Answers

(a)  (i)  Define the term partnership.  [2 marks]

A partnership is a form of business ownership where two to twenty people collectively own the organization. In this case, brothers Jake and Luke own J-RAG as a partnership.

Award [1 mark] if there is some understanding of ‘partnership’ shown, although the answer might lack clarity.

Award [2 marks] if ‘partnership’ is clearly defined, similar to the example above. Application is not required to gain full marks.

(a)  (ii)  Define the term labour turnover.  [2 marks]

Labour turnover measures the number of workers who leave an organization expressed as a percentage of the size of the workforce, per time period (usually each year).

Award [1 mark] if there is some understanding of ‘labour turnover’ shown, although the answer might lack clarity.

Award [2 marks] if ‘labour turnover’ is clearly defined, similar to the example above. Application is not required to gain full marks.

(b)  (i)  Calculate the payback period for the proposed investment project.  [2 marks]

Payback period (PBP) calculations:

• At the end of Year 2, there is a shortfall of $45,000.

• By the end of Year 3, the cumulative net cash flow ($150,000) is greater than the investment cost ($140,000). Hence, the PBP must occur between Year 2 and Year 3.

• In Year 3: $45,000 / ($55,000 / 12) = 4,583.33 = 9.82 months.

• Hence, the payback period is 2 years and 10 months.

Award [1 mark] if the PBP is correct but there is no working out shown or the correct procedure is used but with an incorrect answer.

Award [2 marks] if the correct PBP is given with the working out shown.

(b)  (ii)  Calculate the average rate of return for the proposed investment project.  [2 marks]

• ARR  =  $95,000 / 5 years = $19,000 per year

• ARR  =  $19,000 / $140,000

• ARR  =  13.57%

Award [1 mark] if the ARR is correct but there is no working out shown or the correct procedure is used but with an incorrect answer.

Award [2 marks] if the correct ARR is given with the working out shown.

(b)  (iii)  Calculate the net present value for the proposed investment project.  [2 marks]

The NPV is calculated by taking away the cost of the investment project from the sum of the present values for the duration of the project. The higher the NPV, the more attractive the investment project.

• Cumulative NCF = $209,734.50

• Cost = $140,000.00

• Hence, NPV = $69,734.50

Award [1 mark] if the NPV is correct but there is no working out shown or the correct procedure is used but with an incorrect answer.

Award [2 marks] if the correct NPV is given with the working out shown.

(c)  Evaluate whether J-RAG should invest in the new computerised system. Use information from the case study and both quantitative and qualitative considers in your answer.  [10 marks]

Relevant financial factors could include:

• A relatively long payback period of 3 years and 10 months (especially given that the project is expected to last 5 years before the computerized system needs to be upgraded).
• The ARR of 13.57% is high (and likely to be significantly higher than interest rates in the economy, so there is an opportunity cost to just leaving any spare cash in the bank.
• However, J-RAG should also consider the reliability of the forecasted financial data, especially as they are projecting figures for the next five years.
• There also needs to be consideration of the opportunity cost of the $140,000 that could be used for investment. For example, there is the possibility of using this money for the partners to hire two full-time workers, which would help to minimize the impact of the high labour turnover at J-RAG.
• Accept any other relevant financial / quantitative factor, written in the context of the case study.

Non-financial factors that could be considered by the partners regarding the investment in a new computerized computer system could include:

• Consideration of whether the human resource issues are more of a priority than the need for a new computerized system.
• The state of the economy – people are less likely to spend money on arcade consoles and games if there is a recession, for example.
• The degree of competition in the local area (J-RAG operates in a rather niche market).
• Expected changes in interest rates.
• The impact on human resources, e.g. staff training, staff morale (retention is already an issue for J-RAG).
• Accept any other relevant non-financial / qualitative factor, written in the context of the case study.

Award [1 - 2 marks] if the answer is vague, generalized or lacks substance.

Award [3 - 4 marks] if the answer shows some understanding of the demands of the question. There is some relevant application of the case study and figures calculated in Question (b), although the answer lacks depth / analysis.

Award [5 - 6 marks] if the answer shows understanding of the demands of the question. There is relevant application of the case study and figures calculated in Question (b), although the answer lacks balance. Award up to [6 marks] if only financial or non-financial factors are considered.

Award [7 - 8 marks] if the answer shows good understanding of the demands of the question. There is detailed consideration of both relevant numerical and non-numerical factors in relation to J-RAG’s investment decision. However, evaluation is limited if attempted.

Award [9 - 10 marks] if there is a balanced discussion of relevant numerical and non-numerical factors in relation to whether J-RAG should invest in the new computerized system to improve its stock (inventory) control and operational efficiency. Appropriate terminology and examples from the case study have been used effectively. There is evidence of critical and evaluative thinking.

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