Cambridge A Level Accounting 9706 — 2021 May/June Paper 3 · Variant 4

ACCOUNTING 9706/34 Paper 3 Structured Questions May/June 2021 3 hours You must answer on the question paper. You will need: Insert (enclosed) INSTRUCTIONS ● Answer all questions. ● Use a black or dark blue pen. ● Write your name, centre number and candidate number in the boxes at the top of the page. ● Write your answer to each question in the space provided. ● Do not use an erasable pen or correction fluid. ● Do not write on any bar codes. ● You may use an HB pencil for any diagrams, graphs or rough working. ● You may use a calculator. ● International accounting terms and formats should be used as appropriate. ● You should show your workings. INFORMATION ● The total mark for this paper is 150. ● The number of marks for each question or part question is shown in brackets [ ]. ● The insert contains all of the required information and questions. This document has 20 pages. Any blank pages are indicated. DC (NF) 213384 © UCLES 2021 [Turn over Cambridge International AS & A Level * 1 9 0 1 7 4 6 7 6 8 *

2 9706/34/M/J/21 © UCLES 2021 Section A: Financial Accounting Answer all questions. 1 Read Source A1 in the insert. (a) Prepare the complete subscriptions account for the year ended 31 December 2020. … … … … … … … … … … … … [7] Additional information For the year ended 31 December 2020 $ Profit on sale of refreshments 6 200 Purchase of equipment 10 120 Depreciation on equipment 4 050 Proceeds from sale of equipment 8 440 Profit on disposal of equipment 510 Staff costs 18 310 Other costs 3 100

3 9706/34/M/J/21 © UCLES 2021 [Turn over (b) Prepare the income and expenditure account for the year ended 31 December 2020. … … … … … … … … … … … … … … [7] (c) Advise the managing committee whether or not the new policy on unpaid subscriptions should be continued. Justify your answer. … … … … … … … … … … [5]

4 9706/34/M/J/21 © UCLES 2021 Additional information Inventory of refreshments was $600 at 1 January 2020 and $750 at 31 December 2020. Amounts paid during the year to suppliers of refreshments totalled $16 000. Amounts owing to suppliers of refreshments were $1100 at 1 January 2020 and $920 at 31 December 2020. (d) Prepare the refreshments trading account for the year ended 31 December 2020, showing sales as the balancing figure. … … … … … … … … … … … … … … … [4]

5 9706/34/M/J/21 © UCLES 2021 [Turn over (e) State two reasons why a club or society might engage in a trading activity. 1 … … … 2 … … … [2] [Total: 25]

6 9706/34/M/J/21 © UCLES 2021 2 Read Source A2 in the insert. (a) Prepare the equity and liabilities section of the statement of financial position at 31 December 2020. … … … … … … … … … … … … … … … … … … [10]

7 9706/34/M/J/21 © UCLES 2021 [Turn over (b) Calculate for the year ended 31 December 2020: (i) the profit for the year … … … … … … … [4] (ii) profit from operations. … … … … … … [3] (c) Explain two accounting ratios for which the knowledge of the value of profit from operations is needed. 1 … … … 2 … … … [4]

8 9706/34/M/J/21 © UCLES 2021 Additional information The directors have proposed a final dividend for 2020 to be paid on 1 March 2021. (d) State how the proposed dividend will affect: (i) the books of account … … … … [2] (ii) the financial statements. … … … … [2] [Total: 25]

9 9706/34/M/J/21 © UCLES 2021 [Turn over 3 Read Source A3 in the insert. (a) Explain what is meant by the following terms: (i) an adjusting event … … … [2] (ii) a non-adjusting event. … … … [2] Additional information DW plc has a financial year end of 31 December. On 31 December 2020 the draft profit for the year was calculated as $8100 and the draft statement of financial position at that date included the following values. $ Machinery (at cost) 186 000 Accumulated depreciation of machinery 91 500 On 1 January 2021 the directors reviewed the values of all the non-current assets. This indicated that the machinery could be sold for $87 000. The cost of dismantling the machinery and transporting it to a new owner would amount to $3000. The present value of total future estimated net cash flows arising from the use of the machinery was $90 000. (b) State the amounts of the following with regard to the machinery: (i) its fair value … [1] (ii) its value in use. … [1]

