How to Answer Discounted Cash Flow Questions in ACCA AFM
DCF questions in AFM build on NPV but add complexity — tax timing, inflation, real vs nominal rates. Here's a method that keeps the marks flowing.
Discounted cash flow questions in ACCA AFM extend the NPV technique from FM into more demanding territory — multi-year projects, tax and inflation adjustments, and sometimes an adjusted present value or free cash flow approach. The winning skill is structure: lay out the cash flows so each step earns its method mark.
Build the cash flows in a clear table
Set out years across the top and each cash flow line down the side. Work through operating cash flows, tax (watch the timing — often a year in arrears), tax-allowable depreciation, working capital and any terminal value, then discount at the correct rate.
Get the rate right
- Match real cash flows to a real discount rate and nominal (inflated) cash flows to a nominal rate — mixing them is a fundamental error.
- Use the specific project cost of capital or WACC the question gives you.
- For an APV, discount the base-case cash flows at the ungeared cost of equity, then add the financing side effects separately.
Protect your own-figure marks
Under the ACCA own-error rule, each structural step earns its method mark even if an earlier figure is wrong — provided your method is right. So show every step, label it, and carry your own figures through to the final NPV and conclusion.
The fastest way to see whether your DCF steps score is to mark a full answer against the official ACCA scheme. The 50% Club credits each method and own-figure step the way a real AFM marker does, so you can see exactly where you are losing marks.