Question
Su is considering two options.
Option 1: The joint venture
If AS goes ahead with the joint venture in 2019, there will be consequences it will need to face. DF would have majority ownership in the joint venture, provide most of the senior managers, and is likely to expect changes in the way AS operates. AS would have to significantly increase the production of solar power systems and would have to restructure. Some managers may lose influence over decisions. Su is worried that her Afghanistan project (AS) would take second place.
Having a close working relationship with DF would reduce AS’s risk of failure. Employees at AS have heard rumours about the joint venture and are unhappy with the idea. They fear a loss of identity, being overwhelmed by a much larger organization and possibly losing their jobs. Su is concerned that resistance to change, particularly by employees and managers, is going to be an important consideration in the decision. However she sees the situation as a huge opportunity to make a real change in young people’s lives.
AS would invest $\$1$ million. The net cash inflows to AS (ignoring inflows to DF and before deduction of the investment cost) are forecast to be $\$0.4$ million per year, giving a net present value (NPV) at 6 % discount rate of $\$0.68$ million and a payback of two years and six months. Su gives the project a life of five years.
Option 2: Diversification into biomass
The research and development section of AS has developed a portable electricity generation system based on biomass, a biomas power system (BPS), as an alternative to solar power systems. A new factory costing $\$3$ million will be needed. BPS will be particularly useful to those communities that keep cattle − the dung* produced provides the fuel for BPS. Su has assembled some relevant information.
* dung: animal waste from the cattle
Table 4: Information relevant to the BPS project
Refer to Afghan Sun case study SL/HL P1 May and Nov 2018.
Using the case study, resource and appropriate planning tools, recommend whether Su should choose Option 1, Option 2, or neither. You will find it useful to calculate the ARR for Option 1
▶️Answer/Explanation
Ans:
Marks should be allocated according to the paper 1 markbands for May 2016 forward, section C, available under the “Your tests” tab > supplemental resources.
Note – a recommendation that a decision cannot be made due to lack of information (eg, market research) can be regarded as a decision provided the arguments are supported.
Doing nothing:
• No additional investment.
• Successful – no need for change.
• Resistance to change.
• Su can still manage effectively.
• Low risk, but will market become saturated?
But:
• Missed opportunities.
• Will Su be satisfied?
• Businesses will naturally want to grow.
• Loss of motivational opportunity.
Joint venture with DF:
• Big opportunity to have an impact on a wider/larger scale.
• Positive NPV, good ARR, relatively short payback.
• Suits Su’s objectives.
• Risk smaller because of joint venture.
But:
• Could be overwhelmed.
• Restructuring needs.
• Large investment.
• Managers lose influence.
• Demotivating.
• Possible job losses.
• Are investment appraisal results realistic eg, 6% discount rate?
Biomass:
• Smaller investment.
• Retains autonomy.
• Provides a valuable service to wider community.
But:
• Fairly large investment. Source of finance?
• High risk.
• Smaller NPV, ARR, larger payback.
ARR for Option 1:
The calculation is annual net cash flow/investment × 100.
The investment is $1m.
The cash inflow is $0.4m.
The project takes 5 years. The ARR is ((5 × 0.4) − 1) 5/1 × 100 = 20%
Do not penalize candidates who do not consider the ‘do nothing’ option
Criterion A: possible theories, planning tools and techniques include: Investment appraisal, Management issues such as management of change,, HRM issues such as motivation,, risk (including Ansoff), joint ventures, production problems, force field analysis, the importance of assumptions. Planning tools include those in Section 1.7 of the syllabus plus Ansoff and investment appraisal.
No understanding of investment appraisal max [3]
For [4]: Correct investment appraisal calculation plus at least one other tool, technique or theory understood and developed well with some relevance to the additional stimulus material.
For [2]: some understanding of at least two tools, techniques or theories, but not developed.
Criterion B: the tools, techniques, theories and stimulus applied to the decision. Application will be judged by the use of the stimulus material in particular the extra material especially Table 4.
For [4]: relevant tools, techniques and theories are applied well to the case study (including OFR) context and additional stimulus material, the application is convincing and relevant.
If only one option considered max [3].
Limited use of Table 4 max [3].
For [2]: some limited context/application but not developed. Use of tools limits candidate’s ability to make reasoned arguments.
If a candidate calculates ARR but then does not use it reward can only be made in Criterion A.
Criterion C: Options discussed in a balanced way, conclusions drawn as to whether they work. Remember, ‘do nothing’ can be a recommendation.
For [4]: There needs to be a comparison between the two options using Section C and other material and a recommendation (Option 1, Option 2 or do nothing) made and supported.
For [2]: Only one option considered or some limited arguments but not justified. No comparison limited analysis but candidate arrives/draws a reasoned conclusion.
Criterion D: Structure. This criterion assesses the extent to which the student organizes his or her ideas with clarity, and presents a structured piece of writing comprised of:
• an introduction
• logical structure
• a conclusion
• fit-for-purpose paragraphs. This means: not too long, focused on distinct issues, sequenced well, guides the reader.
• BEWARE OF UNDER_REWARDING WEAK SCRIPTS WHICH, NONETHELESS, HAVE SOME OR ALL OF THE ELEMENTS. The candidate will lose marks in the other criteria so they should not be double-penalized.
For [4]: all four elements present, clearly organized and there is clarity in the student’s answer.
For [2]: No logical structure but other elements present or logical structure with other elements missing.
Criterion E: Stakeholders:
• individuals: Su, individual households
• groups: Managers, employees, customers, communities, governments, NGOs, stakeholders at DF.
For [4]: two or more individuals and groups are considered in a balanced way.
For [2]: one group or individual considered appropriately, or several individuals or groups considered superficially.