What is a key reason why APV is favored when gearing levels change?

APV, or Adjusted Present Value, is favored in situations where gearing levels change primarily because it explicitly accounts for the costs and benefits associated with different financing structures. This method separates the value of a project from the financing effects, allowing analysts to see how changes in capital structure influence overall project valuation.

This is particularly important when a company anticipates changes in its debt levels or financing strategy, as the profitability and risk associated with varying levels of debt can significantly impact project value. By using APV, analysts can better assess the value added or lost due to financing decisions, while also obtaining a clear picture of the project's underlying cash flows without the complexities of the financing structure intertwined.

Understanding the costs of debt, tax shields, and other financing-related impacts becomes clearer through APV, especially in volatile environments where capital structures might shift frequently. Thus, the approach allows for a detailed valuation that aligns closely with the project’s financial realities as gearing levels change.