Refer to lines 24–25. Calculate the accounting rate of return (ARR) for the new grinding machine.

Mark scheme

Marking points from the official mark scheme (May/June 2024). The mark or mark type is shown in brackets.

1. [2] (a) 9000 / 55 000 × 100 = 16.4% OR 16.36% (Accept 16.4 OR 16.36)
2. [1] (a) One or more of the following: Average profit (45 000 / 5 = 9000 [Accept 9]); Average investment (110 000 / 2 = 55 000 [Accept 55]); ARR equation (ARR = Average profit / Average investment × 100)
3. [2] (b) $22 000 OR 22 000 (Accept: $22 OR 22)
4. [1] (b) One or more of the following: Sum of discounted future cash flows (19 + 27.3 + 25.8 + 28.7 + 31.2 = 132 (000)); NPV equation (Sum of discounted future cash flows minus the initial cost)
5. [K] (c) Understanding of investment appraisal methods (NPV, ARR, payback period) and qualitative factors (business attitudes, risk, impact on stakeholders, external factors, objectives, finance availability).
6. [APP] (c) Application points: requirement for skilled operator, loan finance available, use of Table 1.1 data (manufacturer, Mo's experience), impact on unit costs, use of 3(a) and 3(b) answers, NPV is positive $22,000, ARR is 16.4%, payback is in 4th year (3 years 10.3 months or 3.86 years), discounted payback is 4 years 3.5 months or 4.29 years.
7. [AN] (c) Payback within 4th year indicates profitable investment.
8. [AN] (c) Positive NPV ($22,000) suggests it is a worthwhile investment.
9. [AN] (c) Financing through borrowing could increase GBS's gearing and shareholder risk.
10. [AN] (c) Investment enables GBS to meet increasing demand, potentially increasing profit.
11. [AN] (c) Grinding machine decreases unit costs, allowing GBS to set lower prices, which should increase demand.
12. [AN] (c) Positive NPV and ARR (16.4%) being higher than the 5% cost of finance supports going ahead with the investment.
13. [EVAL] (c) Figures may not be accurate or reliable, questioning the validity of investment appraisal data.
14. [EVAL] (c) The realism of a 5-year life and reliance on future period data should be questioned.
15. [EVAL] (c) Qualitative factors might be as important or more important than calculations.
16. [EVAL] (c) Manufacturer's data might be optimistic, and Mo's reliance on experience without market research or research into cost savings is a concern.
17. [EVAL] (c) GBS should consider other investments or changes to meet its needs, considering if finance could be better spent elsewhere.
18. [EVAL] (c) A critical question is whether GBS can afford alternative actions alongside this purchase.
19. [EVAL] (c) More detailed research into sales and cost savings, including data verification, is needed before deciding.
20. [EVAL] (c) The timeframe for making the decision and other growth options need investigation.
21. [EVAL] (c) Justification for further research is strong given the other options and actions in the case.