Simple English definitions for legal terms
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APV: A way to figure out how much something is worth by adding together its current value and the value it gains from how it is paid for. This helps people decide if it is a good investment or not.
APV stands for adjusted present value. It is a financial term used to determine the value of an asset by adding its present value to the value added by capital-structure effects.
Present value is the sum of money that, with compound interest, would amount to a specified sum at a specified future date. It is also known as present worth. For example, if you want to have $10,000 in five years, the present value of that amount would be less than $10,000 because of the time value of money.
Adjusted present value takes into account the value added by capital-structure effects. This means that it considers the impact of financing decisions on the value of an asset. For example, if a company takes on debt to finance a project, the adjusted present value would reflect the impact of that debt on the project's value.
Net present value is another financial term that is related to APV. It is the present value of net cash flow from a project, discounted by the cost of capital. This value is used to evaluate the project's investment potential.
Let's say a company is considering investing in a new project that will cost $100,000. The project is expected to generate net cash flow of $30,000 per year for five years. The cost of capital for the company is 10%. To calculate the net present value of the project, we would discount the net cash flow by the cost of capital and add up the present values. The net present value of the project would be:
NPV = (-$100,000) + ($30,000 / 1.1) + ($30,000 / 1.1^2) + ($30,000 / 1.1^3) + ($30,000 / 1.1^4) + ($30,000 / 1.1^5) = $3,853.68
This means that the project has a positive net present value and is a good investment for the company.