CAIE A-Level Business 10.3.4 Investment Appraisal Decisions

Evaluate whether GBS should purchase the new grinding machine.

Level

AO2 Application 2 marks

AO3 Analysis 2 marks

AO4 Evaluation 6 marks

3

5-6 marks

Developed evaluation in context

- A developed judgement/conclusion is made in the business context.

- Developed evaluative comments which balance some key arguments in the business context.

2

2 marks
Developed application of relevant point(s) to the business context.

2 marks
Developed analysis that identifies
connections between
causes, impacts and/or
consequences.

3-4 marks

Developed evaluation

- A developed judgement/conclusion is made.

- Developed evaluative comments which balance some key arguments.

1

1 mark

Limited application of relevant point(s) to the business context.

1 mark
Limited analysis that identifies
connections between
causes, impacts and/or
consequences.

1-2 marks

Limited evaluation

- A judgement/conclusion is made with limited supporting comment/evidence.

- An attempt is made to balance the arguments.

0

0 marks

No creditable response.

0 marks

No creditable response.

0 marks

No creditable response.

3(c)

Indicative content

A01 Knowledge and understanding

Limited knowledge K will be demonstrated through knowledge of one factor in the decision.

Developed knowledge K+K will be demonstrated through knowledge of two or more factors in the decision.

- Understanding of investment appraisal methods - NPV, ARR, payback period.

- Understanding of possible qualitative factors in investment decision - business attitudes, risk, impact on stakeholders, external factors, consistency with business objectives/strategy availability of finance.

AO2 Application

Limited application, ${ }^{\triangle P P}$ applies knowledge to GBS once.

Developed application, ${ }^{\text {APP }}+{ }^{\text {APP }}$ applies knowledge to GBS twice.

- Requirement for skilled operator.

- Loan finance is available.

- Use of data in Table 1.1 from manufacturer and Mo's experience.

- Impact on unit costs.

- Use of answers to Q3(a) and 3(b) (OFR applies).

- NPV is positive $ 22000.

- ARR is 16.4%.

- Payback and is in 4th year, 3 years and 10.3 months or 3.86 years.

- Discounted payback is 4 years 3.5 months or 4.29 years.

3(c)

AO3 Analysis

Limited analysis ${ }^{\mathrm{AN}}$ - candidate shows one link in the chain of analysis.

Developed analysis L2AN - candidate shows two or more links in the chain of analysis.

- Payback is within the 4th year so the investment is forecast to be profitable AN and therefore potentially worth investing in L2AN.

- NPV is positive and should therefore be considered as a worthwhile investment AN.

- GBS may need to finance the investment through borrowing which will increase the gearing of GBS AN and this increases risk for shareholders L2AN.

- The investment would enable GBS to meet the increasing demand for its products and therefore potentially increase profit AN.

- The grinding machine would decrease unit costs and therefore GBS could set lower prices AN which should result in an increase in demand L2AN.

- NPV (positive) and ARR is higher than 5% cost of finance indicating GBS should go ahead AN.

AO4 Evaluation

Limited evaluation ${ }^{\text {гval }}$ - limited supported judgement and/or a weak attempt at evaluative comment.

Developed evaluation ${ }^{\text {L2 }}$ - supported judgement and/or reasonable evaluative comment.

Developed evaluation in context ${ }^{\lfloor 3 \text { rwa }\rfloor}$ - supported judgement in context and/or reasonable evaluative comment in context.

- Data and investment appraisal methods strongly support the purchase but are the figures accurate and reliable?

- Is a 5 -year life realistic? Can data over a 5 -year future period be relied on?

- Qualitative factors may be as or more important than calculations.

- May not be reliable or accurate - can the manufacturer's data be relied on? They are trying to make a sale so data may be optimistic plus Mo has not done any market research or research into cost savings (relied on experience).

- Are there any other possible investments or changes that will meet GBS's needs? Little evidence of other possibilities other than the bullet points in last section - might finance be better spent on one of these?

- Can GBS afford another course of action as well as the purchase if it goes ahead?

- These points support the conclusion that more detailed research into sales and cost savings including checking the existing data is needed before making a decision.

- Is there a time scale for making the decision?

- Are there other possible ways for growth to occur? Need to investigate before deciding.

- In view of other possible options/actions in the case more research would be justified before deciding.

Accept all valid responses.