Calculate net present value
Discount each future project cash flow, total present values and subtract the initial investment.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. This topic covers future net cash flows, payback, ARR, NPV, IRR and supported investment decisions. Discounted payback and questions involving a residual value at the end of a project are excluded by Cambridge. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use AS Topics 1.5–1.6 for profit, depreciation and financial analysis, and Topic 2.1 for contribution. Keep accounting profit, project cash flow and the time value of money distinct.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Future cash-flow PV totals $72,000 and initial investment is $60,000. Find NPV.
What you will learn
- Calculate present values by year
- Find NPV from a cash-flow schedule
- Apply the decision rule with its assumptions
Build an NPV schedule
NPV = total present value of future net cash inflows and outflows − initial investment. Discount each future flow with its matching period factor, then add the present values.
Positive NPV means discounted future net inflows exceed the initial investment at the chosen rate. Negative NPV means they fall short. Zero NPV just meets the return represented by that rate.
Check what the result depends on
Use the stated rate and horizon. The initial investment at time 0 is not discounted.
A positive NPV supports acceptance under the assumptions, but forecasts, capacity and non-financial factors still need review. Compare projects on a consistent basis.
Pause and explain
A project has NPV −$4,000 at the required rate. What does this mean?
Worked example
A project costs $80,000 now. Inflows are $35,000, $40,000 and $45,000; factors at 10% are 0.909, 0.826 and 0.751. Calculate NPV.
Show the worked solution
- PV year 1 = $31,815.
- PV years 2 and 3 = $33,040 and $33,795; total = $98,650.
- NPV = 98,650 − 80,000 = $18,650.
Answer NPV is $18,650 at 10%.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Initial investment is $50,000 and future PVs total $58,400. Calculate NPV.
Give me a hint
Subtract the time-0 outflow.
Compare my reasoning
- 58,400 − 50,000 = $8,400.
- The sign is positive.
- Label the rate basis from the question.
NPV is positive $8,400 at the supplied rate.
Look for these in your work
- PV used
- Cost deducted
- Sign interpreted
A project costs $120,000. Discounted inflows are $31,000, $38,000, $34,000 and $29,000. Calculate NPV.
Give me a hint
Add PVs before deducting the initial cost.
Compare my reasoning
- Total PV = $132,000.
- NPV = 132,000 − 120,000 = $12,000.
- The discounted forecast exceeds investment by $12,000.
NPV is positive $12,000 at the supplied rate.
Look for these in your work
- PVs totalled
- Initial investment deducted
- Meaning stated
A project has positive NPV but relies on an untested sales forecast. What should the decision paper include?
Give me a hint
Keep the calculation, forecast risk and conditions visible.
Compare my reasoning
- Show NPV at the stated rate and key assumptions.
- Test plausible lower sales or higher costs.
- State what evidence should be met before commitment.
Report the result as conditional on its assumptions, test downside scenarios and set approval conditions.
Look for these in your work
- NPV stated
- Sensitivity tested
- Conditions proposed
Common mistakes
- Discounting the time-0 investment again
- Applying the same factor to each year
- Treating a positive NPV as certainty
What can you explain now?
NPV is…
Compare with the explanation
Total PV of future net cash flows − initial investment
NPV compares discounted future flows with the initial outflow.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
What does a positive NPV mean at the selected rate?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.