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Using the data in Extracts E to H, Payback and NPV investment appraisal methods, evaluate Plan A and Plan B expansion plans and recommend which one might be better for Northfield Cycles - Edexcel - A-Level Business - Question 2 - 2022 - Paper 3
Question 2
Using the data in Extracts E to H, Payback and NPV investment appraisal methods, evaluate Plan A and Plan B expansion plans and recommend which one might be better f... show full transcript
Worked Solution & Example Answer:Using the data in Extracts E to H, Payback and NPV investment appraisal methods, evaluate Plan A and Plan B expansion plans and recommend which one might be better for Northfield Cycles - Edexcel - A-Level Business - Question 2 - 2022 - Paper 3
Step 1
Evaluate Plan A Expansion
Answer
To evaluate Plan A, we can look at its Net Present Value (NPV) of £4,989. NPV is computed by discounting future cash flows back to their present value and subtracting the initial investment. In this case, since the NPV is positive, it indicates that the investment would generate profit over time.
In terms of Payback Period, we would also need to compute the time it takes for the initial investment to be recouped from the net cash inflows from the project. Depending on the cash flows generated in the initial years, if they are substantial and exceed the investment quickly, Plan A could be beneficial.
Step 2
Evaluate Plan B Expansion
Answer
Plan B does not provide a direct NPV in the provided details, so we must calculate it based on the given predicted net cash flows. By discounting these cash flows at the specified interest rate, we can determine the overall profitability of the venture. It is important to observe the cash flow over the years to assess if it provides substantial returns.
For the Payback Period, we would tally the cash inflows year by year until we surpass the initial investment cost. If the Payback Period is shorter than that of Plan A, it may be favorable despite the lack of a positive NPV.
Step 3
Recommendation
Answer
In making a recommendation overall, it is crucial to compare the positive NPV of Plan A against the calculated NPV of Plan B. If Plan B offers a shorter Payback Period and a similar or better NPV, it may be the more viable option. Overall, the decision should hinge on the cash flow stability post-expansions ensuring the long-term sustainability of Northfield Cycles.