Adjusted Present Value (APV)

Adjusted present value (APV) is a valuation method that takes into account the value of a company's interest tax shields. It is calculated by adding the present value of the company's future free cash flows to the present value of the tax shields.

The APV formula is:

APV = PV of future free cash flows + PV of tax shields

The PV of future free cash flows is calculated by discounting the company's future free cash flows to the present using the company's weighted average cost of capital (WACC).

The PV of tax shields is calculated by discounting the present value of the company's future interest tax shields to the present using the company's WACC.

The interest tax shield is the amount of tax that the company saves by deducting its interest payments from its taxable income.

The APV is a more accurate valuation method than the traditional net present value (NPV) method because it takes into account the value of the company's interest tax shields.

The NPV method does not take into account the value of the company's interest tax shields, which can lead to an inaccurate valuation.

The APV method is more commonly used for valuing companies that have a high level of debt or that are expected to generate a high level of interest tax shields.

The APV method is also more commonly used for valuing companies in industries that are subject to high levels of taxation.

The APV method is a more comprehensive valuation method than the NPV method, and it is more likely to provide an accurate valuation of a company.