Performance Pillar

P3 Performance Strategy

Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to begin using your computer to produce your
answer or to use your calculator during the reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or subquestions).
ALL answers must be submitted electronically, using the single Word and
Excel files provided. Answers written on the question paper and note paper
will not be submitted for marking.
You should show all workings as marks are available for the method you use.
The pre-seen case study material is included in this question paper on pages
2 to 6. The unseen case study material, specific to this examination, is
provided on page 8 and 9.
Answer the compulsory question in Section A on page 11. This page is
detachable for ease of reference
Answer TWO of the three questions in Section B on pages 14 to 19.
Maths tables and formulae are provided on pages 21 to 24.
The list of verbs as published in the syllabus is given for reference on page
27.
Your computer will contain two blank files a Word and an Excel file.
Please ensure that you check that the file names for these two documents
correspond with your candidate number.

P3 Performance Strategy

Friday 3 September 2010

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The Chartered Institute of Management Accountants 2010

Aybe
Pre-seen Case Study
Background
Aybe, located in Country C, was formed by the merger of two companies in 2001. It is a listed
company which manufactures, markets and distributes a large range of components
throughout Europe and the United States of America. Aybe employs approximately 700
people at its three factories in Eastern Europe and supplies products to over 05 million
customers in 20 countries. Aybe holds stocks of about 100,000 different electronic
components.
Aybe is regarded within its industry as being a well-established business. Company Ay had
operated successfully for nearly 17 years before its merger with Company Be. Company Ay
can therefore trace its history back for 25 years which is a long time in the fast moving
electronic component business.
The company is organised into three divisions, the Domestic Electronic Components division
(DEC), the Industrial Electronic Components division (IEC) and the Specialist Components
division (SC). The Domestic and Industrial Electronic Components divisions supply standard
electronic components for domestic and industrial use whereas the Specialist Components
division supplies components which are often unique and made to specific customer
requirements. Each of the three divisions has its own factory in Country C.
Composition of the Board of Directors
The Board of Directors has three executive directors, the Company Secretary and five nonexecutive directors. The Chairman is one of the five independent non-executive directors. The
executive directors are the Chief Executive, Finance Director and Director of Operations.
There is also an Audit Committee, a Remuneration Committee and a Nominations
Committee. All three committees are made up entirely of the non-executive directors.
Organisational structure
Aybe is organised along traditional functional/unitary lines. The Board considers continuity to
be a very important value. The present structure was established by Company Ay in 1990 and
continued after the merger with Company Be. Many of Aybes competitors have carried out
structural reorganisations since then. In 2008, Aybe commissioned a review of its
organisational structure from a human resource consultancy. The consultants suggested
alternative structures which they thought Aybe could employ to its advantage. However,
Aybes Board felt that continuity was more important and no change to the organisational
structure took place.
Product and service delivery
Customers are increasingly seeking assistance from their component suppliers with the
design of their products and the associated manufacturing and assembly processes. Aybes
Board views this as a growth area. The Board has recognised that Aybe needs to develop
web-based services and tools which can be accessed by customers. The traditional method
of listing the companys range of components in a catalogue is becoming less effective
because customers are increasingly seeking specially designed custom made components as
the electronics industry becomes more sophisticated.

September 2010

Performance Strategy

Financial data
Aybes historical financial record, denominated in Cs currency of C$, over the last five years
is shown below.

Year ended 31 December:

2009
2008
2007
C$m
C$m
C$m
620
600
475
41
39
35
23
21
16

Revenue
Operating profit
Profit for the year

Earnings per share (C$)

Dividend per share (C$)

0128
0064

0117
0058

0089
0

2006
C$m
433
20
9

2005
C$m
360
13
5

0050
0

0028
0

Extracts from the 2009 financial statements are given at Appendix A. There are currently 180
million ordinary shares in issue with a nominal value of C$010 each. The share price at 31
December 2009 was C$064. No dividend was paid in the three years 2005 to 2007 due to
losses sustained in the first few years after the merger in 2001.
Aybes bank has imposed an overdraft limit of C$10 million and two covenants: (i) that its
interest cover must not fall below 5 and (ii) its ratio of non-current liabilities to equity must not
increase beyond 075:1. Aybes Finance Director is comfortable with this overdraft limit and
the two covenants.
The ordinary shareholding of Aybe is broken down as follows:

