Investment appraisal — Paper 4 · A Level Accounting 9706

2 Read Source B in the insert. (a) State what is meant by the term ‘cost driver’. … … [1] (b) Calculate the total profit or loss made from the production of each product for a year. … … … … … … … … … … … … Workings: [11] Additional information Simran was concerned about the high volume of units being returned. She believed that the workers were not paying enough attention when assembling the products. She considered installing a system of surveillance cameras in the factory so that the workers could be monitored. She believed that this would totally eliminate the returns. Simran would rent the camera system for a fixed period of three years. The costs of renting and monitoring the cameras would amount to $18 000 per annum. Simran decided that this would be added to the cost of the quality inspections. The increased total would then be allocated on the same basis as before. (c) Calculate the revised total profit or loss made from the production of each product for a year if the surveillance cameras were introduced and all the returns were eliminated. … … … … … … … … … … … … [5] (d) Advise Simran whether or not she should install the system of surveillance cameras. Justify your answer. … … … … … … … … … … … … [6] (e) Comment on the suitability of the cost driver to account for the cost of the surveillance cameras. … … … … [2] [Total: 25]

25 marks

Mark scheme: 2(a) State what is meant by the term ‘cost driver’. 1 An activity which causes costs to be incurred in the production process (1) 2(b) Calculate the total profit or loss made from the production of each product for a year. 11 Product A Product B $ $ Net revenue 100 000 288 000 } Scrap 4 000 4 800 }(1) both Direct material (30 750) (152 950) } Direct labour (50 000) (138 000) }(1) both Machine set up (1 280) (1) (3 200) (1) OF Quality inspections (3 200) (1) (4 800) (1)OF Order processing (1 900) (1) (3 600) (1)OF Depreciation (6 840) (1) (8 360) (1)OF Profit/(loss) 10 030 (18 110) (1)OF both 2(c) Calculate the revised total profit or loss made from the production of each product for a year if the surveillance 5 cameras were introduced and all the returns were eliminated. EITHER Product A Product B $ $ Original profit/(loss) 10 030 (18 110) (1)OF both Loss of scrap (4 000) (4 800) (1) both Increase in revenue 25 000 43 200 (1) both Cost of cameras (7 200) (10 800) (1) both Revised profit 23 830 9 490 ((1)OF both 2(c) OR Product A Product B $ $ Net revenue 125 000 331 200 (1) both Direct material (30 750) (152 950) Direct labour (50 000) (138 000) Machine set up (1 280) (3 200) Quality inspections (10 400) (1) (15 600) (1) Order processing (1 900) (3 600) Depreciation (6 840) (8 360) Revised profit 23 830 9 490 (1)OF both Plus (1of) mark for repeating costs from (b) 2(d) Advise Simran whether or not she should install the system of surveillance cameras. Justify your answer. 6 Production of B turns from a loss to a profit. (1) The total production goes from a net loss to a profit. (1) Being monitored might encourage workers to work harder/more consistently as well as more attentively which could reduce the direct labour cost. (1) Fewer returns will improve customer perception due to quality improvement (1) but all returns may not be eliminated. (1) It might be better to increase the number of quality inspections. (1) The cause of the returns may need more investigation – there could be faulty components. (1) Workers may well be resentful/demotivated/demoralised. (1) There may be extra costs such as repairs and training. (1) If the camera system does not eliminate the returns Simran is obliged to go on paying for the cameras for the remainder of the three-year rental period. (1) Might it be cheaper in the long run to buy the cameras rather than renting them? (1) Accept other valid responses. Max 5 marks for comments. 1 mark for decision supported with comment. 2(e) Comment on the suitability of the cost driver to account for the cost of the surveillance cameras. 2 The choice of cost driver does not affect the profit of the business as a whole (1). The cost is not related to the number of inspections taking place (1). A better cost driver might be the number of workers/total labour hours (1). Max 2 Accept other valid responses.

This question in 9706/42 Feb/March 2023

1 Read Source A in the insert. (a) Calculate: (i) the net present value (NPV) of the dig … … … … … … … … … … … … … … … … … … … … … … … … … [9] (ii) the payback period … … … … … … [3] (iii) the accounting rate of return (ARR). … … … … … … [4] (b) Advise Barry whether or not he should go ahead with the dig in the farmer’s field. Justify your answer. … … … … … … … … … … … … … … … [7] (c) State two disadvantages of using ARR for investment decisions. 1 … … 2 … … [2] [Total: 25]

25 marks

Mark scheme: 1(a)(i) Calculate: the net present value (NPV) of the dig Year proceeds $ govt $ costs $ net cash flow $ discount factor discounted cash flow $ 0 (100 000) (100 000) (100 000) (1) 1 225 000 } (22 500) (116 500) 86 000 (1) 0.909 78 174 } 2 125 000 }(1) (12 500) (98 500) 14 000 (1) 0.826 11 564 } 3 100 000 } (10 000) (67 000) 23 000 (1) 0.751 17 273 } 4 50 000 }(1) (5 000) (23 000) 22 000 (1) 0.683 15 026 }(1)OF 45 000 NPV = $22 037 (1)OF 1(a)(ii) the payback period Year $ 0 (100 000) (1) 1 86 000 } 2 14 000 } (1)OF 0 Payback period = 2 years (1)OF 3 1(a)(iii) the accounting rate of return (ARR). total profit 45 000 (1)OF average profit 45 000/4 = 11 250 (1)OF average investment 100 000/2 = 50 000 (1) ARR 11 250/50 000  100 = 22.5% (1)OF 4 Question Answer Marks 1(b) Advise Barry whether or not he should go ahead with the dig in this field. Justify your answer. Max 6 marks for comments 1 mark for decision supported by a comment. The NPV is positive which indicates that it would be financially beneficial (1). The payback period is short which indicates lower risk (1). The ARR is well in excess of his cost of capital (1). The NPV method is considered to be the most reliable method (1). Despite the short payback period this is inherently a very risky venture (1). Barry cannot be certain of the quantity and condition of the items he plans to dig up (1). Nor can he be certain of the proceeds as museums may have limited budgets (1) and the value of any one item is difficult to evaluate as it may well be unique (1). There may be additional costs such as returning the field to its original condition for handing back to the farmer (1). Accept other valid responses. 7 1(c) State two disadvantages of using ARR for investment decisions. It ignores the time value of money (1). It ignores the timing of cash flows (1). Max 2 Accept other valid responses. 2

This question in 9706/41 May/June 2023

2 Read Source B in the insert. (a) Prepare the production budget (in units) for each of the months from January to April. … … … … … … … … … … … … … … [7] (b) Explain how the budgeted revenue for the four months from January to April should be calculated. … … … … [2] Additional information At present, storage space is limited, such that the maximum number of units which can be held in inventory is 3200. (c) Advise the directors of the company whether or not they should invest in a new, larger storage facility. Justify your answer. … … … … … … … … … … … … … … [7] Additional information Each unit requires two kilos of direct material. The production manager expects that this material will cost $6 per kilo in January and $7 per kilo thereafter. No inventory of direct material is kept. Half of the purchases are paid for in the month of purchase. The remainder are paid for in the following month. (d) Prepare the trade payables budget for each of the months of February and March. Include the balance of trade payables at the beginning and the end of each month. Assume that production is still as in your answer to part (a). … … … … … … … … … … … … … … [7] Additional information The directors are considering asking the company’s suppliers to introduce a cash discount of 4% on payments made in the month of purchase. (e) Explain how this change would affect the budgeted statement of profit or loss. … … … … [2]

