ACCA Advanced Performance Management 5

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?

Accepted Answer

EVA may be positive if absolute dollar profits exceed the capital charge, even if the ROI percentage is below the hurdle rate

Answer

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?

Accepted Answer

Risk transfer

Answer

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?

Accepted Answer

Shareholder Value Added (SVA)

Answer

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?

Accepted Answer

Competitive benchmarking

Answer

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?

Accepted Answer

ROI may cause managers to reject positive NPV projects that would dilute divisional ROI

Answer

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.

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA Advanced Performance Management 5