Institutional investors
Executive Directors and Company Secretary
Employees
Individual investors

Percentage of ordinary shares held at 31

December 2009
55
10
5
30

The Executive Directors, Company Secretary and other senior managers are entitled to take
part in an Executive Share Option Scheme offered by Aybe.
Performance Review
Aybes three divisions have been profitable throughout the last five years. The revenue and
operating profit of the three divisions of Aybe for 2009 were as follows:

Revenue
Operating profit

DEC Division
C$m
212
14

IEC Division
C$m
284
16

SC Division
C$m
124
11

Financial objectives of Aybe

The Board has generally taken a cautious approach to providing strategic direction for the
company. Most board members feel that this has been appropriate because the company
was unprofitable for the three year period after the merger and needed to be turned around.
Also, most board members think a cautious approach has been justified given the constrained
economic circumstances which have affected Aybes markets since 2008. While
shareholders have been disappointed with Aybes performance over the last five years, they
have remained loyal and supported the Board in its attempts to move the company into profit.
The institutional shareholders however are now looking for increased growth and profitability.
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Performance Strategy

September 2010

The Board has set the following financial objectives which it considers reflect the caution for
which Aybe is well known:
(i)
(ii)

Dividend payout to remain at 50% of profit for the year;

No further equity shares to be issued over the next five years in order to avoid
diluting earnings per share.

Capital budget overspends

Aybe has an internal audit department. The Chief Internal Auditor, who leads this department,
reports directly to the Finance Director. Investigation by the Internal Audit department has
revealed that managers with responsibility for capital expenditure have often paid little
attention to expenditure authorisation levels approved by the Board. They have justified
overspending on the grounds that the original budgets were inadequate and in order not to
jeopardise the capital projects, the overspends were necessary.
An example of this was the building of an extension to the main factory at the DEC division
that was completed in 2009 at a final cost of nearly C$3 million which was almost 50% over
budget. The capital budget for the extension was set at the outset and the capital investment
appraisal showed a positive net present value. It subsequently became apparent that the site
clearance costs and on-going construction expenditure were under-estimated. These
estimates were provided by a qualified quantity surveyor who was a contractor to Aybe. The
estimates supplied by the quantity surveyor were accurately included in Aybes capital
investment appraisal system which was performed on a spreadsheet. However, no regular
checks were carried out to compare the phased budgeted expenditure with actual costs
incurred. It came as a surprise to the Board when the Finance Director finally produced the
capital expenditure project report which showed the cost of the extension was nearly 50%
overspent.
Strategic development
Aybe applies a traditional rational model in carrying out its strategic planning process. This
encompasses an annual exercise to review the previous plan, creation of a revenue and
capital budget for the next five years and instruction to managers within Aybe to maintain their
expenditure within the budget limits approved by the Board.
Debates have taken place within the Board regarding the strategic direction in which Aybe
should move. Most board members are generally satisfied that Aybe has been turned around
over the last five years and were pleased that the company increased its profit in 2009 even
though the global economy slowed down. Aybe benefited from a number of long-term
contractual arrangements with customers throughout 2009 which were agreed in previous
years. However, many of these are not being renewed due to the current economic climate.
The Board stated in its annual report, published in March 2010, that the overall strategic aim
of the company is to:
Achieve growth and increase shareholder returns by continuing to produce and distribute
high quality electronic components and develop our international presence through expansion
into new overseas markets.
Aybes Chief Executive said in the annual report that the strategic aim is clear and
straightforward. He said Aybe will strive to maintain its share of the electronic development,
operational, maintenance and repair markets in which it is engaged. This is despite the global
economic difficulties which Aybe, along with its competitors, has faced since 2008. Aybe will
continue to apply the highest ethical standards in its business activities.

September 2010

Performance Strategy

In order to facilitate the achievement of the strategic aim, Aybes Board has established the
following strategic goals:
1.
2.
3.
4.

Enhance the provision of products and services which are demanded by customers;
Invest in engineering and web-based support for customers;
Maintain the search for environmentally friendly products;
Pursue options for expansion into new overseas markets.

