Editing Adjusted present value (section)

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|+'''APV formula'''
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APV = Unlevered NPV of Free Cash Flows and assumed Terminal Value + NPV of Interest Tax Shield and assumed [[terminal value (finance)|Terminal Value]]:
The discount rate used in the first part is the return on assets or return on equity if unlevered;
The discount rate used in the second part is the cost of debt financing by period.
In detail:

EBIT – Taxes on EBIT '''= Net Operating Profit After Tax (NOPAT)'''

+ Noncash items in EBIT – Working Capital changes – Capital Expenditures and Other Operating Investments '''=Free Cash Flows'''

Take Present Value (PV) of FCFs discounted by Return on Assets % (also Return on Unlevered Equity %) + PV of terminal value '''=Value of Unlevered Assets'''

+ Excess cash and other assets '''=Value of Unlevered Firm''' (i.e., firm value without financing effects or benefit of interest tax shield)

+ Present Value of Debt's Periodic Interest Tax Shield discounted by Cost of Debt Financing % '''=Value of Levered Firm'''

– Value of Debt '''=Value of Levered Equity or APV'''

The value from the interest tax shield assumes the company is profitable enough to deduct the interest expense. If not, adjust this part for when the interest can be deducted for tax purposes.
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'''Adjusted present value''' ('''APV''') is a [[Valuation (finance)|valuation method]] introduced in 1974 by [[Stewart Myers]].<ref>[http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.468.1912&rep=rep1&type=pdf Myers, S.C. (1974), “Interactions of Corporate Financing and Investment Decisions – Implications for Capital Budgeting”, Journal of Finance (March), pp. 1–25]</ref> The idea is to value the project as if it were all [[Corporate finance#Equity capital|equity financed]] ("unleveraged"), and to then add the [[present value]] of the [[tax shield]] of [[Corporate finance#Debt capital|debt]] – and other side effects.<ref>Dirk Jenter (2003). [https://ocw.mit.edu/courses/sloan-school-of-management/15-402-finance-theory-ii-spring-2003/lecture-notes/lec14awaccapv.pdf WACC and APV], [[MIT OCW]] course-notes</ref>

Technically, an APV valuation model looks similar to a standard [[Discounted cash flow|DCF model]]. However, instead of [[weighted average cost of capital|WACC]], cash flows would be discounted at the unlevered [[cost of equity]], and [[tax shield]]s at either the [[cost of debt]] (Myers) or following later academics also with the unlevered cost of equity.<ref>{{cite tech report |first=Fernández |last=Pablo |title=Levered and Unlevered Beta |url=http://www.iese.edu/research/pdfs/DI-0488-E.pdf |number=488 |institution=University of Navarra |date=May 2006}}</ref> APV and the [[Valuation using discounted cash flows|standard DCF approaches]] should give the identical result if the [[capital structure]] remains stable.<ref>{{Cite web|title=A tool kit for discounted cash flow valuation: consistent and inconsistent ways to value risky cash flows|url=https://www.researchgate.net/publication/321710507}}</ref>

According to Myers, the value of the levered firm (Value levered, Vl) is equal to the value of the firm with no debt (Value unlevered, Vu) plus the present value of the tax savings due to the tax deductibility of interest payments, the so-called value of the tax shield (VTS). Myers proposes calculating the VTS by discounting the tax savings at the [[Cost of capital|cost of debt]] (Kd).<ref>{{Cite web|title=FIRM VALUATION: COST OF CAPITAL AND APV APPROACHES|url=https://pages.stern.nyu.edu/~adamodar/pdfiles/valn2ed/ch15.pdf|url-status=live|archive-url=https://web.archive.org/web/20040421125046/http://pages.stern.nyu.edu:80/~adamodar/pdfiles/valn2ed/ch15.pdf |archive-date=2004-04-21 }}</ref> The argument is that the risk of the tax saving arising from the use of debt is the same as the risk of the debt.<ref>{{Cite journal|last1=Massari|first1=Mario|last2=Roncaglio|first2=Francesco|last3=Zanetti|first3=Laura|date=2007-09-10|title=On the Equivalence between the APV and the wacc Approach in a Growing Leveraged Firm|url=https://onlinelibrary.wiley.com/doi/10.1111/j.1468-036X.2007.00392.x|journal=European Financial Management|volume=14 |language=en|pages=070915221011002––|doi=10.1111/j.1468-036X.2007.00392.x|s2cid=153719371|issn=1354-7798|url-access=subscription}}</ref>

The method is to calculate the NPV of the project as if it is all-equity financed (so called "base case").<ref name=":0">{{Cite news|title=APV -- Base Case|work=Harvard Business Review|url=https://hbr.org/1997/05/using-apv-a-better-tool-for-valuing-operations|access-date=2021-12-20|issn=0017-8012}}</ref> Then the base-case NPV is adjusted for the benefits of financing. Usually, the main benefit is a [[tax shield]] resulted from tax deductibility of interest payments.<ref name=":0">{{Cite news|title=APV -- Base Case|work=Harvard Business Review|url=https://hbr.org/1997/05/using-apv-a-better-tool-for-valuing-operations|access-date=2021-12-20|issn=0017-8012}}</ref> Another benefit can be a subsidized borrowing at sub-market rates. The APV method is especially effective when a [[leveraged buyout]] case is considered since the company is loaded with an extreme amount of debt, so the tax shield is substantial.{{Citation needed|date=December 2021}}