Mark Scheme (Results)

January 2021

Pearson Edexcel International Advanced Level

In Accounting (WAC12)
Unit 2: Corporate and Management Accounting
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January 2021
Publications Code WAC12_01_2101_MS
All the material in this publication is copyright
© Pearson Education Ltd 2021
General Marking Guidance

• All candidates must receive the same

treatment. Examiners must mark the first candidate in
exactly the same way as they mark the last.
• Mark schemes should be applied positively. Candidates
must be rewarded for what they have shown they can do
rather than penalised for omissions.
• Examiners should mark according to the mark scheme
not according to their perception of where the grade
boundaries may lie.
• There is no ceiling on achievement. All marks on the mark
scheme should be used appropriately.
• All the marks on the mark scheme are designed to be
awarded. Examiners should always award full marks if
deserved, i.e. if the answer matches the mark
scheme. Examiners should also be prepared to award
zero marks if the candidate’s response is not worthy of
credit according to the mark scheme.
• Where some judgement is required, mark schemes will
provide the principles by which marks will be awarded
and exemplification may be limited.
• When examiners are in doubt regarding the application
of the mark scheme to a candidate’s response, the team
leader must be consulted.
• Crossed out work should be marked UNLESS the
candidate has replaced it with an alternative response.
 Statement of Changes in Equity of Bangla Aluminium plc for year ended 31 December 2020
Q1 Mark Ordinary Share Share Retained General A B C Total Equity
scheme of £1 Capital Premium Earnings Reserve Capital Foreign Revaluation
Figures are in £ Replacement Exchange Reserve £
£ millions £ £ £ Reserve (1)AO1 Reserve (1)AO1 (1)AO1
£ £ £
(i) Balance at 7
1 January 2020 54 8 16 (1)AO1 85
All four (1)AO2

(ii) Final (9.18) (9.18)

Dividend (1)AO2

(iii) Transfer (3) 3 -----

(1)AO1 (1)AO1

(iv) Transfer (2) 2 -----

(1)AO1 (1)AO1

(v) Revaluation 4.8 4.8

(1)AO2
3.078
(vi) Rights 2.7 0.378 (1)AO2
Issue (1)AO2 (1)AO2 All three

(vii) Transfer 3 (3) -----

(1)AO1 (1)AO1

(viii) Interim (3.402) (3.402)

Dividend 2020 (1)AO2

(ix) Loss for the (3.91) (3.91)

year (1)AO2 (1)AO2Both
(x) Balance at
31December 56.7 8.378 (0.492) 5 --- 2 4.8 76.386
2020 (1o/f) AO2 (1o/f)AO2 (1o/f)AO2
(a) [AO1] 10 [AO2] 12
AO1: Ten marks for correct labelling of account headings, insertion of opening balances and
transfers in February, March and August.
AO2: Twelve marks for correct calculation and insertion of figures into statement for
revaluation of property, rights issue of shares, interim dividend, loss for the year, total equity
column, and end of year balances row.

(b)
[AO1] 2
AO1: Three marks for correct identification of capital reserves
Share Premium (1)AO1 Revaluation reserve (1)AO1 Ordinary Share Capital (1)AO1 (3)

(c) [AO2] 5
AO2: Five marks for correct calculation of maximum payable per share

Maximum amount payable

= (0.492) (1o/f)AO2 + 5(1o/f)AO2+ 2(1o/f)AO2 = 11.47 pence per share (1o/f)AO2 (5)
56.7(1o/f)AO2

(d) [AO1] 2 [AO3] 6

AO1: Two marks for entry of retained earnings and capital replacement reserve.
AO3: Six marks for entries of property, revaluation reserve, equipment, bank or supplier,
retained earnings and profit & loss account.

