Translate words into dated cash flows
Before calculating NPV, label t=0, t=1 and t=2 and separate investment from later receipts. State whether each cash flow occurs at the beginning or end of a period.
ACCA discusses discounted cash-flow appraisal. In a teaching problem use the specified discount rate; a real borrowing rate is not automatically the appropriate cost of capital for every project.
An original two-year calculation
A fictional project costs 1,000 today and yields net cash of 600 at each of the next two year ends. At an assumed annual rate of 10%, NPV = −1,000 + 600/1.1 + 600/1.1², approximately 41.32 currency units.
The first receipt has present value about 545.45 and the second about 495.87. Equal nominal receipts have different present values because of timing. Retain precision until the final sum.
Distinguish profit from project cash flow
Sort items into incremental cash flows, costs already incurred and items needing clarification. Depreciation itself is not a cash payment; where a question includes tax, associated tax effects require separate treatment.
Avoid mechanically deducting financing costs and then discounting at a rate already reflecting financing requirements. Tax, inflation and working capital must follow the module assumptions; they are excluded from this simplified example.
Test the conclusion against an assumption
Reduce each annual receipt to 550 and leave everything else unchanged. NPV becomes about −45.45. The difference shows sensitivity to assumed receipts rather than proving anything about a real investment.
Recalculate both cases independently and explain why the sign changes. Bringing a completed timeline and a specific uncertainty to a tutorial is more useful than requesting only the final NPV. This is academic practice, not investment advice.
References
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