Map the cash flows of a capital project
Identify future net cash inflows and outflows that belong in an 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
Which information is most relevant to a cash-flow appraisal?
What you will learn
- Separate relevant future cash flows from past costs
- Build a consistent project timeline
- Distinguish cash flow from accounting profit
Appraise the change caused by the project
Investment appraisal compares future cash inflows and outflows arising from a proposed project. Include cash flows that change because the business accepts it, and place each amount in the period when it is expected.
A cost already incurred is sunk and cannot be changed by the decision. Opportunity costs and additional operating costs may matter if the project uses scarce resources or changes existing activity.
Keep the project basis consistent
Separate one-off purchase or installation payments from later operating receipts and payments. A forecast is uncertain, so identify which estimates need checking.
Accounting profit is not the same as cash flow. Depreciation can reduce profit without being a current cash payment; the equipment purchase is paid when acquired. ARR uses profit, while payback, NPV and IRR use cash flows.
Pause and explain
Is depreciation itself a cash payment in the period charged?
Worked example
A machine costs $90,000 now, produces annual net cash inflows of $32,000 for three years, and needs an extra $4,000 service payment in year 2. A $2,000 study was paid for last year. Which figures belong in the future appraisal?
Show the worked solution
- Include the $90,000 purchase at time 0.
- Include the annual inflows and the $4,000 year-2 payment.
- Exclude the already-paid study cost from future project cash flows.
Answer Count the $90,000 outflow now, expected annual inflows and year-2 service payment. The past study cost is sunk.
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 needs $60,000 now and is expected to bring $25,000 in year 1 and $28,000 in year 2. List the net cash flows.
Give me a hint
Show the initial outflow separately from future receipts.
Compare my reasoning
- Time 0: −$60,000.
- Year 1: +$25,000.
- Year 2: +$28,000.
The timeline is −$60,000 at time 0, +$25,000 in year 1 and +$28,000 in year 2.
Look for these in your work
- Initial outflow timed
- Future receipts separated
- Signs correct
A proposal includes a $3,000 annual saving, an added $8,000 staff cost in year 1, and a $5,000 study completed last month. Which figures may affect the appraisal?
Give me a hint
Ask which amounts change in future if the business accepts the proposal.
Compare my reasoning
- Include the future $3,000 saving for each affected year.
- Include the $8,000 staff cost if the project causes it.
- Exclude the completed study as sunk.
Include future savings and incremental staff costs by period; exclude the already-paid study.
Look for these in your work
- Future saving included
- Incremental cost included
- Sunk cost excluded
A project would use a room currently rented to another organisation. What cash-flow issue should the appraisal consider?
Give me a hint
The room has an alternative use that may be lost.
Compare my reasoning
- Estimate rental income lost if the project uses the room.
- Include it only for periods when the room is unavailable.
- Check whether the alternative use can be changed.
Consider foregone rental income as an opportunity cost if the project prevents that future receipt.
Look for these in your work
- Alternative use identified
- Timing considered
- Opportunity cost linked
Common mistakes
- Including past sunk costs
- Using profit where a method requires cash flow
- Ignoring when receipts and payments occur
What can you explain now?
Which amount is normally excluded as a sunk cost?
Compare with the explanation
A feasibility cost already paid before the decision
The past payment cannot be changed by the current project choice.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do sunk costs, accounting profit and project cash flows differ?
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.