25 marks

Mark scheme: 2(a) Prepare the production budget (in units) for each of the months from January to April. January February March April Opening inventory 1 500 (1) 2 100} 3 200} 400} (1) Production 6 600 9 500 10 000 (1) 10 000 (1) 8 100 11 600 13 200 10 400 Sales (6 000) (8 400) (12 800) (10 400) (1) Closing inventory 2 100 (1) 3 200 400 0 (1) Question Answer Marks 2(b) Explain how the budgeted revenue for the four months from January to April should be calculated. The number of sales units which equals the demand times the selling price (1) but the production constraint must be taken into account for the sales arising in April (1) Max 2 Accept other valid responses. 2 2(c) Advise the directors whether or not they should invest in a new, larger storage facility. Justify your answer. Max 6 marks for comments 1 mark for decision supported by a comment. This would enable the business to build up their inventory prior to times of expected high demand (1) which should reduce the possibility of losing sales because of a lack of goods (1). If the business had been able to hold more units of inventory at the end of February then sales would not have been lost in April (1). This would also require a change to the policy of holding only 25% of the following month’s sales (1). The business would have space to keep an inventory of direct materials as well as finished goods (1) reducing the risk inherent in relying so heavily on the ability of the supplier to keep up with demand (1). The cost of the new facility could exceed the profit foregone on the lost sales (1). There would be an impact on cash flow (1) and storage costs would also increase (1). The more inventory is held, the greater the chances of some or all being damaged, stolen, or becoming obsolete or out of fashion (1). It might be better to concentrate on increasing the maximum number of units which can be produced in a month (1) but if demand falls then it will have resulted in unnecessary costs (1). 7 Question Answer Marks 2(d) Prepare the trade payables budget for each of the months of February and March. Include the balance of trade payables at the beginning and the end of each month. Assume that production is still as in your answer to part (a). February $ March $ Opening trade payables 39 600 W1 (2)OF 66 500 (1)OF Purchases 133 000 140 000 (1)OF both 172 600 206 500 Bank – previous month (39 600) (66 500) (1)OF both Bank –current month (66 500) (70 000) (1)OF both Closing trade payables 66 500 70 000 (1)OF both W1 (6 600  6  2) (1)OF)  50% = $39 600 (1)OF 7 2(e) Explain how this change would affect the budgeted statement of profit or loss. The budgeted statement of profit or loss would then include an entry for discount received. (1) This would increase budgeted profit by 2% of purchases (1) OR Budgeted cost of sales/gross profit would be unchanged (1). 2

This question in 9706/41 May/June 2023

1 Read Source A in the insert. (a) Calculate: (i) the net cash flow for each year and in total for the project … … … … … … … … … [4] (ii) the accounting rate of return (ARR) to two decimal places. … … … … … … [3] Additional information Hiram’s cost of capital was 10%. The relevant discount factors were as follows: Year Discount factors 1 0.909 2 0.826 3 0.751 4 0.683 (b) Calculate the net present value (NPV) of the project. … … … … … … … … [4] Additional information As Hiram remained undecided as to whether he should proceed, the residents made a further suggestion. In addition to the sea wall, Hiram could build an extension to enable local fishermen to land their catches more easily. This would add $20 000 to the building cost. The residents believed that if the extension was built, it would result in a further increase of another 20 new houses being built in each of the years 2, 3 and 4. (c) Calculate the change in NPV which would arise if the extension was also built. Your answer should indicate whether the change is an increase or a decrease. … … … … … … … … … … [7] (d) Advise Hiram whether or not he should agree to build the sea wall and the extension. Justify your answer. … … … … … … … … … … … … … … … [7] [Total: 25]

25 marks

Mark scheme: 1(a)(i) the net cash flow for each year and in total for the project. $ $ Year 0 – cost (400 000) (1) Year 1 – grant 142 000 Year 1 – fees 64 000 206 000 Year 2 – fees 80 000 (1) Year 3 – fees 96 000 Year 4 – fees 112 000 (1) 94 000 (1)OF 1(a)(ii) Calculate: the accounting rate of return (ARR) to two decimal places. 23500 200000 (1of) (1)  100 = 11.75% (1)OF 3 Question Answer Marks 1(b) Calculate the net present value (NPV) of the project. Year Cash flow $ Discount factor Discounted cash flow $ 0 (400 000) (400 000) (1) 1 206 000 0.909 187 254 2 80 000 0.826 66 080 (1) OF 3 96 000 0.751 72 096 4 112 000 0.683 76 496 (1) OF NPV 1 926 (1) OF 4 Question Answer Marks 1(c) Calculate the change in NPV which would arise if the extension was also built. Your answer should indicate whether the change is an increase or a decrease. Year Cash flow $ Discount factor Discounted cash flow $ 0 (420 000) (420 000) (1) 1 206 000 0.909 187 254 2 84 000 (1) 0.826 69 384 3 104 000 (1) 0.751 78 104 4 124 000 (1) 0.683 84 692 (1) OF NPV (566) Change in NPV = 1926 – (– 566) = 2492 (1) OF decrease (1) OF 7 Question Answer Marks 1(c) OR Year Cash flow $ Discount factor Discounted cash flow $ 0 (20 000) (20 000) (1) 1 0 0.909 0 2 4 000 (1) 0.826 3 304 3 8 000 (1) 0.751 6 008 4 12 000 (1) 0.683 8 196 (1) OF Decrease (1) OF increase in NPV (2 492) (1) OF Question Answer Marks 1(d) Advise Hiram whether or not he should agree to build the sea wall and the extension. Justify your answer. Max 6 marks for comments 1 mark for decision supported by a comment. Building the sea wall alone has a positive NPV (1). But when the extension is added to the project the total NPV becomes negative (1). The ARR of the sea wall alone is greater than Hiram’s cost of capital (1). But when the extension is added the ARR will change (1). There is considerable risk involved in this project (1) as the figures are based on estimates (1). The existing residents may change their minds and not pay their annual fees (1). The new houses may not be built or their owners may not want to pay an annual fee (1). Hiram may have a desire to help the community such that he would take on a project at a loss (1). He may have been chosen by the village because he already has links with it/has family there/lives there himself (1). Accept other valid responses. 7

This question in 9706/42 May/June 2023

2 Read Source B in the insert. (a) Complete the following statement to reconcile the flexible budgeted profit with the actual profit for April 2023. Statement to reconcile flexible budgeted profit and actual profit for April 2023 $ $ $ Flexible budgeted profit 25 500 Variance Favourable Adverse Sales price Material price Material usage Labour rate Labour efficiency Fixed overhead expenditure Fixed overhead volume _________ _________ _________ _________ _________ _________ Actual profit _________ Workings: [15] Additional information The directors of QW plc discovered that the company was losing customers because they preferred the competitor’s product as it was recyclable. QW plc’s product was made of non‑recyclable material. (b) Explain one possible reason for the material price variance. … … … … [2] (c) Explain one possible reason for the labour efficiency variance. … … … … [2] (d) Advise the directors whether or not they should replace the existing material used in production with a recyclable material. The recyclable material would cost $24 per kg. Justify your answer and support it with relevant calculations. … … … … … … … … … … … … [6] [Total: 25]

25 marks

Mark scheme: 2(a) $ $ $ Budgeted profit 25 500 Variance Favourable Adverse Sales price (190–165)  750 18 750 (2) Materials price (18–15)  3150 9 450 (2) Materials usage (4–4.2)  13500 2 700 (2) Labour rate (12–10.5)  2550 3 825 (2) Labour efficiency (3–3.4)  9000 3 600 (2) Fixed overhead expenditure (48 000–46 200) 1 800 (2) Fixed overhead volume (48 000–36 000) ______ 12 000 (2) 15 075 37 050 (21 975) Actual profit 3 525 (1) Marks for variances – (1) for amount and (1) for favourable / adverse Question Answer Marks 2(b) Explain one possible reason for the materials price variance. The market price for the material had fallen (1) because there is lower demand for non recyclable material (1). NOT lower quality material Accept other valid responses. 2 2(c) Explain one possible reason for the labour efficiency variance. More hours have been worked (1) because the hourly rate had been cut / the workers were demotivated (1). NOT less experienced workers had been hired. Accept other valid responses. 2 Question Answer Marks 2(d) Advise the directors whether or not they should replace the existing material used in production with a recyclable material. The recyclable material would cost $24 per kilo. Justify your answer and support it with relevant calculations. Max 2 marks for calculations Max 3 marks for comments 1 mark for decision supported by a comment. With the cost of the new material the profit from the flexible budget statement would be only $7500/fall by $18 000 (750  4  6) (1) and the actual profit would be a loss of $24 825/fall by $28 350 (750  4.2  9) (1). The new material is more expensive (1). If the company does not make the change it may struggle to continue production / make sales (1). If the product became more popular again the selling price / sales could increase (1). Costs of advertising would have to increase to ensure that customers knew of the change (1). There may be factors other than the recyclability of the material affecting customer behaviour (1). Consideration would have to be paid to the selling price of competitors’ products (1). Accept other valid responses. 6

This question in 9706/42 May/June 2023

1 Read Source A in the insert. (a) Calculate: (i) the net present value (NPV) of the dig … … … … … … … … … … … … … … … … … … … … … … … … … [9] (ii) the payback period … … … … … … [3] (iii) the accounting rate of return (ARR). … … … … … … [4] (b) Advise Barry whether or not he should go ahead with the dig in the farmer’s field. Justify your answer. … … … … … … … … … … … … … … … [7] (c) State two disadvantages of using ARR for investment decisions. 1 … … 2 … … [2] [Total: 25]

