How Do You Answer NPV Questions in ACCA FM?
NPV questions are the biggest earners in ACCA FM Section C. Here's how to pick relevant cash flows, handle tax and inflation correctly, and why the discount-rate error costs so many students.
Net present value is the workhorse of ACCA FM Section C — a single question can be worth 15 marks or more, and it rewards method over arithmetic. Students rarely fail these questions because they don't understand NPV; they fail because they include the wrong cash flows, mishandle tax timing, or discount at the wrong rate. Get the framework right and this is one of the most dependable scoring opportunities in the paper.
Rule 1: Only relevant cash flows go in the table
An NPV table should contain only incremental, future cash flows caused by the decision. Exclude sunk costs already incurred, apportioned fixed overheads that won't change, and non-cash items such as depreciation. A common trap is dropping a market-research cost or a share of head-office overhead into the table — both earn zero and signal you haven't grasped relevance.
Rule 2: Get tax timing and allowances right
Tax is where marks are won and lost. Calculate tax on the taxable cash flows, apply tax-allowable depreciation (capital allowances) as a separate line, and be explicit about timing — tax is often paid one year in arrears, so the tax cash flow lands a year after the profit that generated it. Show the allowances working in full: even if a figure is wrong, the method marks carry through under the own-figure rule.
Rule 3: Match the cash flows to the discount rate
This single error sinks more NPV answers than any other. If you inflate cash flows to money (nominal) terms, you must discount at the money cost of capital. If you keep cash flows in real terms, you discount at the real rate. Mixing them — discounting money cash flows at a real rate, or vice versa — produces a nonsense answer and forfeits the marks that depend on it. Decide which approach you're using up front and stay consistent.
Rule 4: Don't forget working capital
Incremental working capital is a cash outflow when it's invested — usually at the start of each year to support the coming year's activity — and is recovered at the end of the project. Only the incremental movement each year is a cash flow, not the full balance. Missing the initial investment or the final recovery is an easy, avoidable loss.
Rule 5: Conclude, don't just compute
There are marks for a clear recommendation: state the NPV, say whether the project should be accepted because it is positive (or rejected because it is negative), and note any assumptions or limitations. A table of numbers with no conclusion leaves those marks on the table.
The takeaway
NPV questions reward a clean framework: relevant cash flows only, tax and allowances timed correctly, cash flows and discount rate on the same basis, working capital in and out, and a decisive conclusion. Show every step and the own-figure rule protects you when the arithmetic wobbles.
The trouble is a full NPV table looks convincing even when a relevant-cash-flow or discount-rate error runs through it — you can't spot your own mistake by rereading it. The 50% Club marks your practice FM answers against the official ACCA scheme, showing you exactly where a cash flow shouldn't have been included, a tax lag was missed, or the rate didn't match the terms — and which method marks you still banked.