Discuss whether the techniques referred to in Appendix 1 are sufficient to allow the directors to make the strategic choice between Option A and Option B.

Mark scheme

Marking points from the official mark scheme (May/June 2018). The mark or mark type is shown in brackets.

1. [Knowledge] Decision trees – consider payoffs and probabilities
2. [Knowledge] Investment appraisal - using forecast cash flows
3. [Knowledge] Ansoff - classifies strategies
4. [Application] Oil companies often subject to pressure group activity
5. [Application] Capital cost - R&D more costly but also many renewable energy projects do not reach a profitable conclusion.
6. [Analysis] Some focus on risk an important consideration for long term projects such as these especially for Option B as renewable energy is 'new' for PGP.
7. [Analysis] Decision trees help to quantify the decision and encourage consideration of all outcomes – important for a profit seeking PLC
8. [Analysis] Ansoff identifies the nature of the expansion – and considers the risk element too so a risk averse business might opt for market penetration
9. [Analysis] Discounted payback is important as it considers the time value of money (long term projects) and PGP has a higher gearing than industry average so paying back loan capital as early as possible could be important.
10. [Evaluation] Uncertainty over the techniques used, e.g. how were the probabilities and expected outcomes estimated in the decision tree?
11. [Evaluation] Risk is not being quantified only identified; is ‘renewable energy' really diversification?
12. [Evaluation] Not enough detail; more information about PGP's finances would be useful, e.g. can the investment be financed internally?
13. [Evaluation] Overall judgement based on preceding analysis and a consideration of the other techniques and information that need to be considered before this type of major strategic decision is made.