25 marks

Mark scheme: 1(a)(i) Calculate: the net present value (NPV) of the dig Year proceeds $ govt $ costs $ net cash flow $ discount factor discounted cash flow $ 0 (100 000) (100 000) (100 000) (1) 1 225 000 } (22 500) (116 500) 86 000 (1) 0.909 78 174 } 2 125 000 }(1) (12 500) (98 500) 14 000 (1) 0.826 11 564 } 3 100 000 } (10 000) (67 000) 23 000 (1) 0.751 17 273 } 4 50 000 }(1) (5 000) (23 000) 22 000 (1) 0.683 15 026 }(1)OF 45 000 NPV = $22 037 (1)OF 1(a)(ii) the payback period Year $ 0 (100 000) (1) 1 86 000 } 2 14 000 } (1)OF 0 Payback period = 2 years (1)OF 3 1(a)(iii) the accounting rate of return (ARR). total profit 45 000 (1)OF average profit 45 000/4 = 11 250 (1)OF average investment 100 000/2 = 50 000 (1) ARR 11 250/50 000  100 = 22.5% (1)OF 4 Question Answer Marks 1(b) Advise Barry whether or not he should go ahead with the dig in this field. Justify your answer. Max 6 marks for comments 1 mark for decision supported by a comment. The NPV is positive which indicates that it would be financially beneficial (1). The payback period is short which indicates lower risk (1). The ARR is well in excess of his cost of capital (1). The NPV method is considered to be the most reliable method (1). Despite the short payback period this is inherently a very risky venture (1). Barry cannot be certain of the quantity and condition of the items he plans to dig up (1). Nor can he be certain of the proceeds as museums may have limited budgets (1) and the value of any one item is difficult to evaluate as it may well be unique (1). There may be additional costs such as returning the field to its original condition for handing back to the farmer (1). Accept other valid responses. 7 1(c) State two disadvantages of using ARR for investment decisions. It ignores the time value of money (1). It ignores the timing of cash flows (1). Max 2 Accept other valid responses. 2

This question in 9706/43 May/June 2023

2 Read Source B in the insert. (a) Prepare the production budget (in units) for each of the months from January to April. … … … … … … … … … … … … … … [7] (b) Explain how the budgeted revenue for the four months from January to April should be calculated. … … … … [2] Additional information At present, storage space is limited, such that the maximum number of units which can be held in inventory is 3200. (c) Advise the directors of the company whether or not they should invest in a new, larger storage facility. Justify your answer. … … … … … … … … … … … … … … [7] Additional information Each unit requires two kilos of direct material. The production manager expects that this material will cost $6 per kilo in January and $7 per kilo thereafter. No inventory of direct material is kept. Half of the purchases are paid for in the month of purchase. The remainder are paid for in the following month. (d) Prepare the trade payables budget for each of the months of February and March. Include the balance of trade payables at the beginning and the end of each month. Assume that production is still as in your answer to part (a). … … … … … … … … … … … … … … [7] Additional information The directors are considering asking the company’s suppliers to introduce a cash discount of 4% on payments made in the month of purchase. (e) Explain how this change would affect the budgeted statement of profit or loss. … … … … [2]

25 marks

Mark scheme: 2(a) Prepare the production budget (in units) for each of the months from January to April. January February March April Opening inventory 1 500 (1) 2 100} 3 200} 400} (1) Production 6 600 9 500 10 000 (1) 10 000 (1) 8 100 11 600 13 200 10 400 Sales (6 000) (8 400) (12 800) (10 400) (1) Closing inventory 2 100 (1) 3 200 400 0 (1) Question Answer Marks 2(b) Explain how the budgeted revenue for the four months from January to April should be calculated. The number of sales units which equals the demand times the selling price (1) but the production constraint must be taken into account for the sales arising in April (1) Max 2 Accept other valid responses. 2 2(c) Advise the directors whether or not they should invest in a new, larger storage facility. Justify your answer. Max 6 marks for comments 1 mark for decision supported by a comment. This would enable the business to build up their inventory prior to times of expected high demand (1) which should reduce the possibility of losing sales because of a lack of goods (1). If the business had been able to hold more units of inventory at the end of February then sales would not have been lost in April (1). This would also require a change to the policy of holding only 25% of the following month’s sales (1). The business would have space to keep an inventory of direct materials as well as finished goods (1) reducing the risk inherent in relying so heavily on the ability of the supplier to keep up with demand (1). The cost of the new facility could exceed the profit foregone on the lost sales (1). There would be an impact on cash flow (1) and storage costs would also increase (1). The more inventory is held, the greater the chances of some or all being damaged, stolen, or becoming obsolete or out of fashion (1). It might be better to concentrate on increasing the maximum number of units which can be produced in a month (1) but if demand falls then it will have resulted in unnecessary costs (1). 7 Question Answer Marks 2(d) Prepare the trade payables budget for each of the months of February and March. Include the balance of trade payables at the beginning and the end of each month. Assume that production is still as in your answer to part (a). February $ March $ Opening trade payables 39 600 W1 (2)OF 66 500 (1)OF Purchases 133 000 140 000 (1)OF both 172 600 206 500 Bank – previous month (39 600) (66 500) (1)OF both Bank –current month (66 500) (70 000) (1)OF both Closing trade payables 66 500 70 000 (1)OF both W1 (6 600  6  2) (1)OF)  50% = $39 600 (1)OF 7 2(e) Explain how this change would affect the budgeted statement of profit or loss. The budgeted statement of profit or loss would then include an entry for discount received. (1) This would increase budgeted profit by 2% of purchases (1) OR Budgeted cost of sales/gross profit would be unchanged (1). 2

This question in 9706/43 May/June 2023

1 Read Source A in the insert. (a) Prepare the flexible budget statement for the month of April. … … … … … … … … [3] (b) Calculate the following variances: (i) sales price … … … … [2] (ii) sales volume (as a measure of change in profit) … … … … [2] (iii) fixed overhead expenditure … … … … [2] (iv) fixed overhead volume. … … … … [2] (c) Prepare a statement to reconcile the flexible budgeted profit as calculated in (a) with the actual profit. Your statement should start with the flexible budgeted profit. … … … … … … … … … … … … … … [7] Additional information An analysis of direct material variance shows that both the material price and material usage have an adverse variance. The directors of T Limited are considering changing the existing supplier. They have two potential suppliers to consider. Local supplier A Overseas supplier B Usage per unit after wastage 2.8 kilos 2.5 kilos Purchase price per kilo quoted by supplier $13.75 $15.40 (d) Advise the directors which supplier they should choose. Justify your answer and support it with relevant calculations. … … … … … … … … … … … … … … … … … … [7] [Total: 25]

25 marks

Mark scheme: Question Answer Marks 1(a) Prepare the flexible budget statement for the month of April. 3 $ Sales revenue ($184 000/2 000)  2180 200 560 } Direct materials ($84 000/2 000)  2180 91 560 } Direct labour ($60 000/2 000)  2180 65 400 } (1) Fixed overhead ($18 000/2 000)  2180 19 620 (1) Total cost 176 580 Budgeted profit 23 980 (1) OF 1(b)(i) Calculate the following variances: 2 sales price Sales price variance $184 000/2000 = $92 (2180  $92) – $196 200= $4360 (1) A (1) 1(b)(ii) Calculate the following variances: 2 sales volume (as a measure of change in profit) Sales volume variance $22 000/2000 =$11 (2180 – $2000)  $11=$1980 (1) F (1) 1(b)(iii) Calculate the following variances: 2 fixed overhead expenditure Fixed overhead expenditure $18 400 – $18 000 = $400 (1) A (1) 1(b)(iv) Calculate the following variances: 2 fixed overhead volume Fixed overhead volume $19 620 OF – $18 000 = $1620 (1) F (1) 1(c) Prepare a statement to reconcile the flexible budgeted profit as calculated in (a) with the actual profit. Your 7 statement should start with the flexible budgeted profit. $ Flexible budgeted profit 23 980 (1)OF Sales price variance (4 360) A} Direct materials variance ($113 796 – $91 560) (22 236) A (2) Direct labour variance ($65 400 – 55 590) 9 810 F (2) Fixed overhead expenditure (400) A} Fixed overhead volume 1 620 F} (1)OF Actual profit 8 414 (1) 1(d) Advise the directors which supplier they should choose. Justify your answer and support it with relevant 7 calculations. Calculations The unit cost for both suppliers is the same – (2.8  $13.75) = (2.5  $15.40) = $38.50 (1) The unit cost $38.5 by either supplier is lower than the budgeted cost of $42 ($84 000/2 000) and actual cost of $52.20 ($113 796/2 180) (1) Max 2 Comments The quality of materials from supplier B is better than from A (1) because of less wastage (1) Direct material of poor quality may affect the efficiency of workers as well as the quality of final product (1) The unit purchase price of supplier A is lower than B (1) Additional costs may be incurred for supplier B, i.e. import duty, freight charge and insurance (1) As delivery takes time, prompt delivery from supplier B may not be possible (1) for an urgent order (1) Max 4 Decision supported by a comment (1) Accept other valid responses.

