

SECTION A: COMPULSORY
Question 1
Albright Autos would like to use a Multi-Criteria Analysis (MCA) to choose between three alternative designs for its new production facilities using three criteria: Cost, Flexibility and Environmental Impact. Having reviewed the company’s priorities, the management team have decided on the following weightings for the criteria: Cost (0.3), Flexibility (0.2) and Environmental Impact (0.5). The rating system they are using runs from 1 to 4, with 4 the most favourable and 1 the least favourable.
Option Cost
Rating Flexibility
Rating Environmental Impact
Rating
Design A 2 4 3
Design B 3 2 4
Design C 5 2 2
Required:
a) What advice would you give Albright Autos based on the information provided?
(6 Marks)
b) Explain the differences between a Positive/Negative/Interesting (PNI) analysis and an MCA to the management of Albright Autos
(4 Marks)
(Total: 10 Marks)
Question 2
Albright Autos manufactures the dynamos for its electric vehicles in its own small factory. The company has estimated the following unit costs for producing the dynamo internally (based on 80 dynamos a month):
Item Cost per unit
Direct Materials £150
Direct Labour 90
Variable Overhead 80
Depreciation of special equipment 15
Supervisor’s salary 30
Allocated general overhead 40
Total Cost per Unit £405
An outside company has offered to supply Albright Autos with 80 dynamos per month for only £370.
[Question 2 continues on the next page]Required:
a) Calculate how much higher or lower Albright Autos’ operating income would be if it accepted the offer. Should it accept the offer?
(6 Marks)
b) You are now told that if Albright Autos did accept the offer, it could use the space in its factory to manufacture 200 charging cables per month which would generate a profit contribution of £60 per unit. Would this change your advice? Show your workings.
(4 Marks)
Question 3
Albright Autos has identified two possible sites (Greenfield & Brownfield) for its proposed new showroom. Their initial cost would be the same (£450,000), but the forecast annual cash flows differ, as the table below shows. They are both assumed to have a ten-year life.
Year 1 Year 2 Year 3 Year 4 Year 5 Years 6-10
Greenfield £120,000 £120,000 £120,000 £120,000 £120,000 £120,000
Brownfield £180,000 £150,000 £100,000 £100,000 £100,000 £80,000
Required:
a) What is the best decision according to the payback period method?
(6 Marks)
b) Despite its limitations the payback period method is still widely used for investment appraisal. Explain why that might be the case.
(4 Marks)
(Total: 10 Marks)
SECTION B
Answer only TWO questions from this section.
Question 4
The Albright Autos management team has identified three potential future strategic options for the company: Increased Marketing, Price Reduction or Expand R&D. They have asked you to model the annual profits or losses associated with different UK economic growth assumptions (which they have identified as being Weak, Medium or Strong). Using their own estimates, extrapolated from recent experience, the management team have produced the following pay-off matrix for you to analyse:
UK Economic Growth (Annual Profits £m)
Options Weak Medium Strong
Increased Marketing 4 8 11
Price Reduction 7 7 7
Expand R&D -2 8 16
a) Explain to the management team the difference between risk and uncertainty, relating this to examples of business decisions.
(4 Marks)
b) What strategies would you advise, based on the following criteria and what attitudes to risk do they assume on the part of the decision maker?
(i) Maximax
(3 Marks)
(ii) Maximin
(3 Marks)
c) Which option is preferred according to the minimax potential regret criterion? Show your workings.
(6 Marks)
d) Assume now that you use a consensus of macroeconomic forecasts to estimate the probability of different economic growth scenarios occurring. These give you the following probabilities: Low growth (15%), Medium growth (55%) and High growth (30%). What is the preferred option based on the expected monetary value (EMV) criterion?
(6 Marks)
e) You are approached by an independent analyst who tells you that she can predict the growth of the UK economy with absolute certainty. What is the most that Albright Autos should pay for this information?
(7 Marks)
f) The Managing Director of Albright Autos recalls from his BDM course (passed successfully some years ago) that a decision tree could be a useful technique for making decisions under risk. Sketch a decision tree to represent this problem, clearly identifying any chance and decision nodes and the expected value at each node.
(6 Marks)
(Total: 35 Marks)
Question 5
Albright Autos offers a self-build kit of one of its small city electric vehicles. Last year, the company ‘supplied’ 500 units of these kits, with the following results:
Total
Sales revenue (500 units) £2,500,000
Less variable expenses (£1,300,000)
Contribution margin £1,200,000
Less fixed expenses (£950,000)
Net Profit £250,000
a) What is the annual break-even point in units and in sales (in £)?