10 9706/34/M/J/21 © UCLES 2021 (c) Calculate with regard to the machinery: (i) the carrying amount … [1] (ii) the recoverable amount … [1] (iii) the impairment loss. … … [2] (d) Explain how the impairment loss should be recorded in the financial statements. … … … … [4] Additional information On 3 January 2021 there was a fire in the company’s warehouse, and inventory costing $18 000 was destroyed. It was expected that the company’s insurance would cover only part of the cost. (e) Explain how the financial effects of the fire should be recorded in the financial statements for 31 December 2020. … … … … … … [3]

11 9706/34/M/J/21 © UCLES 2021 [Turn over (f) Explain what is meant by an audit of a limited company. … … … … … … [3] (g) Discuss how the shareholders of DW plc are likely to react to an unqualified audit report. … … … … … … [3] (h) Explain what is meant by the term ‘stewardship’ in relation to the directors of DW plc. … … … … [2] [Total: 25]

12 9706/34/M/J/21 © UCLES 2021 4 Read Source A4 in the insert. (a) Calculate the sales revenue of the joint venture. … … … … [3] Additional information 1 Rent of the market stall, $420, was paid from the joint venture bank account. 2 Amit paid for fittings for the stall, $180, from his own funds. These were later sold for $50 and the proceeds paid into the joint venture bank account. 3 Barry paid $1400 of the takings from sales into the joint venture bank account. The remainder he took for his own use. 4 At the end of the festival period the profit was calculated and the bank account closed. (b) Prepare in the books of the joint venture: (i) the joint venture account … … … … … … … … … … [5]

13 9706/34/M/J/21 © UCLES 2021 [Turn over (ii) Amit account … … … … … … … … [4] (iii) Barry account … … … … … … … … [4] (iv) the joint venture bank account. … … … … … … … … … … [4]

14 9706/34/M/J/21 © UCLES 2021 (c) Suggest two ways in which the profit could be increased if the joint venture was repeated at the next festival. 1 … … 2 … … [2] Additional information Barry wishes to repeat the joint venture but feels that more help is needed in staffing the stall. He wants to bring in Clara as a third party to the joint venture. (d) Advise Amit whether or not he should agree to repeat the joint venture if it included Clara as a third party. Justify your answer. … … … … … … [3] [Total: 25]

15 9706/34/M/J/21 © UCLES 2021 [Turn over Section B: Cost and Management Accounting Answer all questions. 5 Read Source B1 in the insert. (a) Calculate the total purchases and the purchases returns expected in January 2021. … … … … … [2] (b) Prepare the trade payables budget for January 2021. Show separately the payments made in the month of purchase and the payment made a month in arrears. … … … … … … … … … … [6]

16 9706/34/M/J/21 © UCLES 2021 Additional information In February 2021 the actual results for January 2021 were available. These showed: 1 Trade payables had been $96 000 at the start of the month. 2 Net purchases had been 10% higher than budgeted. 3 The value of purchases returns had been the same as had been expected. 4 The company had maintained its policy of paying for one-third of net purchases in the month of purchase and the remainder in the month following. The rate of cash discount received had been the same as had been expected. 5 A contra with the sales ledger control account, $5000, had been made on 1 January. This related to debts incurred in 2020. (c) Prepare a statement reconciling the opening and closing actual figures for trade payables for January 2021. … … … … … … … … … … … … … … … [10]

17 9706/34/M/J/21 © UCLES 2021 [Turn over Additional information One of the directors has suggested that the business discontinues the use of budgets. (d) Advise the directors whether or not the business should discontinue the use of budgets. Justify your answer. … … … … … … … … … … [5] (e) Explain what is meant by the term ‘flexed budget’. … … … … [2] [Total: 25]

18 9706/34/M/J/21 © UCLES 2021 6 Read Source B2 in the insert. (a) State two ways in which the directors may have estimated the future cash inflows. 1 … … 2 … … [2] (b) Calculate for option 1: (i) the net present value (NPV) … … … … … … … … … … [6] (ii) the payback period, in years. … … … [3]

