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Using the data in Extract F, calculate the difference in the payback period compared to the Chief Executive’s target - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2

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Using the data in Extract F, calculate the difference in the payback period compared to the Chief Executive’s target. You are advised to show your working.

Worked Solution & Example Answer:Using the data in Extract F, calculate the difference in the payback period compared to the Chief Executive’s target - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2

Step 1

Calculate Net Cash Flow for 3 Years

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Answer

The total net cash flow for the first three years is calculated as follows:

  • Year 1: £200,000
  • Year 2: £200,000
  • Year 3: £200,000

Total net cash flow over 3 years = £200,000 + £200,000 + £200,000 = £600,000.

Step 2

Calculate Payback Period

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Answer

The payback period is determined by dividing the initial investment by the annual cash flow. The formula is:

[ \text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Cash Flow}} = \frac{£700,000}{£200,000} = 3.5 \text{ years} ]

Step 3

Calculate Difference in Payback Period

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Answer

The difference in the payback period compared to the Chief Executive’s target of 3 years is:

[ \text{Difference} = \text{Calculated Payback Period} - \text{Target Payback Period} = 3.5 - 3 = 0.5 \text{ years} = 6 \text{ months} ]

Step 4

Final Answer

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Answer

The payback period is 6 months longer than the Chief Executive’s target of 3 years.

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