BMW 2007 Annual Report Download - page 49

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segment and the objectives defined for specific
projects. Once a project decision has been reached,
the task is to manage each individual project over
time. Projects are therefore monitored continuously
and resources reallocated according to require-
ments.
The project decision and related project selec-
tion are therefore important aspects of value-based
management. Net present values (NPVs) and rates
of return are computed as part of the decision-mak-
ing process. This involves computing the present
value of cash flows and the internal project rate of
return (or model rate of return in the case of vehicle
projects) which are expected to be generated by
a project decision and comparing them with the
minimum rate of return derived from capital market
data.
Using this method, the amount by which a
project will contribute to the total value of the seg-
ment can be documented when the project decision
is taken. Targets and performance are controlled
using project-related target NPVs and individual cash
flow related parameters which have an impact on
those values.
The NPV of a project programme is computed
by aggregating the amounts for all projects and
discounting them back to a specific date. This
value serves as an important target for the Auto-
mobiles and Motorcycles segments. The business
value of each segment is then computed by de-
ducting the market value of debt capital. For both
of these segments, the objective is to increase
business value, as computed above, on a con-
tinuous basis.
Return on capital used to measure value on
a periodic basis
The management of product projects and product
programmes is subject to basic conditions which
result from periodic planning. The aim here is to
Group internal management system
The underlying long-term objective of the Group’s
internal management system is to increase the
value of the BMW Group. The targets set for the
Automobiles, Motorcycles and Financial Services
segments all stem from this objective. Within the
Automobiles and Motorcycles segments, this ap-
proach is put into practise for specific product,
process and structure-related projects. By contrast,
the Financial Services segment is primarily con-
cerned with cash flows and risk positions resulting
from its credit and lease portfolio.
Minimum rate of return derived from cost of
capital
The cornerstone of the value-added management
of the BMW Group is the entity-specific minimum
rate of return, derived from capital market data, and
based on the weighted average cost of capital:
Cost of equity capital x market value of equity capital
Market value of equity and debt capital
WACC = +
Cost of debt capital x market value of debt capital
Market value of equity and debt capital
The cost of equity capital is measured using the
Capital Asset Pricing Model (CAPM). The cost of
debt capital is partly based on the average interest
rate paid for long-term external debt and partly on
the interest rate applicable for pension obligations.
Value management in the context of project
control
The strategies set for each segment (and also the
ensuing project decisions) give rise to the areas of
strategic emphasis which are then implemented at
a functional level. The overall project development
process becomes more targeted as a result of the
closer link between the strategies defined for each
Analysis of the Group Financial Statements
Return on Capital Employed Profit before financial result Capital employed Return on Capital Employed
in euro million in euro million in %
2007 2006 2007 2006 2007 2006
Automobiles 3,450 3,055 15,108 14,056 22.8 21.7
Motorcycles 80 75 440 423 18.2 17.7