Net Contribution to Value Performance Measurement Manual

Net Contribution to Value Performance Measurement Manual NET CONTRIBUTION TO VALUE PERFORMANCE MEA UREMENT MANUAL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!" # INTRO$UCTION!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!% NET CONTRIBUTION TO VALUE PERFORMANCE MEA UREMENT MANUAL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!& NET CONTRIBUTION TO VALUE PERFORMANCE MEA UREMENT MANUAL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!' NET CONTRIBUTION TO VALUE PERFORMANCE MEA UREMENT MANUAL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!## ( NCV $EFINITION!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!#" " NCV MEA UREMENT AN$ T)E P*P!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!(( NET CONTRIBUTION TO VALUE PERFORMANCE MEA UREMENT MANUAL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!+& + APPEN$ICE !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!+,

Net Contribution to Value Performance Measurement Manual

# INTRO$UCTION
#!# Net contribution to -alue an. t/e 0erformance 1ro2t/ 0lan!

3/at is Net Contribution to Value 4NCV56 NCV is ICIs measure of economic profit. It measures to what degree a business earns a sufficient return to cover both its tax charge and the cost of capital employed in the business. bsolute NCV and growth in NCV are the !roups "ey performance measures of value and value creation. 3/at is t/e Performance *ro2t/ Plan 4P*P56 ICIs performance growth plan lin"s the remuneration of senior executives to delivery of ICIs governing ob#ective $ the delivery of industry%leading returns to shareholders. Its aim is to focus on the longer%term creation of shareholder value and so rewards performance based on cumulative results over rolling 3 year periods. 3/7 is NCV to be use. for t/e P*P6 &or the ICI !roup as a whole' performance against the shareholder value creation ob#ective will be measured using (otal )hareholder *eturn +()*,. full explanation and definition of ()* can be found in the document -!oal setting for the .!./' available from !roup Compensation 0 1enefits. ()* measurement and reporting is not dealt with further in this manual. &or measuring the performance of each international business however' ()* provides poor line%of%sight' i.e. the effect that each business has on !roup ()* is not strong enough to use ()* as a primary measure of business performance. NCV provides good line of sight at the business level and growth in NCV correlates well with increases in shareholder value over time. (arget setting and performance measurement within the .!. is therefore based upon ()* or NCV measures' or a combination of both' dependent on the role and responsibility of an individual. 3/at .oes t/is mean for NCV re0ortin1 an. measurement6 NCV will continue to be reported 2uarterly as part of the !roups regular management reporting process. (he additional re2uirement that the .!. imposes is for NCV performance to be assessed on a comparable basis against .!. targets over the 3 year time frame of each .!.. (his manual briefly covers the concept of economic profit measurement' gives a full definition of Net Contribution to Value and details how the NCV measure will be used for the purposes of the .erformance !rowth .lan. It should be read in con#unction with the !oal )etting manual available from !roup Compensation and 1enefits.

Fi1ure #

)hare .rice ppreciation vs *ate of Change in 4V

)0. 355' 6789%7:
33 35 ;3 ;5 63 65 3 5 %3 %65 5%7 65%67 ;5%;7 35%37 45%47 35%37 :5%:7 95%97 85%87 75%655

nnualised )hare .rice ppreciation <

4V

Improvement .ercentile

*an"ed by Change in 4V =Invested Capital

Net Contribution to Value Performance Measurement Manual #!( Bac81roun. to t/e use of T R an. EVA

(he use of ()* +(otal )hareholder *eturn, or internal proxies for ()* such as 4V +4conomic Value dded, and 4conomic .rofit +"nown as NCV in ICI, has become increasingly widespread as a measure of corporate success. ma#ority of the analysts and investors in the >)' and a rapidly growing minority in the >?' regard ()*=4V as the "ey performance measures. (hey loo" for regular reassurance that performance assessment and reward systems are based on ()*=4V +even though we and many other companies do not regularly disclose 4V figures,. #!" $efinitions )hare price appreciation plus dividend as a < of original share price Net @perating .rofit after (ax +N@. (, less a charge on Capital 4mployed at the Aeighted verage Cost of Capital +A CC, !rowth in 4conomic .rofit

()* +(otal )hareholder *eturn, 4. +4conomic .rofit, or NCV

4V +4conomic Value dded,

Net operating profit after tax and capital employed are generally ad#usted from the accounting definitions in order to provide as good a representation of real economics as possible. )ome 6:5 ad#ustments are possible' although' in practise' most companies adopt fewer than 65. (ypical ad#ustments to N@. ( include the amortisation of costs that are normally expensed in the year they are incurred but where the benefits of the expenditure arise over a number of future years. 4xamples include restructuring' *0B' and=or dvertising. d#ustments to Capital 4mployed might include the exclusion of ma#or capital under construction and the capitalisation of purchased !oodwill. Caving tailored the measure to their specific circumstances' many companies then adopt an internal name for it in order to distinguish their definition from that of others. ICIDs own measure of 4conomic .rofit is "nown as Net Contribution to Value +NCV,. Ae have examined many of the possible ad#ustments to profit after tax and capital employed as defined in the accounts. In doing so' the right balance has been sought between accuracy i.e. growth in NCV correlates well with ()*' and simplicity i.e. as few ad#ustments as possible. full definition of NCV is provided in section II.

