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Using the data in Extract F, calculate the difference in the payback period compared to the Chief Executive’s target - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2

Question 2

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Using the data in Extract F, calculate the difference in the payback period compared to the Chief Executive’s target. You are advised to show your working.

Worked Solution & Example Answer:Using the data in Extract F, calculate the difference in the payback period compared to the Chief Executive’s target - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2

Step 1

Calculate Net Cash Flow for 3 Years

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Answer

The total net cash flow for the first three years is:

Year 1: £200,000
Year 2: £200,000
Year 3: £200,000

Thus, the total cash flow = £200,000 + £200,000 + £200,000 = £600,000.

Step 2

Calculate Payback Period

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Answer

The Chief Executive's target for payback is 3 years. To find the payback period:

The project requires an investment of £700,000. So, the payback period is calculated as follows:

[ \text{Payback Period} = \frac{£700,000}{£200,000} = 3.5 \text{ years} ]

Step 3

Determine the Difference in Payback Period

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Answer

The difference between the calculated payback period and the Chief Executive’s target is:

[ \text{Difference} = 3.5 \text{ years} - 3 \text{ years} = 0.5 \text{ years} = 6 \text{ months} ]

Therefore, the difference is 6 months longer than the target.

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