OxfordAQA A-Level Business: Deciding on a strategic investment (9725) – Practice Questions

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 – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

This set tests section 3.4.3 Deciding on a strategic investment from the OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. This content belongs to the International A-level only part of the course and appears in Unit 4: Business strategy. If your exam is still on 9625, take your practice from that specification. All businesses in the questions are invented.

If a method is unfamiliar, the study guide teaches each method and the revision notes summarise the formulas. For wider revision, use the course hub for 9725, the 9725 checklist to print and the diagnostics page.

Questions

1. Define the term investment, as used in business. [2]

2. State two limitations of using a decision tree to make a business decision. [2]

3. Fendrake Opticians plans to spend £84,000 on eye-scanning equipment. The expected net cash flows are £30,000 in year 1, £36,000 in year 2, £27,000 in year 3 and £24,000 in year 4. Work out how long the equipment takes to pay back, giving your answer in years and months. [3]

4. Marchcourt Cinemas is considering a £150,000 refit of one screen. Total net cash inflows over the four-year life of the refit are forecast at £204,000. Marchcourt’s investment criteria require an average rate of return of at least 10%. Calculate the ARR and state whether the refit meets this criterion. [4]

5. Tavistrel Boatyard could buy a hull-cleaning machine for £50,000. Net cash flows are forecast at £18,000, £22,000 and £20,000 in years 1 to 3. The discount factors at 10% are 0.909, 0.826 and 0.751. Calculate the net present value and state what it shows. [4]

6. Orlanby Events must choose a venue for a summer food fair.

• Indoor hall: costs £12,000. There is a 0.7 chance of high attendance, earning £40,000. Low attendance would earn £15,000.
• Outdoor park: costs £5,000. Good weather has a 0.6 chance and would earn £30,000. Poor weather has a 0.4 chance and would earn £8,000.

Calculate the missing probability, the expected value and net gain of each option, and state which venue the decision tree recommends. [6]

7. Venmore Construction is thinking about buying a fleet of electric diggers. Explain how a fall in business confidence could affect this decision. [3]

8. Durlston Ferries is planning a new route to an island that has never had a ferry service. Explain the difference between risk and uncertainty in this decision. [4]

9. Ombersley Furniture is deciding whether to replace its skilled hand-finishing team with an automated finishing line. Explain two non-financial factors it should consider. [4]

10. Prenthorpe Pharmacy is deciding whether to open a second shop in a nearby town. Analyse the value of using a decision tree to help make this decision. [6]

11. Yarlside Bakeries supplies bread to local shops. It has £190,000 of retained profit and must choose one of two projects. Its investment criteria are payback within 3 years and a positive NPV at a 6% discount rate.

• Project X: an automated bread line costing £300,000. It would let Yarlside bid for an own-label contract with a supermarket chain; talks have started but nothing is signed. The line would replace 14 of Yarlside’s bakers, and the firm’s brand is built on “hand-made” bread.
• Project Y: a fleet of refrigerated vans costing £180,000 to deliver to a hotel group under a three-year contract that has already been signed.

Year	Project X net cash flow (£)	Project Y net cash flow (£)	Discount factor (6%)
1	110,000	70,000	0.943
2	120,000	70,000	0.890
3	105,000	60,000	0.840
4	90,000	40,000	0.792
5	80,000	–	0.747

Project X has a payback period of 2 years 8 months, an ARR of 13.7% and an NPV of £129,770. Project Y has a payback period of 2 years 8 months and an ARR of 8.3%. A recent survey of local firms shows business confidence falling.

(a) Calculate the net present value of Project Y. [4] (b) Evaluate which project Yarlside Bakeries should choose. [12]

Answers

1. Spending money now on assets such as equipment, buildings or technology [1], in the expectation of earning greater returns in the future [1]. [2] Examiner insight: Credit for the second point depends on mentioning a future return; “buying assets” alone describes a purchase, not an investment.

2. Any two: the probabilities are estimates that may be wrong [1]; the method ignores qualitative factors such as staff morale or brand image [1]; the method ignores the timing of returns; managers may bias the forecast outcomes. [2] Examiner insight: “Probabilities may be wrong” and “the numbers are guesses” are one point, not two.

3. Cumulative cash flow: −54,000 after year 1, −18,000 after year 2 [1]. Still needed at the start of year 3 = £18,000; months = (18,000 ÷ 27,000) × 12 = 8 [1]. Payback = 2 years 8 months [1]. [3] Examiner insight: Show the cumulative figures so the method is visible even if the months slip.

4. Total profit = 204,000 − 150,000 = £54,000 [1]. Average annual profit = 54,000 ÷ 4 = £13,500 [1]. ARR = (13,500 ÷ 150,000) × 100 = 9% [1]. This is below 10%, so the refit does not meet the criterion [1]. [4] Examiner insight: Dividing total inflows (£204,000) by the cost is a frequent slip; ARR uses profit after the cost is taken off.

