Adjusted Present Value (APV)

Adjusted Present Value (APV) is a valuation method that calculates the value of a project or company by determining its net present value (NPV) as if it were all-equity financed, and then adjusting for the value of any financing side effects, such as tax shields from debt. APV separates the impact of financing decisions from the core operations of the business, providing a clear view of how financing affects the overall value.

Example

If a company values a project at $1 million using NPV without considering financing, and the tax shield from debt financing adds $200,000 in value, the APV would be $1.2 million.

Key points

• A valuation method that adds the effects of financing to the NPV of a project.

• Separates the value of core operations from the effects of financing.

• Useful for projects with complex capital structures or significant debt.

Quick Answers to Curious Questions

Why is Adjusted Present Value (APV) used?

APV is used to more accurately value a project by accounting for the impact of financing decisions separately from the core business operations.

How does APV differ from traditional NPV?

APV separates the value of a project from its financing, while traditional NPV combines them, potentially overlooking the impact of financing strategies.