Fi1ure (

NCV

Captures cost of capital & size

RONA Captures investment (but fails to !* .CIC +a, capture cost of capital and size) Tra.in1 Profit
Captures expenses (but fails to capture investment)

Increasin1 Information

Re-enue

Captures growth (but fails to capture expenses)

Increasin1 Ali1nment 2it/ /are/ol.er Value

Net Contribution to Value Performance Measurement Manual #!+ T/e use of t/e conce0ts

(argeting and measuring business performance on the basis of (otal )hareholder *eturn is not new. Indeed' increasing numbers of 2uoted >? companies are adopting ()* targets which are based on ()* performance relative to defined peer groups as the principal measure within their variable reward schemes. Cowever' there is strong evidence that' other than those at the very top of organisations' few managers feel that their individual actions have a significant impact on the corporationDs share price i.e. there is poor Dline of sightD. Increasingly' therefore' companies are see"ing to identify particular measures of performance which both correlate well with ()* and can be applied to assess the performance of individual subsidiaries or business units within the overall group. >nfortunately' traditional accounting does not provide measures which correlate strongly with ()*. .rofit measures fail to pic" up investment information and' whilst they capture investment' return on capital measures such as *@N fail to pic" up the cost of capital and siEe +and often ignore tax, +see figure ;,. Increasingly' therefore' companies are adopting new measures which incorporate more information. (he most common of such is 4V . 4V performance is a "ey driver of ()*. (his is demonstrated in figure 6. (he chart is based on )0. 355 company performance between 6789 and 677: and shows a strong correlation between share price appreciation and rate of change of 4V . s a measure' 4V has many strengthsF % % % % % ease of understanding a single measure which can be applied to all 1usiness >nits it facilitates decentralised decision%ma"ing it is relevant to a wide range of decisions and processes it is readily calculated from existing information systems

but also some potential limitationsF % it can discourage growth or insufficiently emphasise cash generation if it is used as a single year measure % negative numbers can be confusing or demotivating % it is usually unsuitable for measuring performance in businesses in periods of start%up' very high growth or ma#or changes in portfolio. !iven' however' that these potential pitfalls are recognised and avoided' the setting of medium% to long%term targets in terms of growth in 4V and measuring performance against these targets has many attractions compared to traditional measures.

65

Net Contribution to Value Performance Measurement Manual #!% Mana1ement Be/a-iour

(he management behaviours encouraged and discouraged by the use of NCV are summarised below NCV 4ncouragesG Improving returns Investing in businesses where expected returns on capital are greater than cost of capital Hanagers to thin" more carefully about the capital invested in their businesses and the allocation between segments NCV BiscouragesG D1ottom%slicingD i.e. @verloo"ing value creation opportunities which dilute *@N Non%value creating investments

*educing wor"ing capital *educing tax )ensible cost cutting >nderstanding the trade%offs between profit growth and investment I s explained in section 3' targets for the purposes of the .!. will be recalculated following an ac2uisitions or divestment. NCV measurement as applied under the .!. will not therefore reflect whether an ac2uisition or divestment is value creating. Instead' ac2uisitions and divestments will continue to be assessed using the normal investment guidelines. Cowever the .!. framewor" does create an incentive to ensure that the pro#ected value created in the ac2uisition is achieved or exceeded.

66

Fi1ure "

NCV .efinition ;
Net o0eratin1 0rofit after ta9

NCV

E9ce0tional amortisation

Ca0ital C/ar1e

trading profit plus income from associates less tax charge amortisation of capitalised exceptional operating items +post tax, over 3 years

!roup A CC x )CV net assets

)CV net assets J Net operating assets plus Capitalised goodwill plus Capitalised exceptionals

( NCV $EFINITION
s described in section I' Net Contribution to Value +NCV, is ICIs version of economic profit. It has been chosen as the primary internal measure of business performance within ICI and is central to the .erformance !rowth .lan +.!.,. (!# ummar7 of t/e ma<or com0onents of NCV

(!#!# Net O0eratin1 Profit after Ta9 Tra.in1 Profit (he trading profit definition used for NCV is the normal internal ICI definition of trading profit. It excludes goodwill amortisation and exceptional items. Income from Associates Income from ssociates is the !roups share of the profit before tax of all e2uity accounted associated underta"ings. Ta9 C/ar1e (ax represents one of the largest costs to the !roup and is one that needs to be actively managed by both businesses and the centre. &or NCV purposes the tax measure reflects the effect on tax of business activities but excludes the impact on tax of any !roup activities that are outside the control of a business. (!#!( E9ce0tional Amortisation (he treatment of exceptional restructuring is one of the ma#or ad#ustments to standard accounting practice that ICI has adopted for the purposes of NCV measurement. (he NCV framewor" sees exceptional restructuring costs as investments for future growth of the business. s such they are to be capitalised at the point the programme is approved and then amortised over 3 years beginning in the 2uarter following the approval of the restructuring. (he capitalised balance is included in shareholder value net assets for the purposes of calculating the capital charge. (he amount to be capitalised and amortised should be net of any tax relief expected on the restructuring costs. (!#!" Ca0ital C/ar1e (he capital charge represents the cost of the capital invested in a business. (he capital base' "nown as s/are/ol.er -alue net assets' consists ofG (he net boo" value of fixed assets +less individual assets under construction KL;3m, @perating wor"ing capital Investment in associates Net capitalised exceptionals !oodwill (he ca0ital c/ar1e for a 2uarter is calculated as the !roups A CC +currently 65<, multiplied by average net assets for the 2uarter. (he annual charge is the sum of the 2uarterly charges.

(!(

$etaile. notes on t/e com0onents of NCV

(he definitions in section ;.6 above provide a summary of the ma#or components of NCV. (he following notes give more details on each of the lines summarised above and should contain all the information re2uired for calculating NCV in most circumstances. ny 2ueries or issues not covered below should be raised with Controllers Bepartment. (!(!# Income from Associates an. In-estment in Associates E=uit7 Accounte. Associates Income from ssociates arises where an associated underta"ing is consolidated according to the e2uity accounting method. (he !roup Controller designates which entities should be e2uity accounted ta"ing into account their materiality to the ICI !roup. Income from Associates (he income reported should be before tax but after net interest. In-estment in Associates (he investment in associates included within )hareholder Value Net ssets should include ICIs share of post ac2uisition earnings +i.e. it is the normal net boo" value of the investment,. (!(!( Ta9 C/ar1e Ta9 c/ar1e calculation basis (he tax charge should be based on the actual taxes a business would pay on a standalone basis excluding any tax relief for interest payments. (he ad#ustment to tax to exclude relief on interest should be calculated using the statutory tax rates applicable in the territories where interest is paid. (ax relief on interest is excluded to be consistent with the use of profit before interest +or trading profit, in the NCV calculation. 3/ere *rou0 effecti-e rates s/oul. be use. (he -standalone/ principle may be overruled for particular territories where use of the !roup effective rate for that territory is considered appropriate to encourage tax minimisation. (his is most common where the !roup is in a chronic loss situation in a particular territory. (he !roup (axation Controller will decide when it is appropriate to use !roup effective tax rates rather than standalone rates. (!(!" E9ce0tional Amortisation Ta9 relief calculation t the time of the creation of an exceptional charge' the tax relief on the charge may only be available as an estimate' but this estimate should still be used to calculate the post tax amount to be capitalised and amortised. (he estimate is not then generally revised when actual tax data becomes available.

