ACCA P4考試：Adjusted Present Value (APV)

1 Use

APV is used to appraise investments whose financing package disturbs the firm's existing capital structure (i.e. financial risk). It can also deal with a change in business risk.

It is often described as the "divide and conquer" approach in that it separates the "base" benefits of the project from its "side-effects".

APV is based on Modigliani and Miller's assertion that the value of a geared firm = value of an ungeared firm + present value of tax shield. Applied at a project level:

APV = Project value if all equity financed + Present value of the tax shield from any debt ± Present value of other side effects

2 Approach

(a) Calculate the operational value of the project as if it were being financed only by equity—"Base Case NPV".

(b) Calculate the present value of the "side-effects".

For example:

— value of the tax shield on interest on debt finance for the project;

— issue costs from raising external finance;

— value of government subsidies (e.g. loans received below commercial interest rates).

3 Critique of APV

Critics of APV point out that by valuing a project as a standalone entity it ignores the impact of a change in capital structure upon the value of the firm's existing operations.

The correct procedure would therefore be as follows:

1. Value the firm pre-project at its existing WACC.

2. Revalue the firm with the new project included, at the firm's post-project WACC.

3. NPV of project = 2 − 1 − cost of investment.

This type of stepped approach to valuation is particularly important is the case of large strategic investments (e.g. mergers and acquisitions).