On the comparison between the adjusted present value and the net present value computed via the weighted average cost of capital

The valuation of levered investment in the practice is made with the weighted average cost of capital (WACC) approach, even if the superior technique of the adjusted present value (APV) is available. The paper shows that the APV can be interpreted as the arbitrage free value of the portfolio made by an investment and a supporting loan. Therefore the WACC evaluation, generally different from the APV, allows for arbitrage. We provide various conditions which completely characterize the sign of the error as a function of all the variables entering the model.