This question in 9706/43 Oct/Nov 2023

2 Read Source B in the insert. (a) Prepare a statement showing the net cash flow for each year from Year 0 to Year 3 for: (i) model IM3 … … … … … … … … … … … … … … … … … … [5] (ii) model IM8. … … … … … … … … … … … … … … … … … … [4] Additional information W Limited uses a cost of capital of 12%. The relevant discount factors are as follows: year discount factor 1 0.893 2 0.797 3 0.712 (b) State two advantages of using the net present value (NPV) method for investment appraisal. 1 … … 2 … … [2] (c) Calculate the NPV for each model of machine. … … … … … … … … … … … … … … [4]

15 marks

Mark scheme: 2(a)(i) Prepare a statement showing the net cash flow for each year from Year 0 to Year 3 for: 5 model IM3 Option 1 – Model IM3 Year 0 Year 1 Year 2 Year 3 $ $ $ $ Purchase price (141 000) } Cost of improvement (57 000) }(1) Sales W1 624 000 780 000 520 000 (1) row Operating cost W2 (288 000) (360 000) (240 000) (1) row Other fixed overheads W3 (261 000) (261 000) (261 000) (1) row Net cash flow (198 000) 75 000 159 000 19 000 (1)OF row Alternative presentation Purchase price Cost of Sales Operating cost Other fixed Net cash improvement W1 W2 overheads flow W3 $ $ $ $ $ $ Year 0 (141 000)} (57 000)} (1) (198 000) Year 1 624 000 (288 000) (261 000) 75 000 Year 2 780 000 (360 000) (261 000) 159 000 Year 3 520 000 (240 000) (261 000) 19 000 (1) col (1) col (1) col (1) OF col W1 12 000  $52=$624 000, 15 000  $52=$780 000, 10 000  $52=$520 000 W2 12 000  $4.80  5=$288 000, 15 000  $4.80 x5=$360 000, 10 000  $4.80 x5=$240 000 W3 Depreciation ($141 000 + $57 000)/3=$66 000 $327 000 – $66 000=$261 000 2(a)(ii) Prepare a statement showing the net cash flow for each year from Year 0 to Year 3 for: 4 model IM8 Option 2 – Model IM8 Year 0 Year 1 Year 2 Year 3 $ $ $ $ Purchase price (420 000) Sales W1 624 000 936 000 520 000 (1) row Operating cost W2 (230 400) (345 600) (192 000) (1) row Other fixed overheads W3 (215 000) (215 000) (215 000) (1) row Net cash flow (420 000) 178 600 375 400 113 000 (1)OF row Alternative presentation Purchase price Sales Operating cost Other fixed Net cash W1 W2 overheads flow W3 $ $ $ $ $ Year 0 (420 000)} (420 000) Year 1 624 000 (230 400) (215 000) 178 600 Year 2 936 000 (345 600) (215 000) 375 400 Year 3 520 000 (192 000) (215 000) 113 000 (1) col (1) col (1) col (1) col W1 12 000  $52 = $624 000, 18 000  $52 = $936 000, 10 000  $52 = $520 000 W2 12 000  $4.8  4=$230 400, 18 000x$4.8x4=$345 600, 10 000  $4.8  4 = $192 000 W3 Depreciation $420000/3 = $140 000 $355 000-$140 000 = $215 000 2(b) State two advantages of using the net present value (NPV) method for investment appraisal. 2 It takes into account cash flow which is more objective than profitability (1) It takes into account the time value of money (1) It takes into account all cash flows of an investment/a project (1) Max 2 Accept other valid responses. 2(c) Calculate the NPV for each model of machine. 4 NPV of IM3 Net cash Discount Present Year flow factor value $ $ 0 (198 000) 1 (198 000) } 1 75 000 0.893 66 975 } 2 159 000 0.797 126 723 } 3 19 000 0.712 13 528 }(1OF) NPV 9 226 (1OF) NPV of IM8 Net cash Discount Present Year flow factor value $ $ 0 (420 000) 1 (420 000) } 1 178 600 0.893 159 490 } 2 375 400 0.797 299 194 } 3 113 000 0.712 80 456 }(1OF) 119 140 (1OF) 2(d) Advise the directors which model W Limited should choose. Justify your answer. 7 IM8 has a higher positive NPV than IM3 (1) IM8 is more efficient than IM3, i.e. fewer machine hours resulting in lower operating costs (1) IM8 has a higher initial outlay (1) Opportunity cost has to be considered (1) The method of financing IM8 has to be considered (1) IM3 has been used before and there is no need for training of workers, but IM8 may require training (1) IM8 is a new model and the quality of products may be better (1) IM8 has more production capacity to meet urgent sales orders (1) Max 6 for comments. Decision supported by a comment (1) Accept other valid responses. 2(e) Calculate the change in NPV of IM3 if the additional cost is incurred. 3 $ NPV of additional revenue ($18000-$15000) x ($52 – $4.8  5) x 0.797 66 948 (1) NPV of additional improvement cost $5000  0.893 (4 465) (1) Increase in NPV 62 483 (1) OF

This question in 9706/43 Oct/Nov 2023

1 Read Source A in the insert. (a) Explain why non-financial factors are disregarded by traditional investment appraisal techniques. … … … … [2] (b) Suggest two non-financial factors which are disregarded by traditional investment appraisal techniques. 1 … 2 … [2] Additional information The directors of RP plc are considering paying $100 000 to acquire a licence. This would give the company the right to manufacture and sell a product for the next four years. The following budgeted information is available. Units produced and Selling price per unit Variable costs per unit Year sold $ $ 1 6 000 19 11 2 10 000 22 11 3 8 000 18 13 4 4 000 15 14 Fixed costs excluding amortisation (depreciation) are expected to amount to $19 000 per annum. (c) Calculate the net cash flow expected to arise in each of the years 1 to 4. … … … … … … … … … [4] Additional information Discount factors are as follows: Year 10% 15% 1 0.909 0.870 2 0.826 0.756 3 0.751 0.658 4 0.683 0.572 (d) Calculate, to two decimal places, the internal rate of return (IRR) of the purchase of the licence. … … … … … … … … … … … … … … … … … … … … [8] (e) Discuss whether it would be better on financial grounds for the company to stop production at the end of year 3. Assume that the fixed costs and the cost of the licence would be unchanged. Calculations are not required. … … … … … … [3] Additional information The IRR arising from the purchase of the licence was higher than the company’s cost of capital, and so it was decided to go ahead with the purchase. One of the directors thought that the decision was hasty and that other investment appraisal techniques should also be used. (f) Advise the directors whether or not other investment appraisal techniques should also be used. Justify your answer. Calculations are not required. … … … … … … … … … … … … [6] [Total: 25]