The Board has also stated that Aybe is a responsible corporate organisation and recognises
the social and environmental effects of its operational activities.
Concern over the rate of growth
Aybes recently appointed Director of Operations and one of its Non-Executive Directors have
privately expressed their concern to the Chief Executive at what they perceive to be the very
slow growth of the company. While they accept that shareholder expectations should not be
raised too high, they feel that the Board is not providing sufficient impetus to move the
company forward. They fear that the results for 2010 will be worse than for 2009. They think
that Aybe should be much more ambitious and fear that the institutional shareholders in
particular, will not remain patient if Aybe does not create stronger earnings growth than has
previously been achieved.
Development approaches
The Board has discussed different ways of expanding overseas in order to meet the overall
strategic aim. It has, in the past, been reluctant to move from the current approach of
exporting components. However the Director of Operations has now begun preparing a plan
for the IEC division to open up a trading company in Asia. The DEC division is also
establishing a subsidiary in Africa.

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Performance Strategy

September 2010

APPENDIX A
Extracts of Aybes Income Statement and Statement of Financial Position
Income statement for the year ended 31 December 2009
2009
C$million
620
(579)
( 4)
37
( 14)
23

Revenue
Operating costs
Finance costs
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Statement of financial position as at 31 December 2009

2009
C$million
ASSETS
Non-current assets

111

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets

40
81
3
124
235

EQUITY AND LIABILITIES

Equity
Share capital
Share premium
Other reserves
Retained earnings
Total equity

18
9
8
75
110

Non-current liabilities
Bank loan (8% interest, repayable 2015)

40

Current liabilities
Trade and other payables
Current tax payable
Bank overdraft
Total current liabilities
Total liabilities
Total equity and liabilities

73
8
4
85
125
235

End of Pre-seen Material

September 2010

Performance Strategy

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Performance Strategy

September 2010

SECTION A 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER THIS QUESTION. THE QUESTION REQUIREMENTS ARE ON
PAGE 9, WHICH IS DETACHABLE FOR EASE OF REFERENCE

Question One
Unseen case material
New market opportunity
Two years ago IEC, a division of Aybe, established a special parts department (SPD) to
undertake the manufacture of customised components, such as a microprocessor that has
been programmed with a specific set of instructions supplied by the customer. SPD can also
make complex parts and assemblies. For example, a customer might require a circuit board
for a computer or a control panel. Making such an assembly involves overlaying a plastic
sheet with copper tracks to carry electrical current and signals and attaching components and
connectors.
SPD does not generate a large proportion of Aybes revenue, but it has been very profitable
since it began 2 years ago because SPD can charge high profit margins. SPD employs 18
highly skilled technicians who work in a sophisticated electronics workshop.
Almost all of the work undertaken by SPD is jobbing work i.e. for very small quantities,
sometimes only a single unit. This is because SPDs customers often build prototypes of
products that they plan to test before committing themselves to full-scale production. If the
prototype is successful and the customer then requires larger quantities of the component
SPD directs them to Aybes IEC division. IEC has a highly automated electronics factory and
consequently uses mainly semi-skilled employees. IECs equipment can mass-produce
almost anything that SPDs workshop can design. However because of the very high set-up
costs associated with each new order, IEC needs the order to be for a significant volume.
SPD has been approached by Q, a specialist manufacturer of extremely expensive high
performance cars. Q is in the process of developing a new car that will be one of the fastest in
the world. The car will be designed to be driven on public roads, but the owners of such cars
often take them to private race tracks where they can be driven at very high speeds.
Q has designed an electronics system to enable an average driver to drive the car safely at
high speed. The system will monitor the engine, brakes and steering and will compensate for
errors that could cause a crash. The system will, for example, sense that the car is about to
skid and will compensate for that. The electronics system will be based on a circuit board that
Q wishes to have built by SPD.
Building Qs circuit board will pose a number of challenges for SPD. The circuit board will be
subject to a great deal of vibration when the car is driven at speed. The cars are expected to
last for a very long time and so there could be problems if the circuit boards deteriorate with
age. The circuit board will be installed in an inaccessible part of the car where it will be difficult
to inspect or maintain.
Many of the components on the board will be manufactured by SPD, but some crucial
components will be supplied by a third party that has already been selected by Q.
Q is prepared to order a large number of circuit boards but only if they are hand built by SPD.
That is partly because the cars will not be built in sufficient volume to make it possible for IEC
to mass-produce the boards and partly because Q wishes to be able to update and modify the
design of the circuit boards in response to feedback from owners. SPDs Production Manager
believes that the Q contract will create sufficient work to keep four technicians almost fully
occupied. SPD will have to recruit and train additional staff in order to service this contract.

