Adjusted Present Value Template

Adjusted Present Value Template

This adjusted present value template guides you through the calculation of APV starting with the value of the unlevered project and PV of debt financing.

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Adjusted Present Value (APV) is used for the valuationValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions of projects and companies. It takes the net present value (NPV)NPV FormulaA guide to the NPV formula in Excel when performing financial analysis. It's important to understand exactly how the NPV formula works in Excel and the math behind it. NPV = F / [ (1 + r)^n ] where, PV = Present Value, F = Future payment (cash flow), r = Discount rate, n = the number of periods in the future, plus the present value of debt financing costsCost of DebtThe cost of debt is the return that a company provides to its debtholders and creditors. Cost of debt is used in WACC calculations for valuation analysis., which include interest tax shieldsInterest Tax ShieldsThe term interest tax shield refers to the reduced income taxes brought about by deductions to taxable income from a company's interest expense., costs of debtCost of DebtThe cost of debt is the return that a company provides to its debtholders and creditors. Cost of debt is used in WACC calculations for valuation analysis. issuance, costs of financial distress, financial subsidies, etc.

The Adjusted Present Value for Valuation

The APV method to calculate the levered value (VL) of a firm or project consists of three steps:

Step 1

Calculate the value of the unlevered firm or project (VU), i.e. its value with all equity financing. To do this, discount the stream of FCFsFree Cash Flow (FCF)Free Cash Flow (FCF) measures a company’s ability to produce what investors care most about: cash that's available be distributed in a discretionary way. by the unlevered cost of capitalUnlevered Cost of CapitalUnlevered cost of capital is the theoretical cost of a company financing itself for implementation of a capital project, assuming no debt. Formula, examples. The unlevered cost of capital is the implied rate of return a company expects to earn on its assets, without the effect of debt. WACC assumes the current capital (rU).

Step 2

Calculate the net value of debt financing (PVF), which is the sum of various effects, including:

•       PV(interest tax shields) – our main focus
•       PV(issuance costs)
•       PV(financial distress costs)
•       PV(other market imperfections)

Step 3

Sum up the value of the unlevered project and the net value of debt financing to find the adjusted present value of the project. That is, VL = VU + PVF.

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