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Adjusted Present Value
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Terms in this set (6)
APV means?
Adjusted Present Value
APV VS NPV
Although similar to NPV, but uses the cost of equity as a discount rate ( rather than WACC). Seperate adjustments are made for the effects financing. (The tax advantages of debt)
WACC calculation
WACC= [Dividends + Interest(1-t)]/ (M.V Equity +M.V debt )
Two approaches of APV
1) Benefits gained from the project itself
2) Benefits arising from the finance method
Methodology of APV first step
1) Projects net cash flows evaluated first as if fully financed by equity
2) Keu = [(equity x Keg) +(debt xkd)(1-t)]/ equity + debt(1-t)
3)This formula is used to determine the ungeared discount rate for a company
4)The ungeared discount rate can then be used to calculate the NPV of the project.
Methodology of APV second step
The benefit from the financing method used (i.e tax relief on new debt finance) can be added to the NPV to give the Adjusted Present Value.
If the APV is positive, the project should be accepted on the financial grounds
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