September 2010

Performance Strategy

Post-completion audit
The members of Aybes Audit Committee are very concerned about the Chief Internal
Auditors report on the capital budget overspends (see preseen case study page 4). The Audit
Committee is keen to introduce a system of post-completion audits as a matter of priority.
For the sake of clarity, the Audit Committee wishes to adopt the CIMA definition of postcompletion audits:

Post-completion audit: This is an objective and independent appraisal of the

measure of success of a capital expenditure project in progressing the business
as planned. It should cover the implementation of the project from authorisation
to commissioning and its technical and commercial performance after
commissioning. The information provided is also used by management as
feedback which aids the implementation and control of future risk projects.

The Head of the Audit Committee has asked the Chief Internal Auditor to consider the matter
and to brief the Audit Committee on the following matters:

The approach that the internal audit department would take to the planning and execution
of post-completion audits. For example, how will projects be selected for investigation and
what aspects will be examined?

What difficulties does the Chief Internal Auditor envisage in conducting these postcompletion audits?

The Audit Committee has informed the main board of its intention to commission postcompletion audits. The Chief Executive is worried that some managers might be reluctant to
propose projects if they know that such actions could be subjected to an audit
Copper futures
Aybes manufacturing processes use a huge amount of copper. The board of Aybe
anticipated that the price of copper would rise towards the end of 2010 and it hedged against
a significant rise by purchasing 150 copper futures, each of which makes Aybe the purchaser
of 25 tonnes of copper at a price of US$7,800 per tonne.
An earthquake at a major copper mine has caused a degree of panic in the copper market.
The prevailing prices for a future with the same expiry date as those held by Aybe are
US$8,300 per tonne (buyer) and US$8,310 (seller). Aybes Director of Operations believes
that the markets have overreacted to the news of the earthquake and that the company
should sell its copper futures before the price falls. Aybe could then protect itself by waiting
until the markets have settled down and prices have gone back to their equilibrium levels
before purchasing an option to buy the same quantity of copper at the end of 2010.

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Performance Strategy

September 2010

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September 2010

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Performance Strategy

Required:
(a)
(i)

Evaluate FOUR significant risks associated with accepting the order from
Q.
(12 marks)

(ii)

Recommend, with reasons, an appropriate response to each of the risks

identified in (a)(i) above.
(12 marks)

(b)
(i)

Recommend an appropriate approach to the selection and investigation

of projects for post-completion audits by the internal audit department.
(8 marks)

(ii)

Discuss the possibility that the introduction of post-completion audits will

deter capital investment.
(5 marks)

(c)
(i)

Calculate the gain that Aybe would realise if it sells its copper futures.
(3 marks)

(ii)

Discuss the validity of the Director of Operations suggestion. Your

answer should focus on the risks associated with the proposal.
(6 marks)

(iii)

Explain whether your answer to (c)(ii) above would be any different if you
knew whether or not Aybes competitors had hedged against movements
in the cost of copper.
(4 marks)
(Total for Question One = 50 marks)

(Total for Section A = 50 marks)

