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Free ACCA Performance Management Practice Questions & Answers
400 exam-style Performance Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 241
A company evaluates three strategies under three economic scenarios. Payoffs (000s): Strategy 1: Boom=800, Stable=400, Recession=100. Strategy 2: Boom=600, Stable=500, Recession=200. Strategy 3: Boom=700, Stable=450, Recession=150. Probabilities: Boom=0.2, Stable=0.5, Recession=0.3. Which strategy is optimal under EV?
Select an option first.
Correct answer: B — Strategy 2
Explanation: B
Question 242
A payoff matrix has three options (A, B, C) and three states (Boom, Normal, Bust). Payoffs: A: 500, 200, -150. B: 350, 280, 50. C: 400, 250, -50. Apply minimax regret.
Select an option first.
Correct answer: B — Choose B
Explanation: B
Question 243
A project has: base case NPV 400,000; fixed costs sensitivity 30%; variable cost sensitivity 20%; sales volume sensitivity 15%. Which variable should management focus most attention on?
Select an option first.
Correct answer: B — Sales volume — 15% threshold is smallest, meaning a small drop in volume eliminates the NPV
Explanation: B
Question 244
A company uses simulation analysis and finds that its project has a 90% probability of positive NPV, with the distribution skewed toward large positive outcomes. The expected NPV is 350,000 with a 5th percentile (worst 5% of outcomes) of -80,000. How should management interpret this?
Select an option first.
Correct answer: B — The project has a strong expected return (350,000) with only a 10% probability of negative NPV and a limited downside in the worst 5% scenario (-80,000). On a risk-adjusted basis, the project appears attractive — management should consider whether -80,000 is an acceptable worst-case loss and whether it can be managed
Explanation: B
Question 245
The coefficient of variation (CV) measures:
Select an option first.
Correct answer: B — Risk per unit of expected return — calculated as standard deviation divided by expected value
Explanation: B
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Question 246
A project requires 500,000 investment. Sensitivity of NPV to initial investment: NPV is zero if initial investment rises by 20%. Sensitivity to operating costs: NPV is zero if costs rise by 15%. Which variable is more critical?
Select an option first.
Correct answer: B — Operating costs — 15% threshold means a smaller change is needed to destroy NPV; this variable is more critical
Explanation: B
Question 247
An entity is evaluating a project using expected value. The EV is 180,000 but the standard deviation is 220,000. What does this suggest about the reliability of the EV?
Select an option first.
Correct answer: B — High standard deviation relative to EV means the outcomes are widely dispersed — the actual result could be very different from 180,000. The EV is not a reliable predictor for this one-off project. Management should supplement EV with probability of loss analysis and consider the downside risk carefully.
Explanation: B
Question 248
Expected value of perfect information is 80,000. A market research firm offers a study for 65,000 that provides imperfect information (75% accuracy). Should the company buy the study?
Select an option first.
Correct answer: B — Yes — the study costs 65,000 which is below EVPI (80,000). Even though imperfect, if it meaningfully improves decision quality (75% accuracy), the potential benefit is worth investigating further. A formal expected value of imperfect information (EVII) calculation should confirm this.
Explanation: B
Question 249
A company is risk-averse and faces two mutually exclusive projects: Project A — EV 300,000, probability of loss 5%, maximum loss 80,000. Project B — EV 280,000, probability of loss 12%, maximum loss 250,000. Which should a risk-averse manager prefer?
Select an option first.
Correct answer: B — Project A — despite slightly lower EV, it has significantly lower downside risk (5% vs 12% probability of loss, 80,000 vs 250,000 maximum loss). Risk-averse managers weight downside protection more heavily than marginal EV differences.
Explanation: B
Question 250
Three decision options with payoffs under two states of nature: Option 1: State A=600, State B=200. Option 2: State A=400, State B=350. Option 3: State A=500, State B=100. Probability state A=0.4; state B=0.6. Which option maximises EV?
Select an option first.
Correct answer: B — Option 2
Explanation: B
Question 251
A company calculates: without market research, best decision gives EV = 200,000. With perfect information, EV = 260,000. A market research company offers to provide perfect information. Maximum price to pay?
Select an option first.
Correct answer: C — 60,000
Explanation: C
Question 252
A manager must choose between Project X (EV 500,000, SD 200,000) and Project Y (EV 480,000, SD 80,000). She is risk-averse. Calculate coefficient of variation (CV) for each and recommend.
Select an option first.
Correct answer: B — CV: X=40%, Y=16.7% — choose Y (lower risk per unit of return)
Explanation: B
Question 253
A pharmaceutical company is deciding whether to develop a new drug. Two stages: Stage 1 (development) costs 5,000,000, takes 2 years. If successful (probability 0.6), Stage 2 (clinical trials) costs 8,000,000. Trials succeed with probability 0.4, generating NPV of 80,000,000. If trials fail, NPV = 0. Use decision tree to find EV of proceeding with development.