25 marks

Mark scheme: Question Answer Marks 1(a) Explain why non-financial factors are disregarded by traditional 2 investment appraisal techniques. Investment appraisal techniques are based on monetary analysis (1) and non- financial factors cannot be expressed in monetary terms (1). Accept other valid responses. 1(b) Suggest two non-financial factors which are disregarded by traditional 2 investment appraisal techniques. Any two reasonable answers for (1) mark each, e.g. improvement in staff morale, improvement in customer satisfaction, effect on the environment, competitive advantage, effect of job losses to social welfare. Accept other valid responses. 1(c) Calculate the net cash flow expected to arise in each of the years 1 to 4. 4 Sales Variable Fixed Net cash Year costs costs flow $ $ $ $ 1 114 000 (66 000) (19 000) 29 000 (1) 2 220 000 (110 000) (19 000) 91 000 (1) 3 144 000 (104 000) (19 000) 21 000 (1) 4 60 000 (56 000) (19 000) (15 000) (1) 1(d) Calculate, to two decimal places, the internal rate of return (IRR) of the 8 purchase of the licence. Net cash Present Present flow value at value at Year 10% 15% $ $ $ 0 (100 000) (100 000) (100 000) (1) 1 29 000 0.909 26 361 0.870 25 230 (1)OF 2 91 000 0.826 75 166 0.756 68 796 (1)OF 3 21 000 0.751 15 771 0.658 13 818 (1)OF 4 (15 000) 0.683 (10 245) 0.572 (8 580) (1)OF Net present value 7 053 (736) (1)OF IRR = 10% + [(15%-10%)  7053/(7053+736)] (1)OF = 14.53% (1)OF 1(e) Discuss whether it would be better on financial grounds for the 3 company to stop production at the end of year 3. Assume that the fixed costs and the cost of the licence would be unchanged. Calculations are not required. Even though the net cash flow in year 4 is negative/results for year 4 show a loss instead of a profit (1) production creates a positive contribution (1) and so should continue (1). Note – mark on an own figure basis Accept other valid responses. 1(f) Advise the directors whether or not other investment appraisal 6 techniques should also be used. Justify your answer. Calculations are not required. General comments (max 3) Using additional techniques will be more time consuming (1) and the validity of the outcomes will still depend on the accuracy of the estimated values (1). But they may highlight other aspects of the decision, particularly with regard to the level of risk (1). IRR is based on NPV (1) which is widely accepted as the most suitable method of investment appraisal. (1) Payback (max 1) It is simple to calculate and understand (1). It recognises that the sooner cash is received the less risk there is in an investment (1). But it ignores the time value of money (1). It ignores cash flows arising after the payback period (1). Accounting rate of return (max 1) It looks at the earnings over the whole life of an investment in the same way as IRR and NPV (1). It is based on profits which may be more subjective/affected by accounting policies (1). Like payback it ignores the time value of money (1). Decision supported by a comment (1) Accept other valid responses

This question in 9706/42 Feb/March 2024

2 Read Source B in the insert. (a) State why cost drivers are used in the application of activity based costing (ABC). … … [1] (b) Calculate the selling price of one unit of each product. … … … … … … … … … … … … … … … … … Workings: [9] Additional information Sooraj is considering using machine hours rather than carrying values to allocate the depreciation cost. (c) Calculate the change in selling price of one unit of each product if Sooraj uses machine hours as the cost driver for depreciation cost. … … … … … … … … … … … … … [5] (d) Explain the relationship between the choice of cost driver and profit. … … … … … … [3] Additional information In recent months, actual results have been unfavourable in comparison with the budgeted figures. On one occasion, the manufacture of Product A had been stopped and sales lost because the sole supplier of some of the components of that product had been unable to fulfil Sooraj’s orders. Sooraj is considering manufacturing these components in his own factory instead of buying them in. He estimates that the total direct material cost of Product A would fall to $30 per unit and that the labour requirement for Product A would increase to 5 hours per unit, with the wage rate unchanged. The budgeted depreciation cost would increase by $8000 per annum. Sooraj is unclear whether overheads other than depreciation would be affected. (e) Advise Sooraj whether or not he should manufacture these components for Product A in his own factory. Justify your answer. Your answer should include any effect on the costs of Product B. … … … … … … … … … … … … … … … … … … …

18 marks

Mark scheme: 2(a) State why cost drivers are used in the application of ABC. Cost drivers relate cost and effect in allocating indirect costs. (1) OR Cost drivers assist in allocating overheads to activities (1) Accept other valid responses 1 Question Answer Marks 2(b) Calculate the selling price of one unit of each product. A B $ $ Direct material 80 } 66 } Direct labour 33 }(1) 78 }(1) Quality inspections W1 8.40 11.20 (1) both Order processing W2 12 16 (1) both Depreciation W3 9.45 10.08 (1) both Other overheads W4 20 20 (1) both Cost 162.85 201.28 (1)OF both Mark-up 162.85 201.28 Selling price 325.70 (1)OF 402.56 (1)OF W1 8 960  210/560 = 3 360 3 360/400 = 8.40 8 960  350/560 = 5 600 5 600/500 = 11.20 W2 12 800  120/320 = 4 800 4 800/400 = 12 12 800  200/320 = 8 000 8 000/500 = 16 W3 8 820  54/126 = 3 780 3 780/400 = 9.45 8 820  72/126 = 5 040 5 040/500 = 10.08 W4 18 000/900 = 20 18 000  400/900 = 8 000 18 000  500/900 = 10 000 9 Question Answer Marks 2(b) OR A B $ $ Direct material 32 000 } 33 000 } Direct labour 13 200 } (1) 39 000 }(1) Quality inspections W1 3 360 5 600 (1) both Order processing W2 4 800 8 000 (1) both Depreciation W3 3 780 5 040 (1) both Other overheads W4 8 000 10 000 (1) both Cost 65 140 100 640 (1)OF both Mark-up 65 140 100 640 Revenue 130 280 201 280 Selling price 325.70 (1)OF 402.56 (1)OF Question Answer Marks 2(c) Calculate the change in selling price of one unit of each product if Sooraj uses machine hours as the cost driver. A B $ $ Total machine hours 1200 3000 Revised depreciation W1 2520(1) OR 6.30(1) 6300 OR 12.60 (1) (1) Original depreciation (3780) 9.45 (5040) 10.08 Change in depreciation (1260) 3.15 1260 2.52 Cost change per unit (3.15) 2.52 (1)OF both Change in selling price decrease 6.30 1(OF) increase 5.04 (1)OF W1 8820  1200/4200 = 2520 8820  3000/4200 = 6300 5 Question Answer Marks 2(c) OR A B $ $ Total machine hours 1200 3000 Original total cost 65 140 100 640 Revised depreciation W1 2 520(1) 6 300 (1) Original depreciation (3 780) (5 040) Revised total cost 63 880 101 900 Revised revenue 127 760 203 800 Revised selling price 319.40 407.60 (1)OF both Original selling price (325.70) (402.56) Change in selling price decrease 6.30 (1) OF increase 5.04 (1)OF 2(d) Explain the relationship between the choice of cost driver and profit. The choice of cost driver does not affect the total costs (1) as it merely moves costs between products (1). It will affect profits if products have a percentage mark-up (1) but will have no effect where a fixed mark-up is used (1). Max 3 Accept other valid responses. 3 Question Answer Marks 2(e) Advise Sooraj whether or not he should manufacture these components for Product A in his own factory. Justify your answer. For (max 2) It could decrease the total cost of the business (1) by [400  (50 – 22) – 8000] = $3200 (1). He could use any spare capacity in the factory (1). He is not dependant on supplier / no delivery charge (1). He might be able to improve the quality of the components as he would be making them for his own use (1). His business reputation might improve if it is seen as an expanding business (1). Against (max 2 ) He may require new machinery (1) and may have to finance the purchase of the new machinery (1). Extra space for the production may be required (1). Additional workers may not be available (1). Staff training would be needed / staff would lack the necessary expertise / quality may worsen (1). The problems which affected the supplier’s ability to meet demand might also affect Sooraj (1). If he maintained the same percentage mark-up, the decrease in cost would actually reduce profit (1). There may be environmental issues due to extra production (1). Effect on product B (max 2) He might need to process fewer purchase orders (1). This would increase the cost savings for product A and the allocation of overheads to product B might increase (1). OR More quality inspections might be needed to be assured of the quality of the components (1). This would decrease the cost savings for product A and allocation of overheads to product B might decrease (1). Accept other valid responses. Decision supported with a comment (1) 7

This question in 9706/42 May/June 2024

2 Read Source B in the insert. (a) Explain how the internal rate of return (IRR) can be used to make a capital investment decision. … … … … … … … … … … [4] (b) Calculate for Machine A: (i) the net present value (NPV) … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (ii) the internal rate of return (IRR) … … … … … … … … … … … … … … [4] (iii) the accounting rate of return (ARR). … … … … … … … … [4]

