ACCA P4考试: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).
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