A-Level Edexcel Business Decision Making Techniques: Using the data in Extracts E to

Question

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.

Extract E Get on your bike
Northfield Cycles (NC), Birmingham, was established in 1996 by Richard Tranter, a semi-professional cyclist. It has gone from strength to strength as a retailer, repairs and servicing centre.

In 1996, unemployment in the region was growing because of the gradual closure of the Rover car manufacturing plant in nearby Longbridge. NC flourished thanks to cheap overheads but especially given the demand from locals on low incomes. Cars, it seems, were being exchanged for bikes.

Initially Richard sold an average of 20 bikes a week, growing to 20 bikes a day in the summer of 2012. Sales were boosted by Bradley Wiggins winning the Tour de France and the successes of the Great British Cycling Team at the London Olympics.

NC sold an average of £40,000 worth of bikes per week. Sales then experienced phenomenal growth in 2019 because of UK Government schemes and the closure of a competitor, Action Bikes, in Longbridge.

Extract H Expansion plans at Northfield Cycles
In April 2020, Richard approached architects, Slaters Ltd of Dudley, to prepare expansion plans for NC.

Plan A
To remove existing walls and partitions, extending the shop by 25 m². Upgrade the basement of the premises to become the workshop for bike repairs and servicing. The net present value for this project is £4,989 given a 10% discount rate.

Plan B
To build an extension to the rear of the premises, extending the shop by 40 m². Completely refit the basement of the premises to become a high-tech workshop for bike repairs and servicing, to include e-bikes.

The predicted net cash-flows were as follows:

| Year     | Plan A, £000s | Plan B, £000s |
|----------|----------------|----------------|
| 1 (12)   | (60)          |                |
| 2        | 4             | 12             |
| 3        | 12            | 20             |
| 4        | 20            | 28             |
| 5        | 5             | 5              |

The discount rates table for 10% interest is as follows:

| Year     | 1    | 2         | 3         | 4         | 5         |
|----------|------|-----------|-----------|-----------|-----------|
| Discount | 0.909| 0.826     | 0.751     | 0.683     | 0.621     |

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

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

Evaluate Plan A

Evaluate Plan B

Recommend which Plan is better

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