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CA Final · Advanced Financial Management · International Financial Management

A Mumbai-based manufacturer is evaluating a plant in Vietnam funded partly by a concessional loan from a government development agency. Which statement correctly describes how the Adjusted Present Value (APV) method treats this project?

APV first computes the base-case NPV of the foreign project assuming all-equity financing, then adds the present value of financing side effects such as concessional loan benefits and tax shields. This separates operating value from financing value, unlike a single WACC-based NPV.

  1. AIt discounts all project cash flows at a single weighted average cost of capital that already reflects the concessional loan
  2. BIt values the project as if all-equity financed and then adds the present value of financing side effects such as the concessional loan benefitCorrect
  3. CIt ignores financing side effects and only adjusts the cash flows for expected exchange rate movements
  4. DIt values the project at the foreign country's risk-free rate and deducts the present value of the loan repayments

Explanation

APV separates the investment decision from the financing decision. Base-case NPV is computed at the all-equity cost of capital, and the PV of side effects (interest subsidy, tax shield, issue costs) is added. Option A describes the WACC-based NPV method, which is the approach APV avoids.

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