A2 Business Homework for 14.11.19

HongYang’s Investment Decision

Xuzhou is a Tier 3 city in East-Central China so it’s not in the top rank with cities such as Shanghai or Beijing. Nor is it in tier 2 with cities such as Nanjing. Yet Xuzhou’s population is bigger than Birmingham, Manchester, Leeds, Bristol and Newcastle combined and its economy is growing faster than China’s 6% average growth rate. In the past 5 years Xuzhou has gained super-fast rail links to Shanghai and Beijing and its first-ever metro line opened in October2019. Its second line will open in 2020. Xuzhou is relatively poor, but it’s buzzing.

In 1984 construction workers uncovered relics from the Han dynasty era (300 years B.C.). These relics are largely the same as the ‘terracotta warriors’ that have established a huge tourist industry in X’ian. In Xuzhou a huge museum has been built around the discovery and the state has given it an impressive rating of AAAA. But, as yet, nobody comes. 

HongYang is convinced this will change. The Chinese are the world’s most enthusiastic, numerous tourists. Now that the transport links are right, they will find Xuzhou. So she’s returned to China from her job working for the NHS, and is using £8,000 of savings to start up a new business. Her Xuzhou Tourist Centre will focus on making it easy to bring tourist groups to the city. She’ll offer coach transport, tour guides to the Han dynasty area (who can speak English, Chinese and Spanish) and provide literature that cannot be found at the moment, such as Xuzhou maps and restaurant guides in English. She’ll employ guides and drivers on a freelance basis, keeping her fixed costs to the minimum. It may be a struggle at first, but success will come.

She fervently hopes for financial success, as that means independence. She never wants to work for another boss. But she also has an acute sense of responsibility for her parents, who live locally, and for the area where she grew up.   

But moral driving forces are not enough. Saving £8,000 has taken HongYang 6 years, so she needs the investment to be a success. A friend has urged her to calculate the average rate of return (ARR) on the investment, which she’s in the process of doing below.

	Cash in	Cash out
Investment outlay		£8,000
End of Year 1	£12,000	£16,000
End of Year 2	£24,000	£22,000
End of Year 3	£36,000	£28,000
End of Year 4	£48,000	£36,000
End of Year 5	£60,000	£38,000

Should she risk her life savings on this investment?

Questions: 28 marks; 30 minutes

1. Explain one reason why HongYang might be keen to start up her own business. (4)

2. Explain how HongYang might have forecast the cash outflows for her business. (4)

3. Evaluate whether HongYang should proceed or not. Use relevant calculations to help analyse the situation and the decision. (20)