Date Details Debit Credit

£m £m
Feb 12 Retained earnings 3
(1)AO1
Capital Replacement reserve 3
(1)AO1

April 21 Property 4.8

(1o/f)AO3
Revaluation reserve 4.8
(1o/f)AO3

May 11 Equipment 2.9

(1)AO3
Bank / Supplier 2.9
(1)AO3

Dec 31 Retained earnings 3.91

(1)AO3
Statement of Comprehensive Income/ 3.91
Profit & Loss/Appropriation account (1)AO3
(8)
(e) [AO1] 2 [AO2] 4
AO1: One mark for correct formula
AO2: Four marks for correct calculation of gearing

The gearing ratio at 31 December 2020, using the formula Debt___ (1)AO1
Debt + Equity

_____(23.614 (1)AO2 +60) (1)AO2

(23.614 + 60) (1)AO1 + 76.386 (1o/f)AO2

= 83.614 = 52.26%(1o/f)AO2
160 (5)

(f) Mark scheme

[1 AO1] [1 AO2] [4 AO3] [6 AO4]

Own figure rule applies.

Positive points
The debenture was taken out by Bangla Aluminium plc to expand the business which may bring in
future profits.
The debenture interest will mean that future profits after interest may be reduced which means less
tax is payable.
A debenture issue avoids the need for a further share issue and possible dilution of control of the
existing shareholders of the business.

Negative points.
The gearing ratio of Bangla Aluminium plc has increased from 35% to 52% (o/f), an increase of
17% (o/f). This now makes the company highly geared as the ratio is over 50% (o/f).
A highly geared company is a risky company as it may have problems paying large amounts of
interest to lender. Failure to pay interest, or pay back loans or debentures may see lenders take
possession of Bangla Aluminium plc’s assets or wind up the company.
High levels of interest to be paid may mean Bangla Aluminium plc have difficulty trying to make a
profit. This year the company made a loss of £3.91 million.This may mean problems paying
dividends to shareholders which may result in the share price falling.
A high geared company such as Bangla Aluminium plc may have problems if they try to raise
further finance as lenders may think the risk of non-payment too great.

Conclusion
Bangla Aluminium plc is now a highly geared company which is risky. The disadvantages of high
gearing are greater than the advantages of high gearing.
Level Mark Descriptor
0 A completely incorrect response.
Level 1 1- 3 Isolated elements of knowledge and understanding which are
recall based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 4-6 Elements of knowledge and understanding, which may be applied
to the scenario.
Chains of reasoning are present, but may be incomplete or invalid.
A generic or superficial assessment is present.
Level 3 7-9 Accurate and thorough understanding, supported by relevant
application to the scenario.
Some analytical perspectives are present, with developed chains of
reasoning, showing causes and/or effects.
An attempt at an assessment is presented, using financial and
maybe non-financial information, in an appropriate format and
communicates reasoned explanations.
Level 4 10 - 12 Accurate and thorough knowledge and understanding, supported
throughout by relevant application to the scenario.
A coherent and logical chain of reasoning, showing causes and
effects.
Assessment is balanced, wide ranging and well contextualised
using financial and maybe non-financial information and makes an
informed decision.

12 marks
Total for Question 1 - 55 marks
Q2.
(a) [AO1 5]
AO1: Five marks for calculating labour hours required to fulfil total demand for a week.

Pot Vase Mug Plate Total

Weekly demand 20 18 42 12
Time taken to produce 15 minutes 10 minutes 20 minutes 30 minutes
Hours required 5 3 14 6 28
(1)AO1 (1)AO1 (1)AO1 (1)AO1 (1o/f)AO1
(5)

(b) [AO1 2]
AO1: Two marks for explaining the term limiting factor
A limiting factor is a factor of production (1)AO1 which restricts the level of activity / quantity of
output. (1)AO1 (2)

(c) [AO1 3] [AO2 9]

AO1: Three marks including selling price and for calculating contribution per unit for each
product.
AO2: Nine marks for calculating the cost of clay material and cost of labour time for each
product, and the total costs for each product.