Correction to ta9 relief on e9ce0tional correction to the capitalised amount may be re2uired if the tax estimate was materially incorrect +at least L;m,. If' after discussion with Controllers Bepartment' a correction is considered necessary' there will be no restatement of

previously reported NCV figures' instead a correction will be made to the capitalised amount in the current year and the revised balance amortised over the period remaining of the original 3 years. A.<ustin1 for ma<or un.er>o-er s0en. on e9ce0tional 0ro<ects In the case of significant over spend on an exceptional pro#ect' the over spend would either lead to a further exceptional charge % in which case the charge would be capitalised and amortised in the normal way % or % if the over spend was not large enough to warrant exceptional treatment $ the charge would be expensed to trading in the year incurred. In the case of a significant under spend' the correction would be handled in the same way as the tax relief correction above. (here would be no restatement of previously reported NCV figures' instead a correction would be made to the capitalised amount in the current year and the revised balance amortised over the period remaining of the original 3 years. (!(!+ R?$ E90en.iture (here is provision within the definition of NCV for ma#or *0B expenditure to be capitalised and amortised using a similar method to exceptional expenditure. (his would only apply where the expenditure represented a ma#or step%out pro#ect that had been agreed with the ICI 4xecutive. (he general rule for *0B expenditure is that it is expensed as incurred. (!(!% /are/ol.er Value Net Assets an. t/e ca0ital c/ar1e

Calculation of a-era1e )V net assets! (he capital charge is the sum of 2uarterly capital charges calculated on a 2uarterly average )CV Net assets. (he 2uarterly average will in most cases be a straight average of prior 2uarter and current 2uarter closing assets. In most cases this is an ade2uate approximation to a daily average of assets. Cowever' where a material event affecting asset values has ta"en place during the 2uarter such that the simple 2uarter to 2uarter average is misleading +for example if the event too" place on the last but one day of the 2uarter, the average calculation should be ad#usted to ensure it reflects the actual timing of the event. material event is defined as affecting asset values by more than L;5m. (he most common example of this would be the ac2uisition or disposal of a business. Assets un.er construction! ssets under construction are only to be excluded from net assets where the sanction value on an individual asset exceeds !1. ;3m. @nce construction is complete the value of the asset to be amortised and included in shareholder

value net assets should include the rolled up capital charge on the amounts held in the suspension account during construction. 3ACC Calculation of the !roups A CC is set out in the !oal )etting manual available from !roup Compensation and 1enefits. lthough the actual !roup A CC will vary as interest rates and other external factors change' for the purposes of NCV A CC will be "ept constant at 65< unless there is a significant and long term change to the !roups actual A CC.

Fi1ure + $efinition of terms use. for t/e Performance *ro2t/ Plan

(he summary definitions below are provided for 2uic" reference only. (he terms are fully explained within section 3 of this manual. &or the ()* related concepts reference should also be made to the goal setting manual.

Me.ian T R

(he total shareholder return re2uired to reward cost of e2uity. @ver the long run this would lead to ICI being the median ()* performer amongst its peers. ICIDs current cost of e2uity is 6;<.

u0erior T R

(he total shareholder return re2uired for upper 2uartile performance within the peer group. *eference to historical data has established the spread between median and upper 2uartile to be 8< on average. )uperior ()* is therefore the cost of e2uity plus 8<. (otal future NCV re2uired to meet the Hedian = )uperior ()* ob#ective. (his total future NCV is profiled over time for the purposes of comparing NCV growth over the strategic plan time horiEon to ()* goals.

NCV re=uire. for Me.ian > u0erior T R

NCV increment for su0erior T R

(he difference between NCV re2uired for )uperior and Hedian ()*. >sing the NCV time profile referred to above this increment is calculated for the 3 year period of a .!..

T/res/ol.

Cumulative NCV over the 3 years prior to the first year of a .!.' restated to be on a comparable basis to the targets.

Tar1et NCV

Cumulative NCV' ta"en from the business strategic plan' for the 3 years of the .!.. pproval of the businessD strategic plan will depend on its overall NCV growth being consistent with the NCV re2uirement for median ()* performance. (arget NCV plus the -NCV increment for superior ()*/ as defined above. (otal NCV delivered over the 3 years of the plan less threshold. (arget = Haximum NCV growth is (arget = Haximum NCV less threshold . (he NCV growth re2uired to achieve a unit value of L;.35 .oint is set to give a relatively low reward to growth #ust above the threshold' with the reward increasing as growth approaches target.

Ma9imum NCV NCV *ro2t/

Point A

P*P Units

1onus plan members are awarded a number of .!. units dependent on their bonus entitlement. (he units have a potential value from L5 to L;5 +or M5 to M;55 for >) Bollar based schemes, (he actual value is determined by NCV performance over the 3 years of the .!..

" NCV MEA UREMENT AN$ T)E P*P

)ection II gives a full definition of NCV and contains sufficient information for NCV to be calculated for any particular year or 2uarter. >sing NCV for the purposes of the .!.' however re2uires a more comprehensive measurement framewor". (he .!. re2uires performance to be measured on a comparable basis over a : year period +3 year threshold and the 3 years of a bonus plan, and then assessed' also on a comparable basis' against a target established up to 4 years earlier. chieving comparable performance measurement over this timeframe re2uires ma"ing a number of ad#ustments to eliminate factors that are not related to business performance. In ma"ing these ad#ustments' however' there is a need to stri"e a balance between simplicity and accuracyG (o be motivational the measure must be simple enough to be readily understandable by the business' but the scheme must also be fair with NCV seen to correspond to -real/ performance delivery rather than being an academic calculation. (he lin" between business results' NCV and bonus payouts must be clear and easily communicated for the scheme to have credibility. (he scheme needs to be simple to administer with no re2uirement for extensive accounting wor" to calculate measures and payouts.

