Stop Losing Marks on APV in the ACCA AFM exam by Expert Tutor

Struggling with APV questions in ACCA AFM? You're not alone! In this video, we break down the latest ACCA examiner report to reveal the FOUR most common mistakes students make when calculating Adjusted Present Value (APV) – and how to avoid them.

Whether you're missing out on easy marks due to incorrect discount rates, tax shield errors, or misunderstanding financing effects, this video provides the exact strategies to help you boost your APV marks by 50% or more!

Introduction and Overview of APV
00:01 – 00:09

Introduction to the AFM exam topic for 2025.
Focus: Adjusted Present Value (APV).
00:12 – 00:21

Tutor introduction – , expert in AFM.
Purpose: Improve marks on APV questions.
Recap of NPV and APV Concepts
00:26 – 01:27

Definition of Net Present Value (NPV):
Years, cash flows, discounting at WACC (Weighted Average Cost of Capital).
NPV = Sum of discounted cash flows minus initial investment.
01:30 – 02:12

APV Definition:
Separates operating cash flows (business risk) from financing cash flows (financial risk).
Operating cash flows discounted at unlevered cost of equity.
Financing cash flows discounted at risk-free rate or pre-tax cost of debt.
Common APV Mistakes (From Examiner's Report)
04:00 – 04:44

Students confuse NPV and APV by using WACC incorrectly.
Key mistake: Discounting all cash flows at WACC = Wrong.
05:01 – 05:22

Need to apply Modigliani and Miller (M&M) Proposition II to calculate unlevered cost of equity.
05:26 – 06:13

Another error: Incorrect calculation of unlevered cost of equity.
Formula required: Asset beta formula (not always M&M Prop II).
Correct Approach to Calculations
06:13 – 07:05

Use asset beta to remove debt effect, reflecting pure business risk.
Practical advice: Insert business values (equity, debt, tax rate) directly.
07:05 – 07:31

Key tip: Avoid wasting time writing unnecessary assumptions.
Directly apply formulas without stating assumptions.
Issue 3 – Calculating Tax Shield on Interest
07:31 – 08:42

Common error: Calculating tax shield incorrectly.
Mistake: Treating tax savings as a one-year benefit (incorrect).
Correct approach: Use tax saving for each year over the life of debt.
Practical Approach to Tax Shield
08:42 – 09:16

Three elements required for correct tax shield calculation:

Number of years.
Relevant cash flows (tax savings).
Discount rate.
Emphasis on timing – incorrect placement of cash flows results in lost marks.

Issue 4 – Justifying APV Suitability
09:27 – 10:09

APV is appropriate for projects that change financial risk (e.g., highly geared projects).
Incorrect justification: “NPV ignores debt benefit.”
Correct reasoning: WACC already factors in debt benefits.
Key Secret for Gaining Extra Marks
11:00 – 12:07

In recommendations, don't stop at "APV is positive."
Add: "Shareholder wealth will increase if the project is accepted."
This additional statement gains extra marks.
Summary of Key Issues
12:29 – 13:01

Four major issues summarized:
Confusing NPV with APV.
Misapplying asset beta formula.
Incorrect tax shield calculation.
Failure to justify APV suitability properly.