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9609 · 10.4.1

The use of accounting data to enable strategic decision-making — practice questions

Practice and worked examples for 9609 The use of accounting data to enable strategic decision-making. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A retailer considers closing its online division. Accounts show: stores ROCE 18%, online ROCE 4%, online revenue growing 25% but operating loss $2 m. Discuss how accounting data informs the decision.

Show solution outline

For closure: Low ROCE (4%) destroys value vs stores (18%); operating loss drains group profit; resources could fund store refurbishment with higher return.

Against closure: Revenue growth 25% suggests future potential not captured in historic loss; closure costs (redundancies, contracts); segment data may omit shared costs fairly.

Strategic synthesis: Use contribution analysis (5.4.2) for incremental online costs, NPV of continuing vs closing (10.3), plus qualitative brand presence online. Accounting starts the debate — does not alone decide.

Worked example 2

Innovate PLC is choosing between two strategic growth options. Its cost of capital is 10%. Using the Net Present Value (NPV) method, advise which option is financially preferable.

Option A: Market Development

  • Initial Investment: $5,000,000
  • Forecasted Net Cash Flows: Y1: 1.5m,Y2:1.5m, Y2: 2.0m, Y3: 2.5m,Y4:2.5m, Y4: 2.5m

Option B: Product Development

  • Initial Investment: $6,000,000
  • Forecasted Net Cash Flows: Y1: 1.0m,Y2:1.0m, Y2: 2.5m, Y3: 3.5m,Y4:3.5m, Y4: 3.0m

(Discount factors at 10%: Y1=0.909, Y2=0.826, Y3=0.751, Y4=0.683)

Show solution outline

The decision will be based on which project yields a higher positive NPV, as this indicates greater value creation for the business.

Formula: NPV = Sum of Present Values of Cash Inflows - Initial Investment

Step 1: Calculate the Present Value (PV) of cash flows for Option A

  • Year 1: $1,500,000 * 0.909 = $1,363,500
  • Year 2: $2,000,000 * 0.826 = $1,652,000
  • Year 3: $2,500,000 * 0.751 = $1,877,500
  • Year 4: $2,500,000 * 0.683 = $1,707,500
  • Total PV (Option A): $1,363,500 + $1,652,000 + $1,877,500 + $1,707,500 = $6,600,500

Step 2: Calculate NPV for Option A

  • NPV (A) = $6,600,500 - $5,000,000 = $1,600,500

Step 3: Calculate the Present Value (PV) of cash flows for Option B

  • Year 1: $1,000,000 * 0.909 = $909,000
  • Year 2: $2,500,000 * 0.826 = $2,065,000
  • Year 3: $3,500,000 * 0.751 = $2,628,500
  • Year 4: $3,000,000 * 0.683 = $2,049,000
  • Total PV (Option B): $909,000 + $2,065,000 + $2,628,500 + $2,049,000 = $7,651,500

Step 4: Calculate NPV for Option B

  • NPV (B) = $7,651,500 - $6,000,000 = $1,651,500

Conclusion: Both options are financially viable as they have positive NPVs. However, Option B (Product Development) is the financially preferable choice as its NPV of $1,651,500 is higher than Option A's NPV of $1,600,500. This suggests it will add more value to the business. The strategic decision should also consider the higher risk and investment associated with product development compared to market development.

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