State two methods of primary market research.

Calculate, for Option 1 the average rate of return (ARR) (show all your working).

Calculate, for Option 1 the payback period (show all your working).

Calculate, for Option 2, the average rate of return (ARR) (show all your working).

Explain one reason why Option 1 may be a less risky investment than Option 2.

Types of primary market research include:

• questionnaire/surveys (postal, online, face-to-face)
• focus groups
• interviews (telephone or face-to-face)
• observation.

Award [1] for each type of market research method identified, up to a maximum of [2]. If a candidate names two types of the same method (for example, postal survey and online survey), award a maximum of [1].

Do not accept “Data collected from a business” (or something similar), as this wording is insufficiently precise. Many types of data collected from a business would be secondary.

ARR:

$\frac{\mathrm{Profit} \mathrm{from} \mathrm{investment} – \mathrm{Cost} \mathrm{of} \mathrm{investment}}{\mathrm{Number} \mathrm{of} \mathrm{years}} =\frac{\$1 400 000 - \$1 200 000 }{5}= \frac{\$200 000}{5}$

= $40 000 average profit per year

$\frac{\mathrm{Average} \mathrm{per} \mathrm{annum} \mathrm{profit}}{\mathrm{Cost} \mathrm{of} \mathrm{investment}} = \frac{\$40 000}{\$1 200 000} =$ 3.3%

Award [1] for working or formula and [1] for the correct answer. Award up to a maximum of [2].

If a candidate has the workings shown (40 000/1 200 000) and has the answer written out as 3.33, 3.3333, etc, award [2].

If a candidate has the workings shown (40 000/1 200 000) and has the answer written out as 3.3, award [2].

If a candidate has the workings shown (40 000/1 200 000) and has the answer written out as 3.4, or has a maths error, award [1].

Payback period:

Profit after the first four years is $1 000 000, which means that $100 remains going into the fifth year, which has anticipated profits of $300.

$\frac{\$100}{\$300} = \frac{1}{3} =$four months.

The payback period is 4 years and 4 months.

Award [1] for working or formula and [1] for the correct answer. Award up to a maximum of [2].

ARR:

$\frac{\mathrm{Profit} \mathrm{from} \mathrm{investment} – \mathrm{Cost} \mathrm{of} \mathrm{investment}}{\mathrm{Number} \mathrm{of} \mathrm{years}} = \frac{\$2 232 480 - \$1 800 000}{5} = \frac{\$432 480}{5}$

= $86 496 average profit per year

$\frac{\mathrm{Average} \mathrm{per} \mathrm{annum} \mathrm{profit}}{\mathrm{Cost} \mathrm{of} \mathrm{investment}} = \frac{\$86 496}{\$1 800 000}$ = 4.81 %

If a candidate has the workings shown (86 496/ 1 800 000) and has the answer written out as 4.8053, 4.80533, etc., award [2].

If a candidate has the workings shown (86 496/ 1 800 000) and has the answer written out as 4.81 or 4.8, award [2].

If a candidate has the workings shown (86 496/ 1 800 000) and has any other answer than those above or has a maths error, award [1].

Reasons that Option 1 may be the less risky of the two investments include:

• Lesser capital outlay. The success of Option 2 relies heavily on strong and growing demand year on year. Were that demand not to materialize, the returns on the investment would fall and it would take longer to recoup the investment cost.
• In the early years, Option 1 has higher profits as a percentage of investment than Option 2. Forecasts become more problematic the further out they go in years. Option 1 will see a fairly significant recovery of investment in the early years, whereas Option 2 is very dependent on demand of 20 % growth through five years. Profit of $622 080 is crucial to the success of Option 2.

Accept any other relevant response.

Award [1] for identification of a reason why Option 1 may be safer and award [2] for an explanation of why Option 1 may be safer. Application is largely built into the question.