Using the data in Table 1.1, calculate the payback period.

Mark scheme

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

1. [1] Payback in sixth year
2. [2] Payback period is 5 years 1 month OR 5.08 years
3. [1] Total discounted net cash flows = $307.63m
4. [1] Discounted capital cost = $311.11m
5. [2] NPV = 307.63 – 311.11 = ($3.48m)
6. [1] Understanding of the use of investment appraisal – payback period, NPV including advantages (quantitative, based on data, NPV factors in time value,)
7. [1] Understanding of disadvantages (predictions may be inaccurate as circumstances change, false sense of accuracy, providers of data may be biased and provide misleading data).
8. [1] Qualitative factors in investment decisions include: Attitude to risk.
9. [1] Qualitative factors in investment decisions include: Impact on stakeholders e.g. environmental/social considerations, future economic changes.
10. [1] Qualitative factors in investment decisions include: How well the project fits the business objectives.
11. [1] Quantitative results (Payback 5 years 1 month; NPV –$3.48m over 6 years).
12. [1] Project life span is 15 years, but cash flows are only appraised for 6 years.
13. [1] LBM has strict finance limitations (no adverse variances allowed).
14. [1] The project has local opposition.
15. [1] The hot water extraction process allows water to be used for heating local housing.
16. [1] LBM is currently losing $2–3 million per year.
17. [1] Estimated 15 year life span.
18. [1] Uncertain forecasting beyond six years.
19. [1] Non-inclusion of data relating to possible extraction of other metals.
20. [1] Objective of LBM is to produce lithium.
21. [1] Decreasing supply/demand gap (after 2030 demand>supply).
22. [1] LBM only producer in country G.
23. [1] Test mine is the first project, next is hard rock mining.
24. [1] Government concerned to get lithium production in country G,
25. [1] LBM has the finance.
26. [1] The negative NPV (-$3.48m) over six years suggests the project does not cover its costs of capital and should be rejected, thus ensuring LBM does not deepen its existing losses.
27. [1] The project lifespan is 15 years, and the uncounted positive cash flows in Years 7–15, coupled with rapidly rising global demand for lithium, could lead to a highly positive overall NPV, significantly increasing future revenue.
28. [1] If LBM experiences adverse variances, they may run out of finance, leading to project failure and a loss of the large initial investment ($200m + $120m).
29. [1] The dual benefit of extraction and heating local housing may satisfy social objectives and reduce local opposition, thereby lowering the risk of delay.
30. [1] Learning from this project will enhance performance in future projects, therefore increasing the likely success of the hard rock mining project.
31. [1] The price of lithium is likely to continue to rise resulting in higher revenues in years 7-onwards.
32. [1] Other producers may appear causing lower lithium prices and therefore reduce forecast net cash flow.
33. [1] If other metals can be recovered the revenue figures may be higher than forecast.
34. [1] Supported judgement as to whether LBM should proceed.
35. [1] Quantitative investment appraisal indicates the decision is unwise as NPV is negative but likely positive ARR, and NPV very close to zero mean qualitative factors may be more important.
36. [1] Reliability of the estimated cash flows for the remaining 9 years.
37. [1] LBM's willingness to accept high financial and operational risk (local opposition, tight budget).
38. [1] The importance of social benefits (heating local housing) versus financial return.
39. [1] Accuracy of the discount factor and forecast cash flow. In the changing lithium market the indicators are that they are possibly neither, but the most likely possibility is that revenues will be higher than forecast.
40. [1] The risk appears to be low and the finance is available.
41. [1] If LBM does not go ahead, it is likely to go out of business due to increasing losses.
42. [1] The decision is highly subjective due to high uncertainty beyond Year 6. Given that LBM is currently unprofitable and operates with tight funding, the negative NPV indicates high risk. However, strategically, LBM must establish mining operations to leverage the rapid revenue forecast.
43. [1] The project should probably be delayed or redesigned until LBM can secure sufficient finance to absorb potential adverse variances and until a more reliable long-term forecast can demonstrate a clearly positive NPV over the full 15 years.