T/is section co-ers@ Cow .!. targets are initially established and expressed using NCV. Cow actual NCV performance is compared to target to establish bonus payouts Ahat ad#ustments are re2uired to compare actual NCV performance to target Ahat the .!. threshold is and how it should be established.

Fi1ure %

Establis/in1 NCV tar1ets an. t/e P*P Pa7out *ra0/ ettin1

;553 663 643 35 ;554 635 6:3 33 CumDl 355 :;3 6;3

Tar1et

T/e to0 : .o2n a00roac/@ out0ut of T R base. 1oal settin1 mo.el ;555 ;556 ;55; NCV re2uired for median ()* 95 83 655 NCV re2uired for superior ()* 83 653 6;3 Increment for superior over median ()* 63 ;5 ;3 (otal increment for 55%5; plan :5

T/e bottom : u0 a00roac/@ strate1ic forecast as submitte. b7 business ;555 ;556 ;55; ;553 NCV :3 75 77 6;5

;554 633

CumDl 359

Mana1ement re-ie2 @verall' for the 3 year plan' the strategic forecast shows the business delivering cumulative NCV comparable to the top%down calculation of target performance. (he strategic plan figures are therefore acceptable as the basis for the .!. targets.

P*P $efinition an. t/e 0a7out 1ra0/

T/e follo2in1 fi1ures t/erefore .efine t/e AA:A( P*P (hreshold )trategy &orecast 6779 6778 6777 CumDl ;555 ;556 ;55; 43 3; :5 633 :3 75 77 79%77 (hreshold 633 3/ere
(he NCV figures for ;555%;55; are ta"en from the strategic forecast (arget grow th is cumulative NCV from the strategic f orecast less threshold Haximum grow th is target plus NCV increment re2uired for superior over median ()* N.oint N J NCV re2uired for unit value of L;.35 on straight line basis from maximum through target

CumDl ;34

55%5; )trategy ;34

(arget !rowth 77

Hax !rowth 637

;5
P*P Unit Value B

Haximum

637

63
(arget

65 3 5 5
N.oint N

77 34 5
35 655
NCV *ro2 t/ Bm

635

;55

"!#

Tar1et ettin1Tar1et ettin1

NCV goals for the .!. are set using both a top%down perspective % based on investor expectations of ICIs future performance % and a bottom%up perspective $ based on a strategic review. (he top%down goal%setting approach uses the theory of economic value added to translate ICIs ()* goals into NCV goals at the !roup and business levels. (arget performance for ()* purposes is defined as ICI achieving median ()* performance within its peer group. @ver the long run ICI will achieve median ()* performance if it delivers a ()* e2ual to its cost of e2uity +6;<,. )uperior performance is defined as ICI achieving top 2uartile performance within the peer group. *eference to historical data shows that on average the extra ()* re2uired for upper 2uartile over median performance is 8<. &or both median and superior performance' a calculation is made of the total future NCV re2uired to meet the stated ()* goals . (he bottom%up approach % involving the preparation of strategic plans by each business % ensures that financial pro#ections are based on strategic and operational reality. (he figures used in establishing .!. target performance will normally be the NCV forecast included in the business approved strategic plan. Cowever approval of the strategic plan depends in part on a review of the acceptability of the plans forecast against the output of the top%down model. Calculating the NCV maximum figure re2uires the output of the top%down ()* model. @ne of these outputs is the extra NCV re2uired over and above median ()* performance to deliver superior ()* performance. (his same NCV increment is added to the strategy based NCV target to produce the NCV maximum. (he .!. figures for target and maximum performance are expressed in terms of NCV growth rather than absolute NCV' where NCV growth is e2ual to cumulative NCV forecast for the 3 years of the plan less cumulative NCV delivered in the 3 years previous to the plan. (his 3 year historical NCV is "nown as the threshold and the rules for its calculation are given in section 3.3. &igure 3 opposite shows how the figures from the top%down approach and bottom%up approach are ta"en and converted into a .!. definition and a .!. payout graph. Hore detail on the theory of the top%down approach and its application is given in the !oal setting manual available from !roup Compensation and 1enefits.

&igure :

Establis/in1 NCV tar1ets an. t/e P*P Pa7out *ra0/ Alternati-e calculation for 0oint A

In this example the difference between target and threshold is less than the difference between superior and target. In order to achieve the desired graph shape % with a lower payout ratio for performance #ust above threshold % this scenario re2uires the alternative definition of point . (he alternative definition for point sets the unit value of L;.35 e2ual to half target NCV growth.

AA:A( P*P fi1ures 79%77 (hreshold 683 )trategy &orecast ;556 ;55; 75 77 (arget Hax !rowth !rowth :7 647

;555 :3

CumDl ;34

3/ere (hreshold is cumulative NCV over 3 years prior to this plan (he NCV figures for ;555%;55; are ta"en from the strategic forecast (arget growth is cumulative NCV from the strategic forecast less threshold Haximum growth is target plus NCV increment re2uired for superior over median ()* N.oint N J Calf NCV growth re2uired for target

;5
P*P Unit Value B

Haximum

647

63 65 3 5 5 N.oint N (arget

:7

34.3 5
35 655
NCV *ro2 t/ Bm

635

;55

"!(

Translatin1 tar1ets to a P*P 0a7out 1ra0/

Hembers of the .!. bonus scheme are awarded a number of .!. units for each plan that they participate in. Bepending on the performance of their business these .!. units have a potential value at the end of the plan in the range L5 to L;5 +or M5 to M;55 for plans with established in >) Bollars,. (he units will have 5 value if performance over the 3 years fails to exceed the threshold' i.e. the business fails to generate any NCV growth in the 3 years of the plan compared to the previous 3 year history. Belivering target growth will result in a unit value of L65. Belivering maximum growth will give the maximum unit value of L;5.