18 marks

Mark scheme: 2(a) Explain how the internal rate of return (IRR) can be used to make a capital investment decision. 4 Internal rate of return (IRR) considers the time value of money (1) which gives a rate of discount that yields a zero net present value / the present value of total cash inflows equal to the present value of total cash outflows. (1) When capital investment has an IRR above the cost of capital rate, it will give a positive net present value (1) and the capital investment should be accepted. (1) If there are two mutually exclusively capital investments and both give an IRR above the cost of capital rate, the capital investment with higher IRR will be chosen. (1) Max 4 Accept other valid responses. 2(b)(i) Calculate: 6 the net present value (NPV) Direct Direct Fixed Net Discount Year Sales Machine materials Labour overhead cash 10% Present value $ $ $ $ $ $ $ $ 0 (180 000) 1 (180 000) (1) 1 200 000 30 000 48 000 90 000 32 000 } 0.909 29 088 }* 2 300 000 45 000 72 000 90 000 93 000 }(1) 0.826 76 818 }*(1)OF 3 400 000 60 000 96 000 90 000 154 000 }** 0.751 115 654 }*** }**( }***(1)O 4 100 000 15 000 24 000 90 000 (29 000) 1) 0.683 (19 807) F NPV 1 000 000 (180 000) 150 000 240 000 360 000 250 000 21 753 (1)OF 2(b)(ii) Calculate: 4 the internal rate of return (IRR) 10% +[ $21 753/($21 753 + $611) ](1)OF  (16% – 10%) (1) = 15.84% (1)OF Net Discount Year cash 16% $ $ 0 (180 000) 1 (180 000) 1 32 000 0.862 27 584 2 93 000 0.743 69 099 3 154 000 0.641 98 714 4 (29 000) 0.552 (16 008) (611) (1)OF 2(b)(iii) Calculate: 4 the accounting rate of return (ARR) Total profit $250 000 – $180 000 = $70 000 (1) Average profit $70 000/4 = $17 500 (1)OF Accounting rate of return $17 500/($180 000÷2) (1) = 19.44% (1)OF 2(c) Advise the directors which machine they should buy. Justify your answer. 7 Machine A (Max 3) The direct cost of Machine A is lower (1) The average profit of Machine A is higher than Machine B (A $17 500; B $80 000  20.94% = $16 752) (1) The after-sale service of local company should be better than overseas company (1) The total profit of Machine A is higher (1) The total net cash inflow of Machine A is higher (A $250 000; B $16 752  4 + $160 000 = $227 008) (1) Machine B (Max 3) Machine B has a higher NPV (1) Machine B has a higher IRR (1) Machine B has a higher ARR (1) The initial cost of Machine B is lower (1) Directors should also consider other factors such as import duty, time of delivery and foreign exchange (1) Decision supported with a comment (1) Accept other valid responses

This question in 9706/41 Oct/Nov 2024

2 Read Source B in the insert. (a) Calculate: (i) the net present value (NPV) … … … … … … … … … … [4] (ii) the internal rate of return (IRR) … … … … … … … … … … [5] (iii) the accounting rate of return (ARR). … … … … [3] Additional information The directors adopt the NPV method for this investment appraisal and are about to make the decision to buy the machine. The sales manager, however, thinks that the annual estimated sales revenue may be only $380 000. All other information will remain the same. (b) Discuss whether the directors should be concerned about the uncertainty over the estimated sales revenue. Support your answer with calculations. … … … … … … … … … … … … … … [6] Additional information The directors are preparing the cash budget for Year 4. They have two options available for an amount of $80 000. Option 1 Continue to manufacture Product A for two more years by launching a promotional campaign. (Despite the machine being fully depreciated, it can continue to be used for two more years.) Option 2 Start designing a new product, Product B, to be launched in Year 5. (c) Advise the directors which option they should choose. Justify your answer. … … … … … … … … … … … … … … … … … [7] [Total: 25]

25 marks

Mark scheme: 2(a)(i) Calculate: 4 the net present value (NPV) Net cashflow 12% PV $ $ Year 0 (240 000) 1 (240 000) (1) Year 1 W1 87 000 (1) 0.893 77 691 } Year 2 87 000 0.797 69 339 } Year 3 87 000 0.712 61 944 } Year 4 87 000 0.636 55 332 } (1) NPV 24 306 (1)OF OR $87 000 (1)  3.038 (1) – $240 000 (1) = $24 306 (1)OF W1 $27 000 + ($240 000/4) = $87 000 2(a)(ii) Calculate: 5 the internal rate of return (IRR) NPV at the discount rate of 18% $87 000 x 2.69 (1) - $240 000= ($5 970) (1)OF 12% + $24 306/ ($24 306+$5 970) (1)OF x (18%-12%) (1) = 16.82% (1)OF Alternatively $ $ 0 (240 000) 1.00 (240 000) 1 87 000 0.847} 73 689 2 87 000 0.718} 62 466 3 87 000 0.609} 52 983 4 87 000 0.516}(1) 44 892 NPV (5 970) (1)OF 12% + $24 306/($24 306 + $5 970) (1)OF  (18% – 12%) (1) = 16.82% (1)OF 2(a)(iii) Calculate: 3 the accounting rate of return (ARR) ARR = (27 000 (1) / 120 000 (1))  100 = 22.5% (1)OF 2(b) Discuss whether the directors should be concerned about the uncertainty over the estimated sales revenue. 6 Support your answer with calculations. Net cashflow 12% PV $ $ Year 0 (240 000) 1 (240 000) (1) Year 1 67 000 OF 0.893} 59 831 Year 2 67 000 0.797} 53 399 Year 3 67 000 0.712} 47 704 Year 4 67 000 0.636} (1) 42 612 NPV (36 454) (1)OF OR $67 000 (1)OF  3.038 (1) – $240 000 =$(36 454) (1) OF Comments NPV / investment appraisal always depends on estimates (1) The NPV reduces / is negative (1) The directors should be concerned about the uncertainty / would change their decision (1) Max 3 for calculations Max 3 for comments Accept other valid responses. 2(c) Advise the directors which option they should choose. Justify your answer. 7 Option 1 max (3) No need to spend money to design new product in Year 5 and 6 (1). No need to buy new machine for 2 years (1). No need to train workers for 2 years (1). Should plan beyond these extra 2 years (1). The annual profit will increase from year 4 due to there being no depreciation (1). The annual profit may decrease due to increased repairs and maintenance cost (1). It is uncertain whether the sales level can be maintained (1). Option 2 max (3) Should plan for replacing a declining product by a new product in order to sustain profitability (1). New product can appeal to existing customers / diversification as well as new customers (1). More time and cost may be needed for designing a new product (1). A new machine for Product B may be required (1). Workers need training for new machine (1). The commercial success of Product B is uncertain (1). Decision supported with a comment (1) Accept other valid responses

This question in 9706/42 Oct/Nov 2024

1 Read Source A in the insert. (a) Complete the following table by calculating the net cash flow for each year of the project. flow $ cash Net … … … … … … … … $ costs Administrative … … … … … … … … costs $ Fixed … … … … … … … … $ Rental … … … … … … … … $ Tickets … … … … … … … … $ Equipment … … … … … … … … $ Cost … … … … … … … … Year … … … … … … … … [10] Additional information Waheed has a cost of capital of 10%. The discount factors for this are as follows: Year Discount factor 1 0.909 2 0.826 3 0.751 4 0.683 (b) Calculate the net present value (NPV) of the project, assuming that day tickets are sold. … … … … … … … … … … [4] Additional information Waheed was also considering selling annual tickets instead of day tickets. His best estimate of the sales of annual tickets was as follows: Year Number of annual Total revenue tickets sold $ 1 100 20 000 2 120 30 000 3 160 40 000 4 160 40 000 Waheed estimated that the income from renting out fishing equipment would be the same whichever type of ticket was sold. Waheed feels less confident about his projected revenue figures under this option. (c) Advise Waheed whether he should sell day tickets or annual tickets if he goes ahead with the project. Justify your answer. A recalculation of the NPV with annual tickets is not required. … … … … … … … … … … … … … … … … … [7] Additional information Waheed’s brother uses the accounting rate of return (ARR) when considering his projects. (d) State two advantages and two disadvantages of using ARR. Advantages 1 … … 2 … … Disadvantages 1 … … 2 … … [4] [Total: 25]

25 marks

Mark scheme: Question Answer Marks 1(a) Complete the following table by calculating the net cash flow for each year of the project. 10 Year Cost Equipment Tickets Rental Fixed costs Administrative Net cash flow costs $ $ $ $ $ $ $ 0 (57 000) (1) (5 000) (1) (62 000) 1 19 800 1 320} (9 800) (528)}** 10 792 2 (6 000) (1) 29 600 1 480}(1) (9 800) (592)}**(1) 14 688 3 36 000 1 800}* (9 400) (720)}*** 27 680 4 36 000 1 800}*(1) (9 100) (810)}***(1) 27 890 (1) column (1) column (1)OF column 1(b) Calculate the net present value (NPV) of the project, assuming that day tickets are sold. 4 Year Net cash flow Discount factor Present $ value $ 0 (62 000) (62 000) (1)OF 1 10 792 0.909 9 810 } 2 14 688 0.826 12 132 } (1)OF 3 27 680 0.751 20 788 }* 4 27 890 0.683 19 049 }*(1)OF NPV = (221) (1)OF 1(c) Advise Waheed whether he should sell day tickets or annual tickets if he goes ahead with the project. Justify your 7 answer. A recalculation of the NPV with annual tickets is not required. Selling day tickets leads to a negative NPV which indicates that this should not be undertaken (1) Selling annual tickets gives higher revenue (1) of $8 600 (1) from ticket sales which would improve the NPV (1). The increased revenue alone would cause the NPV to become positive (1). Selling annual tickets will cause the variable administrative costs to fall (1) for example staff salaries may reduce (1). The NPV calculations are based on estimates and Waheed has no certainty over how many tickets will be sold of either type (1). If he is less confident about the sales of annual tickets then the risk increases (1). Max 6 Decision supported with a comment (1) Accept other valid responses. 1(d) State two advantages and two disadvantages of using ARR. 4 Advantages (Max 2) Simple to calculate and understand (1) It can be compared with present profitability (1) Multiple projects can be compared (1) Easy availability of information needed for the calculation (1) Disadvantages (Max 2) Does not consider cash flows (1) Does not take into account the timing of profits (1) Does not take into account the time value of money (1) Includes non-cash items such as depreciation which can be changed with different methods / subjectivity (1) Ignores the size of the project (1) Accept other valid responses

