Refer to lines 48-49 and Table 1.1. Calculate the net present value (NPV).

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [1] (a) At least one correct discounted cashflow identified for Years 1-5.
2. [2] (a) Correct calculation of all discounted cash flows for years 1–5 and/or cumulative discounted cash flow of $854 800 for years 1–5.
3. [1] (a) NPV = total discounted cash flows – capital cost (if no correct calculations).
4. [3] (a) NPV = 0.8548 – 1.
5. [4] (a) NPV = ($145 200) OR (145 200).
6. [3] (a) If answer not shown as negative i.e. $145200.
7. [4] (a) Allow rounding of discounted cash flows. Cumulative discounted cash flows 855 000 (2) and NPV of (145 000) (4).
8. [K] (b) Understanding of sustainability – business operations that can be maintained in the long term, for example, by protecting the environment and not damaging the quality of life for future generations.
9. [K] (b) Understanding of investment appraisal techniques NPV, ARR and Payback.
10. [K] (b) Other factors in the decision: Cost; Availability of finance; Impact on workers/consumers; Preferences of owners.
11. [APP] (b) NPV is negative. Discounted cash flows do not cover the capital cost.
12. [APP] (b) Payback is 4 years 10.8 months.
13. [APP] (b) Link between investment and mission statement regarding carbon neutrality.
14. [APP] (b) Investment will support CQ's desire to reduce carbon emissions.
15. [APP] (b) Gearing of CQ is high – 3 / 4.2 X 100 = 71.4%.
16. [APP] (b) Preference of Frederico as owner.
17. [APP] (b) $1m required.
18. [L2 AN] (b) NPV is negative suggesting that the investment is not worth considering as will be loss making in real terms over a five-year period.
19. [L2 AN] (b) Investment would boost CQ's environmental image which could result in higher sales which would increase market share.
20. [L2 AN] (b) Improved environmental image would support maintenance of premium prices resulting in higher profits.
21. [L2 AN] (b) Investment would reduce CQ's reliance on external supplier of energy reducing the volatility of energy costs and therefore make planning easier.
22. [L2 AN] (b) High gearing may make raising finance more difficult from banking sector. This is a significant cost and could impact liquidity of CQ negatively placing a strain on its finances.
23. [EVAL] (b) Supported judgement as to decision.
24. [EVAL] (b) Weighing of factors.
25. [EVAL] (b) Most important factor in decision.
26. [EVAL] (b) Cost savings are estimates made by the Finance Manager. Can these figures be trusted?
27. [EVAL] (b) The data is only on cost savings and may not account for any positive impact of the investment on sales and protection of premium price.
28. [EVAL] (b) Is profit more important to CQ than fulfilling its mission statement?
29. [EVAL] (b) The data is only for five years. It is likely that the data is incomplete as solar panels and insulation should bring benefits over a much longer time period.
30. [EVAL] (b) Quantitative vs qualitative factors – NPV suggests that the investment is unprofitable but consistency with mission statement may be more important in long term.