19 9706/34/M/J/21 © UCLES 2021 (c) Calculate for option 2: (i) the net present value (NPV) … … … … … … … … [6] (ii) the payback period, in years. … … … [3] (d) Advise the directors which, if either, of the options they should choose. Justify your answer. … … … … … … … … … … [5] [Total: 25]

20 9706/34/M/J/21 © UCLES 2021 Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. To avoid the issue of disclosure of answer-related information to candidates, all copyright acknowledgements are reproduced online in the Cambridge Assessment International Education Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download at www.cambridgeinternational.org after the live examination series. Cambridge Assessment International Education is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of the University of Cambridge Local Examinations Syndicate (UCLES), which itself is a department of the University of Cambridge. BLANK PAGE

This document consists of 13 printed pages. © UCLES 2021 [Turn over Cambridge International AS & A Level ACCOUNTING 9706/34 Paper 3 A Level Structured Questions 34 May/June 2021 MARK SCHEME Maximum Mark: 150 Published This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers. Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge International will not enter into discussions about these mark schemes. Cambridge International is publishing the mark schemes for the May/June 2021 series for most Cambridge IGCSE™, Cambridge International A and AS Level components and some Cambridge O Level components.

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 2 of 13 Generic Marking Principles These general marking principles must be applied by all examiners when marking candidate answers. They should be applied alongside the specific content of the mark scheme or generic level descriptors for a question. Each question paper and mark scheme will also comply with these marking principles. GENERIC MARKING PRINCIPLE 1: Marks must be awarded in line with: • the specific content of the mark scheme or the generic level descriptors for the question • the specific skills defined in the mark scheme or in the generic level descriptors for the question • the standard of response required by a candidate as exemplified by the standardisation scripts. GENERIC MARKING PRINCIPLE 2: Marks awarded are always whole marks (not half marks, or other fractions). GENERIC MARKING PRINCIPLE 3: Marks must be awarded positively: • marks are awarded for correct/valid answers, as defined in the mark scheme. However, credit is given for valid answers which go beyond the scope of the syllabus and mark scheme, referring to your Team Leader as appropriate • marks are awarded when candidates clearly demonstrate what they know and can do • marks are not deducted for errors • marks are not deducted for omissions • answers should only be judged on the quality of spelling, punctuation and grammar when these features are specifically assessed by the question as indicated by the mark scheme. The meaning, however, should be unambiguous. GENERIC MARKING PRINCIPLE 4: Rules must be applied consistently, e.g. in situations where candidates have not followed instructions or in the application of generic level descriptors. GENERIC MARKING PRINCIPLE 5: Marks should be awarded using the full range of marks defined in the mark scheme for the question (however; the use of the full mark range may be limited according to the quality of the candidate responses seen). GENERIC MARKING PRINCIPLE 6: Marks awarded are based solely on the requirements as defined in the mark scheme. Marks should not be awarded with grade thresholds or grade descriptors in mind.

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 3 of 13 Social Science-Specific Marking Principles (for point-based marking) 1 Components using point-based marking: • Point marking is often used to reward knowledge, understanding and application of skills. We give credit where the candidate’s answer shows relevant knowledge, understanding and application of skills in answering the question. We do not give credit where the answer shows confusion. From this it follows that we: a DO credit answers which are worded differently from the mark scheme if they clearly convey the same meaning (unless the mark scheme requires a specific term) b DO credit alternative answers/examples which are not written in the mark scheme if they are correct c DO credit answers where candidates give more than one correct answer in one prompt/numbered/scaffolded space where extended writing is required rather than list-type answers. For example, questions that require n reasons (e.g. State two reasons …). d DO NOT credit answers simply for using a ‘key term’ unless that is all that is required. (Check for evidence it is understood and not used wrongly.) e DO NOT credit answers which are obviously self-contradicting or trying to cover all possibilities f DO NOT give further credit for what is effectively repetition of a correct point already credited unless the language itself is being tested. This applies equally to ‘mirror statements’ (i.e. polluted/not polluted). g DO NOT require spellings to be correct, unless this is part of the test. However spellings of syllabus terms must allow for clear and unambiguous separation from other syllabus terms with which they may be confused (e.g. Corrasion/Corrosion) 2 Presentation of mark scheme: • Slashes (/) or the word ‘or’ separate alternative ways of making the same point. • Semi colons (;) bullet points (•) or figures in brackets (1) separate different points. • Content in the answer column in brackets is for examiner information/context to clarify the marking but is not required to earn the mark (except Accounting syllabuses where they indicate negative numbers). 3 Calculation questions: • The mark scheme will show the steps in the most likely correct method(s), the mark for each step, the correct answer(s) and the mark for each answer • If working/explanation is considered essential for full credit, this will be indicated in the question paper and in the mark scheme. In all other instances, the correct answer to a calculation should be given full credit, even if no supporting working is shown. • Where the candidate uses a valid method which is not covered by the mark scheme, award equivalent marks for reaching equivalent stages. • Where an answer makes use of a candidate’s own incorrect figure from previous working, the ‘own figure rule’ applies: full marks will be given if a correct and complete method is used. Further guidance will be included in the mark scheme where necessary and any exceptions to this general principle will be noted.

