Louis owns a coffee shop. He has asked an architect to design a hand car wash facility to be installed next to the coffee shop. Fig. 5.1 shows the architect's design. Use Fig. 5.1 to help you answer the following questions.

Mark scheme

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

1. [1] • Direct service / direct
2. [3] Up to 3 marks for justified reasoning of yes and / or no responses Yes - Convenient for Louis / customers to combine the two services (1) as customer will be tempted to go into the coffee shop to have a coffee (1) while at the same time waiting for car wash (1) may buy other goods at the coffee shop (1) attracts more customers (1) increasing sales / profits (1) the two businesses could share costs (1) e.g. rent (1) e.g. staff (1) No - Would be better if the coffee shop had a drive-thru (1) with a drive-up window to buy a coffee (1) Some customers may not want a noisy car wash next door (1) reduce sales (1) Installing a car wash is expensive (1) be a while before Louis can gain a return on his investment (1) may cause problems with litter (1) adding to pollution (1) customers may complain over parking (1)
3. [3] 1 mark for each correct answer TRUE FALSE Louis would complete a proposal form to receive an insurance quote. ✔ The premium for the car wash would be calculated by a broker. ✔ A car owner can make an insurance claim against Louis for damage caused by the car wash. ✔
4. [8] Level Mark Description 3 7-8 The candidate is able to offer a recommendation with a thorough evaluation of the two sources of finance. 2 5-6 Candidate offers a satisfactory analysis of one or two of the sources of finance with or without a recommendation. 1 1-4 Candidate demonstrates some knowledge and understanding of sources of finance. 0 0 No creditable response. Retained profits is money kept back for use in the business and not given to owners as dividends but reserved for reinvestment back into the business. Bank loan is a fixed agreement between a business and a bank at a fixed interest rate. Retained profits: • It is readily available so no need for documentation. • There is no fixed burden of dividend and no obligation of repayment. Retained profits are the business's own money. • It does not have to be paid back and no interest to be paid. • It can be taken up to any amount of the total available • No loss of ownership involved. • The retained profits might be less than $100 000, so Louis will still need to borrow. Bank Loans: • They would usually be able to spread repayments over a set period of time with a fixed rate of interest. • It is a long-term source of finance, e.g. 3 to 10 years, usually for a large amount. • Normally used for a specific purpose, such as buying land or equipment • While Louis must pay interest on the loan, he does not have to give the bank a percentage of profits or an equity share in his business. • Interest rates will be fixed for the term so they will know the level of repayments throughout the life of the loan so that they know the cost of repayments each month. • They are usually quick / simple to obtain. • As loans are over a long time, this can result in a lot of interest being paid. • Bank loans are often secured against the assets of the business so the business assets could be at risk if they cannot make the repayments. • There may be a charge if Louis wants to repay the loan before the end of the loan term, particularly if the interest rate on the loan is fixed. Evaluation: Both retained earnings and bank loans are very useful for financing the expansion of a business. This business needs finance for a specific project – a fixed asset of land / car wash equipment – so a loan seems most appropriate if they do not have enough retained earnings available, especially as it is a large amount needed. However, if Louis has a profitable business and has large profits, retained earnings is the recommended option.