ACCA Advanced Performance Management 5 — Questions and Answers
Question 1: A division reports a positive Economic Value Added (EVA) but a negative Return on Investment (ROI) relative to the cost of capital. Which statement BEST reconciles this apparent conflict?
- EVA and ROI will always agree on value creation
- EVA may be positive if absolute dollar profits exceed the capital charge, even if the ROI percentage is below the hurdle rate (Correct answer)
- A negative ROI relative to cost of capital always means EVA is negative
- ROI is a superior measure of value creation because it is percentage-based
Correct answer: EVA may be positive if absolute dollar profits exceed the capital charge, even if the ROI percentage is below the hurdle rate
EVA = NOPAT − (WACC × Capital); it is possible for a high-capital division to have ROI below WACC yet still generate positive EVA if absolute NOPAT exceeds the absolute capital charge — though in practice a ROI below WACC will produce negative EVA, so the scenario as stated would typically not occur; the question tests understanding that EVA is an absolute measure while ROI is a ratio.
Question 2: Which risk response strategy involves transferring the financial consequences of a risk to a third party, such as through insurance?
- Risk avoidance
- Risk reduction
- Risk transfer (Correct answer)
- Risk acceptance
Correct answer: Risk transfer
Risk transfer shifts the financial impact of a risk to another party (e.g., insurer or outsourcing partner) while the organization typically retains responsibility for managing the activity.
Question 3: In value-based management, which metric is defined as the present value of all future free cash flows discounted at the weighted average cost of capital?
- Economic Value Added (EVA)
- Market Value Added (MVA)
- Shareholder Value Added (SVA) (Correct answer)
- Enterprise value
Correct answer: Shareholder Value Added (SVA)
Shareholder Value Added (SVA), as defined by Rappaport, equals the present value of future free cash flows discounted at WACC, representing the intrinsic value created for shareholders.
Question 4: A company benchmarks its delivery lead time against the industry's fastest competitor. This is an example of which type of benchmarking?
- Internal benchmarking
- Functional benchmarking
- Competitive benchmarking (Correct answer)
- Generic benchmarking
Correct answer: Competitive benchmarking
Competitive benchmarking compares performance metrics directly against rivals in the same industry, providing market-relevant performance standards.
Question 5: Under the ACCA APM syllabus, which of the following is a key limitation of using Return on Investment (ROI) as a divisional performance measure?
- ROI cannot be calculated without knowing divisional revenues
- ROI may cause managers to reject positive NPV projects that would dilute divisional ROI (Correct answer)
- ROI does not account for the time value of money in short-term decisions
- ROI requires the use of activity-based cost allocation
Correct answer: ROI may cause managers to reject positive NPV projects that would dilute divisional ROI
The dysfunctional behavior associated with ROI is that managers running high-ROI divisions may reject new projects with returns above the company's cost of capital if those projects would reduce their division's current ROI.
Question 6: Which qualitative factor should an organization consider when evaluating a decision to outsource a core competency-based process?
- Whether the outsourcing provider offers a lower unit cost
- The risk of losing proprietary knowledge and long-term strategic capability (Correct answer)
- The reduction in fixed overhead achievable through outsourcing
- The improvement in short-term cash flow from the arrangement
Correct answer: The risk of losing proprietary knowledge and long-term strategic capability
Outsourcing a core competency risks eroding the unique capabilities that underpin competitive advantage, a strategic loss not captured by short-term cost savings.
Question 7: In the context of Big Data and performance management, which characteristic refers to the speed at which data is generated and must be processed?
- Volume
- Variety
- Velocity (Correct answer)
- Veracity
Correct answer: Velocity
Velocity is one of the four Vs of Big Data and describes the rate at which data is created, streamed, and needs to be analyzed — for example, real-time transaction data or social media feeds.
ACCA Advanced Performance Management 5
A division reports a positive Economic Value Added (EVA) but a negative Return on Investment (ROI) relative to the cost of capital.
Which statement BEST reconciles this apparent conflict?