&or performance between the points defined above' reference needs to be made to the .!. >nit Value !raph +see &igure 3,. (arget and maximum performance on the graph are connected using a straight line. &or performance below target the line is "in"ed around a -point / where -point / is the NCV growth re2uired to achieve a unit value of L;.35. (he "in" means that only a relatively low reward is available for NCV !rowth #ust above threshold with an increasing rate of reward available as performance approaches target. .oint in most cases is defined by extending the straight line between maximum and target bac" until it reaches a unit value of L;.35. Cowever' where the gap between target and maximum performance is e2ual to or greater than the gap between target and threshold' this rule will not produce the desired graph shape. In this circumstance -point / sets the NCV growth re2uired for unit values to reach L;.35 to be half the target NCV growth. +see &igure :,. "!"

&igure 9

im0lifie. com0arison of actual 0erformance to tar1et

Performance *ro2t/ Plan Tar1ets 79%77 (hreshold 633 Com0arison to actual ctual NCV Variance (AAA :; :" (AA# 79 & (AA( 663 #C CumDl ;94 (A )trategy &orecast ;556 ;55; 75 77 (arget )uperior !rowth !rowth 77 637

;555 :3

CumDl ;34

For t/e 0ur0oses of calculatin1 t/e 0lan -alueD NCV 1ro2t/ ac/ie-e. is e=ual to t/e total -ariance to 0lan a..e. to t/e tar1et 1ro2t/ fi1ure! In t/is case a -alue of B##'m Plottin1 NCV 1ro2t/ of ##' on t/e 0a7out 1ra0/ 0ro.uces a unit -alue of B#"!""

;5
P*P Unit Value B

Haximum ctual

637

63 65 3 N.oint N 5 5 (arget

667 77

34
655
NCV *ro2t/ Bm

5
35 635 ;55

"!+

Com0arin1 actual 0erformance to tar1et

In a simplified world where no ad#ustments were necessary to compare actual performance against target' the following would be the procedure for measuring .!. performance. s each year is completed NCV delivered in that year is compared to the NCV forecast for the year. ny variance' positive or negative' is then -ban"ed/ and added to any previous completed years of the plan. @nce -ban"ed/ that years variance to plan is finalised and does not need to be revisited when the other years of the plan are completed. fter 3 years a total variance to the target will be established and used as a means of calculating the .!. unit value for that plan. Continuing the example used in figure 3' if NCV performance in the first year was :;' that would be 3 behind the forecast for that year and so a negative variance of 3 would be -ban"ed/. In the next year NCV of 79 is e2ual to a positive variance of 9 and in the third year the variance is 6:. (his gives a total variance to target of O;5. (he .!. payout value can then be calculated by wor"ing out the unit value e2uivalent to NCV growth of 667 +77 O ;5, in this case L63.33. +see figure 9,. "!% A.<ustments re=uire. in com0arin1 actual 0erformance to tar1et

In reality a number of ad#ustments will be re2uired to ensure that actual performance and targets are on a comparable basis. In order to guide decisions on what these ad#ustments should be and on how the ad#ustments should be made the following principles have been appliedG a5 A.<ustments s/oul. be 8e0t to a minimum and only made where they are clearly necessary to retain the lin" between reward and -real/ business performance. (he test for a proposed ad#ustment is thereforeG Is it material $ defined as impacting NCV by KL;m If the ad#ustment is made' does that produce a result for the .!. which is clearly more consistent with the real value created by a business than without the ad#ustment. If the case for an ad#ustment is not clear the ad#ustment should not be made. b5 3/ere a.<ustments .o /a-e to be ma.e t/e im0act of t/ese s/oul. be communicate. an. a1ree. as earl7 as 0ossible . Betails of the ad#ustments currently recognised as necessary for .!. performance measurement follow.

"!%!# A.<ustments to actual results NCV will continue to be reported as part of the normal 2uarterly management information submitted by a business to the centre. +&or reporting instructions see ppendix 4.6,. &or this management reporting' NCV will follow the current management reporting conventions i.e. results will be translated at the prior years average exchange rates and actual' budget and PQ will all be reported for a constant population. Ahere possible ad#ustment to the normal 2uarterly reported NCV figure will be avoided. 1usiness managers should "now that the NCV figure in their

management reports will be the NCV figure used for .!. bonus purposes. Creating one or more alternative measures of NCV will only create confusion. Non 0erformance ta9 items! (he main area where it may be necessary to ad#ust reported NCV will be where the tax charge for the year has been influenced by non performance items. Non performance tax items are influences on the tax charge that are clearly unrelated to the business performance activities of a particular unit. (hese are most li"ely to occur whereG !roup provisions have been used to offset tax liabilities where the original provision had no relation to a business activity. In the early years of the .!.' any impact from tax audit assessments will also be excluded where the tax audit is for years preceding the introduction of the .!.. d#ustment will not be made for changes in statutory tax rates. (hese are considered part of the normal course of doing business. d#ustments relating to the use of !roup effective tax rates are covered below under ad#ustments to targets. d#ustments to exclude tax relief for interest payments and for using standalone tax rates should already have been made for the purposes of reporting the normal 2uarterly NCV number +see reporting instructions,. Ot/er 0ossible a.<ustments! ny other suggested ad#ustments to actual NCV will be considered against the principles for ma"ing ad#ustments outlined in section 3.4.

&igure 8

E9c/an1e a.<ustment
(he exchange ad#ustment will be calculated using the currency brea"down of a businessD results for the previous full year as submitted to ControllerDs Bepartment as part of the nomal &orm data collection. NCV is not itself collected by currency' but operating profit and net assets are' so together with "nowledge of territory tax rates' the exchange effect on NCV can be derived as followsG T/e e9c/an1e effect 2ill be 2or8e. out for eac/ ma<or currenc7 as exchange effect on profit after tax J effect on operating profit x +6 % territory tax rate, exchange effect on capital charge J %6 x +effect on net op assets x A CC, where there are significant exceptional items in other currencies the exchange effect on these will be calculated and added in separately E9am0le calculation for t/e calculation of t/e e9c/an1e a.<ustment for (AA# (he target for ;556 was set using 6777 average exchange rates' these rates are shown below ;556 results will be reported at ;555 avg rates so ;555 avg rates are the actual rates (he currency analysis of profit and assets would be based on the full year ;555 &orm data

currency

exchange rates ;555 actuals by currency exchange effects 6777 avg ;555 avg operating op net tax profit capital total for target for actual profit assets rate after tax charge NCV ;.79 7.7: 6.:; 684.55 3.;9 65.7: 6.48 ;66.:5 33 ;65 665 6735 6:9 6455 :55 63555 ;5< 4;< 3:< 4;< %5.7 %6.6 4.6 %5.8 #!" 5.3 6.3 %3.3 5.7 :A!, :A!" A!( A!C A!# A!%

