Describe one feature of a private limited company.

For the new warehouse, using information from the table, calculate the average rate of return (ARR) (show all your working).

For the new warehouse, using information from the table, calculate the payback period (show all your working).

For the new warehouse, using information from the table below, calculate the net present value (NPV) at a discount rate of 6 % (show all your working).

Explain one disadvantage for S4U of using the NPV method of investment appraisal.

Features of a private limited company may include:

• The company is incorporated. There is a separate legal entity between the shareholders.
• The shareholders have limited liability. The shareholders can only lose up to what they invested. Their private assets will not be affected in the event of any financial problems.
• The current owners, cannot sell shares publically on the stock exchange in order to raise more money.
• Accept any other relevant feature.

Award [1] for stating an appropriate feature and [1] for an appropriate description (application not required), up to a maximum of [2].

ARR = $\frac{\left(\text{total returns}-\text{capital cost}\right)/\text{years of use}}{\text{capital cost}}\times 100$

Total return over 6 years = $208500

Total returns over 6 years: $58 500

Average annual profit: $\frac{58500}{6}$ = $9750

ARR = $\frac{9750}{150000}$ x 100 = 6.5%

Do not credit the formula

Award [1] for working and [1] for the correct answer.

Award a maximum of [2].

Do not credit candidates for just presenting the formula as it is given.

Do not fully credit a figure that is not expressed as a percentage.

Capital/investment cost: $150 000

25 000 + 30 000 + 35 500 + 37 000 + (22 500/39 800) x 12

Payback period = 4 years, 6 months and 24.18 days/4 years and 7 months or 4.56
years or 4 years and 6.78 months.

There is no need to calculate the number of days for full marks.

Award [1] for working and [1] for the correct answer.

Award a maximum of [2].

Using discount tables:

Total present value = $168 187.04
NPV = TPV – capital cost
NPV = $18 187.04

Accept $18 188 Accept $18 187

Given that only [2] are available, on this occasion, full headings and full calculation for each year are not expected.

Full marks can be awarded if there is some evidence of calculation especially the movement from the total DCF to NPV, if the DCF for each year is not shown but it is clear that the candidate understands the method.

N.B. Allow candidate own figure rule (OFR)

Award [1] for working and [1] for the correct answer.

Award a maximum of [2].

Do not credit candidates for just presenting the formula as it is given.

A disadvantage for S4U of using the NPV method of investment appraisal is that the method relies on the use of a realistic discount factor. S4U has chosen 6 % but could have chosen a higher or lower discount rate depending on the current level of interest rates present in the country in which S4U is located. It might be difficult for S4U’s management to decide on the most accurate discount factor for a project that last for at least six years and the interest rate and inflation rate is likely to change. The interest rate is likely to change the longer the project takes, making a selection of a single discount rate of 6 % very difficult. An accurate rate is crucial for S4U as a low discount factor will overestimate the return and a high discount factor will underestimate the return. The net cash flows are forecasted and they may be inaccurate.

Accept any other relevant disadvantage and explanation.

Do not credit a response that says that the all figures are forecasted as this limitation is relevant for all. The question is about a limitation for the NPV method.

Do not credit a response that says that the method does not take non- financial issue into consideration as this limitation is relevant for all. The question is about a limitation for the NPV method. Award [1] for a relevant and correct disadvantage identified and [1] for a relevant and correct explanation with application to S4U, up to a maximum of [2].