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Adjusted Present Value (APV)
Module: advanced financial management P4 (AFM P4)
60 Documents
Students shared 60 documents in this course
University: Association of Chartered Certified Accountants
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19/12/2019 Adjusted Present Value (APV)
https://kfknowledgebank.kaplan.co.uk/adjusted-present-value-(apv)- 1/3
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Contents [Hide]
1 Adjusted Present Value (APV)
1.1 Calculation
1.1.1 Basic principle
1.1.2 The investment element (Base case NPV)
1.1.3 The financing impact
1.2 Further complications
1.2.1 Subsidised/cheap loans
1.2.2 Debt capacity
1.3 Advantages and disadvantages of APV
Adjusted Present Value (APV)
Adjusted Present Value (APV) is an approach to investment appraisal that should be used if the if the financial risk of
the company is expected to change significantly as a result of undertaking a project. A discussion of different
approaches to investment appraisal can be found here.
This approach separates the investment element of the decision from the financing element and appraises them
independently.
APV is also recommended when there are complex funding arrangements (e.g. subsidised loans).
Calculation
Basic principle
The APV method evaluates the project and the impact of financing separately. Hence, it can be used if a new project
has a different financial risk (debt-equity ratio) from the company, i.e. the overall capital structure of the company
changes.
APV consists of two different elements:
The investment element (Base case NPV)
The project is evaluated as though it were being undertaken by an all equity company with all financing side effects
ignored. The financial risk is quantified later in the second part of the APV analysis. Therefore:
ignore the financial risk in the investment decision process
use a beta that reflects just the business risk, i.e. βasset.
The financing impact
Adjusted Present Value (APV)
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Adjusted Present Value (APV)