LO11 2023 Question 4 - Suggested Solution

Please note: Calculations were not required; they are included for completeness purposes.

# Error/ Missing consideration Mark Recommendation Mark

Mr Seda used the monthly figure for wood demand instead of the annual figures, the Mr Seda should use the annual figures which means taking the 291,666.66667*12 (To obtain this mark you simply needed to state that annual
1 0.5
assumption states that all payments take place at year end figures should be used)
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Annual Demand 2024 2025 2026 2027 2028
Quantity of Wood Needed (tons) 3,500,000 3,650,000 3,800,000 3,950,000 4,100,000

Mr Seda should include the inflation(0.5) and risk premium(0.5) as well as make the use of variable rates in his forecast as follows(1). Mr Seda should use the total row in his forecast.
(It is sufficient to state that Mr Seda should use the interest for each year, which is provided in Annex below, the main point here is whether they identified that Mr Seda cannot
2 1.5 2
Mr Seda used an incorrect discount rate of 10.12% (0.5) indicating that he did not take use the fixed rate and that the changing rates should be used.)
into account inflation(0.5) and credit risk premium. (0.5)
Market rates 2024 2025 2026 2027 2028

3 Mr Seda makes an invalid assumption that interest rates will remain constant over the 1 8.12% 8.17% 8.67% 9.17% 9.67%
five year period as it is clearly shown in Annex B that interest rates increase over time. ZARONIA
CPI(inflation) 4.80% 5.09% 5.38% 5.67% 5.96%
Credit risk premium 1.25% 1.25% 1.25% 1.25% 1.25%
Liquidity risk premium 2.00% 2.50% 3.00% 3.50% 4.00%
Total 16.17% 17.01% 18.30% 19.59% 20.88%
Please note that you did not have to recreate this calculation

Mr Seda uses the SUM on the incorrect row, the total cost he provided is in fact a Mr Seda should compute the sum function on row 4, and he will get the following ( Stating that the sum function/ or Row 4 should be the basis of the calculation is sufficient for a
4 1 1
quantity(tons) and not a cost. mark)
To obtain this mark you would have to state that Row 3 was in the incorrect row, and
2024 2025 2026 2027 2028 Sum function
row 4 should have been used.
Value of wood needed R 3,596,675,833.33 R 5,718,103,750.00 R 7,498,883,916.67 R 8,993,012,416.67 R 11,074,865,583.33 R 36,881,541,500.00

5 0.5 0.5
Mr Seda used the incorrect wood price in 2027, he incorrectly used the 2029 figure. Year Price

2027 12,361.99
To obtain this mark you should specifically state that the 2027 figure was incorrect.

In calculating the present value, Mr Seda does not discount the Payments he simply uses Mr Seda should use the Present value function in excel. (Please award the mark only if the student mentioned the present value function or "PV"
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the sum function. function or any other format.)

7 1
Mr Seda did not convert the interest rate to take into account the annual compounding
required, this is evident from the assumption that payments are made once a year
Mr. Seda should use the effective function to convert the compounding period from monthly to annually for the interest rate used for discounting. (To obtain this mark,
you should mention that you need to use the effective function to perform the conversion or if you stated that you would need to convert the nominal rates
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compounded monthly to an annual compounding period)

Email format 1 Please award this mark if the student used an email format.
Communication (tabular format) 1 Please award this mark only if the student used a tabular format AND included it as an Annex/appendices in their email.
Higher order thinking marks (application) 13
Lower order thinking marks (format) 2
Total 8.5 6.5 15