Page 206 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 14

Adjusted Present Value (APV)

10.1 When is APV relevant?

 APV must be used if the gearing ratio of the company changes as a result of the
project and its finance.

 Note: The main reason we cannot use a WACC is that we do not know the final
new gearing level – even if we know the finance to be issued, the gearing will
be affected by the project NPV (which we are trying to calculate!).

 APV is particularly recommended when there are complex funding
arrangements (e.g. subsidised loans).

10.2 Step 1: Base case NPV

 Ignore gearing! – discount project cash flows using a suitable, ungeared ke.

 Steps.

1. Find a listed company in the same industry as the project.

2. Take the equity beta of the listed 'donor' company and 'de-gear' it.

3. Insert this de-geared beta (do not re-gear!) into CAPM to find a project

Ke (do not re-gear!).

4. Use this ungeared Ke to calculate a project NPV.

196