Product Pot Vase Mug Plate

Selling price 7.00 6.00 6.80 10.00(1)AO1
Less Direct costs
Clay material 0.70(1)AO2 0.50(1)AO2 0.30 (1)AO2 0.60(1)AO2
Labour time 3.00 (1)AO2 2.00(1)AO2 4.00 (1)AO2 6.00(1)AO2
Total costs 3.70 2.50 4.30 6.60(1o/f) AO2
Contribution 3.30 3.50 2.50 3.40
(1o/f) AO1 Both (1o/f) AO1Both

(12)

(d) [AO3 6]
AO3: Six marks for calculating order of priority for production

Product Pot Vase Mug Plate

Contribution 3.30 3.50 2.50 3.40
Time taken to paint 15 minutes 10 minutes 20 minutes 30 minutes
Contribution per 13.20 21.00 7.50 6.80
labour hour (1o/f)AO3 (1o/f)AO3 (1o/f)AO3 (1o/f)AO3
2 1 (1o/f)AO3 3 4 (1o/f)AO3
Both Both
(6)
(e) [AO2 6]
AO2: Six marks for calculating the productionschedule:

Order of Product Output Hours

Production
1 Vase 18 (1o/f) AO2 3
2 Pot 20 (1o/f) AO2 5(1o/f) AO2 Both
3 Mug 42 (1o/f) AO2 14
4 Plate 6 (1o/f) AO2 3(1o/f) AO2 Both
(6)

(f) [AO1 4] [AO2 3]

AO1: Four marks for calculating total contribution, rent, utility bills, and profit.
AO2: Three marks for calculating total contribution for each product and depreciation.

Product Contribution per Output Total contribution

unit
Vase 3.50 18 63.00 Both
Pot 3.30 20 66.00 (1o/f)AO2
Mug 2.50 42 105.00 Both
Plate 3.40 6 20.40 (1o/f)AO2
Total 254.40 (1o/f)AO1
Less Fixed Costs Rent (40.00) (1)AO1
Utility Bills (30.00) (1)AO1
Depreciation (6.00) (1)AO2
Profit 178.40 (1o/f)AO1
(7)
(g)
(i)[AO1 1]
AO1: One mark for calculating hours required for assistant to work.
Hours required = 28 - 25 = 3 hours. (1o/f) AO1 (1)

(ii)[AO3 3]
AO3: Three marks for calculating total pay for assistant.
3 hours required to produce 6 extra plates (1o/f) AO3

6 extra plates will bring in a contribution of (6 x 3.40) (1o/f) AO3 = £20.40(1o/f) AO3
(3)
(iii) [AO1 1]
AO1: One mark for calculating hourly rate
Hourly rate = £20.40 = £6.80 per hour(1o/f) AO1
3 (1)
(h)[1 AO1] [1 AO2] [4 AO3] [6 AO4]
Answers may include:
Financial Aspects
Case For
Maria may be able to undertake keeping her own records accurately. This will reduce the need to
hire a costly accountant when calculating annual profits and completing a tax return etc.

Case Against
Maria may find hardware expensive if she has to buy the equipment.
She may find software expensive if she has to buy outright or subscribe monthly,
The small business does not make a great deal of money so any extra expenditure must be justified.

Technical aspects
Case For
A bookkeeping program may ensure Maria keeps financial records in an orderly fashion. She may
be very disorganised at the moment when it comes to paperwork etc.

Case Against
Maria may not require an ICT program for her limited bookkeeping requirements. She will not be
selling on credit so will not have a list of trade receivables.
The bank statement, available at any time online, will provide the small business with a running
bank balance.
The cash till will provide Maria with a running cash balance.

Human aspects
Case For
Maria may find the ICT programmes reduce her workload.
She may find understanding and implementing an ICT programme rewarding.

Case Against
She may find understandingan ICT programme difficult to comprehend and trying to implement an
ICT programme frustrating.
Perhaps Maria is a creative individual, who enjoys making pottery and would not enjoy financial
tasks on the computer.

Conclusion
The size (small) and nature (no credit given) of Maria’s business may mean that she does not really
need an ICT program to help her with bookkeeping and finance.
Level Mark Descriptor
0 A completely incorrect response.

