On the comparison between the APV and the NPV computed via the WACC

The valuation of levered investment in the practice is made with the WACC approach, even if the superior technique of the 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 functions of all the variables entering the model.