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Financial acceptability of projects based on expected net present value

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Financial acceptability of projects based on expected net present value

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
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  • April 29, 2021 at 5:04 am #619129
    ilham9089
    Participant
    • Topics: 301
    • Replies: 190
    • ☆☆☆

    Sir, after calculating the expected net present value, how do we comment on its financial acceptability? Should the project be accepted if EPNV is positive?

    April 29, 2021 at 8:20 am #619154
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    As always, if the NPV is positive we accept and if negative reject.

    However if this was a section C question we would always write (as again I explain in my lectures) that it depends on how certain we are as to the accuracy of the estimates used. This is even more important if we are using an expected NPV because we already know that the cash flows could be lower and might result in a negative NPV – the actual NPV will never be the expected NPV because the cash flows will never be the expected flows. This might turn out to be higher but they might turn out to be lower.

    April 29, 2021 at 9:54 pm #619231
    ilham9089
    Participant
    • Topics: 301
    • Replies: 190
    • ☆☆☆

    So we don’t write yes or no but instead the reservations of using the expected net present value?

    April 30, 2021 at 8:01 am #619248
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    You would write accept or reject, but then state that the decision is subject to the reservations listed.

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