MAY 31, 2010

IDENTIFICATION OF CONTRIBUTORY ASSETS

AND CALCULATION OF ECONOMIC RENTS:
TOOLKIT
BEST PRACTICES FOR VALUATIONS IN FINANCIAL REPORTING - CONTRIBUTORY ASSETS - TOOLKIT

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Working Group on Contributory Asset Charges

Anthony Aaron, Chair Gregory Forsythe
Ernst & Young, LLP - Los Angeles, CA Deloitte Financial Advisory Services LLP - Pittsburgh, PA

Paul Barnes Mark Zyla, Vice Chair

Duff & Phelps, LLC - Philadelphia, PA Acuitas, Inc. - Atlanta, GA

Jim Dondero Jay Fishman, Steering Committee Oversight & Facilitator

Huron Consulting Group - Boston, MA Financial Research Associates Philadelphia, PA

Task Force (Steering Committee) on Best Practices for Valuations in Financial Reporting

Jay Fishman, Chair - Financial Research Associates Lee Hackett - American Appraisal Associates
Anthony Aaron - Ernst & Young, LLP Steve Jones - Mesirow Financial
Paul Barnes - Duff & Phelps, LLC Gerald Mehm - American Appraisal Associates
Carla Glass - Hill Schwartz Spilker Keller LLC Matt Pinson PricewaterhouseCoopers LLP
John Glynn - PricewaterhouseCoopers LLP

Contributors & Special Thanks

Dayton Nordin, Ernst & Young, LLP
Shawn Suttmiller, Deloitte Financial Advisory Services LLP
Carla Glass, Hill Schwartz Spilker Keller LLC
Lee Hackett, American Appraisal Associates

Special Thanks to Gary Roland, Duff & Phelps, LLC, the Primary Author of the Analysis Underlying this Toolkit.

The Appraisal Foundation Staff

David Bunton, President
John Brenan, Director of Research & Technical Issues
Paula Douglas Seidel, Executive Administrator

The Appraisal Foundation served as a sponsor and facilitator of this Working Group. The Foundation is a non-profit educational organization dedicated
to the advancement of professional valuation and was established in 1987 by the appraisal profession in the United States. The Appraisal Foundation
is not an individual membership organization, but rather, an organization that is made up of other organizations. Today, over 130 non-profit
organizations, corporations and government agencies are affiliated with The Appraisal Foundation. The Appraisal Foundation is authorized by the U.S.
Congress as the source of appraisal standards and appraiser qualifications.

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CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Supplemental Toolkit Introduction

This Toolkit was created as a companion piece to Best Practices in Valuations for Financial Reporting: The Identification of Contributory Assets and
Calculation of Economic Rents (the CAC Monograph), published under separate cover. The CAC Monograph was written to present best practices in
calculating contributory asset charges (CACs) when using the Multi-Period Excess Earnings Method (MPEEM) to value a subject intangible asset.

The CAC Monograph presents certain methods and techniques that the Working Group believes to be best practices in developing contributory asset
charges and includes a Comprehensive Example and Practical Expedient Example. This Toolkit is based on the same data used in the Comprehensive
Example but expands on that example by including additional detail. It is being provided as an example of a detailed framework to measure the
internal consistency of the various valuation analyses using these methods and a financial overlay. This Toolkit also provides examples of other specific
issues that were mentioned in the CAC Monograph but for which examples were not otherwise provided, allowing for comparison of alternative concepts
or simply providing more information.

It is important to note that this Toolkit is simply an illustrative example. These sample calculations are for demonstration purposes only and are
not intended as the only form of model or calculation, or final report exhibit, that is acceptable. In many cases, these calculations include details to
demonstrate a point and would not be expected in a typical analysis. It is NOT intended to represent the only (or best) way to perform a particular
analysis or to be used as a how-to formula. It is NOT intended as further advice on Best Practices but rather to provide examples. This Toolkit
example is based on the specific assumptions presented in the introduction or noted in the exhibits. A different set of facts and circumstances may
result in a modification of both judgment and/or application.

This Toolkit was developed by a Working Group comprising individuals from the valuation profession who regularly deal with this issue in the context
of valuations performed for financial reporting purposes (the same working group that developed the CAC Monograph). This Toolkit has no official or
authoritative standing for valuation or accounting.

This document was approved for publication by the Board of Trustees of The Appraisal Foundation on May 22, 2010. The reader is informed that the
Board of Trustees defers to the members of the contributory asset Working Group for expertise concerning the technical content of the document.

Questions on the development of this document can be addressed as follows:

Paula Douglas Seidel
The Appraisal Foundation
1155 15th Street NW, Suite 1111
Washington, DC 20005
202.624.3048 (phone); 202.347.7727 (Fax); [email protected] (email)

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Toolkit Example

This Toolkit Example demonstrates the concepts put forth in the CAC Monograph and applies them in a comprehensive manner to derive the Fair
Value of Customer Relationships based on the application of the MPEEM. In addition, this Toolkit provides a suggested process in the context of a
financial overlay to provide for internal consistency in a valuation analysis (as well as a potential alternative to the WARA analysis provided in the CAC
Monograph). The contributory assets included in this example are as follows:
Working Capital
Fixed Assets (Techniques A&B)
Assembled Workforce
Trade Name*
Intellectual Property*

*These assets contribute to the revenue stream used in the valuation of the customer relationships. However, because they are
valued by use of the relief from royalty method, this is considered a profit split and contributory asset charges are not applied.

Assumptions

The transaction is assumed to be an acquisition of stock (rather than assets) with a purchase price of $4,746;
The tax rate is assumed to be 40% based on the U.S. domiciled blended federal and state statutory rates;
The fair value of the working capital is assumed to be $285;
The fair value of the fixed assets is assumed to be $1,000 and there is no land;
The WACC is assumed to be 10%;
Long-term growth is assumed to be 3%;
The Trade Name royalty rate is assumed to be a gross rate of 5%;
The IP royalty rate is assumed to be a gross rate of 10%;
This Toolkit is not intended to address the issues inherent in arriving at market participant projected financial information. The analysis assumes
that the PFI represents the assumptions of a market participant because, among other things, all entity-specific synergies have been removed from
the projections (e.g., specific revenue or expense synergies).
Royalty rates presented in these exhibits are assumed to be gross rates wherein the licensor is responsible for the advertising and maintenance
R&D expenditures. This assumption was made to demonstrate the need to be consistent in the recognition of these expenses among the various
assets. Where the royalty rates are determined to be net of these expenses, such adjustments would not be required.
To the extent this analysis was performed as part of Step 2 of a goodwill impairment test the fair value of the reporting unit would be considered
the purchase price and the hypothetical transaction structure also is assumed to be the sale of stock rather than assets.
These examples assume that the purchase price (if a transaction has occurred) reflects the fair value of the subject entity. If and when it is
determined that the fair value of the entity differs from the purchase price, the analyses described in this Toolkit might be subject to adjustments
(see Section 4.3 of the CAC Monograph.)

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CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Process

All operating assets of a business contribute to the generation of the revenue and cash flow of that business. If the unit of valuation is viewed as the
entity as a whole with the maximum value of the group of assets derived through their continued use by the entity, the interrelationship of all assets
should be considered in a valuation analysis. CACs assist in properly apportioning the entitys cash flows among the component assets in the context
of a MPEEM, however they do not alleviate the need for the valuation specialist to assess other critical aspects of this apportionment. This Toolkit does
not address these other elements of judgment and incorporates assumptions in this regard. The purpose of this Toolkit is to provide an example of the
application of CACs in the context of the entity as a whole. The following processes or points are demonstrated in the exhibits:

Step 1:
A transaction may reflect certain elements of entity-specific synergies. This example assumes that all such specific synergies have been removed from
the purchase price and the prospective financial information (PFI) to arrive at market participant assumptions.

Step 2:
The internal rate of return (IRR) of the transaction, based on the market participant assumptions, is estimated and compared to the entitys weighted
average cost of capital (WACC). This Toolkit Example assumes that the transaction is a stock acquisition (Exhibit D-5 provides an example of the
calculation of the IRR in an asset acquisition) and that the IRR is equivalent to the WACC of 10%.

Step 3:
The PFI represents the prospective cash flows to be realized in the acquisition, including the tax benefits that would result from a restatement of the
tax basis of certain of the assets to fair value. The CACs are based on the fair value of the contributory assets which is inclusive of the tax benefit from
the basis restatement. Therefore, as the fair value of the contributory asset is inclusive of this tax benefit, the PFI also should be adjusted to include
it. These adjustments increase the Entity Value and result in an Adjusted Entity Value that is inclusive of these incremental tax benefits. In order to
maintain consistency between the PFI to be used in valuing the customer relationships and the fair value of the assets to which a CAC will be applied, the
PFI should be adjusted (if necessary) to include the cash flow benefits of the increase in the tax basis of the contributory assets. Such an adjustment also
might be addressed through the application of a deferred tax liability, however such an analysis adds significant complexities. A restatement of the tax
basis recognizes the need to value assets without reference to the tax structure of the transaction used to purchase the entity. For additional discussion
on the applicability of TABs see paragraphs 3.1.08 and 4.3.08 in the CAC Monograph and paragraphs 5.3.9 - 5.3.108 in the 2001 AICPA IPR&D Practice
Aid (2001 AICPA Practice Aid Series: Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software,
Electronic Devices and Pharmaceutical Industries). It should be noted that an update of this IPR&D Practice Aid was underway as of the finalization of
this Toolkit.

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Step 4:
The analysis is performed using the same rate of return for all assets to assure that all cash flows have been allocated to the assets and that the CAC
calculations are mathematically correct. This interim step of maintaining a constant rate of return and discount rate for all assets (in this example 10%)
eliminates the effect that stratifying the rates has on the present value calculations. In order to accomplish this financial overlay and reconciliation
to the Adjusted Entity Value the present value of excess earnings not related to a separately identified asset (unidentified excess earnings) is also
calculated. This analysis is provided in the Section A exhibits.

Step 5:
The analysis is changed to reflect appropriate rates of return and discount rates for the respective assets and to calculate the implied discount rate for
the unidentified excess earnings (a component of goodwill). This analysis is provided in Section B of the exhibits.

Step 6:
The appropriate TAB is applied to the identifiable intangible assets to arrive at fair value.

Acronyms

The following acronyms are used in the Toolkit:

AWF Assembled Workforce
DFCF Debt Free Cash Flow
DFNI Debt Free Net Income
EBIT Earnings Before Interest and Taxes
EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization
FV Fair Value
IP Intellectual Property
IRR Implied Internal Rate of Return
IRS Internal Revenue Service
PFI Prospective Financial Information
PV Present Value
R&D Research and Development
TAB Tax Amortization Benefit
WACC Weighted Average Cost of Capital
WARA Weighted Average Return on Assets

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TABLE OF CONTENTS
Section A: Financial Overlay and PFI Reconciliation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Exhibit A-1: Entity Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exhibit A-2: Tax Depreciation: Carry-Over Tax Basis of Fixed Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Exhibit A-3: Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Exhibit A-4: Adjusted PFI and Entity Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Exhibit A-4a: Reconciliation of Entity Value and Adjusted Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Exhibit A-5: Working Capital: Incremental Needs and Contributory Asset Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Exhibit A-6: Fixed Assets: Contributory Asset Charge Based on Technique A - Average Annual Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exhibit A-7: Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Exhibit A-8: Assembled Workforce: Growth Investment and Contributory Asset Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Exhibit A-9: Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Exhibit A-10: Trade Name Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exhibit A-11: Intellectual Property Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exhibit A-12: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance. . . . . . . . . . . . 14
Exhibit A-13: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . . . . . 15
Exhibit A-14: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . . 16
Exhibit A-15: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment. . . . . . . . . . . . . 17
Exhibit A-16: Income Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit A-17: Financial Overlay Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Section B: Stratified Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Exhibit B-1: Entity Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit B-2: Tax Depreciation: Carry-Over Tax Basis of Fixed Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Exhibit B-3: Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit B-4: Adjusted PFI and Entity Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Exhibit B-4a: Reconciliation of Entity Value and Adjusted Entity Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Exhibit B-5: Working Capital: Incremental Needs and Contributory Asset Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Exhibit B-6: Fixed Assets: Contributory Asset Charge Based on Technique A - Average Annual Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Exhibit B-7: Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Exhibit B-8: Assembled Workforce: Growth Investment and Contributory Asset Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Exhibit B-9: Revenue Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Exhibit B-10: Trade Name Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Exhibit B-11: Intellectual Property Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Exhibit B-12: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance. . . . . . . . . . . . 30

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Exhibit B-13: Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment . . . . . . . . . . . . . . . . 31
Exhibit B-14: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance . . . . . . . . 32
Exhibit B-15: Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment. . . . . . . . . . . . . 33
Exhibit B-16: Income Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Exhibit B-17: Financial Overlay Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Exhibit B-18: Weighted Average Return on Assets (WARA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Section C: Individual Asset Reconciliations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Exhibit C-1: Working Capital CAC and Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Exhibit C-1a: Working Capital CAC and Reconciliation (Stratified Rates). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Exhibit C-2: Fixed Asset CAC Based on Technique A - Average Annual Balance and Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Exhibit C-2a: Fixed Asset CAC Based on Technique A - Average Annual Balance and Reconciliation (Stratified Rates). . . . . . . . . . . . . . . . . . . . 39
Exhibit C-3: Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Exhibit C-3a: Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation (Stratified Rates). . . . . . . . . . . . . . . . . . . . . . . . . 40
Exhibit C-4: Assembled Workforce CAC and Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Exhibit C-5: Trade Name CAC and Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Exhibit C-6: Intellectual Property CAC and Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Section D: Miscellaneous Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Exhibit D-1: Non-Compete Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Exhibit D-1a: Non-Compete Agreements (Alternative Approach - Specific Asset Income Split) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Exhibit D-2: Favorable (Unfavorable) Leases or Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Exhibit D-3: EBITDA v. EBIT Comparison. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Exhibit D-3a: Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation (Tax-effected EBITDA). . . . . . . . . . . . . . . . . . . . . . . 50
Exhibit D-4: Mid-Period Adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Exhibit D-5: Adjusted Entity Value in an Asset Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Exhibit D-6: Negative Working Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Exhibit D-7: Gross Lease Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

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SECTION A:
FINANCIAL OVERLAY AND PFI
RECONCILIATION

This section of the Toolkit provides an example of the financial overlay and PFI reconciliation performed at a
consistent discount rate. The intangible asset to which a MPEEM is applied is the customer relationships asset.
This analysis results in the calculation of the value of the following assets (prior to the application of the TAB as
noted by an asterisk) which reconciles to the Adjusted Entity Value. Included in the exhibits is the application of
Technique A (Average Annual Balance) and Technique B (Level Payment) to the fixed assets. An analysis of the
following separately identifiable assets and unidentified excess earnings* are provided in the reconciliation:

Identifiable Assets:
Working Capital
Fixed Assets (Techniques A&B)
Assembled Workforce (component of goodwill)
Trade Name - Acquired Company*
Intellectual Property*
Customer Relationships*

Unidentified Excess Earnings - Aggregation of the following:

Trade Name - Acquiring Company
Future Intellectual Property
Future & Other Customers

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CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Entity Value (1) Exhibit A-1

This example assumes that all potential entity-specific synergies and related value have been extracted from the PFI and the purchase price. Based on the market participant
PFI and purchase price of $4,746, the IRR of the transaction is calculated to be 10%. In addition, a market-based WACC of 10% is estimated, which reconciles to the IRR.
This example reflects a non-taxable transaction.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Gross Profit 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832

