CAIE A-Level Business A2 10.3.2 Payback and Arr Topic Practice

Refer to Table 1.1. Calculate the payback period for SCC's new factory.

All in $000
(150)+20+40+80=(10)

10/100 $\times 12=1.2$ so 3 years and 1.2 months / 3 years 2 months / 3.1 years / 3 years and 36.5 or 37 days (1)

Refer to Table 1.1. Calculate the accounting rate of return (ARR) for SCC's new factory.

ARR= average profit/average investment $\times 100$

OR where the average investment $=\frac{\text { initial capital cost }+ \text { residual capital value }}{2}$ (Maximum 1 mark, if no valid calculation)

Average investment $=(150 \mathrm{~m}+0) / 2=75 \mathrm{~m}(1)$

OR

Total net cash flow (all $m) = 240 - set-up costs 150 = 90. (1)

90/4 = 22.5. (2)

OR

$22.5 / 75 \times 100(2)$$22.5 / 75 \times 100=30 \%(3)$

Common error - forget to deduct original cost $=240 / 4=6060 / 75 \times 100=80 \%$ (2)

\% not needed for full marks

Alternative formula: average profit / initial investment x 100

22.5 / 150 = 15\% (2)

\% not needed for full marks

Incorrect units, e.g. $30 (2)