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CA Final · Advanced Financial Management · International Financial Management

Under the Adjusted Present Value (APV) approach to evaluating an overseas project, which of the following is added to the base-case NPV computed using the all-equity cost of capital?

In APV, the base-case NPV, discounted at the all-equity cost of capital, is adjusted by adding the present value of financing side effects, such as interest tax shields and subsidised or concessional loan benefits. Financing is valued separately, so the WACC is not used for discounting project cash flows.

  1. APresent value of financing side effects such as interest tax shield and concessional loan benefitsCorrect
  2. BPresent value of the terminal exchange loss
  3. CParent's weighted average cost of capital
  4. DBook value of the subsidiary's assets

Explanation

APV = base-case NPV (discounted at the unlevered cost of equity) plus PV of financing side effects such as tax shields on debt and subsidised financing. WACC is not used in APV because financing effects are valued separately.

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