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Hello
Ok, I just want to clarify: Adjusted NPV is not meant to give the same result as WACC? It is not just another back end way of doing the calculation, the result is meant to be different??
I took your example 2 and did the calculation using WACC and the NPV was higher than adjusted present value adding the tax relief on interest (your answer on the lecture)I just want to be sure that the answer is expected to be different. If so which is the better calculation to use? Or is it, like you say only for large gearing changes?. I mean why not use WACC on large changes either then?
Thanks
Hi Richard,
Yes apv will be different in most cases as cost different to that of wacc.
Wacc is used when a company’s capital structure either remains unchanged or insignificantly changes.
Wacc is also a collective average of the cost of debt & equity together.
Therefore it wouldn’t be appropriate to use it when the structure changes significantly or if equity & debt are valued separately which is the assumption with apv.
Which one to use depends on the company’s capital structure, apv is used particularly when a subsidised loan exists.
For appraising standard low risk projects wacc can be be used but for risky projects where a greater proportion of debt is used, risk adj wacc or apv would be suitable.
Best of luck.
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