A-LevelBusiness StudiesFinance and accounting9609/33 · May/June 2018 · Q420 Marks

Refer to [Table 2]. Calculate:

(a)(i)accounting rate of return[4]
(a)(ii)net present value (at 6% discount rate)[4]
(b)Refer to your results to 4(a) and any other information. Recommend whether or not RW should offer guided bicycle tours. Justify your decision.[12]

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Mark scheme

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

[1] (a)(i) ARR = average earnings per year × 100/initial cost
[1] (a)(i) Average earnings per year = 30–13/4
[1] (a)(i) = 4.25k
[4] (a)(i) 4.25 × 100/13 = 32.7%
[3] (a)(i) Initial investment not deducted 7.5/13 X 100 = 58%
[3] (a)(i) Not divided by number of years 17/13 X 100 = 131%
[3] (a)(i) OFR applies
[1] (a)(ii) NPV is the difference between present value of cash inflows and outflows.
(a)(ii) NCF Year 0: -13, Year 1: 1, Year 2: 6, Year 3: 10, Year 4: 13
(a)(ii) DF Year 0: 1, Year 1: .943, Year 2: .890, Year 3: .834, Year 4: .792
(a)(ii) DCF Year 0: -13, Year 1: .943, Year 2: 5.34, Year 3: 8.34, Year 4: 10.296
[1] (a)(ii) Total net DCF = 24.92 – 13 = $11.919 (000) or 11.92
[1] (a)(ii) Allow rounding if correct calculation shown, e.g. 12 (000)
[1] (a)(ii) Use of discount factor
[2] (a)(ii) Calculation of annual DCF
[2] (a)(ii) $24.92 i.e. does not deduct capital cost
[2] (a)(ii) OFR applies
[K] (b) costs of setting up and operating – availability of finance and time
[K] (b) projected revenue
[K] (b) Discounted cash flow and investment appraisal techniques
[K] (b) market opportunity exists on basis of forecasts
[App] (b) use of data from table 2, choice of discount factor
[App] (b) Payback period 2 yrs 7.2 months
[App] (b) reference to requirements – recruit guides, admin assistant, cycles
[App] (b) reference to Tourist Authority and enhanced website
[App] (b) space for cycle storage issue
[App] (b) support for tourism from city authorities
[An] (b) results from data
[An] (b) possible benefits of the new product
[An] (b) possible disadvantages of the new scheme
[Eval] (b) supported recommendation on the proposal
[Eval] (b) comments re accuracy of data and implicit assumptions made
[Eval] (b) uncertainty re possible competitors actions
[Eval] (b) RW may be attempting too much given resources available