Select an option first.
Correct answer: A — EV = 9,400,000
Explanation: A
Question 254
A company evaluates a 3-year project. Year 1 cash flow is certain at 100,000. Year 2 has two scenarios: good (prob 0.6, CF 200,000) or poor (prob 0.4, CF 80,000). Year 3 depends on Year 2: if good Y2, then Y3 either excellent (prob 0.5, CF 300,000) or moderate (prob 0.5, CF 150,000); if poor Y2, Y3 either moderate (prob 0.7, CF 100,000) or bad (prob 0.3, CF 20,000). Discount rate 10%. Calculate EV NPV (ignore discounting for simplicity, show EV of total cash flows).
Select an option first.
Correct answer: B — EV CF = 488,000
Explanation: B
Question 255
A company uses Monte Carlo simulation for project risk analysis. The simulation runs 50,000 iterations and produces: mean NPV 320,000; median NPV 280,000; 10th percentile NPV -50,000; 90th percentile NPV 680,000; probability of negative NPV 18%. Interpret these results and make a recommendation.
Select an option first.
Correct answer: B — The simulation shows a right-skewed distribution (mean > median) suggesting upside potential. The 18% negative NPV probability is material but not dominant. The downside risk (-50,000 at 10th percentile) is manageable. If -50,000 is within the organisation's risk tolerance and the project aligns with strategy, accept — but consider risk mitigation (phased investment, contractual protections) given the uncertainty range.
Explanation: B
Question 256
Return on investment (ROI) for a division equals:
Select an option first.
Correct answer: B — Divisional profit divided by divisional net assets (capital employed)
Explanation: B
Question 257
Residual income (RI) equals:
Select an option first.
Correct answer: B — Divisional profit minus a notional charge on net assets (cost of capital x net assets)
Explanation: B
Question 258
A key advantage of RI over ROI is:
Select an option first.
Correct answer: B — RI encourages acceptance of investments earning above the cost of capital even if they dilute divisional ROI
Explanation: B
Question 259
A transfer price is:
Select an option first.
Correct answer: B — The internal price at which goods or services are transferred between divisions of the same organisation
Explanation: B
Question 260
Goal congruence in transfer pricing means:
Select an option first.
Correct answer: B — Divisional decisions driven by the transfer price also serve the best interests of the group as a whole
Explanation: B
Question 261
An investment centre differs from a profit centre because:
Select an option first.
Correct answer: B — Managers of investment centres also have authority over capital investment decisions in addition to revenues and costs
Explanation: B
Question 262
What is the minimum transfer price when the selling division has spare capacity?
Select an option first.
Correct answer: C — Variable cost per unit (no opportunity cost as spare capacity exists)
Explanation: C
Question 263
How does residual income (RI) overcome the main dysfunction of ROI?
Select an option first.
Correct answer: B — RI rewards any investment with positive return above the cost of capital, regardless of how it affects the division's average ROI percentage
Explanation: B
Question 264
What is goal congruence in management control?
Select an option first.
Correct answer: B — A situation where individual managers, acting in their own best interests based on the performance measures and incentives they face, also act in the best interests of the overall organisation
Explanation: B
Question 265
In which situation would a cost-based transfer price set at marginal cost be ideal for the group?
Select an option first.
Correct answer: A — When the selling division has spare capacity and there is no external market for the transferred goods
Explanation: A
Question 266
What is the main disadvantage of using net book value (historical cost less accumulated depreciation) for divisional net assets in ROI calculations?
Select an option first.
Correct answer: B — As assets age and depreciate, net book value falls, artificially inflating ROI and discouraging replacement of old assets even when replacement would be operationally beneficial
Explanation: B
Question 267
Why might a transfer price set at full cost (including fixed overhead) be problematic for group decision-making?
Select an option first.
Correct answer: B — Full cost transfer prices pass a fixed overhead charge to the buying division. This may cause the buying division to treat the fixed overhead as a variable cost in its decisions, leading to suboptimal pricing or sourcing choices that are not in the group's best interest
Explanation: B
Question 268
What is the primary purpose of a transfer price?
Select an option first.
Correct answer: B — To provide a basis for measuring divisional performance, allocate profit between divisions, and guide internal resource allocation decisions — ideally while maintaining goal congruence
Explanation: B
Question 269
Return on capital employed (ROCE) at divisional level equals:
Select an option first.
Correct answer: B — Divisional operating profit / Divisional capital employed (net assets)
Explanation: B
Question 270
Economic value added (EVA) is positive when:
Select an option first.
Correct answer: B — The return on capital employed exceeds the weighted average cost of capital, creating value above the required return
Explanation: B
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