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HBS Toolkit

LICENSE AGREEMENT

HBS Toolkit License Agreement Harvard Business School Publishing (the Publisher) grants you, the individual user, limited license to use this product. By accepting and using this product, you agree to the terms of service described below. Terms You accept that this product is intended for your use, and you will not duplicate in any form or manner, electronic or otherwise, copies of this product nor distribute this product to anyone else. You recognize that the product and its content are the sole property of the Publisher, and that we have copyrighted the product. You agree that the Publisher is not responsible for any interruption of service or malfunction that is a consequence of the Internet, a service provider, personal computer, browser or other software or hardware components. You accept that there is no guarantee that this product is totally error free. You further understand and accept that the Publisher intends to provide reliable information but does not guarantee the accuracy or completeness of any information, and is not responsible for any results obtained from the use of such information. This license is effective until terminated, when the license or subscription period ends without renewal, or when you destroy this product and any related documentation. The Publisher may terminate your license without notice if you fail to comply with the conditions set forth in this agreement, and may pursue any other legal recourse.

Copyright 1999 President and Fellows of Harvard College

Adjusted Present Value Valuation


Contents Introduction Analysis

INTRODUCTION

This sheet Data input and output report sheet

Overview The Adjusted Present Value method is conceptually similar to WACC. Cost of capital is calculated taking into account the benefits of the interest tax shield, enabling the manager to discount expected cash flows and to estimate their present value. Under the APV method, however, all cash flows to capital are discounted at a rate determined by the asset beta that is, the discount rate that would apply if the company were financed entirely through equity. Then, the value of the tax shield is calculated separately and added to the NPV of the investment. The APV tool adds an additional feature, allowing the user to consider a company with a tax loss carryforward benefit. Since this benefit results in a direct reduction of taxes, it adds to the value of the company, but some of this benefit must be discounted since it may not all be applied in a given year. The model applies all of the allowable benefit (up to the total tax bill) in a given year until it has been fully utilized.

To start using the tool, remove the sample data from the tool using the Show/Hide Sample Data option under the HBS Menu

Note About Using Internet Explorer The default setting in Internet Explorer is to open these tools in the Explorer application instead of Excel. We recommend against this and provide directions in the Help section of the HBS Toolkit web site to change this default behavior.

HBS Menu Show/Hide Sample Data: Show Calculator: Show/Hide Celltips: Print Sheet with Celltips: Set Zoom: Visit Web Links: About HBS Toolkit:

Displays or removes sample entries Launches Windows calculator Toggles in/out red Celltips in documented cells Prints Celltip documentation on current sheet Provides quick access to 80%, 100%, and 125% zoom levels Links to HBS Toolkit website, Toolkit Glossary, and Toolkit Feedback, as well as HBS and HBS Publishing web sites Launches the about box for the HBS Toolkit

Jon B. DeFriese MBA `00 and Chad Ellis, MBA `98 developed this software under the supervision of Professor Steven Wheelwright as the basis for class discussion rather than to illustrate either the effective or ineffective handling of an administrative situation.

Copyright 1999 President and Fellows of Harvard College

Adjusted Present Value Valuation

BASE CASH FLOW

Assumptions

Asset Beta RiskFree Risk premium Discount Rate Long-Term Rate Starting Debt Debt Interest Rate Tax Loss Carryforward

$ $

0.7 6.00% 7.80% 11.46% 5.00% 150 8.00% 50

Numbers of Columns to show Year Earnings Before Interest & Taxes Tax EBIT at rate of: Profit After Tax Capital Expenditures Depreciation Change in Working Capital Free Cash Flow (Net Cash Flow) Net Present Value of Cash Flows Net Present Value of Perpetuity NPV Cash Flows + Perpetuity 40.00% 1998 100 40 60 30 20 20 30 87 515 603 1999 134 54 80 40 28 27 39 2000 134 54 80 40 28 27 39

Interest Tax after interest Profit after Tax and Interest Free Cash Flow (Net Cash Flow) after interest Ending Debt Tax Shield Value Additional Tax Shield Discounted Value Tax Loss Carryforwards Tax Loss Carryforward Discounted Value Adjusted Present Value

12 35 53 23 127 5 10 35 45 658

10 50 74 33 94 4

8 51 76 35 59 3

15

Copyright 1999 President and Fellows of Harvard College

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