iii) Although consistent valuation is possible using any of the three methods when the firm maintains a constant leverage ratio, the adjusted present value and flows to equity methods are cumbersome, and the adjusted discount rate method is preferred.
iv) When the asset has a finite life but the schedule of outstanding debt is known with certainly, there are no adjusted discount rate expressions for either the overall cost of capital or the cost of equity, so the adjusted present value method must be used in this case.
The adjusted present value, adjusted discount rate and flows to equity valuation methods represent three different approaches to valuing firms and other assets.
The results indicate that the adjusted present value of the project increases as project risk rises.
The average adjusted present value of the riskless project in Panel B is $751.
The figures are computed by dividing the change in the present value of contributions to the pension fund by the adjusted present value of the project.
Mature Plan, Fully Funded at Outset Project Risk (standard deviation of annual change in project cash flows) Adjusted present value of the 753.
For the valuation of the step-up induced tax benefits, two alternative approaches are meaningful: a standalone valuation, which only calculates the net present value of the tax shield by applying a discount rate which includes the tax benefit of debt with respect to the financing mix, or a valuation via an additional term in the framework of the Adjusted Present Value method (Myers (1974), where the debt tax benefit is already accounted for in the second term of the APV-Formula.
The Adjusted Present Value method has been gaining importance in the recent past, not only among theorists, but also for practitioners.
Case 1 refers to a valuation of the step-up induced depreciation benefit in the context of an Adjusted Present Value approach.
Locke, "Property Investment Analysis Using
Adjusted Present Values," The Appraisal Journal (July 1990): 373-378.
Choosing Between Capital Cash Flows and
Adjusted Present Value Methods
