Adjusted present value

Adjusted present value (APV) adds the base-case NPV of a project as if all-equity financed to the present value of financing side-effects, mainly the interest tax shield. It is preferred over WACC-DCF when leverage changes materially.

ByHoang TruongUpdated July 3, 2026

FrameworkCapital structure theory

What it is

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Adjusted present value keeps two sources of value visible separately. The project is worth €150,000 as a base-case, all-equity NPV. Financing it partly with debt adds a further €25,000, mainly the present value of the interest tax shield on borrowing at 6% with a 25% tax rate. Adding the two gives an APV of €175,000.

The formula

LaTeX

APV = NPV_u + PV_f

Variables

$A P V$: adjusted present value of the project or firm
$N P V_{u}$: base-case NPV assuming all-equity financing, discounted at the unlevered cost of equity
$P V_{f}$: present value of financing side-effects, principally the interest tax shield less any issuance costs and expected distress costs

For perpetual debt under the Modigliani–Miller assumption, PV_f = t × D. APV is preferred over constant-WACC DCF when leverage changes substantially over the project's life.

LaTeX

\text{Annual tax saving} = t \times r_d \times D

Variables

$t$: corporate tax rate (decimal)
$r_{d}$: pre-tax cost of debt (decimal)
$D$: market value of outstanding debt

The annual interest payment is r_d × D; the tax authority forgoes t of each unit of interest, so the annual saving is t × r_d × D. Discounting this stream gives the PV of the tax shield component in APV.