A Level Business: Finance and Accounting (A Level) — Practice Questions (Cambridge 9609)

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available from your board.

Each question practises a skill tested in the June 2024 Paper 32. After each answer there is an examiner insight or a tip and, where one matches, the real question to try next.

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Questions

1. A bakery is considering buying a new oven for $600 000. The oven is expected to last 4 years and then be sold for $80 000. The expected net cash inflows are $200 000 in Year 1, $220 000 in Year 2, $240 000 in Year 3 and $260 000 in Year 4 (the Year 4 amount already includes the $80 000 from selling the oven). Work out the ARR for the oven, as a percentage. [4]

2. A printing firm plans to spend $150 000 on a new press. The expected net cash inflows are $40 000 in Year 1, $50 000 in Year 2, $45 000 in Year 3 and $60 000 in Year 4. Calculate the payback period in years and months, assuming cash flows arrive evenly through each year. [3]

3. A courier company is considering buying electric vans costing $100 000. The expected net cash inflows are $40 000 in Year 1, $45 000 in Year 2 and $50 000 in Year 3. The discount factors at 8% are 0.926 (Year 1), 0.857 (Year 2) and 0.794 (Year 3). Work out the NPV of the vans and say whether, on this figure alone, the purchase is worthwhile. [3]

4. A furniture retailer has annual revenue of $540 000, trade receivables of $45 000 and cost of sales of $360 000. Its inventory was $38 000 at the start of the year and $42 000 at the end. (a) Calculate the trade receivable days. (b) Calculate the rate of inventory turnover. [4]

5. A company’s shares are trading at $4.50. Its earnings per share are $0.36 and it pays a dividend of $0.18 per share. (a) Calculate the dividend yield. (b) Calculate the price/earnings (P/E) ratio. [4]

6. A hotel group only accepts investments with an ARR above its criterion rate of 20%. A proposed spa has an ARR of 23.5%. State whether the spa meets the criterion rate and explain one other factor the hotel group should consider before deciding to invest. [3]

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Answers

1. Total profit = total net cash inflows − capital cost = (200 000 + 220 000 + 240 000 + 260 000) − 600 000 = $320 000 [1]. Average annual profit = 320 000 ÷ 4 = $80 000 [1]. Average investment = (capital cost + residual value) ÷ 2 = (600 000 + 80 000) ÷ 2 = $340 000 [1]. ARR = average annual profit ÷ average investment × 100 = 80 000 ÷ 340 000 × 100 = 23.5% [1].

Examiner insight (Cambridge 9609 June 2024 examiner report, Paper 32, Question 4(a)): the most common error was dividing by the capital cost instead of the average investment, and some candidates took the residual value away from the capital cost instead of adding the two together. Clear working still earned method marks when the final answer was wrong.

Source for the examiner insights on this page: Cambridge International AS & A Level Business 9609 June 2024 Principal Examiner Report for Teachers, Paper 9609/32 section, paraphrased.

Try the real question next: Cambridge International AS & A Level Business 9609, June 2024, Paper 32, Question 4(a).

2. Cumulative net cash flow: end of Year 1 = $40 000, end of Year 2 = $90 000, end of Year 3 = $135 000 [1]. Still needed in Year 4 = 150 000 − 135 000 = $15 000, which is 15 000 ÷ 60 000 = 0.25 of a year = 3 months [1]. Payback period = 3 years 3 months [1].

Tip: write the cumulative total year by year; it makes it obvious which year the payback falls in and earns method marks even if the final step goes wrong.

3. Present values: Year 1 = 40 000 × 0.926 = $37 040; Year 2 = 45 000 × 0.857 = $38 565; Year 3 = 50 000 × 0.794 = $39 700 [1]. Total present value = $115 305, so NPV = 115 305 − 100 000 = $15 305 [1]. The NPV is positive, so the investment is financially worthwhile at an 8% discount rate [1].

Tip: remember to subtract the initial cost at the end. The capital cost is spent now (Year 0), so it is not discounted.

4. (a) Trade receivable days = trade receivables ÷ revenue × 365 = 45 000 ÷ 540 000 × 365 [1] = 30.4 days [1]. (b) Average inventory = (38 000 + 42 000) ÷ 2 = $40 000 [1]. Rate of inventory turnover = cost of sales ÷ average inventory = 360 000 ÷ 40 000 = 9 times a year [1].

Tip: inventory turnover uses cost of sales, not revenue, because inventory is valued at cost. Give the unit (“days” or “times”) with every ratio.

5. (a) Dividend yield = dividend per share ÷ market share price × 100 = 0.18 ÷ 4.50 × 100 [1] = 4% [1]. (b) P/E ratio = market share price ÷ earnings per share = 4.50 ÷ 0.36 [1] = 12.5 [1].

Tip: the P/E ratio has no unit (it is not a percentage), while dividend yield is always a percentage. Mixing these up loses the final mark.

6. Yes: 23.5% is above the 20% criterion rate, so the spa meets the criterion rate [1]. One other factor is the reliability of the forecasts: the ARR depends on predicted cash flows [1], and if demand for spa treatments turns out lower than expected, for example because of a new competitor nearby, the actual return could fall below 20% [1]. (Other valid factors: fit with the group’s objectives and brand, impact on staff and customers, or the opportunity cost of other projects.)

Examiner insight (Cambridge 9609 June 2024 examiner report, Paper 32, Question 4(b)): good answers used the ARR they had calculated and noted that it was above the business’s criterion rate; many answers were one-sided, and better ones balanced this against drawbacks such as the capital cost.

Try the real question next: Cambridge International AS & A Level Business 9609, June 2024, Paper 32, Question 4(b).

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Where marks are usually lost

• Using the capital cost instead of the average investment in the ARR formula, or subtracting the residual value instead of adding it.
• Forgetting to subtract the initial cost when finding total profit (ARR) or NPV.
• Leaving out units: ARR and dividend yield are percentages, receivable days are days, inventory turnover is times.
• Rounding too early; keep full figures until the final answer.
• Giving only the calculation when the question also asks for a judgement against a criterion rate.