Refer to Appendix 2. Calculate the net present value (NPV) for the purchase of the two new aircraft.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2017). The mark or mark type is shown in brackets.

1. [1] 1 mark for some attempt to use discount factors
2. [2] 2 marks for arithmetic error and failure to subtract capital cost
3. [3] 3 marks for 1 error
4. [4] 4 marks for correct answer
5. [4] $3.73m Correct answer
6. [3] $83.73m Capital cost not subtracted
7. [3] -$8.03m Ignores residual value
8. [2] $71.97m Ignores residual value and capital cost not subtracted
9. [1] Formula: non-current liabilities / capital employed × 100 = gearing %
10. [1] $348m + 80m (1 mark for numerator)
11. [1] $1128 + 80m (1 mark for denominator, using total non-current assets + net current assets + shareholders' equity OR non-current liabilities + shareholders' equity)
12. [2] 428m/1208m (2 marks for correctly calculating the sum of numerator and denominator before final calculation)
13. [4] 35.43%
14. [3] $428/$1128 (fails to add $80 in capital employed) = 37.94%
15. [1] Alternative formula: non-current liabilities / shareholders' equity × 100
16. [1] $348m + 80m (1 mark for numerator)
17. [1] $780m (1 mark for denominator)
18. [2] 428m/780m (2 marks for correctly calculating the sum of numerator and denominator before final calculation)
19. [4] 54.87%
20. [2] 348m/1128m = 30.85%
21. [K] Investment appraisal is a way of assessing future returns from a capital purchase.
22. [K] NPV takes into account the future value of money.
23. [K] Leasing the aircraft involves a yearly cost/expense and aircraft will not be business assets.
24. [K] Balance sheet – Assets would increase with purchase option.
25. [APP] NPV 3.73m, so positive after six years, leasing over six years would cost $4.6m x 2 x 6 = 55.2m.
26. [APP] Cost of purchase less residual value is £56m.
27. [APP] Discounted payback 5yrs 10 months.
28. [APP] Payback is 4yrs 10 months.
29. [APP] Increase in gearing ratio could be significant, but still low geared.
30. [APP] How much will painting SA’s colours cost for the leasing option?
31. [APP] Reference to other financial data, such as profit margin (6.6%).
32. [AN] If the competition in the airline industry increases – this would affect expected revenues.
33. [AN] Purchase of aircraft will require financing and potentially increase pressure on cashflow.
34. [AN] Purchase will increase value of assets of SA and increase capital employed thus increasing size of the business.
35. [AN] Leasing will have less impact on the short-term cash-flow position of SA compared to outright purchase.
36. [EVAL] Accept either option or advise not obtaining new equipment – but must be well supported by reasoned argument.
37. [EVAL] Decision may depend on value after six years/speed of depreciation. How accurate is the figure given?
38. [EVAL] Decision may depend on state of economy – are interest rates likely to increase as a result of rising inflation? This could be a disadvantage for the purchase option especially as the payback is nearly 5 years.