Operating Expenses:
Maintenance R&D (2) 0.5% 5 5 6 7 7 8 9 9 10 10 10
R&D - Future IP (3) 2.5% 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising (4) 0.5% 5 5 6 7 7 8 9 9 10 10 10

Current customer marketing (5) 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing (6) 18 22 29 40 53 64 73 80 84 89 92
Total marketing 5% 50 53 58 65 73 80 86 91 95 99 102

Total G&A 7% 70 74 82 91 102 112 120 128 133 138 142

Total Operating Expenses 15% 150 158 175 196 218 240 258 274 286 296 305

EBITDA 750 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527
Depreciation (7) 286 302 337 377 412 451 478 513 540 562 581
Amortization (8) - - - - - - - - - - -
EBIT 464 485 537 602 680 745 810 854 890 920 946
Taxes 40% 186 194 215 241 272 298 324 342 356 368 378
Debt Free Net Income 278 291 322 361 408 447 486 512 534 552 568

less: Incremental Working Capital (9) 30% 15 15 35 42 45 42 37 32 25 21 18

add: Depreciation (10) 286 302 337 377 412 451 478 513 540 562 581
less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
Debt Free Cash Flow 263 178 174 196 250 315 370 419 458 484 504
Residual Value (11) 7,200

PV Factor (12) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV DFCF 251 154 137 140 163 186 199 205 204 196 2,911

Entity Value 4,746

(1) Entity Value projections based on market participant assumptions

assumptions. Excludes entity-specific
entity- synergies.
(2) Maintenance R&D applicable to both current and future IP.
(3) R&D expense for the development of future IP.
(4) Advertising expense related to the trade name.
(5) Maintenance marketing expenses specific to current separately identified customer relationships with following revenue (Exhibit A-8 footnote 1):
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Customer relationship revenue 900 855 770 616 431 259 130 65 33 -

(6) Marketing expenses related to creating and maintaining unidentified and future customer relationships.
(7) 7-MACRS tax depreciation based on carry-over tax basis of $745 and projected capital expenditures. For a detailed calculation see Exhibit A-2 of the Toolkit.
(8) Tax basis of intangible assets is zero.
(9) Represents 30% of incremental revenue. A beginning working capital balance of $285 is based on Year 0 revenue of $950.
(10) The residual year difference in depreciation and capital expenditures recognizes the long term growth in the business and the depreciation lag relative to capital
expenditures. The differential is dependent on the long term growth rate and the fixed asset depreciation rates. This "wedge" is calculated by extending the capital
expenditure projection at the constant residual year growth rate and calculating the depreciation for each annual period until a stable relationship between capital
expenditures and depreciation is achieved.
(11) Based on constant growth model assuming a 3% long-term growth rate.
(12) The market participant based IRR is equivalent to the WACC of 10%. The mid-period convention is applied.

4 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Tax Depreciation: Carry-Over Tax Basis of Fixed Assets (1) Exhibit A-2

This exhibit summarizes the tax depreciation calculations based on the $745 carry-over tax basis of the fixed assets and 7-year MACRS depreciation. These projected
depreciation amounts are reflected in Exhibit A-1.

Existing/
Depreciation Of: CapEx Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired or Current Fixed Assets (2) $ 745 $ 245 $ 175 $ 125 $ 90 $ 60 $ 40 $ 10

Capital Expenditures (3)

Year 1 286 41 70 50 36 26 26 26 13
Year 2 400 57 98 70 50 36 36 36 18
Year 3 450 64 110 79 56 40 40 40 20
Year 4 500 71 122 87 62 45 45 45 22
Year 5 525 75 129 92 66 47 47 47
Year 6 541 77 132 95 68 48 48
Year 7 557 80 136 97 70 50
Year 8 574 82 141 100 72
Year 9 591 84 145 103
Year 10 609 87 149
Residual 627 90
Total Depreciation - CapEx 41 127 212 287 352 411 468 513 540 562 581

Total MACRS Depreciation 286 302 337 377 412 451 478 513 540 562 581

(1) 7-Year MACRS applied to the projected capital expenditures.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

(2) Based on carry-over tax basis of $745. The annual depreciation amounts are stipulated and are not explicitely calculated.
(3) Capital expenditures as per the Entity Value projections (Exhibit A-1).

Copyright 2010 by The Appraisal Foundation. All rights reserved. 5

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets (1) Exhibit A-3

Summary of the tax depreciation calculations based on the $1,000 fair value of the fixed assets and 7-year MACRS depreciation. CACs related to fixed assets are based on
their fair value, as such, the depreciation reflected in the PFI is restated to reflect the fair value of the fixed assets. These projected depreciation amounts are reflected in
Exhibit A-3.

Depreciation Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

FV of Acquired or Current Fixed Assets (1) $ 143 $ 245 $ 175 $ 125 $ 89 $ 89 $ 89 $ 45

Capital Expenditures (2) 41 127 212 287 352 411 468 513 540 562 581

Total Tax Depreciation 184 372 387 412 441 500 557 558 540 562 581

(1) 7-Year MACRS applied to the fair value of the fixed assets and projected capital expenditures.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

(2) Exhibit A-2.

6 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Adjusted PFI and Entity Value Exhibit A-4

The PFI in this Exhibit is adjusted to reflect the tax benefits that would result from a restatement of the tax basis of certain of the assets to fair value. The tax benefit inherent in
the fair value of an asset is not reflected in the PFI of a non-taxable transaction. For example, the step-up in fixed assets or the fair value of an assembled workforce are not
reflected in the entitys tax basis and the PFI for the transaction excludes this benefit. In order to maintain consistency between the PFI to be used in valuing the customer
relationships and the fair value of the assets to which a CAC will be applied, the PFI should be adjusted to include the cash flow benefits of the increase in the tax basis of the
contributory assets. The Working Group believes that the fair value of an intangible asset should not differ depending on the tax structure of a particular transaction. For
additional discussion on the applicability of TABs see paragraphs 3.1.08 and 4.3.08 in the CAC Monograph and paragraphs 5.3.9 - 5.3.108 in the 2001 AICPA IPR&D Practice
Aid.

When the PFI is adjusted to include the additional cash flow benefit embedded in the fair value of the contributory assets, this results in an Adjusted Entity Value that is greater
than the Entity Value by an amount equal to the present value of the tax benefits related to the increase in tax basis. The Entity Value is recalculated at the WACC/IRR of 10%
to arrive at the Adjusted Entity Value of $4,855. This increase of $109 is equivalent to the present value of the incremental tax benefit related to the step-up in the fixed assets
and the assembled workforce. This Adjusted Entity Value is used only for reconciliation at this phase of the analysis.
The Working Group recognizes that these adjustments might not be significant to the analysis and may be excluded based on the judgment of the valuation specialist.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Gross Profit 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832

Operating Expenses:
Maintenance R&D 0.5% 5 5 6 7 7 8 9 9 10 10 10
R&D - Future IP 2.5% 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising 0.5% 5 5 6 7 7 8 9 9 10 10 10

Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing 18 22 29 40 53 64 73 80 84 89 92
Total marketing 5% 50 53 58 65 73 80 86 91 95 99 102

Total G&A 7% 70 74 82 91 102 112 120 128 133 138 142

Total Operating Expenses 15% 150 158 175 196 218 240 258 274 286 296 305

EBITDA 750 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527
Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (2) 20 20 20 20 20 20 20 20 20 20 -
EBIT 546 395 467 547 631 676 711 789 870 900 946
Taxes 40% 218 158 187 219 252 270 284 316 348 360 378
Debt Free Net Income 328 237 280 328 379 406 427 473 522 540 568

less: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18

add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (2) 20 20 20 20 20 20 20 20 20 20
less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
Debt Free Cash Flow 231 214 202 218 270 343 410 445 466 492 504
Residual Value 7,200

PV Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV DFCF 220 185 159 156 176 203 221 218 207 199 2,911

Adjusted Entity Value (4) 4,855

(1) Tax depreciation pursuant to Exhibit A-3 to reflect the fair value of the fixed assets.
(2) Reflects the amortization of the AWF. For purposes of this example the amortization period for the AWF is assumed to be 10 years rather than 15 years as is
required in the U.S. under IRS Code Section 197. 10 years is applied for demonstration purposes as the projections presented are 10 years in length. Tax benefits
related to the future replacement of, or increase in, the AWF are reflected in the operating expenses and no adjustment is required other than for the initial fair value.
(3) The WACC remains at 10%.
(4) The Adjusted Entity Value increase over the Entity Value is due solely to the incremental tax benefits. The Adjusted Entity Value is used only for reconciliation
purposes.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 7

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Reconciliation of Entity Value and Adjusted Entity Value Exhibit A-4a

The purpose of this calculation is to highlight and identify the difference between Entity Value and Adjusted Entity Value. This is provided for clarification purposes and would
not be considered a specific step in this reconciliation process.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Depreciation of:
Fair Value of Fixed Assets (1) $ 184 $ 372 $ 387 $ 412 $ 441 $ 500 $ 557 $ 558 $ 540 $ 562 $ 581
Carry-Over Tax Basis (2) 286 302 337 377 412 451 478 513 540 562 581
Incremental Depreciation (102) 70 50 35 29 49 79 45 - - -

Amortization of:
Assembled Workforce (3) 20 20 20 20 20 20 20 20 20 20 -
Carry-Over Tax Basis - - - - - - - - - - -
Incremental Amortization 20 20 20 20 20 20 20 20 20 20 -

Total Incremental D&A (82) 90 70 55 49 69 99 65 20 20 -

Tax Savings 40% (33) 36 28 22 20 28 40 26 8 8 -

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV of Tax Savings (31) 31 22 16 13 16 21 13 4 3 -

Total (4) 108

(1) Exhibit A-3.

(2) Exhibit A-2.
(3) Exhibit A-4.
(4) Difference from $109 due to rounding.

8 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Working Capital: Incremental Needs and Contributory Asset Charge Exhibit A-5

The annual average balance of working capital, consistent with assumptions reflected in Exhibits A-1 and A-4, is calculated and an assumed 3% rate of return on working capital
is applied to arrive at the annual CAC (see Section 3 in the CAC Monograph). Working capital used in this analysis excludes non-operating cash and all interest-bearing debt.

The Working Group recognizes that under circumstances where working capital correlates directly with revenue (as is the case below), discrete annual calculations may not be
required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the relationship between working capital and revenue is
projected to change significantly (e.g., reduced days receivable), the discrete annual analysis would be considered a best practice (as stated in the CAC Monograph). The need
to calculate discrete annual working capital CAC assumptions would be based on the judgment of the valuation specialist.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 950 $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Beginning Balance Working Capital 285 300 315 350 392 437 479 516 548 573 594
add: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18
Ending Balance Working Capital 300 315 350 392 437 479 516 548 573 594 612

Average Balance 293 308 333 371 415 458 498 532 561 584 603

Mid-period Adjustment Factor (1) 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On (2) 10% 28 29 32 35 40 44 47 51 53 56 57

Percent of Revenue 2.79% 2.79% 2.72% 2.71% 2.71% 2.74% 2.76% 2.78% 2.80% 2.82% 2.83%

(1) The mid-period adjustment is a simplifying adjustment applied to the return on to reflect the timing of the contributory assets charges over the year. A
further discussion of this adjustment is provided in Exhibit D-4. Note: This calculation does not affect the mid-period discounting convention applied to derive present
value elsewhere.
(2) The 10% after-tax return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 9

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Fixed Assets: Contributory Asset Charge Based on Technique A - Average Annual Balance Exhibit A-6

The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets, is calculated and an after-tax rate of
return (equal to the IRR/WACC) on fixed assets is applied to arrive at the annual CAC for the purpose of the financial overly and PFI reconciliation. In the final analysis, the
required rate of return on tangible assets should be commensurate with the relative risk associated with investment in the fixed assets. See Exhibit B-6 for further discussion. In
this Exhibit A-6, the rate of return is based on the 10% after-tax rate of return consistent with the IRR/WACC. The return of and on the acquired or current and future fixed
assets is based on an 8-year straight-line remaining economic useful life in accordance with Technique A Average Annual Balance.

The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete
annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a
percent of revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be considered a best practice. The significance of this
assumption would be based on the judgment of the valuation specialist.

Return Of: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

FV of Acquired or Current Fixed Assets (1) $ 250 $ 214 $ 179 $ 143 $ 107 $ 71 $ 36 - - - -

Capital Expenditures (2):

Year 1 36 36 36 36 36 36 36 36 - - -
Year 2 50 50 50 50 50 50 50 50 - -
Year 3 56 56 56 56 56 56 56 56 -
Year 4 63 63 63 63 63 63 63 63
Year 5 66 66 66 66 66 66 66
Year 6 68 68 68 68 68 68
Year 7 70 70 70 70 70
Year 8 72 72 72 72
Year 9 74 74 74
Year 10 76 76
Residual 78

Total Return Of 286 300 321 348 378 410 445 481 519 545 567

Percent of Revenue 28.6% 28.6% 27.6% 26.6% 26.0% 25.7% 25.9% 26.4% 27.2% 27.6% 27.9%

Return On:

Beginning Balance 1,000 1,000 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000
add: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
less: Return Of 286 300 321 348 378 410 445 481 519 545 567
Ending Balance 1,000 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000 2,060

Average Fixed
Average Fixed Assets
Assets 1
1,000
,000 1,050 1,165 1,305 1,455 1,594 1,715 1,818 1,900 1,968 2,030

Mid-period Adjustment Factor 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On (3) 10% 95 100 111 124 139 152 164 173 181 188 194

Percent of Revenue 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%

Total Return On & Of 381 400 432 472 517 562 609 654 700 733 761
Total Return On & Of as Percent of Revenue 38% 38% 37% 36% 36% 35% 35% 36% 37% 37% 37%

(1) The economic depreciation (return of) of the acquired or current fixed assets is based on the fair value of the fixed assets of $1,000 as follows:

Remaining Economic Life (Years) FV Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
1 35.7 35.7
2 71.4 35.7 35.7
3 107.1 35.7 35.7 35.7
4 142.9 35.7 35.7 35.7 35.7
5 178.6 35.7 35.7 35.7 35.7 35.7
6 214.3 35.7 35.7 35.7 35.7 35.7 35.7
7 250.0 35.7 35.7 35.7 35.7 35.7 35.7 35.7
Total (rounded) 1,000 250 214 179 143 107 71 36

(2) Based on an 8 year economic life with the first year's return on occurring in the year of purchase.
(3) The 10% after-tax return on is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

10 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment Exhibit A-7

In Technique B, the CAC reflects both the return of and on and is calculated as a series of level annual payments. The CAC should be calculated as a "loan payment" at the
after-tax rate of return, or interest rate (with the loan payment conceptually including both principle and interest). See Exhibit B-7 for further discussion. In this
Exhibit A-7, the rate of return is based on the 10% after-tax rate of return consistent with the IRR/WACC for the purpose of the financial overlay and PFI reconciliation. The
calculation incorporates the fair value of the fixed assets and the remaining useful life for each asset group (waterfall payment) and assumes an 8-year remaining useful life for
capital expenditures in each year, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets.
The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete
annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a
percent of revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be appropriate. The materiality of this assumption would be
based on the judgment of the valuation specialist.

