Using the data in Table 1.3, calculate the payback period for PPP's proposed new machine.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2025). The mark or mark type is shown in brackets.

1. Definition of payback: the amount of time it takes for the initial investment cost to be recovered (1 if no valid calculation)
2. (1.9) + 0.5 + 0.6 + 0.8 = 0 payback is 3 years or 36 months (2)
3. 0.5 + 0.6 + 0.8 = 1.9 (1)
4. Correct units needed for full marks – years or months.
5. ARR = average annual profit / average investment × 100 (1 if no valid calculation)
6. ARR = 0.2/0.95 × 100 = 21.05% or 21.1% or 21% (2)
7. Use of 'old' formula 0.2 / 1.9 × 100 = 10.53% (1)
8. Correct units required for full marks – %
9. Limited knowledge K will be demonstrated through knowledge of one factor in investment decision / knowledge of impacts of process innovation.
10. Developed knowledge K + K will be demonstrated through knowledge of two factors in the investment decision / impacts of process innovation.
11. Knowledge of process innovation and its impacts
12. Definition of process innovation: the move to new methods of production, in this case computer-controlled automation.
13. Less labour required.
14. Knowledge of factors in decision
15. Investment cost.
16. Availability of finance.
17. Impact on employees.
18. ARR and Payback results.
19. Technical economies of scale possible.
20. Reduction in average cost of production.
21. Impact on quality.
22. Limited application, APP applies knowledge to PPP once.
23. Developed application, APP + APP applies knowledge to PPP twice.
24. Payback of 3 years – within 4 years of estimated life.
25. Return of $800 000 over 4 year period.
26. ARR of 21.05%
27. Cost of machine $1 900 000
28. NCL are $6 million and gearing is 45%, total CE is therefore $13.3 million
29. Extra borrowing of $1.9 m would make gearing 7.9 / 15.2 = 51.97%
30. Pies have a shelf-life, therefore over-stocking inadvisable
31. Limited analysis AN candidate shows one link in the chain of analysis.
32. Developed analysis L2 AN candidate shows two or more links in the chain of analysis.
33. Machine is costly, but the relatively high gearing of PPP increases risk of further borrowir AN causing cash flow problems for PPP L2AN especially if sales fail to increase at the same rate as capacity increase.
34. Employee training to deal with computer automated system will result in increased cosAN but PPP has a reputation for good employee training, which could be boosted by thi: L2 AN
35. Automation leads to increased efficiency AN and therefore eventually increased profi L2 AN
36. Introducing automation may cause disruption to operations in the short-term reducing output whilst it is install AN possible damage to reputation if orders are not fulfilled resulting in lower sale L2 AN
37. Automation will help PPP fulfil customer orders more quickly resulting in customer satisfactio AN and therefore an increase in sales L2 AN
38. Automation may result in a reduction in the number of employees engaged in production which will reduce operating costs AN but this will also result in redundancy payments being made L2 AN
39. If automation leads to excess stocks, waste may increase AN, which could lead to increased production cost L2 AN
40. Work may become more boring for employees resulting in a reduction in motivation and therefore an increase in labour turnover AN increasing costs L2 AN
41. Limited evaluation EVAL limited supported judgement and/or a weak attempt at evaluative comment
42. Developed evaluation L2 EVAL supported judgement and/or reasonable evaluative comment
43. Developed evaluation in contex L3 EVAL supported judgement in context and/or reasonable evaluative comment in context.
44. A judgement about whether to invest in automation/process innovation.
45. Elements that the evaluation/judgement might depend on:
46. If automation is used, then success greatly depends on increased demand.
47. How flexible might the machine be in changing from one type of pie to another?
48. How well does automation fit with the 'social objectives' of PPP's employment practices?
49. How important might the 'handmade' aspect of PPP's pies be in marketing?
50. Other factors to consider e.g.
51. NPV as this considers time value of money.
52. Depends on availability of finance linked to relatively high gearing and interest rate.
53. How long will it take to install the automated system?
54. Will specialist IT employees be required and how expensive is that?
55. Opportunity cost of this project.
56. Weighing up of the factors and their relative influence on PPP's decision whether to invest in the new machine
57. Accept all valid responses