Refer to Tables 2 and 3. Calculate the:

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. [1] Payback = time taken to recoup initial cost
2. [1] 2.4 / 2.6 X 12 = 11 months OR 2.4 / 2.6 X 365 = 337 days
3. [2] = 3 years and 337 days or 3 years and 11 months or 3.92 years
4. [1] Evidence of a cumulative net cash flow
5. [1] 4 years or during year 4
6. [1] ARR = average profit / original investment cost X 100
7. [1] Profit = 10.4 - 10.2 = 0.2
8. [2] Average annual profit = 0.2 / 4 = 0.05
9. [3] 0.05 / 10.2 X 100 = 0.49%
10. [1] Alternative formula: average profit / average investment X 100
11. [3] = 0.05 / 5.1 = 0.98%
12. OFR
13. [1] NPV is the value today of future cash flows net of the original investment
14. [1] Any correct discounted cash flow
15. [1] Y1 2.6 x .952 = 2.4752
16. [1] Y2 2.6 x .907 = 2.3582
17. [1] Y3 2.6 x .864 = 2.2464
18. [1] Y4 2.6 x .823 = 2.1398
19. [2] Net cash flows Y1 – Y4 = $9.2196m
20. [3] NPV = 9.2196 – 10.2 = (0.9804) $m
21. OFR
22. [Knowledge] Knowledge of investment appraisal techniques and their use.
23. [Knowledge] ARR - profitability of the investment.
24. [Knowledge] NPV - profit considering the time value of money.
25. [Knowledge] Payback – how quickly the investment cost is returned.
26. [Knowledge] Generic reference to short/long/high/low results and importance.
27. [Knowledge] Factors in investment decisions including qualitative factors: Competition, Availability of finance, Gearing, Impact on quality, Pace of technological change in this industry.
28. [Application] Glasses (glasses) frame manufacture.
29. [Application] Recent availability of 3D printers, untried technology.
30. [Application] 4-6-year life span.
31. [Application] 5% target rate of return v ARR of only 0.49%.
32. [Application] Almost a 4-year payback.
33. [Application] Training costs v employee cost reductions.
34. [Application] Competitors considering obtaining 3D printers.
35. [Application] Reduction in employee costs of $2.1m per year.
36. [Analysis] Application of investment appraisal techniques results to decision, e.g. payback is just inside life span and ARR is positive so indicate invest but NPV negative indicates not invest.
37. [Analysis] 3D printer will increase flexibility of FF to respond to changing consumer tastes. Greater variety of designs possible to be supplied quickly to meet customer demands resulting in an increase in sales implications of advantages and disadvantages for aspects of FF operation.
38. [Analysis] Appraisal factors including: greater quality in terms of delivery time leading to increased sales; less waste improves CSR and could benefit FF's image and sales as well as reduce costs; disruptive to present production methods and could be more costly than predicted.
39. [Analysis] Reduction in labour costs may mean that employees will be made redundant causing a negative impact on employee morale. There may be resistance from employees to introduction of the 3D printers resulting in an increase in costs.
40. [Analysis] 3D printers may increase technical economies of scale reducing production costs and making FF more price competitive.
41. [Analysis] Effect on employee morale and motivation is uncertain so quality may or may not suffer.
42. [Evaluation] Investment appraisal indicates do not invest as NPV negative and payback and ARR marginal and below the 5% required.
43. [Evaluation] Significance of the Directors' required rate of return. Non-financial factors may outweigh this.
44. [Evaluation] Accuracy of the assumptions used to calculate the discount rate and cost changes. Data only based on a four-year appraisal.
45. [Evaluation] Why not postpone the decision for a year or two and see if printer costs fall or wait for new process innovations to become available?
46. [Evaluation] Is the investment appraisal data complete? Cost savings shown but no consideration of impact of the technology on sales.
47. [Evaluation] Uncertainties in whether delivery times will improve, the cost of training and acquiring skilled employees outweighs the greater flexibility, less waste and fewer employees or vice versa.
48. [Evaluation] How important is it for FF to be at the forefront of new technology? Being in the lead may enhance reputation, attract skilled employees and lead to further cost falls and/or more contracts. Starting now could pay dividends in the future as it becomes more widespread.