Compare NPV and test assumptions
Compare projects on a consistent discount basis and examine sensitivity to changed assumptions.
Section 4.4 · Investment appraisal
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
A has NPV $11,000 and B $7,000 at the same rate. Which is higher?
What you will learn
- Compare NPV at the same rate
- Test sensitivity to forecast changes
- Explain the limit of a single scenario
Compare like with like
For mutually exclusive projects, use the same rate, time basis and assumptions. A higher positive NPV indicates a larger present-value contribution on that basis, if projects are feasible and comparable.
If lifespan, scale, capacity or risk differ materially, explain those differences. A higher NPV does not make an infeasible project deliverable.
Test assumptions that matter
NPV is sensitive to future cash flows and the discount rate. Recalculate with plausible changes in sales, costs, timing or rate.
Sensitivity analysis shows how a result changes; it does not assign probabilities. Management needs evidence about likelihood and consequences.
Pause and explain
Sales fall in a sensitivity test. What should be recalculated?
Worked example
At the same rate, A has NPV $14,000 and B $9,500. A's sales forecast is less certain. What is balanced analysis?
Show the worked solution
- A leads by $4,500 on the stated assumptions.
- Test A under lower-sales scenarios.
- Compare feasibility and risk before recommending.
Answer A leads on the base forecast, but test its less certain sales assumption and compare operational risk.
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.
A project has base NPV $16,000. A cost rise reduces total PV by $9,000. Find revised NPV.
Give me a hint
Subtract the PV of added costs.
Compare my reasoning
- 16,000 − 9,000 = $7,000.
- The revised NPV remains positive.
- This assumes no other change.
Revised NPV is $7,000 under this scenario.
Look for these in your work
- Effect direction
- Value calculated
- Assumption noted
P has NPV $20,000 and Q $17,000 at the same rate. P's costs may be understated by $5,000 PV. Compare after adjustment.
Give me a hint
Deduct the possible cost shortfall from P.
Compare my reasoning
- P revised NPV = $15,000.
- Q remains $17,000 on its estimate.
- Q leads by $2,000 in this scenario; investigate the cost estimate.
P's scenario NPV is $15,000; Q's $17,000 is higher by $2,000.
Look for these in your work
- Adjustment calculated
- Comparison correct
- Uncertainty retained
A 3-year project and an 8-year project are ranked by total NPV. What should the analyst disclose?
Give me a hint
Different lives and scale may affect total values.
Compare my reasoning
- Show each life, rate and investment.
- Explain whether projects are mutually exclusive and repeatable.
- Consider capacity and risk alongside NPV.
Disclose different lives and decision context; total NPV alone may not settle a choice where lives or scale differ.
Look for these in your work
- Life disclosed
- Context checked
- Limit explained
Common mistakes
- Comparing NPVs calculated at different rates
- Ignoring project feasibility
- Calling a sensitivity scenario a probability
What can you explain now?
What is a sound first step when comparing two NPVs?
Compare with the explanation
Use the same discount rate and consistent assumptions
A common basis makes the figures meaningfully comparable.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
What does sensitivity analysis reveal, and what does it not reveal?
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.