In: Finance
the disadvantages of adjusted present value method are follows:
APV is that the risk is buried in the choice of the discount rate, a choice that is often very difficult to make. Also, like NPV, APV often overlooks the value of flexibility.
Another problem of APV is that its pricing models: its focus solely on the valuing of the project not on the total return. Also, from general perspective, APV do not provide an overall view of the dynamics of the firm's activities. On the other hand, its not supposed to do this: the point of these tools is to give us a number that represents an estimate of value. Often it is better to have tools that lay out the activities of the firm in a manner that allows the investor to get a picture of how the firm operates.
its based on Modigliani-miller(M&M) with tax theory, ignores bankruptcy risk, tax exhaustion, agency costs and its assumes debt is risk free and irredeemable.