Difference between Capital Cash Flow (CCF) and Adjusted Present Value (APV) Approaches

When we consider fixed debt ratio and debt rebalancing, both the interest shields and Free Cash Flows are discounted at the opportunity cost of capital of the project to determine the Adjusted Present Value (APV). So, one can combine these two flows and discount them by the opportunity cost of capital.

Under Fixed Capital Structure

Since FCFs plus interest tax shields equal the Capital Cash Flows (CCF), the CCF and APV approaches under fixed capital structure are the same. Under the assumption of fixed capital structure, CCFs, FCFs and APVs are all equal.

The FCF value is widely used to determine the valuation of a project in such circumstances because it is easier to calculate the value of an investment project. In order to do so, the FCF value is discounted by WACC, and there is no need of using debt amounts, project value, and interest tax shields.

When Debt is Fixed

However, CCF and APV values differ when debt is fixed instead of debt ratio and the repayment schedules are pre-determined. In such a method, the CCF still discounts the interest shield at the project's opportunity cost of capital, but APV considers them to be less risky and discounts them at the cost of debt or the rate of interest in the market. Discounting the interest tax shield by the opportunity cost of capital may be argued to be more realistic by some analysts. In such conditions, the debt is fixed, yet the interest tax shields are tied to the company's operations.

When the Company is Running in Loss

When the operations of the firm are unstable or when the firm is running in losses for a long period of time, there may be no interest tax shield. Moreover, the individual’s income taxes also make the interest tax shields to fade away. So, the interest tax shields may be as risky as in the case of APVs. Therefore, there will be a mismatch in the interest tax shields counted by CCFs and APVs when the debt and repayment schedules are known.

In fact, the interest tax shields tied to the company's operations is what makes the CCFs different from APVs in the longer run. While this may sound unrealistic, this is completely true in case of a loss-making organization that are unstable in terms of finance for a long time.


Capital Cash Flows and Adjusted Present Values are the same in case the organization has no fixed debt and when the interest shield is not tied to its operations; however, when the situation is opposite, they may differ in value.

Updated on: 10-Jan-2022


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