APV
Adjusted Present Value
Short definition
Adjusted present value discounts the project as if all-equity financed, then adds financing side effects such as the shield and distress. It is used when the debt profile breaks WACC’s constant-weight assumption.
Detailed explanation
In LBOs, project finance and amortising debt, WACC changes every year; APV values the shield on the debt schedule. The shield exists only up to tax capacity; distress is a separate minus.
WACC is a practical shortcut for a stable target structure. When structure changes year by year, APV is more transparent. In the same world, with the same assumptions, they should give the same value.
Why it matters for the CFO
Acquisition finance and investment incentives hide the shield inside WACC. APV shows which year the shield is cash.
How it is calculated
APV = NPV_özkaynak_gibi (WACC’siz) + PV(vergi kalkanı) − PV(sıkıntı vb.)
Unlevered cash is discounted at r_U, then shield cash at the appropriate rate. Distress and issue costs are separate PVs.
Variables in the formula
- NPV_U: PV of incremental cash as if all-equity financed
- PV(kalkan): PV of cash tax saved on deductible interest
How to read it
Discounting the shield at Kd assumes debt is certain; discounting at the unlevered cost treats the shield as risky. The choice follows whether the debt is tied to the project.
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Definitions are educational. They are not investment, credit or tax advice.