Refer to Fig. 1.1. Calculate the expected monetary value (EMV) for the new factory in country M (option B).

Mark scheme

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

1. [1] (a) EMV is value in money terms of a possible outcome, taking account of forecast returns and their probability. (1 mark if no correct calculation)
2. [1] (a) New factory: Optimistic forecast $9.0m × 0.7 = $6.3m Accept 6.3
3. [1] (a) OR Pessimistic forecast $6m × 0.3 = $1.8m (1mark) Accept 1.8
4. [2] (a) Combined estimates = $8.1m (2marks) Accept 8.1
5. [3] (a) EMV = $8.1m – $5.5m (3marks) Accept 8.1 – 5.5
6. [4] (a) = $2.6m (4marks)
7. [3] (a) For final answer if no $ or millions then 3 marks e.g. 2.6
8. (a) OFR
9. (b) Understanding of decision trees – method of investment appraisal that takes into account uncertainty when comparing alternative investment opportunities.
10. (b) Knowledge of factors in the decision: TC's objectives, Finance available and cost, Profit, Investment appraisal techniques including payback, ARR and NPV, Risk, Impact on employees, Reputation of TC, Market in country M, Knowledge of strategies for international marketing, Knowledge of marketing strategy and marketing mix, Understanding of other approaches to develop strategy.
11. (b) TC manufactures quality boxed chocolates.
12. (b) Comparison of information in Fig. 1.1 for the three options.
13. (b) EMV highest for option B (2.6m v 0.9m v 0.84m).
14. (b) Option B has higher probability of optimistic forecast (0.7 v 0.6).
15. (b) Optimistic outcome for option B is profit of $3.5m.
16. (b) Pessimistic outcome for option B is $0.5m.
17. (b) Significantly higher cost of option B.
18. (b) Current rate of interest in country R is high.
19. (b) Directors are concerned about TC's liquidity.
20. (b) Financial constraints imposed by other plans such as AI, new product range and introduction of TQM in existing factory.
21. (b) Data is from an industry consultant.
22. (b) Three possibilities for international expansion with EMVs for new marketing strategy and continue existing strategy.
23. (b) Directors wish to increase sales to country M as part of international expansion.
24. (b) The new factory is predicted to generate a higher EMV than the other two options and is therefore the favoured option based on DTA.
25. (b) The new factory will increase capacity and therefore enable TC to increase sales internationally potentially increasing profit.
26. (b) The new factory is the most expensive option and is nearly 8 times more expensive than option A. As interest rates are high this could be very costly if TC has to borrow the finance and therefore there is greater risk to TC if sales are lower than anticipated.
27. (b) A new factory is a new venture requiring trained employees, a location site and planning permissions and will therefore take longer to generate profits.
28. (b) Research using other approaches such as PEST to developing strategy could be recommended.
29. (b) Possibly opt for a new marketing strategy before building a factory.
30. (b) Data is from a consultant. How does TC know the data is accurate, reliable and realistic? Does this apply to the figures for the non-factory options?
31. (b) How do the options fit with TC's corporate strategy and aims? Time scale?
32. (b) Assessment of basing decision on the DT analysis. Advantages of decision tree analysis: Clearly sets out options in a quantitative way. Takes account of level of risk and probability of outcomes. Research needs to be detailed and thorough. 'What if' analysis enables investigation of factors and assumptions opt clarify a decision.
33. (b) Disadvantages: Quantitative nature may disguise poor research. Data and assumptions may not be realistic. Other factors may be important and not taken account of – e.g. inflation, competitor's actions, government policy. EMVs are averages and may never actually occur.
34. (b) Recommendations based on analysis.
35. (b) Quantitatively, based on Fig 1.1 it is clear that building a new factory is a wise choice, assuming the data is accurate.
36. (b) Identification of most important point or weighting of factors.
37. (b) Factors decision depends on: This also assumes that it will be possible to obtain employees, a site, permissions and supply of materials.
38. (b) These other factors need to be carefully researched to before a decision is made.
39. (b) Can TC find $5.5m to finance the venture?