BMW 2014 Annual Report Download - page 22

22
18 COMBINED MANAGEMENT REPORT
18 General Information on the BMW Group
18 Business Model
20 Management System
23 Report on Economic Position
23 General and Sector-specific
Environment
26 Overall Assessment by Management
26
Financial and Non-financial
Performance Indicators
29 Review of Operations
49 Results of Operations, Financial
Position and Net Assets
61 Comments on Financial Statements
of BMW AG
64 Events after the End of the
Reporting Period
65 Report on Outlook, Risks and
Opportunities
65 Outlook
70 Report on Risks and Opportunities
82 Internal Control System and Risk
Management System Relevant for the
Consolidated Financial Reporting Process
83 Disclosures Relevant for Takeovers
and Explanatory Comments
87
BMW Stock and Capital Markets
for these purposes corresponds to Group profit before
tax and adjusted for interest expense incurred in con-
junction
with the pension provision and on the finan-
cial lia bilities of the Automotive and Motorcycles
segments (earnings
before interest expense and taxes).
The cost of capital is the minimum rate of return ex-
pected
by capital providers in return for the capital em-
ployed by the Group. Since capital employed comprises
an equity capital element (e. g. share capital) and a debt
capital element (e. g. bonds), the overall cost of capital
rate is determined on the basis of the weighted average
rates for equity and debt capital, measured using stand-
ard market procedures. The pre-tax average weighted
cost of capital for the BMW Group in 2014 was 12 %, un-
changed from the previous year.
Value management used to control projects
Operations in the Automotive and Motorcycles segments
are influenced, to a large extent, by project work.
Pro-
jects have a substantial impact on future performance.
Project decisions are therefore a crucial component of
financial management for the BMW Group.
Decisions are taken on the basis of project calculations
measured in terms of the cash flows a project is expected
to generate. Calculations are made for the full term of
a project, i.e. for all future years in which the project
generates cash flows. Project decisions are taken on the
basis of the capital value and internal rate of return cal-
culated for the project.
The capital value of a project indicates the extent to
which
a project will be able to generate a positive con-
tribution to earnings over and above the cost of capital.
A project with a positive capital value enhances value
added and therefore results in an increase in the value
of the business. The internal rate of return of the project
corresponds to the average return on capital employed
in the project and, in terms of scope, is equivalent to the
multi-year average RoCE for an individual project. It is
therefore entirely consistent with the principal key per-
formance indicator used for the Automotive and Motor-
cycles segments.
The criteria used for taking decisions as well as the long-
term impact on periodic earnings is documented for
all project decisions and incorporated in the long-term
Group forecast. This system enables an analysis of the
periodic reporting impact of project decisions on earn-
ings and rates of return over the term of each project.
The overall result is a self-contained controlling model.