Clarification details
Updated December 2019. This document has been updated in its entirety to address new issues that have arisen from moderation.
A strategic capital expenditure decision involves a significant investment that has long-term benefit for the business, enabling it to meet strategic goals.
Students are required to research and analyse at least two appropriate financing options for meeting the cost of implementing a strategic capital expenditure decision. For example, a strategic capital expenditure could involve purchasing a processing plant, vehicles or a technology upgrade.
Financing options could entail equity funding involving the contribution of further capital by existing shareholders, or capital raised by attracting new shareholders. External sources of financing could include taking on a new or extending an existing mortgage, a bank loan, leasing or hire purchase.
Financial information could include calculations of the prevailing interest rate and the total amount borrowed, including interest and administration costs. Evidence of non-financial information could include discussion of equity investors having an expectation of dividends and participation in decision making.
Merit and Excellence
Merit requires thorough explanations of each financing option and their consequences for the business, using financial and non-financial information. A detailed explanation of a loan would include the total amount payable over the specified term (based on secondary research).
The student also needs to refer to non-financial implications such as the implication of a non-current asset used as security not being able to be sold. The option considered best for the business needs to be recommended.
For Excellence, students are required to evaluate each option’s consequences for the business using financial and non-financial information, and justify their recommended option.
The evaluation should be based on contrasts between the financial options. For example, external finance such as a mortgage requires interest be paid but there is no change to the ownership structure of a company. In contrast, taking on new shareholders changes the ownership structure, can affect decision-making and can dilute the dividends available to shareholders.