Level 1 1- 3 Isolated elements of knowledge and understanding which are

recall based.
Weak or no relevant application to the scenario set.
Generic assertions may be present.
Level 2 4-6 Elements of knowledge and understanding, which may be applied
to the scenario.
Chains of reasoning are present, but may be incomplete or invalid.
A generic or superficial assessment is present.
Level 3 7-9 Accurate and thorough understanding, supported by relevant
application to the scenario.
Some analytical perspectives are present, with developed chains of
reasoning, showing causes and/or effects.
An attempt at an assessment is presented, using financial and
maybe non-financial information, in an appropriate format and
communicates reasoned explanations.

Level 4 10 - 12 Accurate and thorough knowledge and understanding, supported

throughout by relevant application to the scenario.
A coherent and logical chain of reasoning, showing causes and
effects.
Assessment is balanced, wide ranging and well contextualised
using financial and maybe non-financial information and makes an
informed decision.

12 marks

Total marks for Question 2 = 55 marks

Q3. Mark scheme
(a) AO3 (5)
AO3 : Five marks for correct calculation of purchase price.

Number of shares in Waverley = 21 000 000 x 2 = 42 000 000 (1) AO3

Number of shares in Peninsular Medicines = 42 000 000 = 5 250 000 (1o/f) AO3
8

Three shares trading at £3.52 per share = (5 250 000 x 3) x 3.52 = £55 440 000 (1o/f) AO3
Plus £0.37 cash = 5 250 000 x 0.37 = £1 942 500 (1o/f) AO3

Purchase price = £57 382 500 (1o/f) AO3

(5)

(b) AO1 (5) AO2 (4)

AO1: Five marks for correct adjustment and entry for all assets except property, and all
liabilities.
AO2: Four marks for correct adjustment and entry for property, and calculation of
goodwill.

Calculation of goodwill

Value of assets purchased

Property, plant and equipment 43 616 000 Both
Plus revaluation of property 3 750 000 (1) AO2
Less equipment revaluation (1 400 000) (1) AO1
Intangibles 11 500 000 Both
Plus Calm Balm brand 3 000 000 (1) AO1
Inventories 6 853 000
Less revaluation (940 000) All three
Trade receivables 1 019 000 (1) AO1
Total asset value 67 398 000

Value of liabilities purchased

Mortgage 15 574 000 Both
Bank loan 8 000 000 (1) AO1
Trade and Other payables 1 683 000 Both
Less adjustments (880 000) (1) AO1
Total value of liabilities (24 377 000)

Purchase price 57 382 500 (1o/f) AO2

Less value of net assets purchased (43 021 000) (1o/f) AO2
= Goodwill 14 361 500 (1o/f) AO2

(9)
 (c) AO2 (8) AO3 (2)
AO2: Eight marks for all entries of assets and liabilities, cash paid and shares issued.
AO3: Two marks for correct calculation and entry of share premium

Acquisition account
1 Jan Mortgage 15 574 000 Both 1 Jn PPE 45 966 000 (1)AO2
Bank loan 8 000 000 (1) AO2 Intangibles 14 500 000 (1)AO2
Trade Payables 803 000 (1) AO2 Inventories 5 913 000 (1) AO2
Cash 1 942 500 (1o/f)AO2 Trade Receivbles 1 019 000 Both
Shares of £1 each 15 750 000 (1o/f) AO2 Goodwill 14 361 500 (1o/f)AO2
Share Premium 39 690 000 (1o/f) AO3
81 759 500 _________
81 759 500

Workings for share premium:

15 750 000 shares at a premium of £2.52 per shares = £39 690 000 (1) AO3
(10)
(d) [AO2] 1 [AO3] 2 [AO4] 3

Peninsular Medicines plc have paid £14.36 million goodwill to buy the net assets of Waverley plc
which had an agreed value of £43.02 million This represents 33.3% of the net asset value, or 25%
of the purchase price.

