Investment Appraisal
Payback, accounting return, discounted cash flow, inflation, tax, risk, sensitivity, lease-or-buy, replacement and capital rationing.
How to study ACCA Applied Skills
Build on Applied Knowledge, use the correct UK law and tax versions, practise workplace-style digital responses and keep each independent 50% pass decision visible.
Core concepts
Concept 1
Investment appraisal uses relevant incremental cash flows and a risk-appropriate required return to assess value creation.
Exam cue: Build an incremental cash-flow timeline before discounting.
Concept 2
NPV incorporates cash timing and required return, while payback and accounting return provide narrower supplementary views.
Exam cue: Keep real cash flows with a real rate or nominal cash flows with a nominal rate.
Concept 3
Inflation, tax, working capital, risk and mutually exclusive constraints must be treated consistently.
Exam cue: State the decision and sensitivity or qualitative risks after calculating NPV.
Risk pitfalls and guardrails
Including financing cash flows inside a project NPV already discounted at a financing-based rate.
Guardrail: Do not reuse a legal rule, tax amount, reporting format, audit phrase or finance formula without checking scope, date, units and evidence.
Mixing accounting profit with cash flow.
Guardrail: Do not reuse a legal rule, tax amount, reporting format, audit phrase or finance formula without checking scope, date, units and evidence.
Using a profitability index without checking whether capital rationing is divisible and single-period.
Guardrail: Do not reuse a legal rule, tax amount, reporting format, audit phrase or finance formula without checking scope, date, units and evidence.
Memory anchors
NPV
Net present value is discounted incremental cash inflow less discounted incremental cash outflow.
Payback
Payback measures the time required to recover initial investment without fully measuring value.
Relevant Cash Flow
A relevant project cash flow is future, incremental and attributable to the decision.
Sensitivity
Sensitivity analysis identifies how far a key variable may change before the decision reverses.
Capital Rationing
Capital rationing allocates limited investment funds among acceptable projects.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
A project costs £100,000 and generates one cash inflow of £118,000 in one year. At a 10% discount rate, what is NPV?
Why does NPV normally use cash flows rather than accounting profit?
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
What is Pass Harbor?
Completely free exam prep for 247 UK exams.
- Practice questions
- Flashcards
- Study guides
- Mock exams
- No registration
- No paywall
- Start instantly
“No more expensive exam prep. Quality study tools should be accessible to everyone.”