Adjusted Present Value (APV)

Description

The adjusted present value is a modified version of the Net Present Value
(NPV) that incorporates the benefits and costs of borrowing. It is commonly
used to determine the value of a debt-financed project or a company.

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Adjusted Present Value (APV)
Input Data
Risk-free Rate of Return 3%
Asset Beta 1.5
Required Return of the Market 12%
Cost of Debt 8%
Interest rate on debt financing 4%
Tax rate 40%
Debt Amount $25,000
Loan Term (in Years) 5

Output

Step 1: Find the unlevered cost of equity

Unlevered Cost of Equity 16.5%

Step 2: Find the unlevered project' value

Timeline
Period 0 1 2 3 4 5
Free Cash Flow (FCF) ($50,000) $25,000 $22,500 $32,500 $14,500 $18,500
Net Present Value (NPV) $21,531

Step 3: Find the net value of the debt financing

Timeline
Period 0 1 2 3 4 5
Interest expense $1,000 $815 $623 $424 $216
Tax Shield $400 $326 $249 $169 $86
PV of Tax Shield $370 $280 $198 $125 $59
Net Value of Debt Financing $1,031

Step 4: Calculate the adjusted present value

Adjusted Present Value (APV) $22,563