Return On and Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired FV of Fixed Assets (1)

1-year 37
2-years 39 39
3-years 41 41 41
4-years (2) 43 43 43 43
5-years 45 45 45 45 45
6-years 47 47 47 47 47 47
7-years 49 49 49 49 49 49 49
8-years - - - - - - - -

Capital Expenditures (3):

Year 1 (4) 49 49 49 49 49 49 49 49 - - -
Year 2 68 68 68 68 68 68 68 68 - -
Year 3 77 77 77 77 77 77 77 77 -
Year 4 85 85 85 85 85 85 85 85
Year 5 89 89 89 89 89 89 89
Year 6 92 92 92 92 92 92
Year 7 95 95 95 95 95
Year 8 98 98 98 98
Year 9 101 101 101
Year 10 104 104
Residual 107

Total Return On & Of 350 381 418 463 509 556 604 653 705 741 771
% of Revenue 35% 36% 36% 35% 35% 35% 35% 36% 37% 37% 38%

(1) The level payment related to the acquired Fixed Assets is based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the prior
8 years, similar to Exhibit A-6. This waterfall calculation reflects individual level payment calculations for each asset life group.
(2) Sample calculation of the level payment for the acquired fixed assets with a remaining useful life of 4 years is as follows
CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x (1+Discount Rate)^.5
= -PMT(10%,4,143,0,1) x (1 + 10%)^.5 = 43
(3) Individual level payment calculations for annual capital expenditures.
(4) Sample calculation of the level payment for the $286 of capital expenditures occurring in Year 1 with a remaining useful life of 8 years is as follows:

CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period)

= -PMT(10%,8,286,0,1) = 49

Copyright 2010 by The Appraisal Foundation. All rights reserved. 11

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Assembled Workforce: Growth Investment and Contributory Asset Charge Exhibit A-8

This exhibit calculates the growth investment in AWF and the return on the AWF (the CAC). The fair value of the acquired or current AWF of $200 is estimated based on the
pre-tax replacement cost.
Future operating expenses include the cost to both grow and maintain the AWF. The initial investment to increase the AWF should be excluded to avoid double counting the
initial investment and the future maintenance expenses. In other words, the return on the AWF would increase due to its growth and future operating expenses provide for
maintaining the increase in the AWF (see CAC Monograph). The Working Group recognizes that this adjustment is generally minor and may be excluded in practice.
However, such an adjustment provides for a complete reconciliation of value in the context of this financial overlay.
The Working Group recognizes that under circumstances where the relationship between AWF and revenue (e.g., the revenue per employee) remains relatively stable,
discrete annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the relationship
is projected to significantly change (e.g., increasing revenue per employee), the discrete annual analysis would be considered a best practice. The need for discrete AWF
calculations (and the resulting AWF CAC) would be based on the judgment of the valuation specialist.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Growth 5% 5% 11% 12% 11% 10% 8% 6% 5% 4% 3%

Beginning Balance 200 211 222 246 276 308 338 364 386 404 419
add: Pre-Tax Investment in AWF Growth (1) 11 11 24 30 32 30 26 22 18 15 13
Ending Balance 211 222 246 276 308 338 364 386 404 419 432

Average Balance 206 217 234 261 292 323 351 375 395 412 426

Mid-period Adjustment Factor 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On 10% 20 21 22 25 28 31 33 36 38 39 41

Percent of Revenue 2.0% 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 2.0% 2.0% 2.0% 2.0%

(1) Growth investment correlates to the annual increase in revenue. For example in Year 2 revenue increases by 5% and the AWF grows by $11 (5% x $211).

Revenue Analysis Exhibit A-9

This exhibit provides the revenue attrition assumptions for the Trade Name, IP, and Customer Relationships for use in their respective valuations. The revenue projections for
the Trade Name of the acquiring entity, Future IP, and Future and Other Customers are provided for use in the financial overlay and reconciliation to the Adjusted Entity Value.
The derivation of these assumptions is outside of the scope of this Toolkit.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Trade Name - Acquired Entity $ 1,000 $ 1,050 $ 583 $ - $ - $ - $ - $ - $ - $ - $ -

Trade Name - Acquiring Entity - - 583 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035
Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

Current IP 1,000 900 700 400 200 50 - - - - -

Future IP - 150 465 906 1,256 1,546 1,718 1,823 1,907 1,976 2,035
Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

Customers Relationships 900 855 770 616 431 259 130 65 33 - -

Attrition (% of prior year) 95% 90% 80% 70% 60% 50% 50% 50% 0% 0%
Future & Other Customers 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035
Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

12 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Trade Name Analysis Exhibit A-10

This exhibit provides the assumed valuation of the Trade Names based on the relief from royalty method. This example assumes that the royalty of 5% is stated at a gross
amount and is reduced for the requisite advertising of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization
benefit would not be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to include this tax benefit. The tax
amortization benefit is added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.

The trade name may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would
apply.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 583 - - - - - - - -

Royalty Avoided (2) 5% 50 53 29 - - - - - - - -

less: Trade Name Advertising 0.5% 5 5 3 - - - - - - - -
EBIT 45 48 26 - - - - - - - -
Taxes @ 40% 18 19 10 - - - - - - - -
Debt-Free Net Income 27 29 16 - - - - - - - -
Residual Value -
Present Value Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Royalty Avoided 26 25 12 - - - - - - - -
Total PV Trade Name Income (4) 63

(1) Exhibit A-9.

(2) The pre-tax royalty avoided is based on royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is assumed
to be gross (e.g., inclusive of advertising expenses).
(3) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.
(4) Excludes the TAB, for now, in the reconciliation process.

Intellectual Property Analysis Exhibit A-11

This exhibit provides the assumed valuation of the IP based on the relief from royalty method. This example assumes that the royalty of 10% is stated at a gross amount and is
reduced for the requisite maintenance R&D of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization benefit would
not be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to include this tax benefit. The tax amortization
benefit is added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.

The IP may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would apply.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 900 $ 700 $ 400 $ 200 $ 50 - - - - -

Royalty Avoided (2) 10% 100 90 70 40 20 5 - - - - -
less: Maintenance R&D 0.5% 5 5 4 2 1 - - - - - -
EBIT 95 85 66 38 19 5 - - - - -
Taxes @ 40% 38 34 26 15 8 2 - - - - -
Debt-Free Net Income 57 51 40 23 11 3 - - - - -
Residual Value -
Present Value Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Royalty Avoided 54 44 31 16 7 2 - - - - -
Total PV Current IP Income (4) 154

(1) Exhibit A-9.

(2) The pre-tax royalty avoided is based upon royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is
assumed to be gross (e.g., inclusive of R&D expenses).
(3) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.
(4) Excludes the TAB in the reconciliation process.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 13

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance Exhibit A-12

This exhibit uses the Average Annual Balance technique (Technique A) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM.

Aggregate CACs were estimated in the prior exhibits. An analysis of the subject intangible asset should be performed to assess the required levels of contributory assets. The
aggregate CACs on those assets are then allocated appropriately to the subject intangible asset. For the purposes of this example all contributory assets have been assumed
to benefit all customers equally and the CACs are allocated in proportion to revenue. The allocation of CACs is based on facts and circumstances. For example, in other
circumstances a disproportionate amount of the fixed assets may be used to manufacture the products sold to the separately identified customer relationships ($900 in revenue
in Year 1) versus the unidentified customers ($100 in Year 1). In a similar manner, the IP may be disproportionately allocable to the separately identified customer relationships
rather than the unidentified customers.
In addition to the CACs related to working capital, fixed assets and AWF, profit splits in the form of royalty rates were also applied for the use of the trade name and IP. This
example assumes that certain expense items (e.g., advertising and R&D) are included in the royalty rate and have been eliminated from the excess earnings to avoid double
counting the expense.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Customer Relationship Revenue (1) 900 855 770 616 431 259 130 65 33 - -
Gross Profit 90% 810 770 693 554 388 233 117 59 30 - -
Operating Expenses:
Maintenance R&D (2) 0.0% - - - - - - - - - - -
R&D - Future IP (2) 0.0% - - - - - - - - - - -
Trade name advertising (3) 0.0% - - - - - - - - - - -
Current customer marketing (4) 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing (5) - - - - - - - - - - -
Total marketing 27 26 23 18 13 8 4 2 1 - -
Total G&A 7% 63 60 54 43 30 18 9 5 2 - -
Total Operating Expenses 90 86 77 61 43 26 13 7 3 - -
EBITDA 720 684 616 493 345 207 104 52 27 - -
Depreciation (6) 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF (8) 18 16 13 9 6 3 2 1 - - -
EBIT 536 365 347 290 208 123 60 31 18 - -
less: Trade Name Royalty (7) 5% 45 43 39 31 22 13 7 3 2 - -
IP Royalty (7) 10% 90 86 77 62 43 26 13 7 3 - -
Adjusted EBIT 401 236 231 197 143 84 40 21 13 - -
Taxes 40% 160 94 92 79 57 34 16 8 5 - -
Debt Free Net Income 241 142 139 118 86 50 24 13 8 - -
add: Depreciation (6) 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF (8) 18 16 13 9 6 3 2 1 - -
AWF Growth Investment (9) 10 9 16 14 9 5 2 1 - - -
less: Return On Workingg Capital
p (10)
( ) 25 24 21 17 12 7 4 2 1 - -
Return Of Fixed Assets (11) 257 244 212 164 112 67 34 17 9 - -
Return On Fixed Assets (11) 86 81 73 58 41 25 12 6 3 - -
Return On AWF (9) 18 17 15 12 8 5 2 1 1 - -
Excess Earnings 49 104 103 84 59 35 18 9 3 - -
Residual Value -

PV Factor (12) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 47 90 81 60 38 21 10 4 1 - -

Total PV Excess Earnings (13) 352

(1) Exhibit A-9.

(2) Maintenance and future R&D is assumed to be included in the 10% IP royalty rate (licensor responsible for all R&D in the future) and is therefore removed in the
excess earnings. The R&D expenses would be reflected as a reduction to the royalty in the valuation of the IP. Alternately, it may be determined that the royalty rate
is stated net of the R&D expenses in which case the R&D expenses would remain in the excess earnings.
(3) Advertising expenses removed under the same assumptions provided in footnote 2.
(4) Maintenance marketing expenses specific to current separately identified customer relationships.
(5) Marketing expenses related to creating and maintaining unidentified and future customer relationships are excluded.
(6) Exhibit A-3 amounts allocated in proportion to revenue.
(7) Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The same rates would be incorporated in the valuation of the trade name and IP.
Note that the royalty charge is applicable to both current and future contributory assets.
(8) Exhibit A-4 amounts allocated in proportion to revenue.
(9) Exhibit A-8 amounts allocated in proportion to revenue.
(10) Exhibit A-5 amounts allocated in proportion to revenue.
(11) Exhibit A-6 amounts allocated in proportion to revenue.
(12) Discount rate assumed to be equivalent to the IRR/WACC and a mid-period convention.
(13) Excludes the TAB in the reconciliation process.

14 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment Exhibit A-13

This exhibit uses the Level Payment technique (Technique B) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM. All other CACs
and adjustments discussed in Exhibit A-12 remain the same.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Customer Relationship Revenue 900 855 770 616 431 259 130 65 33 - -
Gross Profit 90% 810 770 693 554 388 233 117 59 30 - -
Operating Expenses:
Maintenance R&D 0.0% - - - - - - - - - - -
R&D - Future IP 0.0% - - - - - - - - - - -
Trade name advertising 0.0% - - - - - - - - - - -
Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing - - - - - - - - - - -
Total marketing 27 26 23 18 13 8 4 2 1 - -
Total G&A 7% 63 60 54 43 30 18 9 5 2 - -
Total Operating Expenses 90 86 77 61 43 26 13 7 3 - -
EBITDA 720 684 616 493 345 207 104 52 27 - -
Depreciation 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF 18 16 13 9 6 3 2 1 - - -
EBIT 536 365 347 290 208 123 60 31 18 - -
less: Trade Name Royalty 5% 45 43 39 31 22 13 7 3 2 - -
IP Royalty 10% 90 86 77 62 43 26 13 7 3 - -
Adjusted EBIT 401 236 231 197 143 84 40 21 13 - -
Taxes 40% 160 94 92 79 57 34 16 8 5 - -
Debt Free Net Income 241 142 139 118 86 50 24 13 8 - -
add: Depreciation 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF 18 16 13 9 6 3 2 1 - -
AWF Growth Investment 10 9 16 14 9 5 2 1 - - -
less: Return On Working Capital 25 24 21 17 12 7 4 2 1 - -
Return On & Of Fixed Assets (1) 315 310 277 218 151 90 46 23 12 - -
Return On AWF 18 17 15 12 8 5 2 1 1 - -
Excess Earnings 77 119 111 88 61 37 18 9 3 - -
Residual Value -

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 73 103 87 63 40 22 10 4 1 - -

Total PV Excess Earnings 403

(1) Exhibit A-7 amounts allocated in proportion to revenue.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 15

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance Exhibit A-14

This exhibit applies the Average Annual Balance technique (Technique A) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP;
and future and other customers) for reconciliation purposes in the context of a financial overlay.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Revenue (1) 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035
Gross Profit 90 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832
Operating Expenses:
Maintenance R&D (2) - - 2 5 6 8 9 9 10 10 10
R&D - Future IP (2) 25 26 29 33 36 40 43 46 48 49 51
Trade name advertising (3) - - 3 7 7 8 9 9 10 10 10
Current customer marketing (4) - - - - - - - - - - -
Future customer marketing (5) 18 22 29 40 53 64 73 80 84 89 92
Total marketing 18 22 32 47 60 72 82 89 94 99 102
Total G&A (6) 7 14 28 48 72 94 111 123 131 138 142
Total Operating Expenses 50 62 91 133 174 214 245 267 283 296 305
EBITDA 40 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527
Depreciation (6) 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF (6) 2 4 7 11 14 17 18 19 20 20 -
EBIT 20 40 127 259 424 553 651 758 852 900 946
less: Trade Name Royalty (7) 5 10 (10) (31) (22) (13) (7) (3) (2) - -
IP Royalty (7) 10 4 (7) (22) (23) (21) (13) (7) (3) - -
Adjusted EBIT 5 26 144 312 469 587 671 768 857 900 946
Taxes 40% 2 10 58 125 188 235 268 307 343 360 378
Debt Free Net Income 3 16 86 187 281 352 403 461 514 540 568
add: Depreciation 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF 2 4 7 11 14 17 18 19 20 20
AWF Growth Investment (8) 1 2 8 16 23 25 24 21 18 15 13
less: Return On Working Capital (9) 3 5 11 18 28 37 43 49 52 56 57
Return Of Fixed Assets (10) 29 56 109 184 266 343 411 464 510 545 567
Return On Fixed Assets (10) 9 19 38 66 98 127 152 167 178 188 194
Return On AWF (8) 2 4 7 13 20 26 31 35 37 39 41
Excess Earnings (19) 7 67 151 216 280 323 324 306 309 303
Residual Value 4,322

PV Factor (11) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings (18) 6 53 108 141 166 174 159 136 125 1,748

Total PV Excess Earnings (12) 2,798

(1) Exhibit A-9.

(2) Maintenance and future R&D.
(3) Advertising related to the acquiring entity trade name.
(4) Maintenance marketing expenses specific to and absorbed by the current separately identified customer relationships.
(5) Marketing expenses related to creating and maintaining unidentified and future customer relationships.
(6) Exhibit A-4 amounts allocated in proportion to revenue.
(7) The royalty applied to the customer relationships revenue reflects the use of both current and future trade name and IP assets (see CAC Monograph). Therefore the
royalty reflected in the unidentified excess earnings becomes negative (or is added back) to recognize the royalties that were deducted from the customer
relationship excess earnings calculation. Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The trade name royalty is calculated
by deducting the royalty per Exhibit A-12 (or A-13) from that on Exhibit A-10. The IP royalty is calculated by deducting the royalty per Exhibit A-12 (or A-13) from that
on Exhibit A-11.
(8) Exhibit A-8 amounts allocated in proportion to revenue.
(9) Exhibit A-5 amounts allocated in proportion to revenue.
(10) Exhibit A-6 amounts allocated in proportion to revenue.
(11) Discount rate assumed to be equivalent to the IRR/WACC, based on a mid-period convention.
(12) Excludes the TAB in the reconciliation process.