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 4 of 13 4 Annotation: • For point marking, ticks can be used to indicate correct answers and crosses can be used to indicate wrong answers. There is no direct relationship between ticks and marks. Ticks have no defined meaning for levels of response marking. • For levels of response marking, the level awarded should be annotated on the script. • Other annotations will be used by examiners as agreed during standardisation, and the meaning will be understood by all examiners who marked that paper.

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 5 of 13 Question Answer Marks 1(a) subscriptions account $ $ Balance b/d 2 100 Balance b/d 300 Income and expenditure a/c 20 000 (1) Bank 19 700 Balance c/d 500 (1) Bad/irrecoverable debts 1 500 W1 Balance c/d 1 100 (1) 22 600 22 600 Balance b/d 1 100 (1of) Balance b/d 500 (1of) W1 (6 × 100) (1) + (3 × 300) (1) = $1500 7 1(b) ZV Sports Club Income and expenditure account for the year ended 31 December 2020 $ $ Subscriptions 20 000 (1of) Profit on disposal of equipment 510 (1) Profit on sale of refreshments 6 200 (1) 26 710 Bad/irrecoverable debts 1 500 (1of) Depreciation 4 050 (1) Staff costs 18 310 } Other running costs 3 100 }(1) 26 960 Deficit for the year 250 (1of) 7

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 6 of 13 Question Answer Marks 1(c) It applies the accounting concept of prudence (1) and avoids assets/debtors being overstated (1). However, the policy has caused an additional cost in the current year which has actually arisen in earlier years (1) which has caused a surplus to turn into a deficit (1). Some members may pay later (1) if reminded (1) Members with unpaid subscriptions should not be allowed to make use of the facilities (1) perhaps by annual membership cards being available only for members who have paid their current subscription (1). Accept other valid points (1) mark for decision plus (max 4) for comments 5 1(d) ZV Sports Club Refreshments trading account for the year ended 31 December 2020 $ $ Sales 21 870 (1of) Opening inventory 600 * Purchases 15 820 W1 16 420 Closing inventory 750 *(1 both) Cost of sales 15 670 Profit 6 200 W1 16 000 (1) + (920 – 1 100) (1) = $15 820 4 1(e) In order to raise funds/make a profit (1) to finance new assets/activities of the club/provide a service to members (1) To keep subscription low (1) To attract new members (1) Max 2 Accept other valid points 2

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 7 of 13 Question Answer Marks 2(a) NT plc Statement of financial position (extract) at 31 December 2020 Equity $ Ordinary share capital 450 000 (1) Share premium 145 000 (1) General reserve 50 000 (1) Retained earnings 505 000 (1) Revaluation reserve 270 000 (1) 1 420 000 Non-current liabilities 8% debenture (2031) 200 000 (1) Current liabilities Trade and other payables 125 000 W1 Total equity and liabilities (1) 1 745 000 (1of) W1 117 000 (1) + 8 000 (1) = 125 000 10 2(b)(i) $ increase in retained earnings 505 000 – 421 000 84 000 (1) final dividend paid 40 000 } (1) interim dividend paid 20 000 } transfer to general reserve 30 000 (1) profit for the year 174 000 (1of) 4

