Some thoughts on NPV questions
Financial Management

Some thoughts on NPV questions

May 3, 2021

A few years ago, we could be absolutely certain that Question 1 in every FM exam paper would be an NPV question. Candidates would therefore prepare extremely well for this question and it was a guaranteed source of “banker” marks.

However, in more recent papers, although NPV calculations have been extremely common, they are definitely no longer guaranteed to appear. As a result, we have noted a decline in student performance in this type of question, presumably on the basis that there is now less incentive to revise a relatively complicated topic that will not always come up on exam day.

Here are some tips to help you improve your NPV technique.

Firstly, we have noted that far too many candidates allocate almost all of their time to the numerical part of the question i.e. creating the tabular pro-forma model appraisal. You should note that there is normally only a half or full mark per component of the numerical elements so it is actually quite hard to pick up a high score as you will need to do a lot of work to get the marks.

We also note that many students spend too long on the numerical element, trying to achieve a perfectly correct result. This is extremely difficult under time pressure in the exam and, as explained above, each element of the calculations has a very low amount of credit in itself so if you complete the calculations quickly but accept that there will be a few minor errors this is always better than aiming for perfection, not achieving it anyway and using up loads of time.

The 2021 version of the ICAEW computer-based assessment software should make certain aspects of the NPV calculations a lot quicker to calculate than in the past. For example, in addition to the spreadsheet function being a lot more responsive, there are now specific functions built into the software to automatically calculate various things that you will need for your NPV calculations. You can now more quickly sum up columns and can calculate discount factors in a “proper” way rather than having to do this on your calculator and type it into the software as in the previous version of the assessment software. Make sure you spend plenty of time getting familiar with how to set things out and how to use these functions.

So far we have mainly talked about calculations, which means we have ourselves fallen into exactly the trap that we want to get students out of! Perhaps this is natural for accountants but if you look at the recent past paper markschemes you will see that often the second part of the question, which is entirely narrative in nature, will be worth at least a third, probably at least half and in some cases even the same amount of marks as the calculations themselves. A very large number of students that we work with never really get to the easy narrative in the second part of the question so again their search for numerical perfection means they end up scoring quite badly.

Our final tip is, as part of your work to look at what happens in the narrative part of the question so that you can understand the mark allocation, please also look at the nature of the topics tested and the exact wording of the model answers. We are very confident that you will see there are some definite patterns here so the narrative is again extremely easy if you put in a little bit of time (and much less time required to get good at the calculations!) to revise these areas.

We cover all the patterns in NPV and other FM questions in our Financial Management Masterclass 2021 interactive on-demand video course which contains detailed tutor debriefs and discussions of “batches” of questions and answers on different topics, one at a time, helping you focus. As we are very confident in the technique used in the Financial Management 2021 Masterclass interactive on-demand video course which comes with a full Pass Guarantee (subject to some basic terms and conditions). Click here to find out more.

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