The requirement here was to discuss the effect of a substantial rise in interest rates on the financing cost of the construction company and its customers and on the capital investment decision-making process. This question allowed students to show their understanding of how a company might be affected by its economic environment and many candidates gained credit for making relevant points.

For example, the increased cost of customer borrowing might lead to a reduction in forecast demand for housing that could be countered in part by a change in product mix, increasing the proportion of small houses expected to be built.

Candidates who lost marks tended to do this in one of two ways. Firstly, some candidates spent time explaining why interest rates might increase in an economy, something that was not required by the question and so did not gain any credit. Secondly, some candidates explained, occasionally at length, the stages in the investment appraisal process. Again, since this had not been asked for, such explanations did not gain any credit.