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APV Business Valuations

Adjusted Present Value Method for Business Valuations

While the net present value method for business valuations is widely used and extremely sound, the Adjusted Present Value method is often considered more accurate and simple to use. In addition, the method favors specific types of transactions over others and is much more effective at getting to your firms core value, especially if the company is:

  • Highly Leveraged
  • Incurring net operating losses (NOLs)
  • Planning changing its capital structure or
  • The effective tax rate is changing

This method is often highly effective at taking into account the benefit of the company’s tax shields and ongoing concerns as capital structure tends to change over time. Many academics and working practitioners tend to favor the adjusted present value method over other methods due to the fact that it is more reflective of reality.

While this method is certainly better in most real-world scenarios because it takes into account potential fluctuations in tax rates and capital structure, it also makes for a much more difficult and time-consuming process. However, because the WACC method in the NPV calculation takes into account a constant capital structure going forward, in many instances using the APV method is often more accurate for finding a valuation more reflective of your company overall.