UniGeniusAdvanced financial management

Unofficial practice for the ACCA Advanced Financial Management (AFM) exam. Not affiliated with or endorsed by ACCA.

Practice · Net present value

Net present value

Discount nominal cash flows at the nominal rate or real cash flows at the real rate, linked by (1 + i) = (1 + r)(1 + h).

The lesson for this topic

Short questions in the course’s own format, not ACCA’s: the exam itself is all written. Written questions in the exam’s shapes

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Question 1 · Course practice question · Net present value2 marks

Net present value

Dovecot Co is appraising a four-year project. A machine costs $2,000,000 now and will be sold for $400,000 at the end of year 4. Sales are $1,500,000 a year and costs $600,000 a year, both in current (time 0) prices. Sales prices will rise by 4% a year and costs by 6% a year.

Tax at 25% is paid one year after the profits arise. Tax-allowable depreciation is 25% a year on a reducing balance from year 1, with a balancing allowance in year 4. The nominal cost of capital is 10%; discount with the present value table's factors.

What is the net present value of the project, in $m to two decimal places? (2 marks)

Formulae and tables