What is the adjusted present value – APV?
Adjusted present value is the net present value (NPV) of a project or business if it is financed only by equity plus the present value (PV) of any financial benefit, which are the additional effects of debt . Taking into account the financial benefits, APV includes tax protections such as those provided by deductible interest.
The formula for APV is
TheAdjusted current value = firm value not raised + NEor:NE = net debt effectTheThe
When the net debt effect includes:
- Interest tax shield created when companies have debts because the interest on the debt is tax deductible. It is calculated as interest expense multiplied by the tax rate. But he only understands the interest tax shield used during this year.
- Then, the current value of the tax shield used must be calculated. The current value of the tax shield is: (tax rate * debt * interest rate) / interest rate.
How to calculate the adjusted present value – APV
To determine the adjusted current value:
- Find the value of the business without leverage.
- Calculate the net worth of debt financing.
- Add up the value of the non-leveraged project or company and the net worth of debt financing.
How to calculate APV in Excel
An investor can use Excel to build a model to calculate the net present value of the business and the present value of the debt.
What does the adjusted current value tell you?
The adjusted present value makes it possible to show an investor the advantages of tax shields resulting from one or more tax deductions from interest payments or from a subsidized loan at below-market rates. For leveraged transactions, APV is preferred. In particular, leveraged buyout situations are the most effective for using the adjusted present value methodology.
The value of a debt-financed project can be greater than a simple equity-funded project because the cost of capital decreases when leverage is used. Using debt can actually turn a negative NPV project into a positive one. NPV uses the cost of equity as the discount rate, while APV uses the weighted average cost of capital as the discount rate.
Key points to remember
- The VPA is the NPV of a project or business if it is funded solely by equity plus the present value of the financial benefits.
- APV shows an investor the advantage of benefiting from tax protections against tax deductible interest payments.
- It is best to use it for leveraged transactions, such as leveraged buyouts, but it is more of an academic calculation.
Example of using the adjusted current value – APV
In a financial projection where a NPV of the base case is calculated, the sum of the present value of the tax shield is added to obtain the adjusted present value.
For example, suppose a multi-year projection calculation reveals that the present value of free cash flow (FCF) from ABC plus the terminal value is $ 100,000. The corporate tax rate is 30% and the interest rate is 7%. Its $ 50,000 debt has a tax shield of $ 15,000, or ($ 50,000 * 30% * 7%) / 7%. Thus, the adjusted present value is $ 115,000, or $ 100,000 + $ 15,000.
The difference between APV and discounted cash flows – DCF
Although the adjusted present value method is similar to the discounted cash flow (DCF) methodology, the adjusted current cash flow does not take into account taxes or other financing effects in a weighted average cost of capital (WACC) or other adjusted discount rates. Unlike the WACC used in discounted cash flows, adjusted present value seeks to measure the effects of the cost of equity and the cost of debt separately. The adjusted present value is not as common as the discounted cash flow method.
Limits on using the adjusted present value – VPA
In practice, the adjusted present value is not used as much as the discounted cash flow method. It is more of an academic calculation, but it is often considered to lead to more precise assessments.
Learn more about adjusted present value – APV
To find out more about calculating the adjusted present value, see the Investopedia guide to calculating the net present value.