Question

The Lessard APV formula

What is D_t in the APV formula?

Select one:

a. 2 of these

b. The market value of the debt used to finance the project each year.

c. The face value of the debt used to finance the project in each year.

d. The interest expense associated with the project for each year.

Answer 1

The Lessard APV Formula:

In 1985 Lessard introduced the formula of Adjusted Present Value which was mainly for foreign currency value and cash flow. As per this undiversifiable risk substantially differentiate from the other country's risk. This supports the perspective that country that mainly depends less on the external economy will have high diversifiable risk. Under this approach, the risk-adjusted factor is taken out for a discount of most likely cash flow.

A key feature of Lessard APV

• A tax shield is provided regardless of the source of finance.
• Taxable income is distributed among foreign affiliates.
• It deals with special cash flow.

The formula for computing APV(Under lessard Method) (Noncontractual operating Flows:) Capital outlay+Remittable after-tax operating cash outflows.

D_t in the APV formula:

Option d is correct.

Reason:

Option a,b & c is incorrect because in APV the present value of interest with tax benefit is taken into consideration and not the face value or market value of the debt. Option d is correct because in APV interest expense of the project is considered.