For Goodwill
If Waverley plc are profitable then goodwill may be justified. We do not know if they are
profitable, but the statement of financial position looks healthy and the retained earnings stands at
£5 million.
Waverley have at least one well known brand name (Calm Balm) so a large goodwill may be
justified. Waverley may have a range of products.
It appears the two companies are in a similar line of business (medicines/pharmaceuticals) so there
may be vertical or lateral economies of scale to be enjoyed.
Shareholders may need to be persuaded financially to be taken over by an outside company and
have their ownership diluted.

Against Goodwill
We do not know if Waverley is profitable or the width of their product range.
The percentage of goodwill in the purchase is high.

Conclusion
The size of the goodwill may/may not be justified.
Level Mark Descriptor
0 A completely incorrect response.
Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.

Total for Question 3 - 30 marks

Q4 Mark scheme

(a) [AO1] 3 [AO2] 5

[AO1] : Three marks for inclusion of fixed costs, total fixed costs and total variable costs.
[AO2] : Five marks for calculation of contribution per room month, and calculation of
break-even point.
Fixed Costs per month Loan Interest = £2 115
Local tax = £675
Maintenance contract = £395(1)AO1
Total Fixed Costs = £3 185 (1)AO1

Variable Costs per room Electricity = £10

per month Gas = £10
Water = £5
Total Variable Costs = £25 (1)AO1

Contribution per room (£480 - £25) (1o/f)AO2 = £455 (1o/f)AO2

per month
Break even point = £3 185(1o/f)AO2 = 7 rooms(1o/f)AO2
£455 (1o/f)AO2

8 marks

(b) [AO1] 4 [AO3] 2

[AO2] : Four marks for calculation of contribution, total fixed costs and profit for year.
[AO3] : Two marks for calculation of total room months rental.

Number of rooms rented out in year:

Number of months of the year 2 4 3 2 1 Total rooms

Number of rooms rented out 6 7 8 9 10 rented in year
Total of rooms 12 28 24 18 10 (1)AO3 92 (1)AO3

£
Contribution = 92 x 455 (1o/f)AO2 = 41 860 (1o/f)AO2
Fixed costs = 3 185 x 12 = (38 220)(1o/f)AO2
Profit = 3 640 (1o/f)AO2
(6)

(c) (i) [AO3] 5

[AO3] : Five marks for calculation of margin of safety.
Actual sales revenue = (92 x £480) (1o/f)AO3 = £44 160 (1o/f)AO3
Break-even sales revenue = (7 x 12 x £480) (1o/f)AO3 = £40 320 (1o/f)AO3
Margin of safety = £3 840 (1o/f)AO3
(5)

(ii)[AO3] 3
[AO3] : Three marks for calculation of margin of safety
Margin of safety as a percentage of sales = (3 840 x 100)(1o/f)AO2 = 8.7% (1o/f)AO2
44 160 (1o/f)AO2
(3)
(d) [AO1] 2
[AO1] : Two marks for expalaining an advantage of break-even analysis
An advantage of break-even analysis is that it ensures a business considers the likely outcome of a
business proposal.(1)AO1 If the proposal does not look profitable, then adjustments need to be
made to the proposal. (1)AO1 (2)

(e) [AO2]1 [AO3]2 [AO4]3

For adopting the new proposal
At present, Capital Residential plc pay £675 a month which is £8 100 per year.
If its predictions are correct, next year there will be 92 monthly room rentals received, which will
result in a tax of (£44 160 x 15%) which is £6 624. This would be a tax saving of £1 476

Against the new proposal

If Capital Residential plc rented all rooms out every month, there would be 120 room rentals
received. This would give a total revenue of £57 600. The tax at 15% would be £8 640. This would
be an increase in tax of £540.

Conclusion
The decision by Capital Residential plc depends upon how many months rental they will receive
from the rooms. The “break-even” point for tax is 112.5 monthly (ie 113) room rentals.
The deciding factor would be how many months’ rentals the company expects from the rooms in
the next year. If they think they will achieve less than 113 room rentals, they should support the
change to 15% of income. If they think they will achieve more than 112 room rentals, they should
argue against the change to 15% of income..

