c) Generally XY are generally financially sound. There profitability has improved, the
capital structure is sound, but the liquidity ratio and increased creditor payment period
are worrying, what is the explanation? Good answers will recognise the need for
additional information and further explanations from XY before a decision can be
made. 5 marks
d) The information could be obtained from a credit report company, or Companies
House which can also be obtained on the Internet. Marks will also be given for any
other suitable answer. 2 marks

SECTION C
15. The marks will be allocated as follows: 6 marks for definitions and discussing the statement, 4
marks for describing the different life cycle stages, 10 marks for evaluation. The following is
an example of comments that could be included; any other valid points will be credited. The
answer should also follow a logical sequence with an introduction and conclusion.
The introduction and definition should include:
TLCC is used to compare and evaluate capital buying projects and attempts to include all
costs from the initial design through to the final disposal. It tries to embrace all the costs that
will be met by the purchasing company, throughout the life cycle of the asset. The idea is to
be able to come up with the total cost throughout the assets life cycle. Appraisal techniques
like TLCC are used because capital buying is on a much greater scale than the purchasing of
other goods and services as it also involves the investment of shareholders funds. It may also
require financing through borrowing of some kind. Although purchasing plays an important
role, other departments must be involved in the process and often a cross-functional team is
set up to evaluate the project. Candidates may also give a brief description of the involvement
of different departments or a brief description of the capital buying process.
A brief description of the stages involved in the process would include an example of the
types of cost incurred at each stage:
§ Pre-purchase costs. These include sourcing, research and development and design
costs.
§ Purchase price or cost of construction. This would include delivery, installation as
well as the cost of the purchasing department.
§ Operation and maintenance costs these include all direct material, labour and
overhead costs.
§ Disposal or decommissioning, these costs should take into account that the asset
must be disposed of in an appropriate manner. An example would be nuclear
power stations, and North Sea oil drilling platforms.
Evaluation of TLCC should include:
§ It is important to be aware of all the costs in order to make an accurate
comparison. Companies often make the cost of spare parts and maintenance
high to offset a low purchase price. Disposal and decommissioning can be a
considerable cost so therefore must be included in the calculations. The future
cash payments and receipts must be discounted to bring all values to the present
value, in order to make a total cost that can give a true comparison. Good
answers may also include a brief description of the time value of money and
discount rates.
§ The TLCC is an exercise that may prove that the cost may not be a good use of
funds as it may not produce an adequate return on investment. Alternatives such
as leasing, hiring and buying second hand equipment may be considered.
§ Although it is an involved process and some degree of estimation of future costs
is involved, computer software makes the calculation easier. It is much more
accurate technique than relying on purchase price alone. 20 marks