Adjusted NPV is the NPV of project after considering the effect of financing. Two adjustment are relavant here (a) Issue cost
(b) Tax shield on interest on debt
In other words The Net Present Value (NPV) of a project if financed solely by equity plus the Present Value (PV) of any financing benefits (the additional effects of debt).
Adjusted Present Value (APV) is the net present value of a project if financed solely by ownership equity plus the present value of all the benefits of financing.
Steps in computation:
Step 1: Compute NPV on assumption that the project fully financed by equity.(Discount at cost of equity)
Step 2: Compute issue cost( It is already in today's value no need to discount)
Step 3: Compute tax saved on interest payable
Step 4: Compute PV of Tax Saved (at pretax cost of debt)
Step 5:ANPV=Base case NPV-Issue cost+PV of Tax Shield (Step1-Step 2+Step 4)
(b) Tax shield on interest on debt
In other words The Net Present Value (NPV) of a project if financed solely by equity plus the Present Value (PV) of any financing benefits (the additional effects of debt).
Adjusted Present Value (APV) is the net present value of a project if financed solely by ownership equity plus the present value of all the benefits of financing.
Steps in computation:
Step 1: Compute NPV on assumption that the project fully financed by equity.(Discount at cost of equity)
Step 2: Compute issue cost( It is already in today's value no need to discount)
Step 3: Compute tax saved on interest payable
Step 4: Compute PV of Tax Saved (at pretax cost of debt)
Step 5:ANPV=Base case NPV-Issue cost+PV of Tax Shield (Step1-Step 2+Step 4)