16 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment Exhibit A-15

This exhibit applies the Level Payment technique (Technique B) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP; and future
and other customers) for reconciliation purposes in the context of a financial overlay. All other CACs and adjustments discussed in Exhibit A-14 remain the same.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Future & Other Customer Revenue 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035
Gross Profit 90 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832
Operating Expenses:
Maintenance R&D - - 2 5 6 8 9 9 10 10 10
R&D - Future IP 25 26 29 33 36 40 43 46 48 49 51
Trade name advertising - - 3 7 7 8 9 9 10 10 10
Current customer marketing - - - - - - - - - - -
Future customer marketing 18 22 29 40 53 64 73 80 84 89 92
Total marketing 18 22 32 47 60 72 82 89 94 99 102
Total G&A 7 14 28 48 72 94 111 123 131 138 142
Total Operating Expenses 50 62 91 133 174 214 245 267 283 296 305
EBITDA 40 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527
Depreciation 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF 2 4 7 11 14 17 18 19 20 20 -
EBIT 20 40 127 259 424 553 651 758 852 900 946
less: Trade Name Royalty 5 10 (10) (31) (22) (13) (7) (3) (2) - -
IP Royalty 10 4 (7) (22) (23) (21) (13) (7) (3) - -
Adjusted EBIT 5 26 144 312 469 587 671 768 857 900 946
Taxes 40% 2 10 58 125 188 235 268 307 343 360 378
Debt Free Net Income 3 16 86 187 281 352 403 461 514 540 568
add: Depreciation 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF 2 4 7 11 14 17 18 19 20 20
AWF Growth Investment 1 2 8 16 23 25 24 21 18 15 13
less: Return On Working Capital 3 5 11 18 28 37 43 49 52 56 57
Return On & Of Fixed Assets (1) 35 71 141 245 358 466 558 630 693 741 771
Return On AWF 2 4 7 13 20 26 31 35 37 39 41
Excess Earnings (16) 11 73 156 222 284 327 325 300 302 293
Residual Value 4,180

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings (15) 9 57 112 145 168 176 159 134 122 1,690

Total PV Excess Earnings 2,757

(1) Exhibit A-7 amounts allocated in proportion to revenue.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 17

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Income Reconciliation Exhibit A-16

Provides an income reconciliation for the intangible assets valued using an income approach to reconcile the debt free net income inherent in the respective assets to the
Adjusted Entity Value debt free net income. This is a complimentary analysis to the value reconciliation. This also provides support for the income allocation in the context of a
financial overlay.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Trade Name Royalty - Acquired Co. (1) $ 50 $ 53 $ 29 $ - $ - $ - $ - $ - $ - $ - $ -

Current IP Royalty (2) 100 90 70 40 20 5 - - - - -
Total Royalty 150 143 99 40 20 5 - - - - -

Expense Adjustments
Trade Name Advertising - Acquired Co. (1) 5 5 3 - - - - - - - -
Maintenance R&D - Current IP (2) 5 5 4 2 1 - - - - - -

Total Expense Adjustments 10 10 7 2 1 - - - - - -

Total Pre-tax income adjustments 140 133 92 38 19 5 - - - - -

Taxes 40% 56 53 37 15 8 2 - - - - -

Total After-tax income adjustments 84 80 55 23 11 3 - - - - -

Customer Relationships DFNI (3) 241 142 139 118 86 50 24 13 8 - -

Unidentified DFNI (4) 3 16 86 187 281 352 403 461 514 540 568

Total DFNI Reconciliation 328 238 280 328 378 405 427 474 522 540 568

DFNI from Adjusted Entity Value (5) 328 237 280 328 379 406 427 473 522 540 568

Difference - (1) - - 1 1 - (1) - - -

(1) Exhibit A-10.

(2) Exhibit A-11.
(3) Exhibits A-12 and A-13.
(4) Exhibits A-14 and A-15.
(5) Exhibit A-4.

Financial Overlay Summary Exhibit A-17

The financial overlay is a diagnostic analysis to provide for a reconciliation to the Adjusted Entity Value. Such an analysis provides stability to the valuation model by
confirming the apportionment of earnings and value among all of the assets. The inclusion of an analysis of the unidentified excess earni ngs provides an alternative and
direct means of calculating the implied rate of return on the excess purchase price (goodwill) which is generally performed in the context of a WARA. With such a diagnostic
analysis completed, the valuation specialist would then proceed to an assessment of the respective rates of return applicable to the various assets and arrive at estimates of
fair value. This next step of stratifying the rates is demonstrated in the Section B exhibits. A summary of the two techniques applied to the fixed assets are provided in
columns A (Average Annual Balance) and B (Level Payment).

Rate of
Return A B
Working Capital 10% $ 285 $ 285
Fixed Assets 10% 1,000 1,000
Trade Name - Acquired Co. (1) 10% 63 63
IP (Current) (2) 10% 154 154
Customer Relationships (3) 10% 352 403
Total Separately Identified Assets 1,854 1,905

AWF 10% 200 200

Excess Purchase Price (4) 10% 2,798 2,757
Total 2,998 2,957

Total Net Assets 4,852 4,862

Adjusted Entity Value (5) 10% 4,855

(1) Exhibit A-10.

(2) Exhibit A-11.
(3) Technique A: Exhibit A-12; Technique B: Exhibit A-13.
(4) Technique A: Exhibit A-14; Technique B: Exhibit A-15.
(5) Exhibit A-4.

18 Copyright 2010 by The Appraisal Foundation. All rights reserved.

THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

SECTION B:
STRATIFIED RATES

This section of the Toolkit repeats analysis provided in Section A, however asset-specific discount rates are
applied to the respective assets. In addition, a weighted average return on assets (WARA) calculation is
provided and compared to the implied discount rate derived from an explicit analysis of the unidentified excess
earnings.

The required rate of return on each asset should be commensurate with the relative risk associated with
investment in that particular asset. For additional discussion, refer to Section 4 of the Monograph.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 19

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Entity Value (1) Exhibit B-1

(Exhibit A-1)

This section of the Toolkit uses the same analysis provided in Section A with the application of stratified discount rates to the respective assets. In addition, a WARA calculation is
also provided and compared to the implied discount rate derived from an explicit analysis of the unidentified excess earnings.

This example assumes that all potential entity-specific synergies and related value have been extracted from the PFI and the purchase price. Based on the market participant PFI
and purchase price of $4,746, the IRR of the transaction is calculated to be 10%. In addition, a market-based WACC of 10% is estimated, which reconciles to the IRR. This
example reflects a non-taxable transaction.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Gross Profit 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832

Operating Expenses:
Maintenance R&D (2) 0.5% 5 5 6 7 7 8 9 9 10 10 10
R&D - Future IP (3) 2.5% 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising (4) 0.5% 5 5 6 7 7 8 9 9 10 10 10

Current customer marketing (5) 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing (6) 18 22 29 40 53 64 73 80 84 89 92
Total marketing 5% 50 53 58 65 73 80 86 91 95 99 102

Total G&A 7% 70 74 82 91 102 112 120 128 133 138 142

Total Operating Expenses 15% 150 158 175 196 218 240 258 274 286 296 305

EBITDA 750 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527
Depreciation (7) 286 302 337 377 412 451 478 513 540 562 581
Amortization (8) - - - - - - - - - - -
EBIT 464 485 537 602 680 745 810 854 890 920 946
Taxes 40% 186 194 215 241 272 298 324 342 356 368 378
Debt Free Net Income 278 291 322 361 408 447 486 512 534 552 568

less: Incremental Working Capital (9) 30% 15 15 35 42 45 42 37 32 25 21 18

add: Depreciation (10) 286 302 337 377 412 451 478 513 540 562 581
less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
Debt Free Cash Flow 263 178 174 196 250 315 370 419 458 484 504
Residual Value (11) 7,200

PV Factor (12) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV DFCF 251 154 137 140 163 186 199 205 204 196 2,911

Entity Value 4,746

(1) Entity Value projections based on market participant assumptions. Excludes entity-specific synergies.
(2) Maintenance R&D applicable to both current and future IP.
(3) R&D expense for the development of future IP.
(4) Advertising expense related to the trade name.
(5) Maintenance marketing expenses specific to current separately identified customer relationships with following revenue (Exhibit A-8 footnote 1):
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Customer relationship revenue 900 855 770 616 431 259 130 65 33 -

(6) Marketing expenses related to creating and maintaining unidentified and future customer relationships.
(7) 7-MACRS tax depreciation based on carry-over tax basis of $745 and projected capital expenditures. For a detailed calculation see Exhibit A-2 of the Toolkit.
(8) Tax basis of intangible assets is zero.
(9) Represents 30% of incremental revenue. A beginning working capital balance of $285 is based on Year 0 revenue of $950.
(10) The residual year difference in depreciation and capital expenditures recognizes the long term growth in the business and the depreciation lag relative to capital
expenditures. The differential is dependent on the long term growth rate and the fixed asset depreciation rates. This "wedge" is calculated by extending the capital
expenditure projection at the constant residual year growth rate and calculating the depreciation for each annual period until a stable relationship between capital
expenditures and depreciation is achieved.
(11) Based on constant growth model assuming a 3% long-term growth rate.
(12) The market participant based IRR is equivalent to the WACC of 10%. The mid-period convention is applied.

20 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Tax Depreciation: Carry-Over Tax Basis of Fixed Assets Exhibit B-2

(Exhibit A-2)

Summary of the tax depreciation calculation based on the carry-over tax basis and 7-year MACRS depreciation. These projected depreciation amounts are reflected in Exhibit B-1.

Total Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Carry-Over Tax Basis (2) $ 745 $ 245 $ 175 $ 125 $ 90 $ 60 $ 40 $ 10

Capital Expenditures (3)

Year 1 286 41 70 50 36 26 26 26 13
Year 2 400 57 98 70 50 36 36 36 18
Year 3 450 64 110 79 56 40 40 40 20
Year 4 500 71 122 87 62 45 45 45 22
Year 5 525 75 129 92 66 47 47 47
Year 6 541 77 132 95 68 48 48
Year 7 557 80 136 97 70 50
Year 8 574 82 141 100 72
Year 9 591 84 145 103
Year 10 609 87 149
Residual 627 90
Total Depreciation - CapEx 41 127 212 287 352 411 468 513 540 562 581

Total MACRS Depreciation 286 302 337 377 412 451 478 513 540 562 581

(1) 7-Year MACRS applied to the fair value of the fixed assets and projected capital expenditures.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

(2) Based on carry-over tax basis of $745.

(3) Capital expenditures as per the Entity Value projections (Exhibit B-1), annual depreciation amounts rounded.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 21

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Tax Depreciation: 7-Year MACRS & Fair Value of Fixed Assets (1) Exhibit B-3
(Exhibit A-3)

Summary of the tax depreciation calculations based on the $1,000 fair value of the fixed assets and 7-year MACRS depreciation. CACs related to fixed assets are based on their
fair value, as such, the depreciation reflected in the PFI is restated to reflect the fair value of the fixed assets . These projected depreciation amounts are reflected in Exhibit B-3.

Depreciation Of: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired FV of Fixed Assets $ 143 $ 245 $ 175 $ 125 $ 89 $ 89 $ 89 $ 45

Capital Expenditures (2) 41 127 212 287 352 411 468 513 540 562 581

Total Tax Depreciation 184 372 387 412 441 500 557 558 540 562 581

(1) 7-Year MACRS applied to the fair value of the fixed assets and projected capital expenditures.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

MACRS Percentages 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

(2) Exhibit B-2.

22 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Adjusted PFI and Entity Value Exhibit B-4

(Exhibit A-4)

The PFI in this Exhibit is adjusted to reflect the tax benefits that would result from a restatement of the tax basis of certain of the assets to fair value. The tax benefit inherent in
the fair value of an asset is not reflected in the PFI of a non-taxable transaction. For example, the step-up in fixed assets or the fair value of an assembled workforce are not
reflected in the entitys tax basis and the PFI for the transaction excludes this benefit. In order to maintain consistency between the PFI to be used in valuing the customer
relationships and the fair value of the assets to which a CAC will be applied, the PFI should be adjusted to include the cash flow benefits of the increase in the tax basis of the
contributory assets. The Working Group believes that the fair value of an intangible asset should not differ depending on the tax structure of a particu lar transaction. For
additional discussion on the applicability of TABs see paragraphs 3.1.08 and 4.3.08 in the CAC Monograph and paragraphs 5.3.9 - 5.3.108 in the 2001 AICPA IPR&D Practice Aid.

When the PFI is adjusted to include the additional cash flow benefit embedded in the fair value of the contributory assets, this results in an Adjusted Entity Value that is greater than
the Entity Value by an amount equal to the present value of the tax benefits related to the increase in tax basis. The Entity Value is recalculated at the WACC/IRR of 10% to arrive
at the Adjusted Entity Value of $4,855. This increase of $109 is equivalent to the present value of the incremental tax benefit related to the step-up in the fixed assets and the
assembled workforce. This Adjusted Entity Value is used only for reconciliation at this phase of the analysis.

The Working Group recognizes that these adjustments might not be significant to the analysis and may be excluded based on the judgment of the valuation specialist.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Gross Profit 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832

Operating Expenses:
Maintenance R&D 0.5% 5 5 6 7 7 8 9 9 10 10 10
R&D - Future IP 2.5% 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising 0.5% 5 5 6 7 7 8 9 9 10 10 10

Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing 18 22 29 40 53 64 73 80 84 89 92
Total marketing 5% 50 53 58 65 73 80 86 91 95 99 102

Total G&A 7% 70 74 82 91 102 112 120 128 133 138 142

Total Operating Expenses 15% 150 158 175 196 218 240 258 274 286 296 305

EBITDA 750 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527
Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (2) 20 20 20 20 20 20 20 20 20 20 -
EBIT 546 395 467 547 631 676 711 789 870 900 946
Taxes 40% 218 158 187 219 252 270 284 316 348 360 378
Debt Free Net Income 328 237 280 328 379 406 427 473 522 540 568

less: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18

add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amorti
tizati
tion - AWF
AWF (2)
(2) 20
20 20 20 20 20 20 20 20 20 20
less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
Debt Free Cash Flow 231 214 202 218 270 343 410 445 466 492 504
Residual Value 7,200

PV Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV DFCF 220 185 159 156 176 203 221 218 207 199 2,911

Adjusted Entity Value (4) 4,855

(1) Tax depreciation pursuant to Exhibit B-3 to reflect the fair value of the fixed assets.
(2) Reflects the amortization of the AWF. For purposes of this example the amortization period for the AWF is assumed to be 10 years rather than 15 years as is required in
the U.S. under IRS Code Section 197. 10 years is applied for demonstration purposes as the projections presented are 10 years in length. Tax benefits related to the
future replacement of, or increase in, the AWF are reflected in the operating expenses and no adjustment is required other than for the initial fair value.

(3) The WACC remains at 10%.