Section B starts on page 14

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September 2010

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Performance Strategy

13

September 2010

SECTION B 50 MARKS
[the indicative time for answering this section is 90 minutes]
ANSWER TWO OF THE THREE QUESTIONS
Question Two
J rents cars and small vans to individual and business customers. The company has twelve
branches located in large towns spread across Js home country.
Each of Js branches has its own computer network which stores details of all vehicles
located at the branch, advanced bookings and current rentals. The only paper records held at
branches are the signed rental agreements. Everything else is held electronically. Each
branch has several PCs that are linked to a branch server where all of the files are stored.
The files on each branch server are backed up to the head office computer system after the
close of business every evening.
Customers can book rentals in advance by telephoning their local branch or by logging onto
the branch web page. Customers details are initially collected on the branch network but all
details including verification of identity and drivers licence are checked when the customer
collects the car. Details of the vehicle, including any dents or scrapes on the bodywork or
minor mechanical defects, are printed on the rental agreement form and the member of staff
and the customer check the vehicle together before the customer signs the agreement.
The branch network keeps track of all vehicles that are supposed to be returned each day. If
a vehicle is overdue without good reason then the police are informed that the vehicle has
been stolen.
All returned vehicles are checked for damage that was not listed on the rental agreement.
Customers have to pay for any damage that occurred while the vehicle was in their
possession.
The manager in charge of Js information systems (IS) at the companys head office has been
asked to investigate two potential problems that occurred at the Southtown branch. A member
of the IS team visited the branch in order to carry out some routine maintenance and
discovered the following:

The Branch Manager had a notebook computer plugged into the branch network. The
manager explained that the notebook computer was his own personal property. He found
it useful to copy branch files so that he could work on writing his monthly management
reports at home.

One of the PCs in the branch was not the standard model used throughout J. The branch
manager explained that there were never sufficient PCs in the branch and so he had
used part of the branch equipment budget to purchase an inexpensive PC from a local
computer store. The inexpensive PC came equipped with the latest version of a standard
operating system. The PCs communicate with the branch network using a specially
written program. The branch staff loaded a copy of that program from a CD that had been
left behind by a member of the head office IS team during an earlier visit.

Js system uses an older version of the standard operating system and the branch network
software installed on the PC was not the latest version, although the Branch Manager insisted
that the PC worked perfectly. It has also been useful because the other PCs in the branch
were not fitted with optical drives (i.e. they cannot read CDs or DVDs) and he has found it
useful to be able to use this machine to install software to other machines over the branch
network in order to enhance efficiency.

September 2010

14

Performance Strategy

Required
(a)

Advise the branch manager on the importance of adequate information

systems (IS) for J.
Your answer to part (a) should NOT discuss the specific matters identified by
the member of the IS team during the branch visit.
(10 marks)

(b)

Evaluate the control implications of each of the matters discovered by the

member of the IS team.
(15 marks)
(Total for Question Two = 25 marks)

Section B continues on the next page

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Performance Strategy

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September 2010

Question Three
M is the leading retailer of mobile telephones in its home country. The company has almost
100 branches, with at least one branch in every major town and city. Some branches are
located within walking distance of one another.
M has a highly aggressive management team. It views sales growth as the key to the
companys continuing success. It believes that increasing their share of the retail market will
enable M to negotiate large discounts from manufacturers and network providers. It also
creates economies of scale in the advertising and promotion of the company and its services.
Two years ago the directors abandoned traditional budgeting and target setting. They decided
that budgets did not necessarily give branch staff a sufficient incentive to maximise sales
because they tended to work towards achieving but not surpassing sales targets. They
introduced a new management control system with the following features:

Shop sales are recorded using electronic point of sales (EPOS) cash registers that are
linked to head office. Every sale indicates the branch and the member of staff responsible
for the sale. These transactions are recorded in real time during the course of the day.

A terminal in every shop lists a running total of that shops sales for the day, analysed
between each member of sales staff. The terminal also indicates the shops ranking for
the day relative to all of Ms other shops.

Every shop manager must be at work at least an hour before the shop opens. During that
hour the manager receives a telephone call from the regional sales manager to discuss
the previous days sales and likely sales during the day ahead.

Each shop manager is permitted considerable freedom to introduce special offers and
promotions, subject to achieving an acceptable margin on each sale made.

At the end of every week the manager and staff of the ten shops with the highest sales
are given a substantial bonus. The manager and staff at the ten shops with the poorest
sales are given one weeks notice to improve or they face being moved to other shops or
even dismissal.

Sales have grown rapidly since this system was introduced, although the rate of growth
has been declining recently.

