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Worked example
Investment appraisal and NPV, worked through a ceramics studio
Net present value turns future cash into today’s money so you can judge an investment properly. Here it is worked step by step through a ceramics studio deciding whether to buy a new kiln.
Updated August 2026 · 8 min read
Investment appraisal is how a business decides whether a big spend is worth it, and net present value (NPV) is the technique that does it properly. The idea behind it is simple once you see it: money in the future is worth less than money today, so before you compare the cash an investment brings in with what it costs, you have to bring the future cash back to today's value. Let us work an example.
Why future money is worth less
A pound in your hand today is worth more than a pound in three years' time, because you could invest today's pound and have more than a pound by then. So to judge an investment fairly, we discount each future cash flow back to its value today using the business's cost of capital, the return it needs to earn. Add up those present values, subtract the cost, and you have the net present value.
The scenario
Halcyon Ceramics, a small pottery studio, is deciding whether to buy a new kiln. The kiln costs £50,000 now, and the studio expects it to bring in extra net cash of £20,000 in year 1, £25,000 in year 2, £20,000 in year 3 and £10,000 in year 4. The studio's cost of capital is 10%. Is the kiln worth buying?
Discount each cash flow to today
We multiply each year's cash flow by the discount factor for that year at 10%. The discount factor is simply 1 divided by (1.10) raised to the power of the year, and in the exam it is given to you in a table. The initial cost sits in year 0, so its discount factor is 1.000.
Adding the present value column gives a net present value of +£10,680. The present values of the four years of inflows come to £60,680, and taking off the £50,000 cost leaves £10,680.
The decision rule is straightforward: a positive NPV means the investment earns more than the cost of capital and adds value, so you accept it. A negative NPV means it destroys value, so you reject it. Here the +£10,680 says the kiln is worth buying.
What NPV does and does not tell you
NPV is the soundest single measure of whether an investment adds value, because it uses all the cash flows and accounts for the time value of money. But it is only as good as its inputs: the cash flow estimates and the cost of capital are assumptions, and a small change in the discount rate can change the answer. That is why exam questions often ask you to consider risk and sensitivity alongside the NPV, and why other measures such as the internal rate of return and payback period are used to give a fuller picture.
Where this comes up in ACCA
Investment appraisal is a core, high-value topic in Financial Management (FM), where a discounted cash flow is almost guaranteed in Section C, usually with tax and inflation added in. It returns at an advanced level in Advanced Financial Management (AFM). Getting the basic NPV layout automatic, exactly as above, is the foundation for both.
The fastest way to make it automatic is to work it, not read it. The free ACCA FM course on Clevernest teaches investment appraisal inside a real business, with instant-marked questions so the method sticks.
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Frequently asked questions
What is net present value?
Net present value is the value today of an investment's future cash flows, discounted at the cost of capital, minus the initial cost. A positive NPV means the investment adds value and should be accepted; a negative NPV means it should be rejected.
How do you calculate NPV?
List the cash flows by year, multiply each by the discount factor for that year (given in the exam), add up the present values, and subtract the initial investment. In our example the present values total £60,680 and the £50,000 cost gives an NPV of +£10,680.
What does a positive NPV mean?
It means the investment earns more than the business's cost of capital and adds value, so the decision rule is to accept it. A negative NPV means the investment earns less than the cost of capital and should be rejected.
What is a discount factor?
A discount factor is the multiplier that converts a future cash flow into its value today. It equals 1 divided by (1 plus the discount rate) raised to the power of the year, and in ACCA exams it is provided in a discount-factor table so you do not have to calculate it.
Where is NPV tested in ACCA?
Mainly in Financial Management (FM), where investment appraisal is a core Section C topic, often with tax and inflation built in. It appears again at an advanced level in Advanced Financial Management (AFM).