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 8 of 13 Question Answer Marks 2(b)(ii) $ profit for the year 174 000 bank interest 7 000 (1) debenture interest 8 000 (1) profit from operations 189 000 (1of) 3 2(c) Return on capital employed/ROCE (1) to show the return on the investment in the business (1). Income gearing (1) to show the ability of a business to pay the interest out of profit (1). 4 2(d)(i) A proposed dividend is not recorded in the books of account (1). It is recorded in the cash book when it is actually paid (1). 2 2(d)(ii) A proposed dividend is not recorded in the financial statements for 2020 / is recorded in 2021 (1) but in a note to the 2020 accounts (1). 2 Question Answer Marks 3(a)(i) An event for which the condition existed at the year end (1) and which, if material, requires adjustment(s) to be made to the financial statements (1). 2 3(a)(ii) An event for which the condition arose after the year end (1) but which, if material, is disclosed by a note to the accounts (1). 2 3(b)(i) $84 000 (1) 1 3(b)(ii) $90 000 (1) 1 3(c)(i) $94 500 (1) 1 3(c)(ii) $90 000 (1) 1 3(c)(iii) $94 500 (1) – $90 000 (1) = $4 500 2 3(d) In accordance with IAS36 (1) it should be recorded as an expense (1) in the income statement (1) and a reduction in the value of the asset (1) in the statement of financial position (1). Max 4 4 3(e) In accordance with IAS10 (1) this is a non-adjusting event (1) as the fire happened after the year end (1). It should be disclosed as a note to the accounts (1). Max 3 3 3(f) It is a check on the financial statements (1) by a qualified, independent person (1). It checks that they have been prepared in accordance with legislation and accounting standards (1), that they contain no material errors and/or omissions (1) so that the auditor can report (1) on whether they give a true and fair view of the company’s performance (1). Accept other valid points. Max 3 3

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 9 of 13 Question Answer Marks 3(g) They will know that the auditor has reported that the financial statements show a true and fair view. (1) They will have more confidence in using the financial statements as a basis for further investment decisions. (1) They will be able to make comparisons with more confidence. (1) They will be assured that the directors have done their jobs properly. (1) Accept other valid points. Max 3 3 3(h) The directors are appointed by/responsible to the shareholders (1) for managing the company (1) 2 Question Answer Marks 4(a) $ 900 × 1.8 1 620 (1) 100 × 0.5 50 (1) 1 670 (1of) 3 4(b)(i) Joint venture account $ $ JV bank (purchases) 1 000 (1) Cash 1 670 (1of) JV bank (rent) 420 } JV bank (fittings) 50 (1) Amit (fittings) 180 }(1) Profit – Amit 80 } – Barry 40 }(1of) 1 720 1 720 5 4(b)(ii) Amit account $ $ JV bank 1 060 (1of) JV bank 800 (1) JV account (fittings) 180 (1) JV account (profit) 80 (1of) 1 060 1 060 4 4(b)(iii) Barry account $ $ Cash 270 (1of) JV bank 400 (1) JV bank 170 (1of) JV account (profit) 40 (1of) 440 440 4

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 10 of 13 Question Answer Marks 4(b)(iv) Joint venture bank account $ $ Amit 800 }(1) JV account (purchases) 1 000 }(1) Barry 400 } JV account (rent) 420 } JV account (fittings) 50 } Amit 1 060 } Cash 1 400 }(1) Barry 170 }(1of) 2 650 2 650 4 4(c) Negotiate lower rent for the stall. (1) Rent the fittings instead of buying them/negotiate a better deal on buying the fittings (1) Seek cheaper supplier for pastries (1) Make sure they only buy what they can sell (1) Consider reducing the selling price so that all pastries can be sold and total takings would increase (1) Accept other valid points Max 2 2 4(d) The already small profit would be split further if there was another party. (1) The profit would not necessarily be higher just because there was another party as they already can’t sell all their goods. (1) If Clara made a cash contribution it would lower the amount Amit had to pay. (1) Risk would be shared. (1) Consider whether Clara has any special knowledge. (1) There may be disputes when three coventurers are involved. (1) Accept other valid points (1) mark for decision plus (max 2) for comments 3 Question Answer Marks 5(a) $000 Total purchases 200 (1) Purchases returns 20 (1) Net purchases 180 2

