The first step in the APV method is to calculate ________ using the project's cost of capital if it were financed ________ leverage.
A) the market value of free cash flows; with
B) the future value of free cash flows; without
C) the present value of free cash flows; without
D) the book value of free cash flows; with

Question

Quizplus · Accepted Answer

The first step in the APV (adjusted present value) method is to calculate the present value of free cash flows using the project's cost of capital if it were financed without leverage. This value represents the unlevered value of the project. The APV method then accounts for the value of any financing side effects by adjusting this unlevered value for the tax shields and costs of debt financing. Therefore, the correct answer is C) the present value of free cash flows; without leverage.

The First Step in the APV Method Is to Calculate