What is Contributory Asset Charge (CAC) in MPEEM?

Full Explanation

MPEEM requires isolating the excess earnings attributable to a single intangible asset (usually customer relationships). To do this, you deduct charges for all contributory assets: working capital (fair return on cash needed to support operations), tangible fixed assets (fair return on machinery, buildings), workforce and workforce-related assets, and other intangibles (brand, technology). Each contributory asset is valued first, then assigned a fair return rate (often equal to the discount rate or WACC). For example, if customer relationship valuation requires £1M working capital supporting the customers, and the fair return on working capital is 8%, then CAC for working capital is £80K annually. Similarly, if £500K of technology supports the customer relationships, technology CAC might be £75K (at 15% return). The total of all CACs is deducted from total earnings, leaving the excess attributed to the subject asset. CAC is the most contentious part of MPEEM because determining what assets contribute and what returns they deserve is highly subjective. This is why MPEEM is applied last in a PPA exercise, after all other assets have been valued using other methods.

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