(4) The Adjusted Entity Value increase over the Entity Value is due solely to the incremental tax benefits. The Adjusted Entity Value is used only for reconciliation purposes.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 23

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Reconciliation of Entity Value and Adjusted Entity Value Exhibit B-4a

(Exhibit A-4a)

The purpose of this calculation is to highlight and identify the difference between Entity Value and Adjusted Entity Value. This is provided for clarification purposes and would not be
considered a specific step in this reconciliation process.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Depreciation of:
Fair Value of Fixed Assets (1) $ 184 $ 372 $ 387 $ 412 $ 441 $ 500 $ 557 $ 558 $ 540 $ 562 $ 581
Carry-Over Tax Basis (2) 286 302 337 377 412 451 478 513 540 562 581
Incremental Depreciation (102) 70 50 35 29 49 79 45 - - -

Amortization of:
Assembled Workforce (2) 20 20 20 20 20 20 20 20 20 20 -
Carry-Over Tax Basis - - - - - - - - - - -
Incremental Amortization 20 20 20 20 20 20 20 20 20 20 -

Total Incremental D&A (82) 90 70 55 49 69 99 65 20 20 -

Tax Savings 40% (33) 36 28 22 20 28 40 26 8 8 -

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV of Tax Savings (31) 31 22 16 13 16 21 13 4 3 -

Total (3) 108

(1) Exhibit B-3.

(2) Exhibit B-2.
(3) Exhibit B-4.
(4) Difference from $109 due to rounding.

24 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Working Capital: Incremental Needs and Contributory Asset Charge Exhibit B-5

The annual average balance of working capital, consistent with assumptions reflected in Exhibits B-1 and B-4, is calculated and an assumed 3% rate of return on working capital is
applied to arrive at the annual CAC (see Section 3 in the CAC Monograph). Working capital used in this analysis excludes non-operating cash and all interest-bearing debt.

The Working Group recognizes that under circumstances where working capital correlates directly with revenue (as is the case below), discrete annual calculations may not be
required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the relationship between working capital and revenue is
projected to change significantly (e.g., reduced days receivable), the discrete annual analysis would be considered a best practice (as stated in the CAC Monograph). The need to
calculate discrete annual working capital CAC assumptions would be based on the judgment of the valuation specialist.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 950 $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Beginning Balance Working Capital 285 300 315 350 392 437 479 516 548 573 594
add: Incremental Working Capital 30% 15 15 35 42 45 42 37 32 25 21 18
Ending Balance Working Capital 300 315 350 392 437 479 516 548 573 594 612

Average Balance 293 308 333 371 415 458 498 532 561 584 603

Mid-period Adjustment Factor (1) 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On (2) 3% 8 9 10 11 12 13 14 15 16 17 17

Percent of Revenue 0.84% 0.84% 0.82% 0.81% 0.81% 0.82% 0.83% 0.83% 0.84% 0.84% 0.85%

(1) The mid-period adjustment is a simplifying adjustment applied to the return on to reflect the timing of the contributory assets charges over the year. A
further discussion of this adjustment is provided in Exhibit D-4. Note: This calculation does not affect the mid-period discounting convention applied to derive present
value elsewhere.
(2) The 3% after-tax return (CAC) is based on market participant assumptions.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 25

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Fixed Assets: Contributory Asset Charge Based on Technique A - Average Annual Balance Exhibit B-6

The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets, is calculated and an assumed 5% after-
tax rate of return on fixed assets is applied to arrive at the annual CAC (see CAC Monograph). The return of and on the acquired or current and future fixed assets is based on an 8-
year straight-line remaining economic useful life in accordance with Technique A Average Annual Balance. The required rate of return on tangible assets should be commensurate
with the relative risk associated with investment in the fixed assets. The rate of return on tangible assets may be the calculated after-tax interest rate based on such indicators as (a)
observed rates charged by vendor financing, or (b) the weighted average returns for the level of debt and equity financing that could be secured for the tangible assets (see Section 4
of the CAC Monograph for further discussion).

The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete annual
calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a percent of
revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be considered a best practice. The significance of this assumption would
be based on the judgment of the valuation specialist.

Return Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired FV of Fixed Assets (1) $ 250 $ 214 $ 179 $ 143 $ 107 $ 71 $ 36 - - - -

Capital Expenditures (2):

Year 1 36 36 36 36 36 36 36 36 - - -
Year 2 50 50 50 50 50 50 50 50 - -
Year 3 56 56 56 56 56 56 56 56 -
Year 4 63 63 63 63 63 63 63 63
Year 5 66 66 66 66 66 66 66
Year 6 68 68 68 68 68 68
Year 7 70 70 70 70 70
Year 8 72 72 72 72
Year 9 74 74 74
Year 10 76 76
Residual 78

Total Return Of 286 300 321 348 378 410 445 481 519 545 567

Percent of Revenue 28.6% 28.6% 27.6% 26.6% 26.0% 25.7% 25.9% 26.4% 27.2% 27.6% 27.9%

Return On

Beginning Balance 1,000 1,000 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000
add: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
less: Return Of 286 300 321 348 378 410 445 481 519 545 567
Ending Balance 1,000 1,100 1,229 1,381 1,528 1,659 1,771 1,864 1,936 2,000 2,060

Average Fi
Fixed Assets 1,000
000 1
1,050
050 1
1,165
165 1
1,305
305 1
1,455
455 1
1,594
594 1,715
1 715 1,818
1 818 1,900
1 900 1,968
1 968 2,030
2 030

Mid-period Adjustment Factor 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On (3) 5% 48 50 56 62 69 76 82 87 91 94 97

Percent of Revenue 4.8% 4.8% 4.8% 4.7% 4.7% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%

Total Return On & Of 334 350 377 410 447 486 527 568 610 639 664
Total Return On & Of as Percent of Revenue 33% 33% 32% 31% 31% 30% 31% 31% 32% 32% 33%

(1) The economic depreciation (return of) of the acquired or current fixed assets is based on the fair value of the fixed assets of $1,000 as follows:

Remaining Economic Life (Years) FV Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
1 35.7 35.7
2 71.4 35.7 35.7
3 107.1 35.7 35.7 35.7
4 142.9 35.7 35.7 35.7 35.7
5 178.6 35.7 35.7 35.7 35.7 35.7
6 214.3 35.7 35.7 35.7 35.7 35.7 35.7
7 250.0 35.7 35.7 35.7 35.7 35.7 35.7 35.7
Total (rounded) 1,000 250 214 179 143 107 71 36
(2) Based on an 8 year economic life with the first year's return on occurring in the year of purchase.
(3) The 5% after-tax return on is discussed in Section 4 of the CAC Monograph.

26 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Fixed Assets: Contributory Asset Charge Based on Technique B - Level Payment Exhibit B-7

In Technique B, the CAC reflects both the return of and on and is calculated as a series of level annual payments based on an assumed 5% after-tax rate of return on fixed assets
(see CAC Monograph). In this exhibit, the CAC is calculated as a "loan payment" at the after-tax rate of return, or interest rate (with the loan payment conceptually including both
principle and interest). The calculation incorporates the fair value of the fixed assets and the remaining useful life for each asset group (waterfall payment) and assumes an 8-year
remaining useful life for capital expenditures in each year, consistent with the Adjusted Entity Value projections and the fair value of the fixed assets.

The Working Group recognizes that under circumstances where the fixed asset CAC as a percent of revenue would remain relatively stable (as is the case below) discrete annual
calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the fixed asset CAC as a percent of
revenue is projected to change (e.g., increasing asset utilization) then the discrete annual analysis would be considered a best practice. The significance of this assumption would
be based on the judgment of the valuation specialist.

Return On and Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired FV of Fixed Assets (1)

1-year 37
2-years 38 38
3-years 39 39 39
4-years (2) 40 40 40 40
5-years 41 41 41 41 41
6-years 42 42 42 42 42 42
7-years 43 43 43 43 43 43 43
8-years - - - - - - - -

Capital Expenditures (3):

Year 1 (4) 42 42 42 42 42 42 42 42 - - -
Year 2 59 59 59 59 59 59 59 59 - -
Year 3 66 66 66 66 66 66 66 66 -
Year 4 74 74 74 74 74 74 74 74
Year 5 77 77 77 77 77 77 77
Year 6 80 80 80 80 80 80
Year 7 82 82 82 82 82
Year 8 85 85 85 85
Year 9 87 87 87
Year 10 90 90
Residual 92

Total Return On & Of 324 346 373 408 445 483 523 565 610 641 667
% of Revenue 32% 33% 32% 31% 31% 30% 30% 31% 32% 32% 33%

(1) The level payment related to the acquired Fixed Assets is based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the prior 8
years, similar to Exhibit B-6. This waterfall calculation reflects individual level payment calculations for each asset life group.
(2) Sample calculation of the level payment for the acquired fixed assets with a remaining useful life of 4 years is as follows:
CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x (1+Discount Rate)^.5
= -PMT(5%,4,143,0,1) x (1 + 10%)^.5 = 40
(3) Individual level payment calculations for annual capital expenditures.
(4) Sample calculation of the level payment for the $286 of capital expenditures occurring in Year 1 with a remaining useful life of 8 years is as follows:

CAC = -PMT(After-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period)

= -PMT(5%,8,286,0,1) = 42

Copyright 2010 by The Appraisal Foundation. All rights reserved. 27

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Assembled Workforce: Growth Investment and Contributory Asset Charge Exhibit B-8
(Exhibit A-8)

This exhibit calculates the growth investment in AWF and the return on the AWF (the CAC). The fair value of the acquired or current AWF of $200 is estimated based on the
pre-tax replacement cost.
Future operating expenses include the cost to both grow and maintain the AWF. The initial investment to increase the AWF should be excluded to avoid double counting the initial
investment and the future maintenance expenses. In other words, the return on the AWF would increase due to its growth and future operating expenses provide for maintaining
the increase in the AWF (see CAC Monograph). The Working Group recognizes that this adjustment is generally minor and may be excluded in practice. However, such an
adjustment provides for a complete reconciliation of value in the context of this financial overlay.
The Working Group recognizes that under circumstances where the relationship between AWF and revenue (e.g., the revenue per employee) remains relatively stable, discrete
annual calculations may not be required, as demonstrated in the Practical Expedient in the CAC Monograph. However, in those circumstances where the relationship is projected to
significantly change (e.g., increasing revenue per employee), the discrete annual analysis would be considered a best practice. The need for discrete AWF calculations (and the
resulting AWF CAC) would be based on the judgment of the valuation specialist.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Growth 5% 5% 11% 12% 11% 10% 8% 6% 5% 4% 3%

Beginning Balance 200 211 222 246 276 308 338 364 386 404 419
add: Pre-Tax Investment in AWF Growth (1) 11 11 24 30 32 30 26 22 18 15 13
Ending Balance 211 222 246 276 308 338 364 386 404 419 432

Average Balance 206 217 234 261 292 323 351 375 395 412 426

Mid-period Adjustment Factor 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On (2) 10% 20 21 22 25 28 31 33 36 38 39 41

Percent of Revenue 2.0% 2.0% 1.9% 1.9% 1.9% 1.9% 1.9% 2.0% 2.0% 2.0% 2.0%

(1) Growth investment correlates to the annual increase in revenue. For example in Year 2 revenue increases by 5% and the AWF grows by $11 (5% x $211).
(2) The required rate of return on separately identified intangible assets such as the AWF may be estimated through the relative risk of the intangible asset compared
to the entitys overall WACC.

Revenue Analysis Exhibit B-9

(Exhibit A-9)

This exhibit provides the revenue attrition assumptions for the Trade Name, IP, and Customer Relationships for use in their respective valuations. The revenue projections for the
Trade Name of the acquiring entity, Future IP, and Future and Other Customers are provided for use in the financial overlay and reconciliation to the Adjusted Entity Value. The
derivation of these assumptions is outside of the scope of this Toolkit.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Trade Name - Acquired Entity $ 1,000 $ 1,050 $ 583 $ - $ - $ - $ - $ - $ - $ - $ -

Trade Name - Acquiring Entity - - 583 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035
Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

Current IP 1,000 900 700 400 200 50 - - - - -

Future IP - 150 465 906 1,256 1,546 1,718 1,823 1,907 1,976 2,035
Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

Customers Relationships 900 855 770 616 431 259 130 65 33 - -

Attrition (% of prior year) 95% 90% 80% 70% 60% 50% 50% 50% 0% 0%
Future & Other Customers 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035
Total Revenue 1,000 1,050 1,165 1,306 1,456 1,596 1,718 1,823 1,907 1,976 2,035

28 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Trade Name Analysis Exhibit B-10

This exhibit provides the assumed valuation of the Trade Names based on the relief from royalty method. This example assumes that the royalty of 5% is stated at a gross amount
and is reduced for the requisite advertising of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization benefit would not
be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to include this tax benefit. The tax amortization benefit is
added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.
The trade name may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would
apply.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 583 - - - - - - - -

Royalty Avoided (2) 5% 50 53 29 - - - - - - - -

less: Trade Name Advertising 0.5% 5 5 3 - - - - - - - -
EBIT 45 48 26 - - - - - - - -
Taxes @ 40% 18 19 10 - - - - - - - -
Debt-Free Net Income 27 29 16 - - - - - - - -
Residual Value -
Present Value Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Royalty Avoided 26 25 12 - - - - - - - -
Total PV Trade Name Income 63
Tax Amortization Benefit (4) 17
Fair Value - Trade Name 80

(1) Exhibit B-9.

(2) The pre-tax royalty avoided is based on royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is assumed to
be gross (e.g., inclusive of advertising expenses).
(3) A rate of return of 10% was assumed commensurate with the relative risk of investment in this asset (see Section 4 of CAC Monograph).
(4) Based on a 15 year straight-line amortization period, 40% tax rate and a 10% discount rate using a mid-period convention.

Intellectual Property Analysis Exhibit B-11

This exhibit provides the assumed valuation of the IP based on the relief from royalty method. This example assumes that the royalty of 10% is stated at a gross amount and is
reduced for the requisite maintenance R&D of 0.5%. The present value of this asset is provided for use in the financial overlay reconciliation. The tax amortization benefit would
not be included at this stage because the Adjusted Entity Value to which the reconciliation takes place, has not been revised to include this tax benefit. The tax amortization benefit
is added after the reconciliation and the application of the appropriate discount rate to arrive at fair value.
The IP may also provide defensive value. While the determination of defensive value is outside of the scope of this Toolkit, the same principles related to CACs would apply.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 900 $ 700 $ 400 $ 200 $ 50 - - - - -

Royalty Avoided (2) 10% 100 90 70 40 20 5 - - - - -
less: Maintenance R&D 0.5% 5 5 4 2 1 - - - - - -
EBIT 95 85 66 38 19 5 - - - - -
Taxes @ 40% 38 34 26 15 8 2 - - - - -
Debt-Free Net Income 57 51 40 23 11 3 - - - - -
Residual Value -
Present Value Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Royalty Avoided 54 44 31 16 7 2 - - - - -
Total PV Current IP Income 154
Tax Amortization Benefit (4) 42
Fair Value - IP 196

(1) Exhibit B-9.

