Part (b) (i) of question one required candidates to undertake a net present value computation of an international investment decision to assess whether or not the investment was worthwhile. The calculations were complex because there were three currencies involved and because of changing
inflation rates.

Complexity was also increased because a tax holiday was available in the first two years of operation, because of other complications such as royalty fees and parts coming from the parent company, both of which could have the amounts changed, depending on the assumptions that the candidates made.

Finally, there was the added complication of the impact on the current situation in terms of redundancies and lost contribution, although this was not significant.
On the whole, this part was done quite well by many candidates.

Varying inflation rates were applied correctly and the impact of the working capital required was determined correctly. In many answers, tax was correctly calculated and the tax holiday was taken into account. Some answers assumed that tax, if not paid in Yilandwe, would be paid in the USA.

This was a valid assumption for which credit was given. The better answers also considered the royalties, contribution and opportunity costs correctly, as well as any tax implications. But many candidates simply ignored these more difficult aspects.

Many satisfactory answers then converted the Yilandwe currency into dollars at the end.

The following errors were made in a number of responses:

1. Unsatisfactory answers tried to convert all cash flows into dollars from the outset, instead of keeping them in Yilandwe currency. This was not a good approach, as it made the subsequent inflationary impact very difficult to calculate and often the answers were incorrect. Therefore, such answers received few marks.

2. Sometimes inflation was not taken into account at all or not cumulated correctly. Some responses used average inflation rates instead of year-specific rates

3. In terms of taxation calculations, sometimes candidates did not carry forward loses or apply the tax holiday properly. In a minority of cases, a tax rate of 25% was used or reducing balance was applied to allowable depreciation or an additional tax was also paid in the USA.

4. Some candidates did not increase the royalties or contribution, and did not make that assumption. Other responses made the assumption but still used the higher figures. A significant number of answers simply ignored these figures completely.

5. On occasion the full amount of working capital was used every year instead of the incremental amount.

6. A minority of candidates estimated future expected exchange rates, even though they were given in the question.

These points suggest that sometimes candidates either do not read the question properly or do not understand fundamental aspects such as how to inflate future cash flows. It is also concerning when some candidates convert currency into dollars at the outset because this makes the question much more complex.

These are serious shortcomings and candidates need to ensure that they take account of these when undertaking discounted cash flow techniques in international capital investment type questions. Sometimes candidates are quite tactical and avoided the more difficult and time-consuming calculations.

This may be a valid time management strategy, but it is risky. It assumes that the calculations that are done are correct.

Part (b) (ii) asked candidates to discuss the assumptions made and the risks and issues which should be considered by the company before a final decision is made. On the whole, this part was done well with the majority of responses gaining at least half of the total marks.

The satisfactory answers discussed a variety of points, and used commercial sense to contextualise them. Unsatisfactory responses stated the points without much discussion, repeated the same point in different forms and/or did not discuss how the issue, risk or assumption would impact the company commercially.

Part (b) (iii) asked candidates to give a reasoned recommendation. Most answers stated whether or not the project should be accepted or not but then did not take the points from (b) (ii) to give a more detailed and considered justification.

Four professional marks were available for the report for part (b). It was disappointing that many answers could not frame a report adequately and gained few professional marks. Given that a number of scripts were awarded marks in the higher 40s, gaining all the professional marks would have enabled these scripts to achieve a pass mark.

It is important that answers to all the questions focus on good layout, structure, presentation and neatness (including legibility). Such an approach shows the markers that the candidate understands the topic area(s) and makes awarding marks a straightforward process.