ACCA FM December 2026: Depreciation in NPV — Why Excluding It Isn’t the Whole Answer

Depreciation is never a cash flow in an FM NPV, so strike it out. But the tax saving it creates is a real cash flow, and leaving that out is how a profitable project ends up with a negative NPV.

What the examiner keeps seeing

In the June 2026 FM examiner report, the 10-mark AgeAid buy-versus-lease question again showed candidates mishandling depreciation. Some included it as a cash flow. Others calculated only three years of depreciation, or put the residual value in year 5 rather than year 4. Some added an Equivalent Annual Cost calculation nobody asked for, which is only needed when comparing replacement cycles.

The strong answers did four things: separate schedules for buying and leasing, consistent signs with outflows negative, running costs compounded year on year, and a stated treatment for every line followed by a clear conclusion. Buying came out at a present value cost of about $338,552 and leasing about $334,593, so leasing won by roughly $3,959. Tiny margin, so every slip mattered.

The same report shows the other side of the coin. In the 4-mark part (b), tax-based reasons earned no credit because the charity was tax-exempt and could not claim tax-allowable depreciation. Always check whether the entity pays tax before you build a tax column.

Wrong vs correct: a $200,000 machine

Four-year life, nil residual value, straight-line depreciation of $50,000 a year, pre-tax operating cash flow of $90,000 a year, tax at 25% paid in the same year, cost of capital 10% (4-year annuity factor 3.170).

Wrong: deduct depreciation as if it were cash. ($90,000 − $50,000) × 75% = $30,000 a year. PV = $95,100. NPV = −$104,900. Reject.

Correct: tax the cash flow, then add back the tax saving on depreciation. $90,000 × 75% = $67,500, plus $50,000 × 25% = $12,500, giving $80,000 a year. PV = $253,600. NPV = +$53,600. Accept.

Same project, opposite decision, and the only difference is one line of treatment. That is a pass-or-fail swing in a 20-mark Section C question.

What to do

1. Build the tax column in two parts. Tax on operating cash flows first, then a separate line for the tax saving on tax-allowable depreciation. Never net them in your head.

2. Write the treatment next to every line. A short note such as “depreciation excluded, non-cash; tax saving included” protects your marks even if an arithmetic slip follows.

3. Count the years before you discount. Check the depreciation years, the residual value year and the timing of tax against the question. The examiner has flagged all three.

The numbers

FM pass rates have sat between 46% and 50% for the last six sittings, so roughly half of candidates miss the 50% mark. Investment appraisal sits in the heaviest part of the syllabus, which means these small treatment errors are where the difference is made.

Depreciation out, tax saving in. Say it twice before you walk into the exam.