(2) The pre-tax royalty avoided is based upon royalty rates that market participants would have to pay to license comparable intangible assets. The royalty rate is assumed
to be gross (e.g., inclusive of R&D expenses).
(3) A rate of return of 10% was assumed commensurate with the relative risk of investment in this asset (see Section 4 of CAC Monograph).
(4) Based on a 15 year straight-line amortization period, 40% tax rate and a 10% discount rate using a mid-period convention.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 29

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance Exhibit B-12

This exhibit uses the Average Annual Balance technique (Technique A) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM.
Aggregate CACs were estimated in the prior exhibits. An analysis of the subject intangible asset should be performed to assess the required levels of contributory assets. The
aggregate CACs on those assets are then allocated appropriately to the subject intangible asset. For the purposes of this example all contributory assets have been assumed to
benefit all customers equally and the CACs are allocated in proportion to revenue. The allocation of CACs is based on facts and circumstances. For example, in other
circumstances a disproportionate amount of the fixed assets may be used to manufacture the products sold to the separately identified customer relationships ($900 in revenue in
Year 1) versus the unidentified customers ($100 in Year 1). In a similar manner, the IP may be disproportionately allocable to the separately identified customer relationships rather
than the unidentified customers.
In addition to the CACs related to working capital, fixed assets and AWF, profit splits in the form of royalty rates were also applied for the use of the trade name and IP. This
example assumes that certain expense items (e.g., advertising and R&D) are included in the royalty rate and have been eliminated from the excess earnings to avoid double
counting the expense.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Customer Relationship Revenue (1) 900 855 770 616 431 259 130 65 33 - -
Gross Profit 90% 810 770 693 554 388 233 117 59 30 - -
Operating Expenses:
Maintenance R&D (2) 0.0% - - - - - - - - - - -
R&D - Future IP (2) 0.0% - - - - - - - - - - -
Trade name advertising (3) 0.0% - - - - - - - - - - -
Current customer marketing (4) 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing (5) - - - - - - - - - - -
Total marketing 27 26 23 18 13 8 4 2 1 - -
Total G&A 7% 63 60 54 43 30 18 9 5 2 - -
Total Operating Expenses 90 86 77 61 43 26 13 7 3 - -
EBITDA 720 684 616 493 345 207 104 52 27 - -
Depreciation (6) 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF (8) 18 16 13 9 6 3 2 1 - - -
EBIT 536 365 347 290 208 123 60 31 18 - -
less: Trade Name Royalty (7) 5% 45 43 39 31 22 13 7 3 2 - -
IP Royalty (7) 10% 90 86 77 62 43 26 13 7 3 - -
Adjusted EBIT 401 236 231 197 143 84 40 21 13 - -
Taxes 40% 160 94 92 79 57 34 16 8 5 - -
Debt Free Net Income 241 142 139 118 86 50 24 13 8 - -
add: Depreciation (6) 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF (8) 18 16 13 9 6 3 2 1 - -
AWF Growth Investment (9) 10 9 16 14 9 5 2 1 - - -
less: Return On Working Capital (10) 8 7 6 5 4 2 1 1 - - -
Return Of Fixed Assets (11) 257 244 212 164 112 67 34 17 9 - -
Return On Fixed Assets (11) 43 41 37 29 20 12 6 3 2 - -
Return On AWF (9) 18 17 15 12 8 5 2 1 1 - -
Excess Earnings 109 161 154 125 88 53 27 13 5 - -
Residual Value -

PV Factor (12) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 104 140 121 90 57 31 15 6 2 - -

Total PV Excess Earnings 566

Tax Amortization Benefit (13) 153
Fair Value - Customer Relationships 719

(1) Exhibit B-9.

(2) Maintenance and future R&D is assumed to be included in the 10% IP royalty rate (licensor responsible for all R&D in the future) and is therefore removed in the excess
earnings. The R&D expenses would be reflected as a reduction to the royalty in the valuation of the IP. Alternately, it may be determined that the royalty rate is stated
net of the R&D expenses in which case the R&D expenses would remain in the excess earnings.
(3) Advertising expenses removed under the same assumptions provided in footnote 2.
(4) Maintenance marketing expenses specific to current separately identified customer relationships.
(5) Marketing expenses related to creating and maintaining unidentified and future customer relationships are excluded.
(6) Exhibit B-3 amounts allocated in proportion to revenue.
(7) Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The same rates would be incorporated in the valuation of the trade name and IP.
Note that the royalty charge is applicable to both current and future contributory assets.
(8) Exhibit B-4 amounts allocated in proportion to revenue.
(9) Exhibit B-8 amounts allocated in proportion to revenue.
(10) Exhibit B-5 amounts allocated in proportion to revenue.
(11) Exhibit B-6 amounts allocated in proportion to revenue.
(12) A rate of return of 10% was assumed commensurate with the relative risk of investment in this asset (see Section 4 of CAC Monograph). A mid-period convention was
used.
(13) Based on a 15 year straight-line amortization period, 40% tax rate and a 10% discount rate utilizing a mid-period convention.

30 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Customer Relationships MPEEM: Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment Exhibit B-13

This exhibit uses the Level Payment technique (Technique B) for the calculation of fixed asset CACs in the valuation of customer relationships using an MPEEM. All other CACs and
adjustments discussed in Exhibit B-12 remain the same.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Customer Relationship Revenue 900 855 770 616 431 259 130 65 33 - -
Gross Profit 90% 810 770 693 554 388 233 117 59 30 - -
Operating Expenses:
Maintenance R&D 0.0% - - - - - - - - - - -
R&D - Future IP 0.0% - - - - - - - - - - -
Trade name advertising 0.0% - - - - - - - - - - -
Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing - - - - - - - - - - -
Total marketing 27 26 23 18 13 8 4 2 1 - -
Total G&A 7% 63 60 54 43 30 18 9 5 2 - -
Total Operating Expenses 90 86 77 61 43 26 13 7 3 - -
EBITDA 720 684 616 493 345 207 104 52 27 - -
Depreciation 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF 18 16 13 9 6 3 2 1 - - -
EBIT 536 365 347 290 208 123 60 31 18 - -
less: Trade Name Royalty 5% 45 43 39 31 22 13 7 3 2 - -
IP Royalty 10% 90 86 77 62 43 26 13 7 3 - -
Adjusted EBIT 401 236 231 197 143 84 40 21 13 - -
Taxes 40% 160 94 92 79 57 34 16 8 5 - -
Debt Free Net Income 241 142 139 118 86 50 24 13 8 - -
add: Depreciation 166 303 256 194 131 81 42 20 9 - -
Amortization - AWF 18 16 13 9 6 3 2 1 - -
AWF Growth Investment 10 9 16 14 9 5 2 1 - - -
less: Return On Working Capital 8 7 6 5 4 2 1 1 - - -
Return On & Of Fixed Assets (1) 292 281 247 192 132 78 40 20 11 - -
Return On AWF 18 17 15 12 8 5 2 1 1 - -
Excess Earnings 117 165 156 126 88 54 27 13 5 - -
Residual Value -

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 112 143 123 90 57 32 15 6 2 - -

Total PV Excess Earnings 580

Tax Amortization Benefit 157
Fair Value - Customer Relationships 737

(1) Exhibit B-7 amounts allocated in proportion to revenue.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 31

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique A - Average Annual Balance Exhibit B-14

This exhibit applies the Average Annual Balance technique (Technique A) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP; and
future and other customers) for reconciliation purposes in the context of a financial overlay.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Revenue (1) 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035
Gross Profit 90 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832
Operating Expenses:
Maintenance R&D (2) - - 2 5 6 8 9 9 10 10 10
R&D - Future IP (2) 25 26 29 33 36 40 43 46 48 49 51
Trade name advertising (3) - - 3 7 7 8 9 9 10 10 10
Current customer marketing (4) - - - - - - - - - - -
Future customer marketing (5) 18 22 29 40 53 64 73 80 84 89 92
Total marketing 18 22 32 47 60 72 82 89 94 99 102
Total G&A (6) 7 14 28 48 72 94 111 123 131 138 142
Total Operating Expenses 50 62 91 133 174 214 245 267 283 296 305
EBITDA 40 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527
Depreciation (6) 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF (6) 2 4 7 11 14 17 18 19 20 20 -
EBIT 20 40 127 259 424 553 651 758 852 900 946
less: Trade Name Royalty (7) 5 10 (10) (31) (22) (13) (7) (3) (2) - -
IP Royalty (7) 10 4 (7) (22) (23) (21) (13) (7) (3) - -
Adjusted EBIT 5 26 144 312 469 587 671 768 857 900 946
Taxes 40% 2 10 58 125 188 235 268 307 343 360 378
Debt Free Net Income 3 16 86 187 281 352 403 461 514 540 568
add: Depreciation 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF 2 4 7 11 14 17 18 19 20 20
AWF Growth Investment (8) 1 2 8 16 23 25 24 21 18 15 13
less: Return On Working Capital (9) 0 2 4 6 8 11 13 14 16 17 17
Return Of Fixed Assets (10) 29 56 109 184 266 343 411 464 510 545 567
Return On Fixed Assets (10) 5 9 19 33 49 64 76 84 89 94 97
Return On AWF (8) 2 4 7 13 20 26 31 35 37 39 41
Excess Earnings (12) 20 93 196 285 369 429 442 431 442 440
Residual Value 4,376

PV Factor (11) 13.05% 0.9405 0.8319 0.7359 0.6510 0.5758 0.5093 0.4505 0.3985 0.3525 0.3118 0.3118

PV Excess Earnings (12) 17 69 128 164 188 193 176 152 138 1,365

Total PV Excess Earnings 2,578

Tax Amortization Benefit (12) 567
Total Including TAB 3,145

(1) Exhibit B-9.

(2) Maintenance and future R&D.
(3) Advertising related to the acquiring entity trade name.
(4) Maintenance marketing expenses specific to and absorbed by the current separately identified customer relationships.
(5) Marketing expenses related to creating and maintaining unidentified and future customer relationships.
(6) Exhibit B-4 amounts allocated in proportion to revenue.
(7) The royalty applied to the customer relationships revenue reflects the use of both current and future trade name and IP assets (see CAC Monograph). Therefore the
royalty reflected in the unidentified excess earnings becomes negative (or is added back) to recognize the royalties that were deducted from the customer
relationship excess earnings calculation. Royalty rates assumed to be gross (e.g., inclusive of advertising and R&D expenses). The trade name royalty is calculated
by deducting the royalty per Exhibit BA-12 (or B-13) from that on Exhibit B-10. The IP royalty is calculated by deducting the royalty per Exhibit B-12 (or B-13) from that
on Exhibit B-11.
(8) Exhibit B-8 amounts allocated in proportion to revenue.
(9) Exhibit B-5 amounts allocated in proportion to revenue.
(10) Exhibit B-6 amounts allocated in proportion to revenue.
(11) Implied rate of return that reconciles the total asset values to the Adjusted Entity Value (Exhibit B-17, column headers A & B), based on a mid-period convention.
(12) Based on a 15 year straight-line amortization period, 40% tax rate and a 13.05% discount rate utilizing a mid-period convention.

32 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Unidentified Excess Earnings (MPEEM): Fixed Asset Contributory Asset Charge Based on Technique B - Level Payment Exhibit B-15

This exhibit applies the Level Payment technique (Technique B) to separate the unidentified excess earnings (consisting of the acquiring entity trade name; future IP; and future and
other customers) for reconciliation purposes in the context of a financial overlay. All other CACs and adjustments discussed in Exhibit B-14 remain the same.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Future & Other Customer Revenue 100 195 395 690 1,025 1,337 1,588 1,758 1,874 1,976 2,035
Gross Profit 90 175 356 621 922 1,203 1,429 1,582 1,686 1,778 1,832
Operating Expenses:
Maintenance R&D - - 2 5 6 8 9 9 10 10 10
R&D - Future IP 25 26 29 33 36 40 43 46 48 49 51
Trade name advertising - - 3 7 7 8 9 9 10 10 10
Current customer marketing - - - - - - - - - - -
Future customer marketing 18 22 29 40 53 64 73 80 84 89 92
Total marketing 18 22 32 47 60 72 82 89 94 99 102
Total G&A 7 14 28 48 72 94 111 123 131 138 142
Total Operating Expenses 50 62 91 133 174 214 245 267 283 296 305
EBITDA 40 113 265 488 748 989 1,184 1,315 1,403 1,482 1,527
Depreciation 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF 2 4 7 11 14 17 18 19 20 20 -
EBIT 20 40 127 259 424 553 651 758 852 900 946
less: Trade Name Royalty 5 10 (10) (31) (22) (13) (7) (3) (2) - -
IP Royalty 10 4 (7) (22) (23) (21) (13) (7) (3) - -
Adjusted EBIT 5 26 144 312 469 587 671 768 857 900 946
Taxes 40% 2 10 58 125 188 235 268 307 343 360 378
Debt Free Net Income 3 16 86 187 281 352 403 461 514 540 568
add: Depreciation 18 69 131 218 310 419 515 538 531 562 581
Amortization - AWF 2 4 7 11 14 17 18 19 20 20
AWF Growth Investment 1 2 8 16 23 25 24 21 18 15 13
less: Return On Working Capital 0 2 4 6 8 11 13 14 16 17 17
Return On & Of Fixed Assets (1) 32 65 126 216 313 405 483 545 599 641 667
Return On AWF 2 4 7 13 20 26 31 35 37 39 41
Excess Earnings (10) 21 95 198 287 370 432 445 431 441 437
Residual Value 4,349

PV Factor 13.05% 0.9405 0.8319 0.7359 0.6510 0.5758 0.5093 0.4505 0.3985 0.3525 0.3118 0.3118

PV Excess Earnings (10) 17 70 129 165 189 195 177 152 137 1,356

Total PV Excess Earnings 2,577

Tax Amortization Benefit 567
Total Including TAB 3,144

(1) Exhibit B-7 amounts allocated in proportion to revenue.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 33

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Income Reconciliation Exhibit B-16

(Exhibit A-16)

Provides an income reconciliation for the income based intangible assets to reconcile the debt free net income inherent in the respective assets to the Adjusted Entity Value debt
free net income. This is a complimentary analysis to the value reconciliation. This also provides support for the income allocation in the context of a financial overlay.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Trade Name Royalty - Acquired Co. (1) $ 50 $ 53 $ 29 $ - $ - $ - $ - $ - $ - $ - $ -

Current IP Royalty (2) 100 90 70 40 20 5 - - - - -
Total Royalty 150 143 99 40 20 5 - - - - -

Expense Adjustments
Trade Name Advertising - Acquired Co. (1) 5 5 3 - - - - - - - -
Maintenance R&D - Current IP (2) 5 5 4 2 1 - - - - - -

Total Expense Adjustments 10 10 7 2 1 - - - - - -

Total Pre-tax income adjustments 140 133 92 38 19 5 - - - - -

Taxes 40% 56 53 37 15 8 2 - - - - -

Total After-tax income adjustments 84 80 55 23 11 3 - - - - -

Customer Relationships DFNI (3) 241 142 139 118 86 50 24 13 8 - -

Unidentified DFNI (4) 3 16 86 187 281 352 403 461 514 540 568

Total DFNI Reconciliation 328 238 280 328 378 405 427 474 522 540 568

DFNI from Adjusted Entity Value (5) 328 237 280 328 379 406 427 473 522 540 568

Difference - (1) - - 1 1 - (1) - - -

(1) Exhibit B-10.

(2) Exhibit B-11.
(3) Exhibits B-12 and B-13.
(4) Exhibits B-14 and B-15.
(5) Exhibit B-4.

34 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Financial Overlay Summary Exhibit B-17

The comprehensive nature of this diagnostic financial overlay provides assurance that the entity's PFI has been fully apportioned among the assets (Section A) and detailed insight
into the implied rate of return for the excess purchase price (goodwill). With such a framework, the relative value of all assets (both separately identified assets and the excess
purchase price/goodwill) should be assessed for reasonableness and assumptions modified as appropriate. Such an assessment could include a reassessment or consideration of
issues such as the following:

Relative rates of return and discount rates, both derived and implied;
Magnitude of the residual value (excess purchase price or goodwill);
Royalty rates and other revenue or profit split assumptions;
Allocation of the respective CACs to the current and future assets; and
Other assumptions based on the facts and circumstances specific to the analysis.

