A-LevelBusiness StudiesFinance and accounting9609/32 · May/June 2019 · Q218 Marks

Refer to lines 37–48 and Table 2. Calculate, for the purchase of the automated milking machinery, the:

(a)(i)accounting rate of return (ARR)[3]
(a)(ii)net present value (NPV) at a discount rate of 10%.[3]
(b)Recommend to SWF whether the new automated milking machinery should be purchased. Justify your recommendation.[12]

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

2(a)(i) For full marks units (%) required
2(a)(i) ARR = Annual return/Capital cost x 100 (1 if no calculation)
2(a)(i) Return = $940000 or 940000(1)
2(a)(i) Annual return = $188000 or 188000 (2)
2(a)(i) ARR = 9.4% (3)
2(a)(i) 9.4 (2)
2(a)(i) Likely answers with errors: Requires working to be shown for award of marks.
2(a)(i) 1 error due to residual value being added or subtracted
2(a)(i) 148000/2000000 × 100 = 7.4% or 7.4 (2)
2(a)(i) 228000/2000000 = 11.4% or 11.4 (2)
2(a)(i) Alternative formula: ARR = Annual return/Average investment x 100 (1 if no calculation)
2(a)(i) Where: Average investment = (Initial capital cost + scrap value)/2
2(a)(i) Return = $940 000 (1)
2(a)(i) Annual return = $188 000 (2)
2(a)(i) ARR = 188 000/(2.2/2) × 100 = 17.1% (3)
2(a)(i) 17.1 (2)
2(a)(i) OFR applies
2(a)(ii) For full marks units ($) are required
2(a)(ii) Year 1 Net cash flows (000s) 200 Discounted cash flows (000s) 182
2(a)(ii) Year 2 Net cash flows (000s) 710 Discounted cash flows (000s) 589.3
2(a)(ii) Year 3 Net cash flows (000s) 780 Discounted cash flows (000s) 585
2(a)(ii) Year 4 Net cash flows (000s) 650 Discounted cash flows (000s) 442
2(a)(ii) Year 5 Net cash flows (000s) 600 Discounted cash flows (000s) 372
2(a)(ii) 1 for any accurate use of discount factor(s)
2(a)(ii) Cumulative inflow 2170.3
2(a)(ii) Less Yr 0 (2000) (2000)
2(a)(ii) NPV 170.3
2(a)(ii) NPV = $170300 (3)
2(a)(ii) 170300 (2)
2(a)(ii) $2170300 (2)
2(a)(ii) Likely Answers with errors. Requires working to be shown for award of marks.
2(a)(ii) Added on the residual value: $294300 or 294300 (2)
2(a)(ii) Subtracted residual value: $46300 or 46300 (2)
2(a)(ii) OFR
2(b) Understanding of factors influencing decision: NPV
2(b) ARR
2(b) Payback
2(b) Importance of finance required/cost of investment
2(b) Benefits of automation: Increased productivity
2(b) Lower labour costs
2(b) Consistent quality
2(b) Disadvantages of automation: Labour redundancy
2(b) Training of workers
2(b) Initial cost
2(b) Use of strategic choice techniques such as force field analysis
2(b) Use of results to investment appraisal/case study information. OFR
2(b) NPV $170 300 so worth considering
2(b) ARR 9.4% a good return on investment?
2(b) Calculation of payback; 3yrs 5.72 months (Allow 5.7 or 5.8 months)
2(b) Discounted payback; 4yrs 6.5 months
2(b) 100 employees may lose jobs. Contradicts the stated core values of SWF regarding employees
2(b) Other firms too small to take advantage of machinery – SWF gains competitive advantage
2(b) Calculation of cost per farm = $100 000
2(b) Reference to industry being competitive. Price important.
2(b) Application of strategic choice techniques
2(b) Cost savings would make SWF more competitive in market enabling price to be reduced leading to higher sales.
2(b) Impact of redundancies on motivation and therefore productivity of firm
2(b) Impact of redundancies on reputation and sales of SWF
2(b) Reaction of unions/ employees could lead to industrial action and disruption to production during transition. This could impact reputation and future sales
2(b) Identification and justification of most important factor.
2(b) How many employees will leave due to natural wastage?
2(b) Would consumers care about redundancies or do they just want cheaper milk - Some evidence of ethical considerations as sales of organic produce is increasing
2(b) This is a competitive industry, feed costs are increasing and sales decreasing - SWF must change to remain competitive.
2(b) This is a significant investment that has to be financed. Does SWF have sufficient funds? Will a loan be required? What is the rate of interest for borrowing?