(6 Marks)
b) How many units would have to be sold to earn a target profit of £400,000 for the year?
(4 Marks)
c) Calculate the company’s margin of safety in both £ pound and percentage terms. Explain to Albright Autos how these figures should be interpreted.
(6 Marks)
d) What is the company’s contribution margin (CM) ratio?
(4 Marks)
e) If sales increase by £750,000 per year and there is no change in fixed expenses, by how much would you expect profit to increase each year?
(5 Marks)
f) Refer to the original data. Albright Autos’ marketing team believes that a 20% reduction in the selling price would cause annual sales in units to increase by 60 units. Calculate the impact on annual profit.
(4 Marks)
g) Using the data from part (f), calculate the price elasticity of demand for a self-build kit (based on a 20% reduction from the current selling price) and use this information to calculate the profit-maximising mark-up on variable costs.
(6 Marks)
(Total: 35 Marks)
Question 6
Albright Autos news to update the technology used in its factory and has identified three possible new automated manufacturing systems (designated at the moment simply as Design 1, 2 and 3). All three designs will lead to annual reductions in labour and energy costs and these are shown as positive cash flows (in £000s) in the table, below. Obviously, only one of the designs can be chosen. You have been asked to appraise the options over an eight-year planning period; assume that there is no residual value at the end of that period. Design 3 is the most innovative of the three, but consequently riskier (in terms of the reliability of future cash flows) and should be appraised using a 10% discount rate for the cost of capital; for Design 1 and Design 2, you have been asked to use an 8% discount rate. Ignore depreciation.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6-8 (Annual Cash Flows)
Design 1 -550 100 100 100 100 100 100
Design 2 -450 50 70 90 110 110 110
Design 3 -600 150 200 -50 200 150 100
a) Appraise the three designs using the net present value (NPV) method. Clearly show all calculations. (Present Value Tables are provided at the end of this OLTA)
(14 Marks)
[Question 6 continues on the next page]
b) Which option would you advise Albright Autos to choose based on your NPV calculations? Include an explanation of why it makes sense to have used a higher discount rate for appraising Design 3.
(5 Marks)
c) Write a short note (of approximately 200 words) to the management of Albright Autos explaining the differences between the average rate of return (ARR) and internal rate of return (IRR) as investment appraisal methods.
(6 Marks)
d) Calculate the internal rate of return (IRR) of each of the three designs. Interpret your results. Which design should Albright Autos choose based on the IRR criterion?
(10 Marks)
(Total: 35 Marks)
Question 7
Albright Autos is planning to introduce an electric van (E-Van) which it will manufacture in same factory as the electric car (E-Car) it currently makes. However, it faces constraints in three elements in the manufacturing and testing process. The following table shows the requirement for one vehicle of each type:
Electric Car (E-Car) Electric Van (E-Van)
18 12 Skilled Labour (Hours)
10 8 Aluminium Casing (Kgs)
3 6 Road Testing (Hours)
The firm’s monthly resources are limited to 9,000 hours of Labour time, 6,000 kgs of Aluminium Casing and 3,000 hours of Road Testing. Each E-Car assumed to make a profit contribution £1,000, while each E-Van is expected to make a profit contribution of £750.
a) Formulate the above information as a linear programming model where the objective is the maximisation of the profit contribution from the production of the two vehicles.
(6 Marks)
b) Solve graphically, determining the optimum number of E-Cars and E-Vans to be produced and sold each month. Confirm the solution you have found algebraically.
(15 Marks)
[Question 7 continues on the next page]
c) Explain precisely what is meant by the shadow price or dual value of a constraint, illustrating your answer with data from the Excel Solver Sensitivity Report for the problem, which is provided on the next page.
(5 Marks)
d) Using the Excel Solver Sensitivity Report, identify the range of values for the profit contribution of the two types of vehicle for which the optimal solution identified in (b) remains valid.
(4 Marks)
e) A sensitivity analysis asks a series of ‘what-if’ questions. What information does a Monte Carlo simulation analysis provide for decisions makers that a sensitivity analysis cannot?
(5 Marks)
(Total: 35 Marks)
(Total: 100 Marks)
[END OF ONLINE TIMED ASSESSMENT]
Present Value of £1
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
(after n years)
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855
Annuity Factors
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
(after n years)
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
Present value interest factor of £1 per period at i% for n periods, PVIF(i,n).
Period 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162