A-Level Edexcel Business Managing Finance: Using the data in Extract F, cal

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

Net cash-flow for 3 years is £600,000

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Answer

To find the net cash-flow over the proposed 3-year period, we sum the net cash-flows for each year:

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

Thus, total cash-flow over 3 years = £200,000 + £200,000 + £200,000 = £600,000.

Step 2

Calculation of payback: 3 years plus additional time

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Answer

The total investment for the project is £700,000. The remaining amount after 3 years of cash flows is:

£700,000 - £600,000 = £100,000.

To calculate the additional time needed to recover this amount:

This can be calculated using the cash-flow from Year 4, which is £200,000. Therefore, the time needed to recover the leftover amount is:

$rac{£100,000}{£200,000} imes 12 ext{ months} = 6 ext{ months}$ .

Step 3

The difference is 6 months longer

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Answer

The Chief Executive's target for payback is 3 years (36 months). With the additional 6 months required, the total payback period becomes:

36 months + 6 months = 42 months.

Therefore, the project will take 6 months longer than the expected target.

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

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

Net cash-flow for 3 years is £600,000

Calculation of payback: 3 years plus additional time

The difference is 6 months longer

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