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Q: Discuss why a company may prefer to use the adjusted present value (APV) method, rather than the net present value (NPV) method
A: Adjusted present values (APVs) separate out a project’s cash flows and allocate a specific discount rate to each type of cash flow, dependent on the risk attributable to that particular type of cash flowMy question how APV method separate out CF and allocate specific discount rates if APV calculated based on Base NPV+ Financial impact taken into account (issue costs, tax reliefs).
What I am missing here?Thank you
Always in calculation questions in the exam, we discount all the project flows at the all equity cost of capital and discount the tax saving on debt at the risk free rate (or the return on debt – either is acceptable).
The reason is the the tax savings on debt have a different level of risk from the returns from the project.
In principle (although it will never be required in calculation questions) if different project flows had different levels of risk then we could split them and discount the different flows at different rates.
In ordinary NPV calculations we just discount everything at the same WACC.
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