The Director of Human Resources has investigated staff absenteeism and turnover and has
discovered that many of Ms branch managers and sales staff have been with the company
for several years. They seem to thrive in the competitive environment and the company pays
staff with good sales records a substantial salary compared with other retailers. M also suffers
a high staff turnover every year and some members of staff are frequently absent for health
reasons, with their doctors certifying them as ill due to stress-related conditions.
Ms Chief Accountant is concerned that the companys management accounting systems are
unethical and she has provided the board with a copy of CIMAs Code of Professional Ethics.

September 2010

16

Performance Strategy

Required:
(a)

Discuss the operational risks that could arise as a result of the new
management control system. Your discussion should include the potential
risks associated with this new system.
(15 marks)

(b)

Advise Ms directors on the ethical implications of their approach to

personnel management.
(10 marks)
(Total for Question Three = 25 marks)

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September 2010

Question Four
N manufactures fire engines. It has a reputation for excellent build quality and has been
successful in its home market for many years. N is based in Asia.
Five years ago N introduced a new fire engine that is superior to any competing product. The
factors that make Ns design superior are protected by patent and are unlikely to be matched
by competitors in the foreseeable future. N has had growing interest from overseas customers
and it has recently been asked to consider two major contracts, both of which will provide N
with a significant increase in revenue and profit. These will be Ns first significant export
contracts.
South American contract
E, a South American country, requires several hundred fire engines in order to re-equip its
emergency services. Es government cannot afford to purchase these fire engines directly
from N and has proposed a mutually beneficial agreement.
The government of E proposes that N will establish a subsidiary in the South American
country that will assemble fire engines using parts imported from Ns Asian factory and local
labour. N will buy as many parts and materials as possible locally in E. For example, E has a
factory that manufactures diesel engines that are almost identical to those used by N and
these would be suitable alternatives to the standard engines.
Ns Production Managers have estimated that 50% (by value) of the parts and 60% of the
labour could be sourced in E. Complex parts will continue to be sourced from Ns main factory
and skilled assembly work will still be undertaken there. N has found a suitable factory in E
that can be rented for the duration of the contract. It will take four years to build the entire
order.
This arrangement will help the economy because parts and labour will be purchased locally.
The government of E insists that N must invoice it in the E Peso. This currency is freely
exchanged on international currency markets, although it is regarded as rather weak.
It is anticipated that N will complete ten fire engines per month and will invoice for deliveries
on a monthly basis. All payments will be made to Ns subsidiary in E. The subsidiary will pay
for all local wages and purchases and will remit any cash surplus back to N on a monthly
basis.
The selling price has been fixed in terms of E Pesos for the duration of the contract.
European contract
S, a European country, also requires several hundred fire engines. The countrys senior firefighters have argued that they should be equipped with Ns fire engine despite the fact that
they have always purchased from K, a company located in S that manufactures a range of
vehicles including fire engines.
The government of S is concerned about the political implications of placing such a large
order with a foreign supplier because doing so will risk the loss of jobs at K. The government
of S proposes that N should sell K a licence to manufacture its fire engine. Under this
arrangement K will provide 100% of the labour and will purchase 90% by value of the parts
and materials. Only 10% of the parts will be purchased from N. The part sales form a very
minor part of the contract and will not have a material effect on Ns business.
Under the licence K will make an annual payment, in Euros, to N. The annual payment will
vary in line with the number of fire engines completed during the year and has been
negotiated at a sum that is slightly more than the profit that N normally makes on the
manufacture and sale of that number of fire engines.
It will take K approximately four years to manufacture the order.

September 2010

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Performance Strategy

Required:
(a)
(i)

Evaluate the currency transaction risks that will arise under each of these
contracts. Your answer should indicate why the nature of the currency risk
associated with each of the contracts differs.
(6 marks)

(ii)

Recommend, with reasons, an appropriate strategy for the management of

each of the currency transaction risks you have identified.

(9 marks)

(b)

Recent newspaper reports have documented the high levels of corruption and
economic instability in E. Ns directors are concerned that they will be exposed to
significant risks if they establish a subsidiary in E and have identified two possible
strategies for managing the risks:

(i)

Entering into a joint venture with a company located in E

(ii)

Borrowing in E Pesos

Discuss the advantages and disadvantages of each of the two strategies for N.
(10 marks)
(Total for Question Four = 25 marks)

(Total for Section B = 50 marks)

End of question paper

Maths tables and formulae are on pages 21 to 24

Performance Strategy

19

September 2010

September 2010

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Performance Strategy

Performance Strategy

21

September 2010

PRESENT VALUE TABLE

Present value of $1, that is 1+ r

payment or receipt.

