Adjusted present value (APV) is the sum of the net present value (NPV) of a project and the present value of debt financing costs. The debt financing costs include things like interest tax shields, costs of debt issuance, costs of financial distress, financial subsidies. An APV analysis is widely used in the valuation of highly leveraged projects because of two main reasons: - Projects financed with debt usually have a lower cost of capital, resulting in positive NPVs. - Raising debts provide companies with interest tax shield which is beneficial to the businesses. To calculate APV of a project, follow the following three steps:
- Discount the free cash flows of the project by the unlevered cost of capital to determine the value of the unlevered project.
- Sum up the present values of all debt financing costs to find the net value of debt financing.
- Add the value of unlevered project and net value of debt financing to calculate the APV of the project.