Accounting 9706/42 May/June 2025: question paper and mark scheme

Mark scheme

1(a) Calculate the net cash flow for each year 1 to 4 for Option 1. 4 Year $ 1 4 000 × (80 – 52 – 3) – 60 000 40 000 (1) 2 5 000 × (80 – 52 – 3) – 60 000 65 000 (1) 3 5 000 × (82 – 52 – 3) – 60 000 75 000 (1) 4 6 000 × (86 – 52 – 3) – 64 000 122 000 (1) 1(b)(i) Calculate the net present value (NPV) for: 4 Option 1 Year Net cash flow Discount factor Present value $ $ 0 (224 000) (224 000) (1) 1 40 000 0.909 36 360 } 2 65 000 0.826 53 690 }(1)OF 3 75 000 0.751 56 325 }* 4 122 000 0.683 83 326 }*(1)OF Net present value 5 701 (1)OF 1(b)(ii) Calculate the net present value (NPV) for: 4 Option 2 Year Net cash flow Discount Present $ factor value $ 0 (950) (950) (1) 1–3 1 500 2.486 3 729.0 (1) 4 1 800 0.683 1 229.4 (1) Net present value 4 008.4 (1)OF Or Year Net cash flow Discount Present $ factor value $ 0 (950) 1.000 (950) (1) 1 1 500 0.909 1 363.5 } 2 1 500 0.826 1 239.0 } (1) 3 1 500 0.751 1 126.5 }* 4 1 800 0.683 1 229.4 }* (1) Net present value 4 008.4 (1)OF 1(c) State what is meant by the payback period. 1 The time taken to recover the cost of an investment (1) Accept other valid responses. 1(d) Discuss whether Babar should take the payback period of the options into account when making a decision. 4 Calculations are not required. Payback considers cash flows (1) and not profit (1). The shorter the payback period the less risky the option (1) as later cash flows are more uncertain than earlier ones (1). The more risk averse Babar is, the more he will look for an option which pays back quickly (1). Payback does not consider the cash flows which arise after the end of the payback period / the whole life of the project (1) and does not consider the time value of money (1). Max 4 Accept other valid responses. 1(e) Advise Babar which option he should implement. Justify your answer. 7 Option 1 has the higher NPV (1). There is a higher initial outlay for option 1 (1) which may require financing (1). The payback period for option 1 is longer (1) so it is a riskier investment (1). Organising option 1 will involve considerably more work and stress than option 2 (1). Option 1 will provide employment opportunities for local people (1). If option 1 goes well Babar could bottle his own juice and sell it himself (1). For option 2 the tenant might stay longer than four years with no additional outlay (1) whereas continuation of option 1 would require the purchase of further machinery which will require funding (1). Max 6 for comments Decision supported with a comment (1) Accept other valid responses 1(f) Name one other method of investment appraisal which Babar could use. 1 Accounting rate of return / (ARR) (1) OR Internal rate of return / (IRR) (1)

Mark scheme

2(a) Complete the following table to reconcile the standard profit for April 2025 with the actual profit using the required 14 variances. Enter each variance in either the favourable or adverse column as appropriate. $ $ $ Favourable Adverse Standard profit 255 200 (1) Sales price variance 11 000(92.5 – 85) 82 500 (2) Material price variance 46 200(4.6 – 2.5) 97 020 (2) Material usage variance 4.6(44 000 – 46 200) 10 120 (2) Labour rate variance 39 600(11.2 – 11) 7 920 (2) Labour efficiency variance 11(33 000 – 39 600) 72 600 (2) Total fixed overhead variance 15 100 (2) (17.9 × 11 000) – 21 2000 97 020 188 240 (91 220) Actual profit 163 980 (1) Note – marks for variance are (1) for amount and (1) for correct direction ( column -favourable or adverse) 2(b) Discuss whether variance analysis is useful in this situation. 4 Shows the differences between budget and actual (1) caused by this change in materials (1). It shows how it affects other variances (1), for example workers being less efficient as they are not experienced with the materials, wastage etc (1). Indicates where changes may be made to improve outcomes / take remedial action or suitable example such as training (1). Helps to plan more realistic and attainable goals (1). The standards being used are unlikely to be realistic (1). Not useful in assessing performance when changes are beyond the control of the business (1). Accept other valid answers Max 4 Accept other valid responses 2(c) Advise the directors whether or not they should continue with the change in material. Justify your answer and 7 support it with relevant calculations. Calculations Price rise of metal would have reduced profit by 44 000 × (7.80 – 4.60) = $140 800 (1) compared to the actual reduction in profit of $91 220 (1). Continue (Max 2) Product is still profitable (1). Profit is higher than if the business uses metal, given its price rise (1). Customers have not been let down (1). Plastic is cheaper than metal (1). As new type of production becomes established some adverse variances may improve (1). Business is able to maintain operating at full capacity (1). Do not continue (Max 2) The quality may be adversely affected (1). Sales have decreased / product may become harder to sell in the future (1). The brand image may be damaged (1). There may be environmental concerns (1). May require a shorter warranty period (1). Decision supported with a comment (1) Accept other valid responses