)n where r = interest rate; n = number of periods until

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820

2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673

3%
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554

4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456

Interest rates (r)

5%
6%
0.952
0.943
0.907
0.890
0.864
0.840
0.823
0.792
0.784
0.747
0.746
0.705
0.711
0.665
0.677
0.627
0.645
0.592
0.614
0.558
0.585
0.527
0.557
0.497
0.530
0.469
0.505
0.442
0.481
0.417
0.458
0.394
0.436
0.371
0.416
0.350
0.396
0.331
0.377
0.312

7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258

8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215

9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178

10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

11%
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124

12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104

13%
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087

14%
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073

Interest rates (r)

15%
16%
0.870
0.862
0.756
0.743
0.658
0.641
0.572
0.552
0.497
0.476
0.432
0.410
0.376
0.354
0.327
0.305
0.284
0.263
0.247
0.227
0.215
0.195
0.187
0.168
0.163
0.145
0.141
0.125
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.070
0.060
0.061
0.051

17%
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043

18%
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037

19%
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.079
0.062
0.052
0.044
0.037
0.031

20%
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026

September 2010

22

Performance Strategy

Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n
years

1 (1+ r ) n
r

Periods
(n)
1
2
3
4
5

1%
0.990
1.970
2.941
3.902
4.853

2%
0.980
1.942
2.884
3.808
4.713

3%
0.971
1.913
2.829
3.717
4.580

4%
0.962
1.886
2.775
3.630
4.452

Interest rates (r)

5%
6%
0.952
0.943
1.859
1.833
2.723
2.673
3.546
3.465
4.329
4.212

7%
0.935
1.808
2.624
3.387
4.100

8%
0.926
1.783
2.577
3.312
3.993

9%
0.917
1.759
2.531
3.240
3.890

10%
0.909
1.736
2.487
3.170
3.791

6
7
8
9
10

5.795
6.728
7.652
8.566
9.471

5.601
6.472
7.325
8.162
8.983

5.417
6.230
7.020
7.786
8.530

5.242
6.002
6.733
7.435
8.111

5.076
5.786
6.463
7.108
7.722

4.917
5.582
6.210
6.802
7.360

4.767
5.389
5.971
6.515
7.024

4.623
5.206
5.747
6.247
6.710

4.486
5.033
5.535
5.995
6.418

4.355
4.868
5.335
5.759
6.145

11
12
13
14
15

10.368
11.255
12.134
13.004
13.865

9.787
10.575
11.348
12.106
12.849

9.253
9.954
10.635
11.296
11.938

8.760
9.385
9.986
10.563
11.118

8.306
8.863
9.394
9.899
10.380

7.887
8.384
8.853
9.295
9.712

7.499
7.943
8.358
8.745
9.108

7.139
7.536
7.904
8.244
8.559

6.805
7.161
7.487
7.786
8.061

6.495
6.814
7.103
7.367
7.606

16
17
18
19
20

14.718
15.562
16.398
17.226
18.046

13.578
14.292
14.992
15.679
16.351

12.561
13.166
13.754
14.324
14.878

11.652
12.166
12.659
13.134
13.590

10.838
11.274
11.690
12.085
12.462

10.106
10.477
10.828
11.158
11.470

9.447
9.763
10.059
10.336
10.594

8.851
9.122
9.372
9.604
9.818

8.313
8.544
8.756
8.950
9.129

7.824
8.022
8.201
8.365
8.514

Periods
(n)
1
2
3
4
5

11%
0.901
1.713
2.444
3.102
3.696

12%
0.893
1.690
2.402
3.037
3.605

13%
0.885
1.668
2.361
2.974
3.517

14%
0.877
1.647
2.322
2.914
3.433

Interest rates (r)

