A-LevelBusiness StudiesFinance and accounting9609/33 · Oct/Nov 2022 · Q418 Marks

(a) Refer to Table 1. Calculate, for the purchase of the safari vehicles, the:

(a)(i)accounting rate of return (ARR)[3]
(a)(ii)net present value (NPV) at a discount rate of 8%.[3]
(b)You may refer to your results from 4(a) and other information. Recommend whether MAA should purchase the safari vehicles. Justify your recommendation.[12]

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Mark scheme

Marking points from the official mark scheme (Oct/Nov 2022). The mark or mark type is shown in brackets.

[1] Formula: average annual profit / amount of investment X 100
[1] 145 – 120 = 25 (Profit over life)
[1] 25 / 4 = 6.25 (Average annual profit)
[3] 6.25 / 120 = 5.2% or 5.21%
[1] Any correct discounted cash flow for Years 1–4
[2] Sum of discounted cash flows for Years 1–4 = 27.90 + 30.10 + 31.60 + 29.60 = 119.2
[3] NPV = 119.5 – 120 = – 0.8 or (0.8)
[3] NPV = – $800
[1] ARR calculates the return on investment.
[1] NPV discounts future cash flows
[1] Other appraisal techniques such as payback
[1] Factors in the decision: Capital cost
[1] Factors in the decision: Availability of finance
[1] Factors in the decision: Impact on stakeholders such as customers and employees
[1] Factors in the decision: Attraction to new customers
[1] Investment appraisal based on 4 years, but vehicles should have more than 4 years of useful life
[1] Comment on payback - 3 years and 4.5 months
[1] Comment on ARR 5.2%, may be relatively low?
[1] Comment on NPV, -$800, (just) negative after 4 years
[1] Safari vehicles will considerably upgrade the service provided by MAA, link with marketing.
[1] Case indicates MAA has strategy of growth.
[1] If MAA do not purchase the new vehicles they will continue to be unable to satisfy demand at busy times.
[1] Purchase will enable a growth in passengers and revenue from safari trips and hence profit
[1] Possible use of extra revenue to cross-subsidise other services such as education, enhancing brand image and meeting social objectives
[1] Low IA results suggest that there may be more profitable growth options or even that these vehicles are not the right choice.
[1] Negative NPV suggests not profitable at this discount rate
[1] Supported decision – to purchase or not?
[1] Limited data - four years figures - but vehicles should last much longer
[1] May need comparative quotes from other vehicle providers
[1] Is the upgrading of services offered essential for MAA, due to changing consumer needs and expectations?
[1] Other evidence needs to be considered, e.g. social objectives, would these be helped or hindered?
[1] Need for more research on services offered in similar facilities.