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Introduction

Overall, the performance of candidates was satisfactory and this was reflected in the pass rate. There was, however, a wide range in the quality of projects submitted. At one end of the range, there were projects of a very high standard and at the other end of the range there were projects that reflected only perfunctory effort. In the latter case, answers to questions posed were sparse and arguments were not developed to the point where a reasonable mark could be awarded.

General

The majority of projects submitted showed an understanding of the issues and points were generally made in a logical, well structured manner. However, in a few cases, candidates did not clearly state key assumptions or show key workings despite the fact that these requirements were clearly stated. Though similar remarks have been made in previous reports, it is worth repeating the point that, by reading the instructions carefully, higher marks may be gained.

In some cases, the particular part of the question being addressed was not clearly shown and it was not always obvious where the answer to one part ended and another began. This failure to indicate clearly the relevant part of the question being answered can work to the disadvantage of the candidate.

Specific comments

The case study on which the issues were based concerned a low-cost airline that was contemplating expansion into Eastern Europe. The case study included information concerning the likely market for low-cost flights as well as information relating to the business.

Part (a) carried 42 marks out of 100 marks for the whole project and required candidates to (i) calculate the net present value and payback period for the proposed plans (ii) re-calculate the net present value and payback period using an alternative approach to predicting incremental cash flows, and (iii) calculate the sensitivity of the net present value calculations to changes in the weighted average cost of capital.

On the whole, this part was answered satisfactorily. The key to answering this part lay in the calculation of the seat revenue, which could be calculated in two ways. First, by using a ‘top down’ approach based on data concerning population change and market share and second, by reference to load factors, number of trips per day and average revenue figures provided. Both methods were required in order to answer parts (a)(i) and (a)(ii). In some cases, candidates only managed to calculate the net present value and payback period based on one of these methods and so lost the opportunity to gain a substantial number of marks.

Some candidates offered the internal rate of return as an alternative to one of these two methods. However, this showed a misunderstanding of what was required. The internal rate of return method provides an alternative discounting method to the net present value method for evaluating projects rather than an alternative method of calculating incremental cash flows, as required by the question. Having calculated the seat revenues, the remaining calculations were fairly straightforward, although a number of candidates failed to take account of ancillary revenues arising from the proposed expansion. Part (a)(ii) was generally well answered. Most candidates who managed to identify both methods to calculating seat revenues, managed to score highly in undertaking sensitivity analysis based on both methods.

Part (b) carried 6 marks and required a discussion of the calculations carried out in (a). Most candidates made a reasonable stab at this part, although a fuller discussion of the calculations, particularly with respect to the underlying assumptions and results of the sensitivity analysis could often have been undertaken.

Part (c) carried 8 marks and required candidates to state what additional information would be required before a final decision was made. Although a variety of answers would have been acceptable, those provided were not always very well thought out. Issues relating to the objectives of the business, the resources required to undertake the expansion and the ways in which the expansion could be monitored and controlled were highly relevant in answering this part.

Part (d) carried 16 marks and required the identification and assessment of the risks involved in the proposed expansion. This part was generally well answered with some candidates scoring very high marks. However, a significant number of candidates did not answer the question fully. A common error was to identify a particular risk but then fail to make any assessment of the risk that had been identified. As a result, the opportunity to gain higher marks was lost.

Part (e) carried 18 marks and required the preparation of a risk map and a discussion of policies concerning how to deal with the risks identified. Although this part was generally done well, a surprising number of candidates failed to produce a risk map, even though this was specifically required by the question. In some cases, answers to this part could have been more fully developed. In particular ways of dealing with risk could have been discussed in more detail rather than relying on vague statements about transferring the risk, accepting the risk etc.

Part (f) carried 10 marks and required a discussion of the role of the internal audit department in managing risk. Answers to this part were satisfactory, although few candidates managed to score high marks. In some cases, candidates answered this question by simply stating the traditional role of the internal audit department and seemed unaware of the ways in which it could help in managing risk.

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