Level Mark Descriptor

0 A completely incorrect response.
Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.

(6)
 Total for Question 4 = 30 marks

5. Mark scheme

(a)
(i)
[AO2] : Three marks for correct calculation of ordinary shares issued, preference dividend
and earnings per ordinary share.
[AO3] : Two marks for correct calculation of net profit after tax.

Earnings per ordinary share = Net profit after tax – preference dividend
Issued ordinary shares

= £1 250 000 (1)AO3 - £200 000 (1)AO3 - £240 000 (1)AO2 = 2.89 pence per share (1o/f) AO2
28 000 000 (1)AO2 (5)

(ii)
[AO2] : Three marks for correct calculation of interim dividend paid per ordinary share,
issued ordinary shares and total dividend per share.
[AO3] : One mark for correct calculation of total ordinary dividend paid in pounds.

Dividend paid per share = Total ordinary dividend

Issued ordinary shares

Interim dividend paid = 28 000 000 x £0.0015 = £42 000(1)AO2

= (£42 000 + £210 000) (1o/f) AO3 = 0.9 pence per share (1o/f) AO2
28 000 000 (1) AO2 (4)

(iii)
[AO1] : One mark for correct insertion of total ordinary dividend.
[AO2] : Two marks for correc insertion of net profit after tax and preference dividends and
calculation of dividend cover.

Dividend cover = Net profit after tax – preference dividend

Total ordinary dividend

= £810 000 (1o/f) AO2 = 3.21 times (1 o/f)AO2

£252 000 (1o/f) AO1 (3)

(iv)
[AO1] : Two marks for correct insertion of market price of share and earnings per share.
[AO2] : One mark for correct calculation of price/earnings ratio.

Price/earnings ratio = Market price of share

Earnings per share

= 32 p (1)AO1 = 11.07 times (1o/f)AO2

2.89 p (1 o/f)AO1 (3)
(v)
[AO1] : Two marks for correct insertion of market price of share and dividend per share.
[AO2] : One mark for correct calculation of dividend yield.

Dividend yield = Dividend per share x100

Market price of share

= 0.9 p (1o/f)AO1 x 100 = 2.81% (1o/f)AO2

32p (1)AO1 (3)

(vi)
[AO2] : Two marks for correct calculation of value of preference shares and correct
calculation of return on capital employed.
[AO3] : Four marks for correct calculation of net profit before interest and tax, value of share
capital and inclusion of debenture and reserves in capital employed.

Return on Capital employed = Net profit before interest and tax x 100
Capital employed

= _ £1 250 000 (1) AO3 + £450 000 (1)AO3_____________________________________

(£14 000 000 (1)AO3+ £4 800 000(1) AO2 + £5 000 000 +£900 000 +£300 000(1)AO3(all three)

= £1 700 000 x 100 = 6.8% (1o/f) AO2

£25 000 000 (6)

(b) [AO2] 1 [AO3] 2 [AO4] 3

Arguments for software
The software may react quicker than a human response if there is a sudden drop in the market price
and selling the shares is advantageous. If Port Shelter Trading plc shares appear to be dropping
further, then Benson Pensions will benefit by selling them as soon as possible.

The software will save time if Benson Pensions have a large portfolio of shares which need to be
watched over in person. The alternative may be to arrange a meeting to discuss the share price,
which may be time-consuming.

Arguments against software

The software follows a “one size fits all” approach and will sell the shares regardless of the
individual company’s situation. It is possible that the share price fall may be temporary eg due to a
reason outside the control ofPort Shelter Trading plc.

The market may be falling as a whole, and this could see a large number of shares sold, much
reducing the size of the portfolio.

The ratios for Port Shelter Trading plc are reasonably good. Benson could sell shares in a company
that is doing quite well and has a promising future. The shares may rise in the future. Buying the
shares back may be at a higher price than at which they were sold.