5. Present values: 18,000 × 0.909 = 16,362; 22,000 × 0.826 = 18,172; 20,000 × 0.751 = 15,020 [1]. Total present value = £49,554 [1]. NPV = 49,554 − 50,000 = −£446 [1]. The negative NPV shows the machine earns slightly less than a 10% return, so on financial grounds it is not worthwhile [1]. [4] Examiner insight: Keep the minus sign; a bare “£446” reverses the meaning and the interpretation that follows.

6. Probability of low attendance = 1 − 0.7 = 0.3 [1]. Indoor EV = (0.7 × 40,000) + (0.3 × 15,000) = £32,500 [1]; net gain = 32,500 − 12,000 = £20,500 [1]. Outdoor EV = (0.6 × 30,000) + (0.4 × 8,000) = £21,200 [1]; net gain = 21,200 − 5,000 = £16,200 [1]. The tree recommends the indoor hall, which has the higher net gain [1]. [6] Examiner insight: Base the recommendation on net gain, not expected value; here both agree, but they often do not.

7. Lower business confidence means Venmore’s managers expect weaker demand for building work [1]. They may doubt that the forecast cash flows from the diggers will happen [1], so they may delay the purchase or keep their current machines, even if the appraisal figures look positive [1]. [3] Examiner insight: Linking confidence to doubt about forecast cash flows turns a definition into an explanation.

8. Risk applies where outcomes can be identified and given probabilities [1], such as fuel price changes, which Durlston can estimate from its other routes [1]. Uncertainty applies where outcomes or their chances cannot be measured [1]; with no past ferry service, Durlston cannot reliably estimate how many islanders and visitors will travel [1]. [4] Examiner insight: Apply each definition to Durlston; two textbook definitions alone reach only half the marks.

9. Staff: the line would end the jobs of skilled finishers [1], which could lower morale and loyalty among the remaining workforce and harm Ombersley’s local reputation [1]. Brand and quality: customers may value hand-finished furniture [1], so automation could weaken the brand’s appeal even if unit costs fall [1]. [4] Examiner insight: Factors must be non-financial; “it saves wages” is a financial point and gains no credit here.

10. A decision tree would make Prenthorpe set out every option, including not opening the shop [1], and assign probabilities to outcomes such as strong or weak local demand [1]. This gives a net gain for each option, so the owner has a numerical basis to compare the cost of the second shop with the return [1]. The tree can be amended, for example if rent rises, to see whether the decision switches [1]. However, the probabilities for a town where Prenthorpe has never traded are largely guesses [1], so the tree’s value depends on how good the local research is, and it should be used alongside judgement about competitors and staffing [1]. [6] Examiner insight: One point developed through its consequences earns more analysis credit than a list of features.

11. (a) Present values: 70,000 × 0.943 = 66,010; 70,000 × 0.890 = 62,300 [1]; 60,000 × 0.840 = 50,400; 40,000 × 0.792 = 31,680 [1]. Total present value = £210,390 [1]. NPV = 210,390 − 180,000 = £30,390 [1]. (b) Both projects meet both criteria: each pays back in 2 years 8 months, inside the 3-year target, and both have positive NPVs [1]. Project X’s NPV of £129,770 is more than four times Project Y’s £30,390 [1], and its ARR of 13.7% is well above Y’s 8.3% [1], so on the numbers X is clearly stronger. However, X costs £300,000 and Yarlside has only £190,000, so it must borrow at least £110,000 [1], adding interest costs and risk while confidence is falling [1]. X’s cash flows depend on a supermarket contract that is not signed [1]; this is uncertainty, so the NPV may be far too high [1]. Y’s income rests on a contract already signed, so its forecasts are more reliable [1]. X would also replace 14 bakers, which could damage morale and the “hand-made” brand that existing shop customers value [1]. Choosing one project has an opportunity cost: picking Y gives up X’s higher potential return, while picking X could tie up borrowing capacity Yarlside may need later [1]. Judgement: Yarlside should choose Project Y now, because it meets both criteria, can be funded from retained profit and carries far less uncertainty [1]. It could revisit X once a signed supermarket contract makes the forecasts dependable [1]. Examiner insight: Strong evaluations use the calculated NPV and the case facts to reach a supported decision; either project can be justified with clear reasoning.

Where marks are usually lost

• Comparing expected values instead of net gains when options cost different amounts.
• Forgetting to complete a missing probability before calculating an expected value.
• Converting part-years to months wrongly, such as writing 0.67 years as 6.7 months.
• Using total inflows rather than profit in the ARR calculation.
• Dropping the minus sign on a negative NPV.
• Defining risk or uncertainty without applying it to the firm in the question.
• Listing financial points when the question asks for non-financial factors.
• Recommending the project with the highest NPV without weighing funding, uncertainty and opportunity cost.
• Finishing an evaluation with no firm recommendation backed by the case facts.

Next steps

• Recap every formula with the strategic investment revision notes
• Rework the examples in the strategic investment study guide
• Find gaps quickly: all free 10-minute diagnostics
• Case-study technique: 9725 exam preparation guide
• See all the 9725 topics on the OxfordAQA A-level Business hub
• Mark your progress on the printable 9725 checklist
• Book a free trial class

Official syllabus

OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. Published by OxfordAQA.