This question in 9706/41 May/June 2025

1 Read Source A in the insert. (a) Calculate the net cash flow for each year 1 to 4 for Option 1. … … … … … … … … [4] Additional information Babar has a cost of capital of 10%. The discount factors for this are: Year Discount factor 1 0.909 2 0.826 3 0.751 4 0.683 (b) Calculate the net present value (NPV) for: (i) Option 1 … … … … … … … … [4] (ii) Option 2. … … … … … … … … [4] Additional information Babar’s brother has told him that it is important to choose the option which has the shorter payback period. (c) State what is meant by the payback period. … … [1] (d) Discuss whether Babar should take the payback period of the options into account when making a decision. Calculations are not required. … … … … … … … … … … … … [4] (e) Advise Babar which option he should implement. Justify your answer. … … … … … … … … … … … … … … … [7] (f) Name one other method of investment appraisal which Babar could use. … … [1] [Total: 25]

25 marks

Mark scheme: Question Answer Marks 1(a) Calculate the net cash flow for each year 1 to 4 for Option 1. 4 Year $ 1 4 000  (80 – 52 – 3) – 60 000 40 000 (1) 2 5 000  (80 – 52 – 3) – 60 000 65 000 (1) 3 5 000  (82 – 52 – 3) – 60 000 75 000 (1) 4 6 000  (86 – 52 – 3) – 64 000 122 000 (1) 1(b)(i) Calculate the net present value (NPV) for: 4 Option 1 Year Net cash flow Discount factor Present value $ $ 0 (224 000) (224 000) (1) 1 40 000 0.909 36 360 } 2 65 000 0.826 53 690 }(1)OF 3 75 000 0.751 56 325 }* 4 122 000 0.683 83 326 }*(1)OF Net present value 5 701 (1)OF 1(b)(ii) Calculate the net present value (NPV) for: 4 Option 2 Year Net cash flow Discount Present $ factor value $ 0 (950) (950) (1) 1–3 1 500 2.486 3 729.0 (1) 4 1 800 0.683 1 229.4 (1) Net present value 4 008.4 (1)OF Or Year Net cash flow Discount Present $ factor value $ 0 (950) 1.000 (950) (1) 1 1 500 0.909 1 363.5 } 2 1 500 0.826 1 239.0 } (1) 3 1 500 0.751 1 126.5 }* 4 1 800 0.683 1 229.4 }* (1) Net present value 4 008.4 (1)OF 1(c) State what is meant by the payback period. 1 The time taken to recover the cost of an investment (1) Accept other valid responses. 1(d) Discuss whether Babar should take the payback period of the options into account when making a decision. 4 Calculations are not required. Payback considers cash flows (1) and not profit (1). The shorter the payback period the less risky the option (1) as later cash flows are more uncertain than earlier ones (1). The more risk averse Babar is, the more he will look for an option which pays back quickly (1). Payback does not consider the cash flows which arise after the end of the payback period / the whole life of the project (1) and does not consider the time value of money (1). Max 4 Accept other valid responses. 1(e) Advise Babar which option he should implement. Justify your answer. 7 Option 1 has the higher NPV (1). There is a higher initial outlay for option 1 (1) which may require financing (1). The payback period for option 1 is longer (1) so it is a riskier investment (1). Organising option 1 will involve considerably more work and stress than option 2 (1). Option 1 will provide employment opportunities for local people (1). If option 1 goes well Babar could bottle his own juice and sell it himself (1). For option 2 the tenant might stay longer than four years with no additional outlay (1) whereas continuation of option 1 would require the purchase of further machinery which will require funding (1). Max 6 for comments Decision supported with a comment (1) Accept other valid responses 1(f) Name one other method of investment appraisal which Babar could use. 1 Accounting rate of return / (ARR) (1) OR Internal rate of return / (IRR) (1)

This question in 9706/42 May/June 2025

1 Read Source A in the insert. (a) Complete the following table by calculating the net cash flow for each year of the project. flow $ cash Net … … … … … … … … $ costs Administrative … … … … … … … … costs $ Fixed … … … … … … … … $ Rental … … … … … … … … $ Tickets … … … … … … … … $ Equipment … … … … … … … … $ Cost … … … … … … … … Year … … … … … … … … [10] Additional information Waheed has a cost of capital of 10%. The discount factors for this are as follows: Year Discount factor 1 0.909 2 0.826 3 0.751 4 0.683 (b) Calculate the net present value (NPV) of the project, assuming that day tickets are sold. … … … … … … … … … … [4] Additional information Waheed was also considering selling annual tickets instead of day tickets. His best estimate of the sales of annual tickets was as follows: Year Number of annual Total revenue tickets sold $ 1 100 20 000 2 120 30 000 3 160 40 000 4 160 40 000 Waheed estimated that the income from renting out fishing equipment would be the same whichever type of ticket was sold. Waheed feels less confident about his projected revenue figures under this option. (c) Advise Waheed whether he should sell day tickets or annual tickets if he goes ahead with the project. Justify your answer. A recalculation of the NPV with annual tickets is not required. … … … … … … … … … … … … … … … … … [7] Additional information Waheed’s brother uses the accounting rate of return (ARR) when considering his projects. (d) State two advantages and two disadvantages of using ARR. Advantages 1 … … 2 … … Disadvantages 1 … … 2 … … [4] [Total: 25]

25 marks

Mark scheme: Question Answer Marks 1(a) Complete the following table by calculating the net cash flow for each year of the project. 10 Year Cost Equipment Tickets Rental Fixed costs Administrative Net cash flow costs $ $ $ $ $ $ $ 0 (57 000) (1) (5 000) (1) (62 000) 1 19 800 1 320} (9 800) (528)}** 10 792 2 (6 000) (1) 29 600 1 480}(1) (9 800) (592)}**(1) 14 688 3 36 000 1 800}* (9 400) (720)}*** 27 680 4 36 000 1 800}*(1) (9 100) (810)}***(1) 27 890 (1) column (1) column (1)OF column 1(b) Calculate the net present value (NPV) of the project, assuming that day tickets are sold. 4 Year Net cash flow Discount factor Present $ value $ 0 (62 000) (62 000) (1)OF 1 10 792 0.909 9 810 } 2 14 688 0.826 12 132 } (1)OF 3 27 680 0.751 20 788 }* 4 27 890 0.683 19 049 }*(1)OF NPV = (221) (1)OF 1(c) Advise Waheed whether he should sell day tickets or annual tickets if he goes ahead with the project. Justify your 7 answer. A recalculation of the NPV with annual tickets is not required. Selling day tickets leads to a negative NPV which indicates that this should not be undertaken (1) Selling annual tickets gives higher revenue (1) of $8 600 (1) from ticket sales which would improve the NPV (1). The increased revenue alone would cause the NPV to become positive (1). Selling annual tickets will cause the variable administrative costs to fall (1) for example staff salaries may reduce (1). The NPV calculations are based on estimates and Waheed has no certainty over how many tickets will be sold of either type (1). If he is less confident about the sales of annual tickets then the risk increases (1). Max 6 Decision supported with a comment (1) Accept other valid responses. 1(d) State two advantages and two disadvantages of using ARR. 4 Advantages (Max 2) Simple to calculate and understand (1) It can be compared with present profitability (1) Multiple projects can be compared (1) Easy availability of information needed for the calculation (1) Disadvantages (Max 2) Does not consider cash flows (1) Does not take into account the timing of profits (1) Does not take into account the time value of money (1) Includes non-cash items such as depreciation which can be changed with different methods / subjectivity (1) Ignores the size of the project (1) Accept other valid responses

This question in 9706/43 May/June 2025

1 Read Source A in the insert. (a) Calculate the net present value (NPV) of: (i) the new machine … … … … … … … … … … … … [3] (ii) the upgraded machine. … … … … … … … … … … … … [3] (b) Calculate, to two decimal places, the internal rate of return (IRR) of: (i) the new machine … … … … … … … … … … [3] (ii) the upgraded machine. … … … … … … … … … … [3] (c) Advise the directors which machine they should adopt if Product P were to be made. Justify your answer. … … … … … … … … … … … … … … … … … … … … [7] Additional information One of the directors raises two issues before making the final decision. 1 In his opinion, the accounting rate of return (ARR) should be the only criterion for making the investment decision.