This assessment of relative values should give specific consideration to the tax benefit of depreciation or amortization that has been incorporated into the respective asset values
and not for those assets to which the value of this tax benefit has not yet been added (such as those assets valued by the relief from royalty method, representing a profit split in the
MPEEM rather than a CAC). This assessment is performed in the context of the Adjusted Entity Value, therefore the value reconciliation and calculation of the implied rate of return
on the excess purchase price should be performed with assumptions consistent with those in the Adjusted Entity Value. For example, the Entity Value was adjusted for the tax
benefit of depreciating the fair value of the fixed assets and amortizing the AWF, therefore the reconciliation should consider the fair value of these assets. The tax amortization
benefit related to the other separately identified intangible assets (acquired entity trade name, IP, and customer relationships) should be applied after the reconciliation is performed
as this benefit has not been included in the PFI.

An alternative approach would be to include the tax amortization benefit of all the intangible assets to arrive at the Adjusted Entity Value and the assets in the reconciliation.
However, such an approach creates additional complexities and should result in the same outcome as demonstrated in this example.
A summary of the two techniques applied to the fixed assets are provided in columns A (Average Annual Balance) and B (Level Payment). These columns A&B provide the
reconciliation to the Adjusted Entity Value excluding the tax depreciation/amortization benefit for all assets except the fixed assets and AWF (as these cash flow benefits are included
in the Adjusted Entity Value). Columns FV A & FV B are inclusive of the TAB for all assets as indicated. This calculation is provided as it serves as the basis for the WARA
calculation in Exhibit B-18.

Rate of TAB %
Return A B (6) FV A FV B
Working Capital 3% $ 285 $ 285 n/a $ 285 $ 285
Fixed Assets 5% 1,000 1,000 n/a 1,000 1,000
Trade Name - Acquired Co. (1) 10% 63 63 27% 80 80
IP (Current) (2) 10% 154 154 27% 196 196
Customer Relationships (3) 10% 566 580 27% 719 737
Total Separately Identified Assets 2,068 2,082 2,280 2,298

AWF 10% 200 200 n/a 200 200

Excess Purchase Price/Goodwill (4) 13.05% 2,578 2,577 22% 3,145 3,144
Total 2,778 2,777 3,345 3,344

Total Net Assets 4,846 4,859 5,625 5,642

Adjusted Entity Value (5) 10% 4,855

(1) Exhibit B-10.

(2) Exhibit B-11.
(3) Technique A: Exhibit B-12; Technique B: Exhibit B-13.
(4) Technique A: Exhibit B-14; Technique B: Exhibit B-15. 13.05% is the implied rate of return calculated based on the specific identification of the cash flows. This
calculation is similar to that included in the WARA analysis. However, this analysis results in an implied rate of return that is slightly greater than that calculated in the
WARA (12.2%, Exhibit B-18).
(5) Exhibit B-4.
(6) Based on a 15 year straight-line amortization period, 40% tax rate and the respective 10% discount rates for the assets using a mid-period convention.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 35

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Weighted Average Return on Assets (WARA) Exhibit B-18

The WARA analysis is applied to the fair value of the assets and the implied rate of return on goodwill (excess purchase price) is calculated. The purpose of the WARA is the
assessment of the reasonableness of the asset-specific returns for separately identified intangible assets and the implied (or calculated) return on the goodwill (excess purchase
price). The WARA then should be compared to the derived market-based WACC (see CAC Monograph).
Note: the implied rate of return on the goodwill (excess purchase price) in this WARA calculation is 12.2% compared to the explicit calculation of 13.05% in Exhibit A-17. This
differential is due to the embedded rounding nature of the WARA calculation and the impact of the timing of the cash flows.

Average Annual Balance (FV A) Level Payment (FV B)

Fair Rate of Weighted Fair Rate of Weighted
Value Return Return Value Return Return

Working Capital (1) $ 285 3% $ 8.6 $ 285 3% $ 8.6

Fixed Assets (2) 1,000 5% 50.0 1,000 5% 50.0
Trade Name (3) 80 10% 8.0 80 10% 8.0
IP (4) 196 10% 19.6 196 10% 19.6
Customer Relationships (5) 719 10% 71.9 737 10% 73.7
AWF (6) 200 10% 20.0 200 10% 20.0
Excess Purchase Price/Goodwill (7) 3,145 12.2% 383.7 3,144 12.2% 383.6

Total (8) 5,625 10.0% 561.7 5,642 10.0% 563.4

(1) Exhibit B-5.

(2) Exhibit B-6.
(3) Exhibit B-10.
(4) Exhibit B-11.
(5) Exhibits B-12 and B-13. The Working Group believes that both of these values are within an acceptable range of results as the difference is the result of timing
differences inherent in the CAC calculations.
(6) Exhibit B-8.
(7) Other than AWF. Actual recorded goodwill will differ from the excess purchase price/goodwill shown here due to other purchase accounting adjustments.
(8) Includes the TAB assuming an asset transaction (Exhibit B-17).

36 Copyright 2010 by The Appraisal Foundation. All rights reserved.

THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

SECTION C:
INDIVIDUAL ASSET
RECONCILIATIONS

This section of the Toolkit provides an analysis of the respective assets individually to demonstrate the
application of the CAC methodology to the various contributory assets. These calculations are the same as those
performed in Section A and provide a reconciliation to the Adjusted Entity Value for each of the contributory
assets. Stratified rates of return also have been applied to the working capital and fixed asset examples to
demonstrate their individual calculations. The purpose of these individual examples is to provide the user with
examples of the respective calculations on a stand-alone basis to isolate the specific calculations.

Each of these examples applies the CAC calculations in the context of the Adjusted Entity Value and does not
provide for the next step of apportioning the excess income among other assets. The intent of the reconciliation
process is to demonstrate that the aggregate MPEEM adjusted for each of the respective contributory assets
results in the following relationship:

Aggregate present value of the Multi-Period Excess Earnings after consideration of a given
contributory asset in isolation (as if it were the only contributory asset)
+ fair value of the assumed sole contributory asset = Adjusted Entity Value

Copyright 2010 by The Appraisal Foundation. All rights reserved. 37

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Working Capital CAC and Reconciliation Exhibit C-1

This analysis isolates the working capital CAC in the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and applied in the context
of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the working capital CAC only). The annual average balance of the working capital, consistent with the
Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.
The outcome of this analysis demonstrates that when the CACs are applied to working capital in the context of the Adjusted Entity Value, no value is created or destroyed in the
context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual
Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (1) 328 237 280 328 379 406 427 473 522 540 568
less: Incremental Working Capital (2) - - - - - - - - - - -
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627
Return On Working Capital (3) 28 29 32 35 40 44 47 51 53 56 57
Excess Earnings (4) 218 200 205 225 275 341 400 426 438 457 465
Residual Value (5) 6,636
PV Factor (3) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Excess Earnings 208 173 162 161 179 202 215 209 195 185 2,683
Total PV Excess Earnings 4,572
Working Capital (6) 285
Total 4,857
Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit A-4.

(2) Incremental working capital is removed as it is captured in the average annual balance of the working capital. Therefore, the return on working capital also captures
future increases in working capital.
(3) Based on a 10% rate of return on the average annual working capital balance and a 10% discount rate applied to the excess earnings (Exhibit A-5). The 10% rate of
return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for working capital. All other adjustments have been excluded to
isolate the calculation of the working capital CAC within the financial overlay process provided in Section A.
(5) Based on constant growth model assuming a 3% long-term growth rate.
(6) Beginning working capital balance (Exhibit A-5).

Working Capital CAC and Reconciliation (Stratified Rates) Exhibit C-1a

This analysis modifies that in Exhibit C-1 to reflect the application of stratified rates. The outcome of this analysis demonstrates that when the CACs are applied to working capital
in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (1) 328 237 280 328 379 406 427 473 522 540 568
less: Incremental Working Capital (2) - - - - - - - - - - -
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627
Return On Working Capital (3) 8 9 10 11 12 13 14 15 16 17 17
Excess Earnings (4) 238 220 227 249 303 372 433 462 475 496 505
Residual Value (5) 6,658

PV Factor (6) 10.6% 0.9510 0.8600 0.7777 0.7033 0.6360 0.5751 0.5201 0.4703 0.4253 0.3846 0.3846

PV Excess Earnings 226 189 177 175 193 214 225 217 202 191 2,561

Total PV Excess Earnings 4,570

Working Capital (7) 285
Total 4,855

Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit B-4.

(2) Incremental working capital is removed as it is captured in the average annual balance of the working capital. Therefore, the return on working capital also captures
future increases in working capital.
(3) Based on a 3% after-tax rate of return on the average annual working capital balance (Exhibit B-5).
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for working capital. All other adjustments have been excluded to
isolate the calculation of the working capital CAC within the financial overlay process provided in Section B.
(5) Based on constant growth model assuming a 3% long-term growth rate.
(6) Implied rate of return required to reconcile to the Adjusted Entity Value, based on a mid-period convention.
(7) Beginning working capital balance (Exhibit B-5).

38 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Fixed Asset CAC Based on Technique A - Average Annual Balance and Reconciliation Exhibit C-2

This analysis isolates the Average Annual Balance fixed asset CAC in the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and
applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the fixed asset CAC based on the Average Annual Balance technique only). The
annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the
annual CAC.
The outcome of this analysis demonstrates that when the CACs are applied to the Average Annual Balance fixed assets in the context of the Adjusted Entity Value, no value is
created or destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual
Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (1) 328 237 280 328 379 406 427 473 522 540 568
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (2) - - - - - - - - - - -
Return Of Fixed Assets (3) 286 300 321 348 378 410 445 481 519 545 567
Return On Fixed Assets (3) 95 100 111 124 139 152 164 173 181 188 194
Excess Earnings (4) 136 214 220 246 278 322 358 365 357 368 370
Residual Value (5) 5,286
PV Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Excess Earnings 130 185 173 176 181 191 193 179 159 149 2,137
Total PV Excess Earnings 3,853
Fair Value of Fixed Assets (3) 1,000
Total 4,853
Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit A-4.

(2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures
future increases in fixed assets.
(3) Exhibit A-6.
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate
the calculation of the fixed asset CAC within the financial overlay process provided in Section A.
(5) Based on constant growth model assuming a 3% long-term growth rate.
(6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

Fixed Asset CAC Based on Technique A - Average Annual Balance and Reconciliation (Stratified Rates) Exhibit C-2a

This analysis modifies that in Exhibit C-2 to reflect the application of stratified rates. The outcome of this analysis demonstrates that when the CACs are applied to the Average
Annual Balance fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (1) 328 237 280 328 379 406 427 473 522 540 568
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (2) - - - - - - - - - - -
Return Of Fixed Assets (3) 286 300 321 348 378 410 445 481 519 545 567
Return On Fixed Assets (3) 48 50 56 62 69 76 82 87 91 94 97
Excess Earnings (4) 183 264 275 308 348 398 440 451 447 462 467
Residual Value (5) 5,356

PV Factor (6) 11.7% 0.9461 0.8468 0.7580 0.6785 0.6073 0.5436 0.4866 0.4355 0.3898 0.3489 0.3489

PV Excess Earnings 173 224 208 209 211 216 214 196 174 161 1,869

Total PV Excess Earnings 3,855

Fair Value of Fixed Assets (7) 1,000
Total 4,855

Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit B-4.

(2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures
future increases in fixed assets.
(3) Exhibit B-6. Return on is based on a 5% after-tax rate of return on the average annual fixed asset balance.
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate
the calculation of the fixed asset CAC within the financial overlay process provided in Section B.
(5) Based on constant growth model assuming a 3% long-term growth rate.
(6) Implied rate of return required to reconcile to the Adjusted Entity Value, based on a mid-period convention.
(7) Beginning fixed asset balance (Exhibit B-6).

Copyright 2010 by The Appraisal Foundation. All rights reserved. 39

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation Exhibit C-3

This analysis isolates the Level Payment fixed asset CAC in the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and applied in
the context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the fixed asset CAC based on the Level Payment technique only). The annual average
balance of the fixed assets, consistent with the Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.
The outcome of this analysis demonstrates that when the CACs are applied to the Level Payment fixed assets in the context of the Adjusted Entity Value, no value is created or
destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual
Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (1) 328 237 280 328 379 406 427 473 522 540 568
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (2) - - - - - - - - - - -
Return On and Of Fixed Assets (3) 350 381 418 463 509 556 604 653 705 741 771
Excess Earnings (4) 167 233 234 255 286 328 363 366 352 360 360
Residual Value (5) 5,144
PV Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Excess Earnings 159 202 184 183 186 194 195 179 157 146 2,080
Total PV Excess Earnings 3,865
Fair Value of Fixed Assets (7) 1,000
Total 4,865
Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit A-4.

(2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures
future increases in fixed assets.
(3) Exhibit A-7.
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate
the calculation of the fixed asset CAC within the financial overlay process provided in Section B.
(5) Based on constant growth model assuming a 3% long-term growth rate.
(6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.
(7) Exhibit A-6.

Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation (Stratified Rates) Exhibit C-3a

This analysis modifies that in Exhibit C-3 to reflect the application of stratified rates. The outcome of this analysis demonstrates that when the CACs are applied to the Level
Payment fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (1) 328 237 280 328 379 406 427 473 522 540 568
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (2) - - - - - - - - - - -
Return On and Of Fixed Assets (3) 324 346 373 408 445 483 523 565 610 641 667
Excess Earnings (4) 193 268 279 310 350 401 444 454 447 460 464
Residual Value (5) 5,309

PV Factor (6) 11.7% 0.9460 0.8465 0.7576 0.6779 0.6067 0.5429 0.4858 0.4347 0.3890 0.3481 0.3481

PV Excess Earnings 183 227 211 210 212 217 216 197 174 160 1,848

Total PV Excess Earnings 3,855

Fair Value of Fixed Assets (7) 1,000
Total 4,855

Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit B-4.

(2) Capital expenditures are removed as they are captured in the average annual balance of the fixed assets. Therefore, the return on and of fixed assets also captures
future increases in fixed assets.
(3) Exhibit B-7. Return on based on a 5% after-tax rate of return.
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate
the calculation of the fixed asset CAC within the financial overlay process provided in Section B.
(5) Based on constant growth model assuming a 3% long-term growth rate.
(6) Implied rate of return required to reconcile to the Adjusted Entity Value, based on a mid-period convention.
(7) Exhibit B-6.

40 Copyright 2010 by The Appraisal Foundation. All rights reserved.

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Assembled Workforce CAC and Reconciliation Exhibit C-4

This analysis isolates the assembled workforce CAC in the financial overlay provided in Section A. As in Section A, the analysis is performed in aggregate and applied in the
context of an aggregate MPEEM (e.g., Adjusted Entity Value projections and the assembled workforce CAC only). The annual average balance of the assembled workforce,
consistent with the Adjusted Entity Value projections, is calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.
The outcome of this analysis demonstrates that when the CACs are applied to the assembled workforce in the context of the Adjusted Entity Value, no value is created or
destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
EBITDA (1) 750 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527
Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
EBIT 546 395 467 547 631 676 711 789 870 900 946
Taxes 40% 218 158 187 219 252 270 284 316 348 360 378
Debt Free Net Income 328 237 280 328 379 406 427 473 522 540 568
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20
AWF Growth Investment (2) 11 11 24 30 32 30 26 22 18 15 13
less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627
Return On AWF (2) 20 21 22 25 28 31 33 36 38 39 41
Excess Earnings (3) 222 204 204 223 274 342 403 431 446 468 476
Residual Value (4) 6,794

PV Factor (5) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 211 177 161 160 178 202 217 211 198 189 2,747

Total PV Excess Earnings 4,651

Fair Value AWF (2) 200
Total 4,851

Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit A-4.

