = -10,000

Tax Shield = (0.05*200000*0.4) = 4,000

PV of tax shield = 4000/5% = 80,000

APV = -10,000 + 80,000 = Rs. 70,000

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