19 Arch Energy (Alexia Putellas)
Exam context - Paper 2 Exam Practice Question, Section A
Alexia Putellas is the chief executive officer (CEO) of Arch Energy (AE). The publicly held company owns 45 gasoline stations in Spain and India. It also operates car rental services in Spain. At last month’s directors’ meeting, Alexia presented the following data for discussion with the other members of the board. The directors have shortlisted three growth strategies (see below). The data are based on forecasts of the economic conditions in Europe for Options 1 and 3, and in India for Option 2.
Option 1 – Redevelop AE’s existing gasoline stations as convenience stores. This is due to the directive from the European Union (EU) that there will be no new gasoline-fuelled cars for sale in the EU from 2035. The cost of Option 1 is expected to be €110 million.
Option 2 – Expand AE’s car rentals division to Mumbai, India’s financial capital. The cost of Option 2 is expected to be €110 million.
Option 3 – Launch new electric charging stations for electric vehicles (EVs) in Spain, Germany, and France. This would involve enhanced technologies including a smartphone app for customers of electrically powered cars. The cost of Option 3 is expected to be €130 million.
Table 1 – Data for decision tree analysis
Option | Economic conditions | Probability | Forecast revenue (€m) | |
1 | Redevelop gas stations to convenience stores | Improve | 60% | 180 |
Unchanged | 20% | 120 | ||
Worsen | 20% | 80 | ||
2 | Expand car rentals division to India | Improve | 65% | 200 |
Unchanged | 15% | 100 | ||
Worsen | 20% | 40 | ||
3 | Launch new electric charging stations in Spain, Germany, and France | Improve | 60% | 200 |
Unchanged | 20% | 130 | ||
Worsen | 20% | 60 | ||
| (a) | In the context of business management, describe the purpose of a decision tree. | [2 marks] |
| (b) | State two features of a publicly held company. | [2 marks] |
| (c) | Construct a fully labelled decision tree diagram using the data provided above and identify the best option for AE (show all your working). | [6 marks] |
Teacher only boxAnswers
(a) In the context of business management, describe the purpose of a decision tree. [2 marks]
(b) State two features of a publicly held company. [2 marks]
A publicly held company has its shares listed and traded on stock exchanges, making them accessible to the general public. [1]
Shareholders are only liable for the company’s debts and obligations up to the amount they have invested, providing financial protection. [1]
Ownership is spread amongst shareholders, while the management and day-to-day operations are controlled by a board of directors and executives. [1]
Publicly held companies are required to disclose detailed financial information and performance data to regulatory authorities and investors, ensuring transparency. [1]
Publicly held companies can raise large amounts of capital by issuing shares or bonds, which can be used to finance growth, acquisitions, or other investments. [1]
(c) Construct a fully labelled decision tree diagram using the data provided above and identify the best option for AE (show all your working). [6 marks]
Step 1: Calculate the expected values for each option
The formula for calculating the expected value (EV) is: EV = ∑(Probability × Revenue)
Option 1: Redevelop gasoline stations to convenience stores
EV = (0.6 × 180) + (0.2 × 120) + (0.2 × 80) = 108 + 24 + 16 = €148 millionOption 2: Expand car rentals division to India
EV = (0.65 × 200) + (0.15 × 100) + (0.2 × 40) = 130 + 15 + 8 = €153 millionOption 3: Launch electric charging stations
EV = (0.6 × 200) + (0.2 × 130) + (0.2 × 60) = 120 + 26 + 12 = €158 million
Step 2: Subtract the cost of each option to find net gains
Option 1: 148 – 110 = €38 million
Option 2: 153 – 110 = €43 million
Option 3: 158 – 130 = €28 million
Based on the decision tree, Option 2 (expand car rentals division to India) is the most financially attractive growth option for AE to pursue, with an expected monetary value (EMV) of €43 million (see decision tree diagram below).
Award marks as follows:
[0 marks]
The decision tree does not reach a standard described below.
[1 – 2 marks]
The decision tree is not accurately constructed, and/or the calculations of each option are not presented or accurate. However, there is some evidence of a general understanding of the model.
[3 – 4 marks]
The principal elements of the decision tree are constructed but may not be entirely accurate. The calculations of each option are largely correct. Allow up to three mistakes in calculations and/or presentation for [3 marks].
For an accurately constructed decision tree with incorrect calculations, award up to a maximum of [3 marks].
Allow for either two errors in the calculations or two error in the presentation for up to [4 marks].
For an accurately constructed decision tree with expected value (EV) calculations, but no working out, award up to [4 marks].
[5 – 6 marks]
The decision tree is accurately constructed. The calculations of each option are correct and well presented. A suitable key is provided. Workings are shown. The two rejected options are also shown for [6 marks].
Full marks can be awarded for variations of the headings, such as expected monetary values (EMV), expected returns, predicted outcomes, net expected values (NEV), or forecast revenues.
Deduct [1 mark] if a key is not provided.
Deduct [1 mark] if the best option is not identified either on the diagram OR following the EMV calculations.
Essentially, treat the lack of a key or rejected options in the diagram as presentation errors. Hence, three presentation and/or calculation errors = maximum of [3 marks].
Note: for answers that show only correct calculations of all options without a decision tree diagram, award a maximum of [2 marks].
Apply candidate own figure rule (OFR) throughout this response.
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