19 marks

Mark scheme: Question Answer Marks 1(a)(i) Calculate the net present value (NPV) of: 3 the new machine Year Purchase cost Sales revenue Operating costs Net cash flow cost of capital $ $ $ $ $ 10% 0 (400 000) – – (400 000) 1.000 (400 000) 1 – 260 000} (160 000)}* 100 000 0.909 90 900 2 – 430 000} (240 000)}* 190 000 0.826 156 940 3 – 580 000} (1) (340 000)}* (1) 240 000 0.751 180 240 NPV 28 080 (1)OF Alternative presentation Year 0 Year 1 Year 2 Year 3 NPV $ $ $ $ Purchase cost (400 000) Sales revenue 260 000 430 000 580 000 (1) row Operating costs (160 000) (240 000) (340 000) (1) row (400 000) 100 000 190 000 240 000 10% cost of capital 1 0.909 0.826 0.751 (400 000) 90 900 156 940 180 240 28 080 (1)OF 1(a)(ii) Calculate the net present value (NPV) of: 3 the upgraded machine Year Upgrade cost Sales revenue Operating costs Net cash flow cost of capital $ $ $ $ $ 10% 0 (220 000) (1) – – (220 000) 1.000 (220 000) 1 – 260 000 (241 000) 19 000 } 0.909 17 271 2 - 430 000 (321 000) 109 000 } 0.826 90 034 3 – 580 000 (421 000) 159 000 } (1) 0.751 119 409 NPV 6 714 (1)OF Alternative presentation Year 0 Year 1 Year 2 Year 3 NPV $ $ $ $ Upgrade cost (220 000) (1) Sales revenue 260 000 430 000 580 000 Operating costs (241 000) (321 000) (421 000) (220 000) 19 000 109 000 159 000 (1) row 10% cost of capital 1 0.909 0.826 0.751 (220 000) 17 271 90 034 119 409 6 714 (1)OF 1(b)(i) Calculate, to two decimal places, the internal rate of return (IRR) of: 3 the new machine NPV of 14% cost of capital ($100 000  0.877) + ($190 000  0.769) + ($240 000x0.675) – $400 000 = ($4 190) (1)OF IRR = 10% + [(14%-10%)  $28 080/($28 080+$4 190) (1)OF] = 13.48% (1)OF 1(b)(ii) Calculate, to two decimal places, the internal rate of return (IRR) of: 3 the upgraded machine NPV of 14% cost of capital ($19 000  0.877) + ($109 000  0.769) + ($159 000  0.675) – $220 000 = $(12 191) (1)OF IRR = 10% + [(14%-10%)  $6 714/($6 714 + $12 191) (1)OF] = 11.42% (1)OF 1(c) Advise the directors which machine they should adopt if Product P were to be made. Justify your answer. 7 Both machines have a positive NPV. (1) The IRR of both machines is more than the cost of capital of 10%. (1) New machine has a higher NPV than upgraded machine. (1) New machine has a higher IRR than upgraded machine. (1) The initial outlay of new machine is $180 000 higher than the upgraded machine. (1) High repair and maintenance cost is incurred for the upgraded machine. (1) Quality / quantity of output from the new machine may be better. (1) Training may be needed for the new machine. (1) Max 6 for comments Decision supported with a comment. (1) Accept other valid responses. 1(d) Assess the impact on the directors’ decision to make Product P if these two issues are addressed. Support your 6 answer with calculations. New machine $ Total sales revenue 1 270 000 Total operating costs (740 000) Depreciation of bought machine (400 000) Profit 130 000 ARR of Product P on its own $130 000/3 / (400 000) / 2 = 21.67% (1) However, the loss of profit $40 000 ($200 000  20%) of Product C should also be considered. This will result in a gain of $10 000 ($610 000 – $600 000). (1) Product P should be made. (1) Upgraded machine $ Total sales revenue 1 270 000 Total operating costs (983 000) Upgrade cost (220 000) Profit 67 000 ARR of Product P on its own $67 000/3 / (220 000) / 2 = 20.30% (1) The loss of profit $40 000 ($200 000x20%) of Product C should also be considered. This will result in a loss of $53 000 ($547 000 – $600 000). (1) Product P should not be made. (1)

This question in 9706/41 Oct/Nov 2025

1 Read Source A in the insert. (a) State two benefits of preparing a: (i) cash budget 1 … … 2 … … [2] (ii) production budget. 1 … … 2 … … [2] (b) Prepare the production budget (in units) for each of the months of April, May and June. April May June … … … … … … … … [4] (c) Calculate the payments to suppliers for each of the months of April, May and June. … … … … … … … … … … … … … … [4] (d) Prepare the cash budget for each of the months of April, May and June. April May June … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] Additional information The directors think that they will have some surplus cash at the end of June 2026 which could be used for other purposes. They have two options: Option 1: use the surplus cash to incur expenditure on developing a new product Option 2: place the surplus cash in a fixed deposit account at an estimated interest of 2% per annum. (e) Advise the directors which option they should choose. Justify your answer. … … … … … … … … … … … … … … … … … … … [7] [Total: 25]

25 marks

Mark scheme: Question Answer Marks 1(a)(i) State two benefits of preparing a: 2 cash budget Ensuring that the payments are made to avoid a shortage of cash / liquidity problems. (1) Ensuring arrangements are made for the investment of surplus funds. (1) Max 2 Accept other valid responses. 1(a)(ii) State two benefits of preparing a: 2 production budget Ensuring right amount of inventory to meet the customers’ demand. (1) Ensuring resources are available to meet the production target. (1) Max 2 Accept other valid responses. 1(b) 4 Prepare the production budget (in units) for each of the months of April, May and June. April May June Sales of next month (units) 3 100 3 000 2 800 (1) row Opening inventory (units) (160) (155) (150) (1) row Closing inventory (units) 155 150 140 (1) row Production (units) 3 095 2 995 2 790 (1)OF row 1(c) Calculate the payments to suppliers for each of the months of April, May and June. 4 March April May June $ $ $ $ Units produced 3 235 W1 3 095 2 995 Direct material required per unit (kilos) 3 3 3 Total direct material required (kilos) 9 705 9 285 8 985 Decrease in base inventory (200) (1) Total direct material purchased (kilos) 9 705 9 285 8 785 Direct material cost per kilo $8 $8 $8 Purchases payable next month 77 640 74 280 70 280 Payment to suppliers 77 640 (1) 74 280 (1)OF 70 280 (1)OF W1 3200 + 160 – 125 = 3 235 units 1(d) Prepare the cash budget for each of the months of April, May and June. 6 April May June $ $ $ Receipts February sales 156 000 March sales 48 500 150 000 April sales 62 080 192 000 May sales 63 147 204 500 (1) 212 080 (1) 255 147 (1) Payments Suppliers 77 640 74 280 70 280 OF Direct wages and variable overheads 61 900 59 900 55 800 (1)OF row Fixed overheads 52 000 55640 55640 (1) row Promotion cost 20 000 211 540 189 820 181 720 Net cash increase/(decrease) (7 040) 22 260 73 427 Opening balance 38 000 30 960 53 220 Closing balance 30 960 53 220 126 647 (1)OF row 1(e) Advise the directors which option they should choose. Justify your answer. 7 Option 1 (Max 3) Existing product may be coming to the end of its product life cycle. (1) Developing a new product is important for the future of the business. (1) Further costs may be incurred on development / promotion of new product. (1) Research and development may fail / it is risky. (1) Option 2 (Max 3) It has less risk (1) Interest income increases the profit or cash / return from the interest income is too low (1) Cash can be used for other investments to generate a higher return (1) Cash is not available for long-term investment / emergency use in the business (1) Decision supported with a comment (1) Accept other valid responses.

This question in 9706/42 Oct/Nov 2025