15%
16%
0.870
0.862
1.626
1.605
2.283
2.246
2.855
2.798
3.352
3.274

17%
0.855
1.585
2.210
2.743
3.199

18%
0.847
1.566
2.174
2.690
3.127

19%
0.840
1.547
2.140
2.639
3.058

20%
0.833
1.528
2.106
2.589
2.991

6
7
8
9
10

4.231
4.712
5.146
5.537
5.889

4.111
4.564
4.968
5.328
5.650

3.998
4.423
4.799
5.132
5.426

3.889
4.288
4.639
4.946
5.216

3.784
4.160
4.487
4.772
5.019

3.685
4.039
4.344
4.607
4.833

3.589
3.922
4.207
4.451
4.659

3.498
3.812
4.078
4.303
4.494

3.410
3.706
3.954
4.163
4.339

3.326
3.605
3.837
4.031
4.192

11
12
13
14
15

6.207
6.492
6.750
6.982
7.191

5.938
6.194
6.424
6.628
6.811

5.687
5.918
6.122
6.302
6.462

5.453
5.660
5.842
6.002
6.142

5.234
5.421
5.583
5.724
5.847

5.029
5.197
5.342
5.468
5.575

4.836
4.988
5.118
5.229
5.324

4.656
7.793
4.910
5.008
5.092

4.486
4.611
4.715
4.802
4.876

4.327
4.439
4.533
4.611
4.675

16
17
18
19
20

7.379
7.549
7.702
7.839
7.963

6.974
7.120
7.250
7.366
7.469

6.604
6.729
6.840
6.938
7.025

6.265
6.373
6.467
6.550
6.623

5.954
6.047
6.128
6.198
6.259

5.668
5.749
5.818
5.877
5.929

5.405
5.475
5.534
5.584
5.628

5.162
5.222
5.273
5.316
5.353

4.938
4.990
5.033
5.070
5.101

4.730
4.775
4.812
4.843
4.870

Performance Strategy

23

September 2010

Formulae
Annuity
Present value of an annuity of 1 per annum receivable or payable for n
years, commencing in one year, discounted at r% per annum:
PV =

1
1
1
r [1 + r ] n

Perpetuity
Present value of 1 per annum, payable or receivable in perpetuity,
commencing in one year, discounted at r% per annum:
PV =

1
r

Growing Perpetuity
Present value of 1 per annum, receivable or payable, commencing in one
year, growing in perpetuity at a constant rate of g% per annum, discounted at
r% per annum:
PV =

September 2010

24

1
r g

Performance Strategy

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Performance Strategy

25

September 2010

This page is blank

September 2010

26

Performance Strategy

LIST OF VERBS USED IN THE QUESTION REQUIREMENTS

A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.
It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE
Level 1 - KNOWLEDGE
What you are expected to know.

Level 2 - COMPREHENSION
What you are expected to understand.

VERBS USED

DEFINITION

List
State
Define

Make a list of
Express, fully or clearly, the details/facts of
Give the exact meaning of

Describe
Distinguish
Explain

Communicate the key features

Highlight the differences between
Make clear or intelligible/State the meaning or
purpose of
Recognise, establish or select after
consideration
Use an example to describe or explain
something

Identify
Illustrate
Level 3 - APPLICATION
How you are expected to apply your knowledge.

Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate

Level 4 - ANALYSIS
How are you expected to analyse the detail of
what you have learned.

Level 5 - EVALUATION
How are you expected to use your learning to
evaluate, make decisions or recommendations.

Performance Strategy

Analyse
Categorise
Compare and contrast

Put to practical use

Ascertain or reckon mathematically
Prove with certainty or to exhibit by
practical means
Make or get ready for use
Make or prove consistent/compatible
Find an answer to
Arrange in a table

Construct
Discuss
Interpret
Prioritise
Produce

Examine in detail the structure of

Place into a defined class or division
Show the similarities and/or differences
between
Build up or compile
Examine in detail by argument
Translate into intelligible or familiar terms
Place in order of priority or sequence for action
Create or bring into existence

Advise
Evaluate
Recommend

Counsel, inform or notify

Appraise or assess the value of
Advise on a course of action

27

September 2010

Performance Pillar

Strategic Level Paper

P3 Performance Strategy

September 2010

September 2010

28

Performance Strategy