Photo AI
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
Plan A involves extending the shop by 25 m² and upgrading the basement for bike repairs, with a net present value (NPV) of £4,989 at a 10% discount rate. The cash flows from this plan are moderate, with an initial inflow of £12,000 followed by £4,000 and variable amounts in the subsequent years. The total cash inflow looks promising, but the returns are relatively low compared to the effort and investments required.
Step 2
Evaluate Plan B Expansion
Answer
Plan B entails a more substantial commitment, extending the shop by 40 m² and refitting the basement for high-tech workshops and e-bike services. The initial cash flow is significantly higher at £60,000 and maintains promising returns throughout the years, peaking at £28,000 in year 6. This plan's total NPV, although not explicitly given, can be expected to be substantially higher than Plan A due to larger initial and ongoing cash flows.
Step 3
Recommendation
Answer
Given the substantial difference in cash inflows and the strategic advantage of modernizing services, Plan B is recommended as the better option for Northfield Cycles. Despite a heavier initial investment, the higher returns and expansion into newer markets, like e-bikes, can solidify NC's competitive position in the cycling industry.