ACCA FM NPV 2026: Money Method vs Real Method — The Inflation Mistake Losing You Marks

If a question gives you tax, or cash flows inflating at different rates, you must use the money method: inflate the cash flows, then discount at the money cost of capital. Mixing inflated cash flows with a real discount rate is the single most common way FM candidates throw away investment appraisal marks.

Two methods, one answer

There are only two valid ways to deal with inflation in an NPV. The money (nominal) method inflates the cash flows and discounts them at the money cost of capital. The real method uses today's prices and discounts at the real cost of capital. Done correctly, both give the same NPV. The examiner has repeatedly noted that candidates don't realise this — they get two different numbers, then waste time inventing reasons for the gap instead of spotting their own error.

Why the money method wins in the exam

The real method only works when every cash flow inflates at the same rate. The moment a question gives you sales inflating at 4%, costs at 6%, and tax on top, the real method falls apart. ACCA's own guidance is blunt: use the money method as soon as cash flows inflate at different rates, or whenever tax is involved. Because most FM appraisal questions include tax, the money method is what you'll need almost every time.

The mistake the examiner keeps flagging

Straight from the FM examiner's report: a common wrong approach is to calculate cash flows ignoring inflation, adjust for tax, and then discount at the real cost of capital. That hybrid is neither method. It inflates nothing, yet uses a rate that already assumes inflation has been stripped out — so tax and working capital cash flows, which are money amounts, get discounted at the wrong rate. Marks gone.

Worked example: spot the error

Real cost of capital 7%, general inflation 3%. The money cost of capital is (1.07 × 1.03) − 1 = 10.21%, say 10%.

Wrong: take a Year 1 contribution of $100,000 in today's prices, deduct tax, then discount at the real 7%. You've used a real cash flow but the tax computation is built on money amounts — your answer is internally inconsistent, and the examiner can see exactly where it broke.

Right: inflate the $100,000 to $103,000 (×1.03), run the tax computation on the inflated figure, then discount the whole money cash flow at 10%. Inflation, tax and discount rate now all sit in money terms. Consistent — full marks.

What to do

Default to the money method. If you see tax anywhere in the question, inflate first and discount at the money rate. Don't even reach for the real method.

Memorise the Fisher equation: (1 + money) = (1 + real) × (1 + inflation). It's the only correct way to convert between the two rates, and it's examinable on its own.

Inflate each line at its own rate. Sales, materials and labour usually inflate differently — apply the specific rate to each cash flow, not one blanket figure across the table.

The bottom line

FM pass rates sit around 50%, and investment appraisal turns up on almost every paper. The next sitting runs 7–11 September 2026, with standard entry closing 27 July. Get the money method automatic now and you bank marks that half the exam hall hands straight back. Pick your method before you touch a single number — that one decision is worth more than any clever calculation.