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CA Final · Advanced Financial Management · International Financial Management

Which statement about the adjusted present value (APV) approach for evaluating a foreign subsidiary project of an Indian parent is correct?

APV first computes the project's NPV as if it were entirely equity financed, then adds the present value of financing side effects such as interest tax shields, concessional host-government loans and subsidies. This separates operating value from financing benefits, which is useful for foreign projects.

  1. AIt values the project as if all-equity financed, then adds the present value of financing side effects such as concessional loans and tax shieldsCorrect
  2. BIt discounts all cash flows at the weighted average cost of capital adjusted for country risk only
  3. CIt ignores subsidised financing since only operating cash flows matter
  4. DIt requires the parent to use the host country's risk-free rate for all cash flows

Explanation

APV = base-case NPV (unlevered cost of equity) + PV of financing side effects, such as interest tax shields and subsidised loans. Option 3 is wrong since side effects are explicitly added.

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