B4H &*& >)B R.Q Total

(he total exchange effect +L5.3m, is then applied proportionately to the target NCV for the year

@riginal NCV .rior Q* 4xch effect 4xch as < NCV Tar1et e9c/an1e a.<ustment

;555 .rior Q* :5 5.3 A!'E

;556 (arget 75 5.7< A!,

"!%!( A.<ustments to tar1ets "!%!(!# E9c/an1e 4xchange rate movements impact business NCV in two ways. Translation exchange refers to the impact of moving exchange rates on the translation of local currency operating unit results into the currency of the international business. Transaction exchange refers to the impact of moving exchange rates on the local currency results of a particular operating unit' for example through changes in the cost of imported raw materials or the price of export sales priced in a foreign currency.

(he .!. framewor" re2uires the translation impact of exchange rate movements to be ad#usted out of performance comparisons. )hort term exchange rate movements can have 2uite significant effects on the consolidated value of a business results. (hese effects are not related to the -underlying/ performance at the operating unit level. (he impact of transaction exchange effects is not excluded within the .!. framewor". (he exchange rate exposure of an operating unit is part of the ris" profile of that unit and can' to some extent' be managed through hedging

strategies. (ransaction impacts are also sometimes difficult to distinguish from general pricing pressure or raw material price inflation. Calculatin1 e9c/an1e a.<ustment for t/e P*P 4see fi1ure ,5 .recise calculation of the exchange difference between targets set at the time of the strategy review and actual figures reported up to 4 years later using very different exchange rates could be difficult and complex. (he principles of NCV measurement for the .!. outlined state that a simple' clear solution is preferable to a highly complex one as long as the simpler solution is materially accurate +KL;m NCV impact,. (he following method will therefore be adopted for the calculation of exchange ad#ustmentsG (he ad#ustment will be calculated at the beginning of the year to which it applies. It will be calculated by Controllers based on the currency analysis of the prior years business results already available to Controllers through the &orm reporting system. Controllers will retranslate prior year results at old and new exchange rates and apply the difference proportionately to the target for the coming year. (he calculation will be shared with and confirmed for each business before being finalised. n example of the calculation is shown opposite.

&igure 7

*rou0 effecti-e ta9 rate a.<ustment

In this example the !roup (axation Controller has decided that' from the beginning of ;556' businesses should use the !roup 4ffective *ate for (erritory S rather than standalone rates. (he !roup effective rate is 65< whereas businesses have been using a standalone rate of 33<. Calculation of the effect of the change based on ;555 operating profits ;555 op profit ;3 73 #(A )=alone rates 33< ;5< *evised .rofit rates impact 65< :.3 ;5< 5 C!"

(erritory S @thers Total

(he tax ad#ustment to be applied to the ;556 target is therefore L:.3m &or the ;55; target the ad#ustment would be recalculated at the beginning of ;55; using ;556 operating profits

"!%!(!( Po0ulation (he .!. framewor" re2uires actual performance and targets to be compared using a constant population. (his means that an ad#ustment to target will always be calculated on completion of a material ac2uisition or disposal. A.<ustin1 for an ac=uisition (he ad#ustments to target NCV will be calculated using the NCV forecast for the ac2uired entity included in the ac2uisition case. (he ad#ustment will be included from the date of ac2uisition and not bac"dated to the beginning of the year in which the ac2uisition was made. A.<ustin1 for a .is0osal (he ad#ustments to target NCV will be calculated using the NCV forecast for the divested entity included in the divestment case. Normal procedure will be for the disposal to be stripped out of reported NCV from the beginning of the year in which the disposal is made' in which case a full years NCV will also be ad#usted in comparison to target. n alternative method is to ad#ust only from the point of disposal not from the beginning of the year. business may propose the use of this alternative method if they deem it fairer. In this case they should raise the issue with Controllers who will decide on which basis to ma"e the ad#ustment. (he advantage of this approach to population ad#ustments is its simplicity. (he alternative of allowing the NCV impact of ac2uisitions and divestments to go towards the meeting of business NCV growth targets would be more complex and would be unli"ely to lead to any improvement in the incentives for ma"ing the right portfolio decisions. Transfer of entit7 across business boun.aries Ahere responsibility for a business unit transfers across international business boundaries' targets for the affected international businesses would be ad#usted for the agreed NCV forecast for the transferring unit at the time of the transfer. "!%!(!" Ta9 effecti-e ta9 rates s described in section II' the !roup (axation Controller may at times decide that !roup effective rates should be used for the calculation of the NCV tax charge rather than a standalone rate. Ha"ing the transition to using a !roup effective rate can have a substantial impact on a business NCV' however it is also clearly a change that is entirely unrelated to the performance of that business. (he impact of a change to !roup effective rates or from !roup effective rates bac" to standalone rates is therefore to be excluded for .!. performance measurement purposes. &or the years affected by the change the ad#ustment will be calculated based on prior year profits and then applied to the current year. (he reason prior year profits would be used is to enable the ad#ustment to be calculated and communicated at the beginning of the year +consistent with the principles in section 3.4 above, that if affects. n example of this calculation is given opposite in figure 7.

"!%!(!+ Asset re-aluation In the event of a business assets being revalued and the depreciation charge conse2uently affected' an ad#ustment would be made to target to neutralise the impact.

"!%!(!%

"!%!(!C Accountin1 tan.ar.s s and when accounting standards change the !roup will normally wish to update its management accounting practices to "eep internal accounts consistent with external reporting re2uirements. s internal management accounting conventions change it will be necessary to include an ad#ustment in comparing the .!. (argets to current years NCV. (his manual cannot cover all the possible calculations necessary for all the possible changes in accounting standards. (he general principle' however' is that the ad#ustment would be 2uantified based on its impact on the previous years actual results using a similar method to the tax ad#ustment above. "!%!(!& Ot/er 0ossible a.<ustments ny other suggested ad#ustments to NCV targets will be considered against the principles for ma"ing ad#ustments outlined in section 3.4.

