Adjusted Present Value (APV)

Written By
Paul Tracy
Updated June 30, 2021

What is APV?

Adjusted present value (APV) refers to the net present value (NPV) or investment adjusted for the interest and tax advantages of leveraging debt provided that equity is the only source of financing.

How APV Works

A company may finance a project or investment using shareholders' equity alone (i.e., without leveraged, or borrowed, cash flows). Under these circumstances, the company repays associated debts using the unleveraged cash flow from shareholder's equity. As a result, the company is entitled to significant tax deductions on the interest component of these payments.

These tax deductions put the company at an advantage as far as the project's ultimate profitability, because they help to increase the project's bottom line. For this reason, a company can analyze such a project's profitability using the adjusted present value (APV). This measure reflects the project or investment's NPV adjusted for the tax benefits from interest obligations on outstanding debts associated with the project or investment.  

To illustrate, suppose company XYZ invests $1,000 in a project, $800 of which is equity and $200 of which is debt. The annual cash flow year after a year is projected to be $146. The tax rate is 25%, and both the interest and cost of debt are each 7%, while the return on equity is 15%.

APV = NPV + PV of debt financing advantages

NPV = -$1000 init. invest. + ($146 ann. ret. / 0.15 ret. on eq.) = -$26.67

PV of debt fin. adv. = (0.25 tax rate ($200 debt * 0.07 debt int.)) / (1 – (1 / (1 + 0.07 debt cost)))

= $3.5 / 0.0655

= $53.44

APV = -$26.67 NPV + $53.44 PV of debt fin. adv.

APV = $26.77

In this instance, the tax advantages to company XYZ for financing with equity alone make the project profitable as reflected in the positive APV. Were it not for these advantages, the project would not have been accepted on the basis of its negative NPV.

Why APV Matters

The APV measures the profitability of a project or investment in which tax deductions apply on the basis of debt financing through an un-leveraged equity cash flow. For this reason, the APV can be a useful measure for investments and projects with high levels of debt that would be transferred to the acquiring company if accepted. 

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Adjusted Present Value (APV).
Be the first to ask a question

If you have a question about Adjusted Present Value (APV), then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Adjusted Present Value (APV), then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Adjusted Present Value (APV)

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms