Uploaded by kharov98

5BUSS001W: BUSINESS DECISION MAKING: EXAMINATION PAPER SEMESTER ONE JANUARY 2019: All Solutions

advertisement
UNIVERSITY OF WESTMINSTER
WESTMINSTER BUSINESS SCHOOL
EXAMINATION PAPER
SEMESTER ONE
JANUARY 2019
Solutions
https://bit.ly/2KrOA5U
MODULE CODE:
MODULE TITLE:
DATE:
TIME:
5BUSS001W
BUSINESS DECISION MAKING
INSTRUCTIONS TO CANDIDATES:
This is a RESTRICTED exam.
You may use the following limited materials in this examination. You are
permitted to bring in to the examination room an annotated copy of the case
study and nothing more.
In addition to this examination paper you will receive a case study
SECTION A: You MUST answer all THREE questions in this section. Each
question is worth 10 marks.
SECTION B: You must answer any TWO questions in this section. Each
question is worth 35 marks.
The use of silent non-programmable calculators is permitted.
The use of dictionaries is not permitted.
TIME ALLOWED: 1 HOUR 30 MINUTES
PLEASE DO NOT TURN OVER THIS PAGE UNTIL INSTRUCTED TO
DO SO BY THE INVIGILATOR
5BUSS001W/S1/18-19
Page 1 of 11
SECTION A
Answer all THREE questions in this section.
Question 1
Zenith Sporting Goods Company (ZSGC) is trying to decide which of four possible
locations it should select for its new ‘mega-store’; the choice is between Aldershot,
Brighton, Canterbury and Dover. It has asked you, as one of new business analysts,
to undertake a multi-criteria analysis (MCA). The company has identified three key
criteria: Average Incomes, Transport Links and Investment Cost. You have used a
range of sources to help determine the weighting given to each criterion, together
with the rating assigned to each option (where 5 indicates the best and 1 the worst).
The information that have provided is summarised in the decision matrix, below:
Location
Average Incomes
(Weight = 0.35)
Score
2
5
4
2
Aldershot
Brighton
Canterbury
Dover
Transport Links
(Weight = 0.35)
Score
4
1
2
3
Investment Cost
(Weight = 0.3)
Score
4
2
1
3
Solution available at https://bit.ly/2KrOA5U
Required:
a)
Copy the decision matrix above. Use a MCA to advise ZSGC on the
location it should choose, based on the information provided.
Location
Average Incomes
(Weight = 0.35)
Score
2*0.35
5*0.35
4*0.35
2*0.35
Aldershot
Brighton
Canterbury
Dover
Transport Links
(Weight = 0.35)
Score
4*0.35
1*0.35
2*0.35
3*0.35
Investment Cost
(Weight = 0.3)
Score
4*0.3
2*0.3
1*0.3
3*0.3
Weighted score
3.3*
2.7
2.4
2.65
Aldershot is the preferred location. Up to 6 marks for workings; 2 marks
for correct choice. (8 marks)
b)
Give two limitations of multi-criteria analysis as a decision-making
technique.
(2 marks)
(10 marks)
Question 2
ZSGC is considering two possible marketing campaigns to increase company
turnover (celebrity endorsement or social media adverts). Celebrity endorsement
would cost £100,000 (whether the company decides to go with Lewis Hamilton or
5BUSS001W/S1/18-19
Page 2 of 11
Johanna Konta), while social media adverts would cost the company £50,000. The
decision tree, below, sets out the probabilities and payoffs (profit contribution in
£000s) associated with the two marketing options under conditions of high and low
growth, but it is incomplete:
Required: Solution available at https://bit.ly/2KrOA5U
Copy and complete the decision tree (shown over page) by adding any missing
elements. Use it to advise ZSGC which option to choose, assuming the company
wishes to maximize expected profits from the marketing campaigns.
(10 marks)
Question 3
The management team at ZSGC has been offered a new credit control system and
would like you to determine whether it will generate an accounting rate of return
(ARR) that exceeds the company’s benchmark of 25%. The system costs £180,000
and has a 10-year life. The system is expected to generate incremental revenues of
£120,000 and will have incremental expenses of £66,000 including depreciation.
Solution available at https://bit.ly/2KrOA5U
5BUSS001W/S1/18-19
Page 3 of 11
Required:
a) Calculate the accounting rate of return (ARR) on the investment project.
(8 marks)
b) For the benefit of the ZSGC management team highlight two limitations of
ARR as an investment appraisal technique.
(2 marks)
(10 marks)
Section B starts on the next page
SECTION B
Answer only TWO questions from this section.
Question 4
ZSGC has long believed that demand for its sporting goods is sensitive to the overall
weather conditions in any year. In 2018, for instance, the hot, dry spring and summer
weather in the UK boosted sales of water sports wear and equipment, while reducing
sales of its hiking gear. The market research consultancy hired by ZSGC has
produced forecasts of sales of four of the company’s best-selling products over the
next year, based on three alternative weather forecasts for 2019 (relative to long
term average conditions). It has summarised these as: Cool & Wet, Warm & Variable
or Hot & Dry. This information is summarised in the following pay-off matrix (with
sales volumes in £000s). Solution available at https://bit.ly/2KrOA5U
Weather Conditions
Sporting Good
Cool & Wet
Warm & Dry
Hot & Dry
Mountain Bikes
400
330
200
Surfboards
-150
150
550
Tennis racquets
-100
300
450
Running shoes
300
300
300
a)
Explain the difference between a situation of risk and one of uncertainty.
(3 marks)
b)
What is the preferred option according to each of the following criteria and
what attitude to risk do they represent?
5BUSS001W/S1/18-19
Page 4 of 11
c)
Construct a potential regret matrix and use it to determine the best choice of
sporting good according to the minimax regret criterion.
(8 marks)
Opp Loss Matrix
Sporting Good
Mountain Bikes
Weather Conditions
Cool & Wet Warm & Dry
Hot & Dry
MAX
0
0
350
350
Surfboards
550
180
0
550
Tennis racquets
500
30
100
500
Running shoes
100
30
250
250*
The market research consultancy has obtained weather forecasts from the Meteorological
Office for the coming year and using these has estimated the following probabilities for the
different weather conditions: Cool & Wet (25%), Warm & Dry (55%), and Hot & Dry (20%).
Which sporting good looks the best choice according to the expected monetary value (EMV)
criterion? Solution available at https://bit.ly/2KrOA5U
EV
Weather Conditions
Sporting Good
Cool & Wet
(0.25)
Warm & Dry
(0.55)
Hot & Dry
(0.20)
EV
400*0.25
330*0.55
200*0.2
321.5*
Surfboards
-150
150
550
155
Tennis racquets
-100
300
450
230
Running shoes
300
300
300
300
Mountain Bikes
(8 marks)
d)
ZSGC has now been contacted by a private weather agency that has offered
to provide infallible forecasts of next year’s weather conditions. What is the
maximum that ZSGC should be prepared to pay the weather agency for this
information (in other words what is the value of perfect information concerning
next year’s weather conditions in the UK)?
.
(8 marks)
5BUSS001W/S1/18-19
Page 5 of 11
(Total: 35 marks)
Question 5
ZSGC has so far operated as a merchandising company, but would like to move into
the manufacture of some ‘own-brand’ sporting goods in its own workshop. Initially, it
has plans to produce a high quality badminton racquet made from lightweight, high
performance materials. The fixed costs of operating the workshop for a month
amount to £16,000. Each racquet will require £120 of material and will take 2 hours
of direct labour at an hourly rate of £20. The racquet will be sold at its stores for
£240. The company expects to sell 300 racquets each month. Solution available at
https://bit.ly/2KrOA5U
a) Calculate the company’s annual profit.
(6 marks)
b) Calculate the break-even point both in terms of number of racquets and in
terms of sales revenue.
(6 marks)
c) Calculate the ‘margin of safety’ as a percentage of the expected level of sales
and briefly explain what the ‘margin of safety’ means.
(5 marks)
d) Would it be worthwhile to increase the selling price of each racquet by £40
from its current level if it leads to a decrease of 20% in demand for the
racquet? Estimate the new annual profit if the price reduction was
implemented.
(6 marks)
e) Use the information from d) to calculate the price elasticity of demand for the
racquet and the optimal mark-up (on variable costs).
(6 marks)
f) What price should the company sell each racquet for if it wishes to make an
annual profit of £120,000?
(6 marks)
(Total: 35 marks)
Question 6
ZSGC would like you to appraise two possible designs for its new workshop, which it
has code-named Alpha and Omega. The following table presents the annual net
cash flows of these two designs; assume that both would have an eight-year life, at
5BUSS001W/S1/18-19
Page 6 of 11
the end of which there would be no scrap value. Solution available at
https://bit.ly/2KrOA5U
Year
Alpha
Omega
£
£
Initial investment
(100,000)
(180,000)
1
10,000
10,000
2
20,000
20,000
3
20,000
20,000
4
30,000
30,000
5
40,000
40,000
6
30,000
50,000
7
30,000
60,000
8
20,000
70,000
a) Calculate the payback period for each of the designs and suggest which of
them (if any) is worthwhile if it is the company’s policy not to take on a project
with a payback period longer than 4 years.
Alpha Payback
Omega Payback
Cum CF
Cum CF
-100
-180
10
10
30
30
50
50
80
80
120
120
170
4 years + 20/40 yrs
230
4.5 years
6 years + 10/60yrs
6.16 years
(8 marks)
5BUSS001W/S1/18-19
Page 7 of 11
b) Briefly discuss the main reasons why, despite its numerous drawbacks,
payback still remains a widely used technique for investment appraisal.
Solution available at https://bit.ly/2KrOA5U
(5 marks)
c) Calculate the Net Present Value (NPV) for both Alpha and Omega, using a
cost of capital of 9%. Recommend which design should be chosen (if any).
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Alpha
Omega
Cashflows PV Factor (r=9%) PV
Cashflows PV Factor (r=7%) PV
-100
1
-100
-180
1
-180
0.9174
0.9174
10
9.174
10
9.174
0.8417
0.8417
20
16.834
20
16.834
0.7722
0.7722
20
15.444
20
15.444
0.7084
0.7084
30
21.252
30
21.252
0.6499
0.6499
40
25.996
40
25.996
0.5963
0.5963
30
17.889
50
29.815
0.547
0.547
30
16.41
60
32.82
0.5019
0.5019
20
10.038
70
35.133
NPV
33.037
NPV
6.468
14 marks)
d) You are told that at a discount rate of 20% the NPV of Alpha is –£12,593 and
that of Omega is –£65,900. Using this information calculate the internal rate of
return (IRR) of each option and indicate which should be preferred according
to this criterion.
Alpha
IRR = 9% + [(33.037/(33.037+12.593)]*11%
IRR = 9% + [(33.037/(45.967)]*11% =
IRR = 9% + (0.719)*11% = 16.9%
Omega
IRR = 9% + [(6.468/(6.468+65.9)]*11%
IRR = 9% + [(6.468/(73.368)]*11% =
IRR = 9% + (0.088)*11% = 9.969%
(8 marks)
(Total: 35 marks)
Question 7
ZSGC buys the component parts for two types of bicycle, a road bike and a
mountain bike, which it them assembles, tests and packs under its own brand name.
It has a small facility attached to its mega-store in Slough which it uses for this
operation. The table, below, shows the hours required for each stage of the
operation and the total hours available each month.
5BUSS001W/S1/18-19
Page 8 of 11
Solution available at https://bit.ly/2KrOA5U
Assembly
Testing
Packing
Profit Contribution
Road Bike
2
4
6
£400/unit
Mountain Bike
10
5
5
£250/unit
Total hours available
8,000
5,500
6,000
Required:
a) Formulate as a linear programming problem, where the objective is to maximise
the total profit from the two products.
(6 marks)
b) Solve the problem graphically to determine the optimal number of Road Bikes
and Mountain Bikes to produce each month. Confirm the solution algebraically.
So the optimum solution should be:
X1=250; X2=900
And 7c: £325,000?
Solution available at https://bit.ly/2KrOA5U
(14 marks)
c) What is the maximum achievable monthly profit?
(4 marks)
d) What is meant by the shadow price of a constraint? Using the information
provided in the Excel Sensitivity Report shown below, advise ZSGC on the
benefits to be gained from increasing the hours available at each stage
(Assembly, Testing and Packing).
(5 marks)
Microsoft Excel Sensitivity Report
5BUSS001W/S1/18-19
Page 9 of 11
ADJUSTABLE CELLS
Objective Allowable Allowable
Coefficient Increase Decrease
400
100
200
250
250
50
Cell
Name
$D$5 Quantity produced Road Bike
$E$5 Quantity produced Mountain
CONSTRAINTS
Shadow
Price
Constraint Allowable Allowable
R.H. Side Increase Decrease
0
8000
Infinity
1500
1.67
5500
500
1500
5.56
6000
2250
900
Cell
Name
$C$8 Assembly Amount used
$C$9 Testing Amount used
$C$10 Packing Amount used
Briefly explain how Scenario Analysis and the Monte Carlo Simulation technique differ from
Sensitivity Analysis. How could they could be helpful to ZSGC when dealing with risky
decisions? Solution available at https://bit.ly/2KrOA5U
(6 marks)
(Total: 35 marks)
End of Examination
Present Value of £1
Period
(after
n
years)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0.9901
0.9803
0.9706
0.9610
0.9515
0.9420
0.9327
0.9235
0.9143
0.9053
0.8963
0.8874
0.8787
0.8700
0.8613
0.9804
0.9612
0.9423
0.9238
0.9057
0.8880
0.8706
0.8535
0.8368
0.8203
0.8043
0.7885
0.7730
0.7579
0.7430
0.9709
0.9426
0.9151
0.8885
0.8626
0.8375
0.8131
0.7894
0.7664
0.7441
0.7224
0.7014
0.6810
0.6611
0.6419
0.9615
0.9246
0.8890
0.8548
0.8219
0.7903
0.7599
0.7307
0.7026
0.6756
0.6496
0.6246
0.6006
0.5775
0.5553
0.9524
0.9070
0.8638
0.8227
0.7835
0.7462
0.7107
0.6768
0.6446
0.6139
0.5847
0.5568
0.5303
0.5051
0.4810
0.9434
0.8900
0.8396
0.7921
0.7473
0.7050
0.6651
0.6274
0.5919
0.5584
0.5268
0.4970
0.4688
0.4423
0.4173
0.9346
0.8734
0.8163
0.7629
0.7130
0.6663
0.6227
0.5820
0.5439
0.5083
0.4751
0.4440
0.4150
0.3878
0.3624
0.9259
0.8573
0.7938
0.7350
0.6806
0.6302
0.5835
0.5403
0.5002
0.4632
0.4289
0.3971
0.3677
0.3405
0.3152
0.9174
0.8417
0.7722
0.7084
0.6499
0.5963
0.5470
0.5019
0.4604
0.4224
0.3875
0.3555
0.3262
0.2992
0.2745
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
0.3505
0.3186
0.2897
0.2633
0.2394
5BUSS001W/S1/18-19
Page 10 of 11
16
17
18
19
20
21
0.8528
0.8444
0.8360
0.8277
0.8195
0.8114
0.7284
0.7142
0.7002
0.6864
0.6730
0.6598
0.6232
0.6050
0.5874
0.5703
0.5537
0.5375
0.5339
0.5134
0.4936
0.4746
0.4564
0.4388
0.4581
0.4363
0.4155
0.3957
0.3769
0.3589
0.3936
0.3714
0.3503
0.3305
0.3118
0.2942
0.3387
0.3166
0.2959
0.2765
0.2584
0.2415
0.2919
0.2703
0.2502
0.2317
0.2145
0.1987
0.2519
0.2311
0.2120
0.1945
0.1784
0.1637
0.2176
0.1978
0.1799
0.1635
0.1486
0.1351
Solution available at https://bit.ly/2KrOA5U
5BUSS001W/S1/18-19
Page 11 of 11
Download