"!C

T/res/ol.

.!. targets are expressed in terms of NCV growth. NCV growth is e2ual to cumulative NCV over the 3 years of the plan less cumulative NCV delivered in the 3 years prior to the plan. (his 3 year historical NCV is the threshold. @ne of the principles of the .!. is that a plan only begins to have any value to its participants if NCV performance exceeds the threshold. Cowever for performance levels #ust above the threshold the rate of return is deliberately lower than it is once performance starts approaching target. !iven this low return for performance #ust above threshold' it is not necessary to conduct an extensive

history restatement exercise for the purposes of the getting the threshold exactly right. Cowever the threshold still needs to be on a comparable basis to the .!. targets and so some ad#ustment is li"ely to be necessary. @nce a particular .!. has been launched it is not then necessary to "eep ad#usting the threshold to be on a comparable basis to actual performance. number of ad#ustments may be necessary to restate historical NCV to be comparable to the NCV targets before a plan is launched. Cowever' for the reasons given above' a high level of materiality can be applied in deciding what ad#ustments really need to be made and to what degree of accuracy they must be calculated. &or the ad#ustments most li"ely to be necessary' the following notes provide guidance on their calculation. Ac=uisitionsG It is not necessary to -bac"fill/ data for recent ac2uisitions using the historical performance of that unit prior to ac2uisition. c2uisitions can be added into threshold figures based on their full year performance in the year they were ac2uired. (his full year performance can either be applied -as is/ to earlier years or by bac" calculating to earlier years using an estimated growth rate. $i-estments@ Bivestments should be subtracted from all years of the threshold. If full information is not available for earlier years' estimates are acceptable based on years for which data is available. E9c/an1e@ n exchange ad#ustment similar to that used for comparing actuals to target should be used to calculated the exchange difference on retranslating previous years results using the exchange rates on which the targets are based. Non 0erformance ta9@ ny non performance tax items should be excluded from the tax figures used in threshold NCV calculations. (his will include both the impact of any change between !roup effective rates and standalone rates and other non performance items as described under the section 3.4.6. Accountin1 stan.ar.s@ )hould accounting standards have changed during the period of the threshold' ad#ustment will be re2uired to ensure that all years are calculated as if the current accounting standards had applied throughout. 3ACC@ (he A CC used for .!. calculations will only be revised if there has been a long term' significant change to ICIs cost of capital. In this case the threshold capital charge figures would be recalculated using the new A CC.

&igure 65

am0le P*P Pro1ress Re0ort

Februar7 (AA( u0.ate for AA:A" 0lan Performance *ro2t/ Plan Tar1ets 79%77 (hreshold 633 55%5; CumDl ;34 (arget )uperior !rowth !rowth 77 637 (AAA C% (AA# 'A (AA( ''

@riginal strategic plan forecast A.<ustments to tar1et 4xchange +77 avg to 55 avg, 4xchange +77 avg to 56 avg, c2uisition of business S Bivestment of business Q Change to !roup 4ffective *ate in territory S (otal d#ustments A.<uste. Tar1ets Actual Variance to 0lan Cumulati-e -ariance to 0lan Forecast for remainin1 7ears of 0lan Pro<ecte. total cumulati-e -ariance to 0lan

6 %3 %: : %; ,, #A" 63 ;4 663 ", ; ; %65 8 ; #A#

%4 %4 C# &A 7 7

If 0erformance is on 0lan for remainin1 7earsD unit -alue 2oul. be B #"!AA If forecasts are met for future 7earsD unit -alue 2ill be B #+!&%

;5 63 65 3 5 5 5 35 655
NCV *ro2 t/ Bm

Haximum
pro#ected performance vs plan

637

639

P*P Unit Value B

actual performance vs plan

6;3

(arget

77

N.oint N 34 635 ;55

"!&

Full e9am0le of a P*P 0ro1ress re0ort

(he wor"ed example opposite +figure 65, shows how a .!. progress report will be used to compare performance on an ongoing basis against target and how the ad#ustments necessary will be clearly presented in ma"ing the comparison. In this example the .!. progress report is being issued at the beginning of ;55;. (he business has therefore completed two years of the plan. (he progress report shows Q(B progress over those two years and also communicates what ad#ustments will be made in comparing ;55; actuals to target. @n the .!. payout graph two -pro#ected/ values have been plotted. @ne assuming the plan to date variance remains unchanged to the end of the plan +i.e. ;55; comes in on plan,' the second uses the most up to date forecast for ;55; +most li"ely to be the budget, and predicts the payout for the plan if the ;55; budget = forecast is met. (he ad#ustments will all have been made in accordance with the principles outlined in this manual. summary of the ad#ustments made follows. E9c/an1e@ &or ;555 no exchange ad#ustment is necessary as both targets and actuals were calculated using 6777 average rates. &or ;556 the exchange ad#ustment is for the difference between target rates +77 average, and the rates for ;556 reporting +55 average, &or ;55; the exchange ad#ustment is for the difference between target rates +77 average, and the rates for ;55; reporting +56 average, Ac=uisition new business was ac2uired on the 6st Ruly ;556. (he target ad#ustment is based on the ac2uisition case and includes the : months post ac2uisition in ;556 and full years thereafter. In this case the ac2uired unit is forecast to ma"e L+3,m NCV for the : months post ac2uisition improving to L;m in ;55;. $is0osals unit was divested with effect from the 6st pril ;555. s part of normal management reporting re2uirements its results have been excluded from actuals bac"dated to the beginning of ;555. (argets have been ad#usted to exclude NCV based on the NCV forecast for the business at the time of disposal. C/an1e to *rou0 Effecti-e Rate s in the example given earlier in the manual' the !roup (axation Controller has decided that with effect from ;556' businesses should be using the !roup 4ffective *ate of 65< for territory S. (he ad#ustment to target is calculated based on prior years profits as shown in figure 7. Accountin1 stan.ar.s

In this example no ad#ustment is re2uired for changes in accounting standards.

