Article Review; Using APV
Number of words: 868
The article discusses essential information for financial management and presents a case that helps one understand the concept. The discussion on using APV as a better tool for business valuation is of great essence to investors and managers (Luehrman, 1997). The article written by Timothy Luehrman is useful in explaining why the APV is preferable over the common WACC in valuing business assets and forecasting future sales. The author has organized information in the article in a logical manner, which makes one capture the information easily. It is also important to note that the author has used different approaches to delivering crucial content on financial management. In the article, the advantages of using an APV are listed, making it easy for one to decide as to whether they can use the approach (Luehrman, 1997). In essence, the article discusses an APV as a better tool for handling financial management issues within an organization.
The article highlights APV as a reliable tool for forecasting future sales and the present value of a particular business. Investors need such information to help them make informed decisions on whether they should fully fund the investment. The author notes that learning institutions preferred teaching the WACC over the APV, but that has since changed. The first reason why the APV tool is better as compared to WACC is that it can work in both circumstances. There are situations where the business cannot be valued by WACC, necessitating the use of APV as an alternative approach to forecast and get the present value. In such circumstances, APV will prove useful over the WACC approach (Luehrman, 1997). The second reason the author highlights is that the APV has fewer restrictive assumptions, which makes it more convenient for many. For instance, in the case study listed in the article, IBEX should acquire Acme after conducting a valuation process using the APV tool.
The fact that APV can handle financial side effects makes it a better tool over the WACC approach, as asserted by the author of the article. The tool helps in discounting through spreadsheets, and the unbundling of its attributes of value is proving inexpensive. The author has also stressed the flexibility of the approach in its bid to handle financial management issues. Equally, the use of the APV tool allows a user to customize its features preferably. Its flexibility to the user makes it effective and convenient over the WACC approach. In the case study, Acme has not utilized its opportunities, and IBEX wishes to acquire the firm and rebrand all operations (Luehrman, 1997). In the event, there is a need to value all operations of Acme to establish future cash-flow forecasts. Discounted cash-flow methodologies are useful to enterprises as they help in forecasting future cash-flows and discounting the present value of a particular asset. The article notes that such discounted methodologies reflect on the riskiness of venturing into a particular business.
The article identifies key steps that one should follow when using APV as a tool for valuation. The first step is to lay the base-case cash-flows, which will be important in the subsequent steps of an APV valuation (Luehrman, 1997). For instance, Henry should obtain cash flow figures of Acme before proceeding to conduct and evaluation of the business. According to the author, there is a need to project the financial implications associated with the acquisition of the new firm. When operations increase after the acquisition, there is also an expected rise in the level of expenditure for IBEX (Luehrman, 1997). The second step in the evaluation of a business using an APV tool is discounting the flows using the most appropriate discount rate and terminal value. The use of a wrong value in the execution of this step can cost an organization, according to the article.
The third step in the execution of an APV analysis is evaluating the financial side effects that are associated with venturing into the new opportunity. In the case study, Henry should learn how acquiring the firm can cripple operations, especially on finances and other costs. The fourth sp involves adding the pieces together to get an initial APV value for the said firm (Luehrman, 1997). The initial APV will be obtained by adding the base-case cash-flows and the value of the side effects. In step five, one should tailor the APV to meet the manager’s needs. Henry would need to reassess and check on what value he adds after the acquisition of Acme.
To sum it up, the author of the article has given crucial information on the application of the APV tool as a better tool for business valuation. It is reliable, flexible, and can be applied in all circumstances. In executing an APV analysis, one needs to the base-case cash-flow and deductions that have been discounted. Using the APV as an approach guarantees one fewer mistakes and helps in the analysis of financial maneuvers within a firm. Institutions should consider teaching APV as an approach to handle financial management problems, especially in valuation and forecasting of future sales.
Luehrman, T. A. (1997). Using APV (adjusted present value): a better tool for valuing operations. Harvard business review, 75(3), 145-6.