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 11 of 13 Question Answer Marks 5(b) Trade payables budget for January 2021 $000 Opening balance 105 Purchases, net of returns 180 (1) 285 Payment in month of purchase 57 W1 Discount received 3 (1) Payment for December 2018 105 (1) Closing balance (180 x 2/3) 120 (1) W1 1 180 3   ×     (1) – 3 (1) = 57 6 5(c) Statement reconciling opening and closing trade payables for January 2021 $ Opening trade payables 96 000 Purchases 218 000 W1 Purchases returns (20 000) (1of) Discount received (3 300) W2 Bank (153 700) W3 Sales ledger control account (5 000) (1) Closing trade payables 132 000 W4 W1 (180 000 + 18 000) (1) + 20 000 (1of) = 218 000 W2 [ ] 1 180000 18000 3   + ×     (1of) × 5% (1) = 3 300 W3 (66 000 – 3 300) (1of) + (96 000 – 5 000) (1) = 153 700 W4 (180 000 + 18 000) (1of) 2 3 × (1) = 132 000 10 5(d) budgets may be time consuming/expensive to prepare (1) the data used in budgets are only estimates and may be inaccurate (1) a desire to achieve the budget’s targets may lead to a sub optimal use of resources (1) budgets may demotivate staff (1) budgets enable co-ordination (1) budgets enable planning/control to take place (1) budgets define areas of responsibility/set targets (1) budgets should lead to a better use of resources (1) budgets can motivate staff (1) Accept other valid points (1) mark for decision plus (max 2) for disadvantages plus (max 2) for advantages 5 5(e) a budget based on actual levels of activity (1) which enables meaningful comparisons to be made (1) 2

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 12 of 13 Question Answer Marks 6(a) based on market research (1) based on demand for existing/competitors’ products (1) based on budgets (1) Accept other valid points Any two for (1) mark each 2 6(b)(i) Year net cash flow $ discount factor discounted cash flow $ 0 (460 000) 1 (460 000) (1) 1 150 000 0.909 136 350 (1) 2 150 000 0.826 123 900 (1of) 3 150 000 0.751 112 650 (1of) 3 160 000 0.751 120 160 (1) Net present value 33 060 (1of) 6 6(b)(i) OR Year net cash flow $ discount factor discounted cash flow $ 0 (460 000) 1 (460 000) (1) 1–3 150 000 (1) 2.486 (1) 372 900 (1of) 3 160 000 0.751 120 160 (1) Net present value 33 060 (1of) 6(b)(ii) $ Initial cost (460 000) Net cash flow Year 1 150 000 Net cash flow Year 2 150 000 Net cash flow Year 3 150 000 (10 000) (1) Cash inflow End of year 3 160 000 (1) Payback period 3 years (1) 3 6(c)(i) Year net cash flow $ discount factor discounted cash flow $ 0 (100 000) 1 (100 000) (1) 1 40 000 0.909 36 360 (1) 2 40 000 0.826 33 040 (1of) 3 40 000 0.751 30 040 (1of) 3 10 000 0.751 7 510 (1) Net present value 6 950 (1of) 6

9706/34 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2021 © UCLES 2021 Page 13 of 13 Question Answer Marks 6(c)(i) OR Year net cash flow $ discount factor discounted cash flow $ 0 (100 000) 1 (100 000) (1) 1–3 40 000 (1) 2.486 (1) 99 440 (1of) 3 10 000 0.751 7 510 (1) Net present value 6 950 (1of) 6(c)(ii) $ Initial cost (100 000) Net cash flow Year 1 40 000 Net cash flow Year 2 40 000 (20 000) (1) Net cash flow Year 3 40 000 (1) Payback period 2.5 years (1) (2 years + 20/40 years) 3 6(d) NPV is higher/better for option 1 (1) Payback period is shorter/better for option 2 (1) NPV is generally considered a better method of investment appraisal (1) Both options have a positive NPV (1) Option 2 involves a smaller capital outlay which reduces risk (1) so option 1 may have higher finance costs (1) Accept other valid points (1) mark for decision plus (max 4) for comments 5