"!, A t70ical 7ear b7 7ear timetable (he following year by year timetable gives an indication of the .!. related wor" that would happen each year to help gain an impression of how .!. will operate in practice.

Acti-it7
(AAA E TABLI ) TAR*ET FOR T)E P*P FOR AA:A( AN$ A#:A" *un goal setting model to calculate NCV growth re2uired to meet ()* ob#ectives Complete strategy review for years ;555%;554 gree threshold for 6779%6777 &inalise NCV growth targets using outputs from goal setting model and strategic forecast. Paunch .!. for 55%5; (AA# UP$ATE EFI TIN* PLAN >pdate 55%5; .!. progress report to show actual ;555 NCV. Calculate exchange ad#ustment for ;556. Calculate and communicate any further ad#ustments "nown about for 56%53 e.g. from disposals' ac2uisitions or non performance tax items. Issue .!. progress reports for 55%5; showing -ban"ed/ variance for ;555 and any new ad#ustments +including the ;556 exchange ad#ustment, to be applied to ;556 and ;55;. LAUNC) P*P FOR A#:A" Calculate threshold for 78%55 for purposes of 56%53 plan Paunch .!. for 56%53

Res0onsible
Centre 1usiness .roposed by centre = reviewed by business. Centre Centre

Centre = business Centre with business input 1usiness with centres review Centre .roposed by centre = reviewed by business. Centre

43

(AA( UP$ATE EFI TIN* PLAN >pdate 55%5; .!. and 56%53 .!. progress reports to show actual ;556 NCV. Calculate exchange ad#ustment for ;55;. Calculate any further ad#ustments "nown about for years ;55; 0 ;553 e.g. from disposals' ac2uisitions or non performance tax items. Issue .!. progress reports for 55%5; and 56%53 showing -ban"ed/ variance for ;556 and any new ad#ustments to be applied to future years. E TABLI ) TAR*ET FOR T)E P*P A(:A+ AN$ A":A% *un goal setting model to calculate NCV growth re2uired to meet ()* ob#ectives Complete strategy review for years ;55;%;55: gree threshold for 6777%;556 &inalise NCV growth targets using outputs from goal setting model and strategic forecast. Paunch .!. for 5;%54. (AA" FINALI E PLAN AA:A( &inalise 55%5; .!. progress report with ;55; actual NCV. Confirm value of units and action bonus payments. UP$ATE EFI TIN* PLAN >pdate 56%53' and 5;%54 .!. progress report to show actual ;55; NCV. Calculate exchange ad#ustments for ;553. (wo exchange ad#ustments are re2uired with targets for the 56%53 plan at 77 avg rates and targets for the 5;%54 = 53%53 plan at 56 avg rates. Calculate any further ad#ustments "nown about for 53%53 e.g. from disposals' ac2uisitions or non performance tax items. Calculate threshold for 55%5; for purposes of 53%53 plan Issue .!. progress reports for 56%53 and 5;%54 showing -ban"ed/ variance for ;55; and any new ad#ustments to be applied to future years Centre = business Centre with business input 1usiness with centres review Centre = business Centre 1usiness .roposed by centre = reviewed by business. Centre Centre

Centre Centre Centre = business Centre with business input 1usiness with centres review .roposed by centre = reviewed by business. Centre = business

Net Contribution to Value Performance Measurement Manual

Net Contribution Anal7sis

ccDt No Bescription ;5575 ;5574 ;5579 ;5935 ;59:3 ;5995 (rading .rofit Income from ssociates &re2uency Honthly Honthly Honthly Tuarterly Tuarterly Tuarterly Notes subtotal from .0P input input subtotal input input calculated for the 2uarter as 6=4 of avg shv net assets x A CC subtotal

@perating .rofit mortisation of Cap exceptionals (axation Capital Charge

;5983

Net Contribution

Tuarterly

Asset anal7sis
ccDt No Bescription 95535 35394 35393 3539: 35399 35374 3537: 35379 35378 35377 &ixed ssets +N1V, Investment in ssociates (otal &ixed ssets @perating Aor"ing Capital Net @perating ssets &re2uency Honthly Honthly Honthly Honthly Honthly Notes input input subtotal subtotal from wor"ing capital detail input 3539: O 35393 input only re2uired if *0B costs capitalised input subtotal 2uarter to 2uarter average of 35378

Capital expend under constr K L;3m Honthly Capitalised Intangibles !oodwill on ac2uisition )CV Net ssets ssets Honthly Honthly Honthly Tuarterly

verage )CV Net

49

+ APPEN$ICE
+!# tan.ar. instructions for re0ortin1 NCV .ata

Fre=uenc7 (rading profit is reported monthly as part of the normal ICI management reporting re2uirements. NCV' however' is only reported 2uarterly and so the lines between trading profit and NCV are only re2uired 2uarterly. (hese are taxation' exceptional amortisation and capital charge. &ull year NCV forecasts for the current year are also re2uired 2uarterly and NCV is included as a "ey component of the budget agreed with an international business each year. In0ut Forms copy of the relevant parts of the standard management input forms is shown opposite +figure 66, giving the account numbers for each line of the NCV calculation. 4ach input line is defined within )ection II of this manual with further detail and references to !roup ccounting Panguage in 4.; below. Ta9 re0ortin1 for statutor7 an. NCV 0ur0oses &urther detail is available from Controllers Bepartment or !roup (axation on the instructions and forms to be used for reporting tax in accordance with both statutory and NCV re2uirements. +!( References to 1rou0 accountin1 lan1ua1e

Befinitions of the "ey components of NCV are also included in the !roup ccounting Panguage. *eferences to these definitions are provided below. (rading .rofit + B 3 3 6 4, Income from ssociates is covered under ssociated >nderta"ings + B 4 6 3 6, @perating .rofit + B 3 3 6 :, 4xceptional mortisation + B 7 3 6, Capital Charge + B 7 3 ;, Net ssetsG )hareholder Value + B 7 ; ;, Aeighted verage Cost of Capital + B 7 ; 6,