Conclusion
Using the software may /may not be a good idea for Benson Pensions.
Level Mark Descriptor
0 A completely incorrect response.
Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.

(6)

Total for Question 5 = 30 marks

Question 6
(a) AO1 (3) AO2 (12)
AO1: Three marks for calculation of depreciation.
AO2: Twelve marks for calculation of extra costs, including scrap value, net cash flows, and discounted net cash flows.

NPV
Calculation Cost Scrap Net Discount Discounted
Extra Net Cash
Savings costs value cash flow Factor Flow
Year 0 135000 (135000) 1 (135000.00) (1)AO2
Year 1 54000 16000 (1)AO2 38000 both 0.926 35188.00 both
Year 2 54000 16800 both 37200 (1o/f) AO2 0.857 31880.40 (1o/f) AO2
Year 3 54000 16800 (1)AO2 37200 both 0.794 29536.80 both
Year 4 54000 17640 both 36360 (1o/f) AO2 0.735 26724.60 (1o/f) AO2
Year 5 54000 17640 (1) AO2 5000 AO2 41360 (1o/f) AO2 0.681 28166.16 (1o/f) AO2
Total NCF 16495.96 (1o/f) AO2

Workings:
Depreciation per year = (£135 000 - £ 5000) AO1 = £26 000 AO1
5 AO1
15 marks
(b)
(i)AO1 (1) AO3 (1)
AO1: One mark for one point made.
AO3: One mark for development.
Answers may include:
One advantage of using the net present value method to assess an investment project is:
It takes into account the falling value of money over time.AO1 thus inflation is accounted for.AO3

The cost of capital could be seen as the target rate of return. AO1 This must be met ie NPV must be positive for the investment to proceed.AO3
(2)
(ii) AO1 (1) AO3 (1)
AO1 (1): One mark for one point made.
AO3 (1): One mark for development.
One disadvantage of using the net present value method to assess an investment project is:
The method may involve a large number of calculations. AO1 This may result in possible errors in
the calculations / require skilled staff /
take a lot of time. AO3
(2)
(c)AO1 (3): Three marks for calculation of profitability index.
Profitability index of investment

= Net present value + cost of investment = 151 496 (1o/f) AO3

Cost of investment 135 000 (1)AO3

= 1.122 (1o/f) AO3 (3)

(d)AO3 (2) One mark for point made and one mark for development.
The profitability index allows the returns of different projects to be compared AO3 even
if the projects are of different size/ initial investment.AO3
2 marks

(e) AO2 (1) AO3 (2) AO4 (3)

In favour of Akme Robotics
The net present value of the investment is £16 496 (o/f) which is higher than that of
Dijital Solutions plc of £12 000. The difference is £4 496.

In favour of Dijital Solutions

The profitability index of this investment is 1.15 which is higher than that of Akme
Robotics plc which is 1.122 (o/f). The difference is 0.028.
The cost of the investment is £80 000 which is £55 000 less than Akme Robotics. It
may be easier to raise the smaller sum.

Other points
Both projects will involve staff redundancies.

Conclusion
The profitability index states Dubai Foods should select Dijital Solutions plc for the
investment. However, the NPV states choose Akme Robotics.

Level Mark Descriptor

0 A completely incorrect response.
Level 1 1-2 Isolated elements of knowledge and understanding that are recall
based.
Generic assertions may be present.
Weak or no relevant application to the scenario set.
Level 2 3-4 Elements of knowledge and understanding, which are applied to
the scenario.
Some analysis is present, with developed chains of reasoning,
showing causes and/or effects applied to the scenario, although
these may be incomplete or invalid.
An attempt at an evaluation is presented, using financial and
perhaps non-financial information, with a decision.
Level 3 5-6 Accurate and thorough knowledge and understanding. Application
to the scenario is relevant and effective.
A coherent and logical chain of reasoning, showing causes and
effects is present.
Evaluation is balanced and wide-ranging, using financial and
perhaps non-financial information and an appropriate decision is
made.

(6)
Total for Question 6 – 30 marks
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