QUESTION 65 (5 marks)
A business is considering borrowing $2 million for new equipment. Expected additional annual operating surplus before financing costs is $130 000. The interest-only loan rate rises from 5% to 7%. Calculate the expected annual surplus after interest at each rate and explain the investment-channel implication. Ignore all other costs.
Practice marking scheme
Answer
$30 000 at 5%; −$10 000 at 7%; the investment becomes less attractive.
Working
Interest is $100 000 at 5% and $140 000 at 7%. Deducting it from $130 000 gives $30 000 and −$10 000. Higher financing costs can postpone investment and reduce AD. A real decision would also consider risk, future returns and the equipment’s value; this simplified annual calculation is not a complete investment appraisal.
Marking criteria
- Calculates both financing costs and net surpluses. [2 marks]
- Explains weaker investment and AD. [2 marks]
- Recognises the simplified appraisal’s limitation. [1 mark]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.