(2) Exhibit A-8.
(3) As stated, this is a limited-use excess earnings calculation to demonstrate the CAC calculations for the AWF. All other adjustments have been excluded to isolate
the calculation of the AWF CAC within the financial overlay process provided in Section A.
(4) Based on constant growth model assuming a 3% long-term growth rate.
(5) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 41

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Trade Name CAC and Reconciliation Exhibit C-5

This analysis isolates the trade name royalty in the financial overlay provided in Section A. As in Section A, the analysis is performed in aggregate and applied in the context of
an aggregate MPEEM (e.g., Adjusted Entity Value projections and the trade name royalty only). The royalty rate and related adjustments are applied to the Adjusted Entity
Value projections and the IRR/WACC 10% rate of return is applied.
The outcome of this analysis demonstrates that when the royalty rate (profit split) related to the trade name is shown in the context of the Adjusted Entity Value, no value is
created or destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Gross Profit (1) 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832
Operating Expenses:
Maintenance R&D (1) 0.5% 5 5 6 7 7 8 9 9 10 10 10
R&D - Future IP (1) 2.5% 25 26 29 33 36 40 43 46 48 49 51
Trade name advertising (2) 0.5% - - - - - - - - - - -
Current customer marketing (1) 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing (1) 18 22 29 40 53 64 73 80 84 89 92
Total marketing 45 48 52 58 66 72 77 82 85 89 92
Total G&A (1) 7% 70 74 82 91 102 112 120 128 133 138 142
Total Operating Expenses 145 153 169 189 211 232 249 265 276 286 295
EBITDA 755 792 880 986 1,099 1,204 1,297 1,376 1,440 1,492 1,537
Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
EBIT 551 400 473 554 638 684 720 798 880 910 956
less: Trade Name Royalty (3) 5% 50 53 58 65 73 80 86 91 95 99 102
Adjusted EBIT 501 347 415 489 565 604 634 707 785 811 854
Taxes 40% 200 139 166 196 226 242 254 283 314 324 342
Debt Free Net Income 301 208 249 293 339 362 380 424 471 487 512
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627
Excess Income (4) 204 185 171 183 230 299 363 396 415 439 448
Residual Value (5) 6,406

PV Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 194 161 135 131 150 177 196 194 185 177 2,590

Total PV Excess Earnings 4,290

PV Acquired Trade Name (7) 63
PV Acquiring Co. Trade Name (8) 502
Total 4,855

Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit A-4.

(2) The advertising expense was applied to the trade name, therefore it is eliminated here to avoid double counting the expense. Advertising is assumed to be included in
the 5% trade name royalty rate (licensor responsible for all advertising in the future) and is therefore removed from the excess earnings. The advertising expenses are
reflected as a reduction to the royalty in the valuation of the trade name. Alternately, it may be determined that the royalty rate is stated net of the advertising expenses
in which case the advertising expenses would remain in the excess earnings.
(3) The royalty is applied to total revenue to reflect the use of the trade names of both the acquired entity as well as the acquiring entity. The royalty rate is assumed to be
gross (e.g., inclusive of advertising expenses).
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the royalty calculations for the trade name. All other adjustments have been excluded to
isolate the calculation of the trade name royalties within the financial overlay process provided in Section A.
(5) Based on a constant growth model assuming a 3% long-term growth rate.
(6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.
(7) Exhibit A-10.
(8) The following is a calculation of the present value of the trade name of the acquiring entity (using relief from royalty method) to demonstrate the reconciliation to the
Adjusted Entity Value. It is provided to be consistent with the application of the trade name royalty beyond the RUL of the acquired entity trade name. These cash flows
are included in the unidentified excess earnings used in the financial overlay (Exhibits A-14 & A-15) and are a component of goodwill.

Acquiring Entity Trade Name Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (a) $ - $ - $ 583 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Royalty Avoided 5% - - 29 65 73 80 86 91 95 99 102
less: Trade Name Advertising 0.5% - - 3 7 7 8 9 9 10 10 10
EBIT - - 26 58 66 72 77 82 85 89 92
Taxes @ 40% - - 10 23 26 29 31 33 34 36 37
Debt-Free Net Income - - 16 35 40 43 46 49 51 53 55
Residual Value 789
Present Value Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Royalty Avoided - - 12 25 26 26 25 24 23 22 319
Total PV Trade Name Income 502

(a) Exhibit A-9

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 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Intellectual Property CAC and Reconciliation Exhibit C-6

This analysis isolates the IP royalty in the financial overlay provided in Section A. As in Section A, the analysis is performed in aggregate and applied in the context of an
aggregate MPEEM (e.g., Adjusted Entity Value projections and the IP royalty only). The royalty rate and related adjustments are applied to the Adjusted Entity Value projections
and the IRR/WACC 10% rate of return is applied.
The outcome of this analysis demonstrates that when the royalty rate (profit split) related to the IP is shown in the context of the Adjusted Entity Value, no value is created or
destroyed in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Gross Profit (1) 90% 900 945 1,049 1,175 1,310 1,436 1,546 1,641 1,716 1,778 1,832
Operating Expenses:
Maintenance R&D (2) 0.5% - - - - - - - - - - -
R&D - Future IP (2) 2.5% - - - - - - - - - - -
Trade name advertising (1) 0.5% 5 5 6 7 7 8 9 9 10 10 10
Current customer marketing (1) 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing (1) 18 22 29 40 53 64 73 80 84 89 92
Total marketing 5% 50 53 58 65 73 80 86 91 95 99 102
Total G&A (1) 7% 70 74 82 91 102 112 120 128 133 138 142
Total Operating Expenses 120 127 140 156 175 192 206 219 228 237 244
EBITDA 780 818 909 1,019 1,135 1,244 1,340 1,422 1,488 1,541 1,588
Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
EBIT 576 426 502 587 674 724 763 844 928 959 1,007
less: IP Royalty (3) 10% 100 105 117 131 146 160 172 182 191 198 204
Adjusted EBIT 476 321 385 456 528 564 591 662 737 761 803
Taxes 40% 190 128 154 182 211 226 236 265 295 304 321
Debt Free Net Income 286 193 231 274 317 338 355 397 442 457 482
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627
Excess Income (4) 189 170 153 164 208 275 338 369 386 409 418
Residual Value (5) 5,969

PV Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 180 147 121 117 135 163 182 181 172 165 2,414

Total PV Excess Earnings 3,977

PV Current IP (7) 154
PV Future IP (8) 723
Total 4,854

Adjusted Entity Value (1) 4,855

(1) From Adjusted Entity Value Exhibit A-4.

(2) The R&D expense was applied to the IP, therefore it is eliminated here to avoid double counting the expense. Maintenance and future R&D is assumed to be included
in the 10% IP royalty rate (licensor responsible for all R&D in the future) and is therefore removed in the excess earnings. The R&D expenses are reflected as a
reduction to the royalty in the valuation of the IP. Alternately, it may be determined that the royalty rate is stated net of the R&D expenses in which case the R&D
expenses would remain in the excess earnings.
(3) The royalty is applied to total revenue to reflect the use of the current and future IP. The royalty rate is assumed to be gross (e.g., inclusive of R&D expenses).
(4) As stated, this is a limited-use excess earnings calculation to demonstrate the royalty calculations for the IP. All other adjustments have been excluded to
isolate the calculation of the IP royalties within the financial overlay process provided in Section A.
(5) Based on a constant growth model assuming a 3% long-term growth rate.
(6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.
(7) Exhibit A-11.
(8) The following is a calculation of the present value of the future IP to demonstrate the reconciliation to the Adjusted Entity Value. It is provided to be consistent with
the application of the IP royalty beyond the RUL of the current IP. These cash flows are included in the unidentified excess earnings used in the financial overlay
(Exhibits A-14 & A-15) and are a component of goodwill.

Future IP Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual
Revenue (a) $ - $ 150 $ 465 $ 906 $ 1,256 $ 1,546 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Royalty Avoided 10% - 15 47 91 126 155 172 182 191 198 204
less: Maintenance R&D 0.5% - 1 2 5 6 8 9 9 10 10 10
R&D - Future IP (1) 25 26 29 33 36 40 43 46 48 49 51
EBIT (25) (12) 16 53 84 107 120 127 133 139 143
Taxes @ 40% (10) (5) 6 21 34 43 48 51 53 56 57
Debt-Free Net Income (15) (7) 10 32 50 64 72 76 80 83 86
Residual Value 1,226
Present Value Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV Royalty Avoided (14) (6) 8 23 33 38 39 37 35 34 496
Total PV Future IP Income 723

(a) Exhibit A-9

Copyright 2010 by The Appraisal Foundation. All rights reserved. 43

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

THIS PAGE INTENTIONALLY LEFT BLANK.

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SECTION D:
MISCELLANEOUS ISSUES

This section of the Toolkit provides a discussion and analysis of other types of contributory assets and
additional issues.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 45

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Non-Compete Agreements Exhibit D-1

Non-compete valuations vary widely based on the facts and circumstances of each case and the impact they have on the component assets of an entity. This sample analysis assumes
that a non-compete agreement affects all of the entity's intangible assets. The issue arises in the application of CACs to the various intangible assets for the value of the non-compete
agreement. This example assumes that the non-compete agreement's value is determined through a "with and without competition" analysis.
For the purposes of this example, the following changes in the Exhibit A-4 Adjusted Entity Value assumptions (which reflect the appropriate probability adjustments) were made for the
scenario where the non-compete was not in place:
Revenue is 80% of the Adjusted Entity Value projection for years 1 - 5 (the contractual period of the non-compete);
Current customer marketing increased by 15% for years 1 - 5 to respond to the increased competition; and
Incremental working capital is reduced to correlate with the revenue reduction.
Based on the following example, the Adjusted Entity Value is reduced to $4,366. Applying the analysis provided in Sections A and B to this reduced Adjusted Entity Value will provide for
an application of the CAC for the non-compete to the analysis of the respective assets.
Alternatively, where the non-compete provides for the protection of specific subject assets, an alternative form of an income split may be appropriate. Exhibit D-1a provides a sample of
this approach.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue $ 800 $ 840 $ 932 $ 1,045 $ 1,165 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Gross Profit 90% 720 756 839 940 1,048 1,436 1,546 1,641 1,716 1,778 1,832
Operating Expenses:
Maintenance R&D 0.5% 5 5 6 7 7 8 9 9 10 10 10
R&D - Future IP 2.5% 25 26 29 33 36 40 43 46 48 49 51

Trade name advertising 0.5% 5 5 6 7 7 8 9 9 10 10 10

Current customer marketing 31 30 26 21 15 8 4 2 1 - -
Future customer marketing 18 22 29 40 53 64 73 80 84 89 92
Total marketing 54 57 61 68 75 80 86 91 95 99 102
Total G&A 7% 70 74 82 91 102 112 120 128 133 138 142
Total Operating Expenses 154 162 178 199 220 240 258 274 286 296 305
EBITDA 566 594 661 741 828 1,196 1,288 1,367 1,430 1,482 1,527
Depreciation 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF 20 20 20 20 20 20 20 20 20 20 -
EBIT 362 202 254 309 367 676 711 789 870 900 946
Taxes 40% 145 81 101 124 147 270 284 316 348 360 378
Debt Free Net Income 217 121 153 185 220 406 427 473 522 540 568
less: Incremental Working Capital 30% (45) 12 28 34 36 129 37 32 25 21 18
add: Depreciation 184 372 387 412 441 500 557 558 540 562 581
Amortization - AWF 20 20 20 20 20 20 20 20 20 20
less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
Debt Free Cash Flow 180 101 82 83 120 256 410 445 466 492 504
Residual Value 7,200

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV DFCF 172 88 64 60 78 152 221 218 207 199 2,911

Adjusted Entity Value

With Competition (1) 4,370

Adjusted Entity Value (2) 4,855

Diffential due to Non-Compete (3) 485

(1) Reflects the assumed expected impact of competition (adjusted for appropriate probability).
(2) From Adjusted Entity Value Exhibit A-4.
(3) This differential is assumed to be attributable to the non-compete agreement and would be adjusted for a TAB as appropriate.

46 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Non-Compete Agreements (Alternative Approach - Specific Asset Income Split) Exhibit D-1a

The facts and circumstances inherent in the non-compete valuation may require an income split specific to the respective assets. The following example assumes that the protection
afforded by the non-compete is limited to the customer relationships, current trade name and the IP. The process of splitting the income is more direct than calculating the return on and
of the non-compete and then in turn allocating the annual CAC, therefore such an approach is not provided herein.
The following specific income split calculations are NOT indended to be a best practice but are provided solely for demonstration purposes. The facts and circumstances, as well as the
specific assumptions used in the valuation of the non-compete, must be considered in preparing such an analysis.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Debt Free Cash Flow:

Without competition (1) $ 231 $ 214 $ 202 $ 218 $ 270 $ 343 $ 410
With compentition (2) 180 101 82 83 120 256 410
Incremental DFCF due to non-compete 51 113 120 135 150 87 -

Trade Name DFNI (3) 27 29 16 - - - -

IP DFNI (4) 57 51 40 23 11 3 -
Customer Relationships Excess Earnings (5) 109 161 154 125 88 53 27

Allocation of non-compete incremental DFNI (6):

Trade Name DFNI 7 14 9 - - - -
IP DFNI 15 24 23 21 17 5 -
Customer Relationships Excess Income 29 75 88 114 133 82 -
Total 51 113 120 135 150 87 -

Note: these allocated amounts can be deducted directly from the respective asset projections. Alternatively, the present value of these allocated amounts can be deducted from the
respective present values of the subject assets (prior to the application of the TAB).

(1) From Adjusted Entity Value Exhibit B-4.

(2) Reflects the assumed expected impact of competition (adjusted for appropriate probability) - Exhibit D-1.
(3) Exhibit B-10.
(4) Exhibit B-11.
(5) Exhibit B-12.
(6) For demonstration purposes they have been allocated in proportion to the respective income projections. This specific calculation is not intended to be a best practice.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 47

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Favorable (Unfavorable) Leases or Contracts Exhibit D-2

Favorable and unfavorable leases or contracts represent contractual terms that are not stated at market rates. The differential in the after-tax income is typically attributable to such assets
or liabilities. The MPEEM should use market participant PFI that would reflect the market rates rather that the favorable or unfavorable rates. Therefore, the Working Group believes that
it would be appropriate to remove the favorable or unfavorable terms from the Adjusted Entity Value projections to arrive at market participant PFI. The analysis in Section A would then be
performed based on the restated Adjusted Entity Value projections that exclude the impact of the favorable or unfavorable terms.

The fair value of the favorable or unfavorable aspect of the leases or contracts would, however, be included in the WARA analysis as they would be a component of the purchase price.
The following demonstrates a beneficial lease adjustment that would be applied to arrive at an Adjusted Entity Value.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

EBITDA (2) 770 808 896 1,002 1,116 1,221 1,314 1,367 1,430 1,482 1,527.0
Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581.0
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
EBIT 566 416 489 570 655 701 737 789 870 900 946.0
less: Favorable Lease Terms (3) 20 21 22 23 24 25 26 - - - -
Adjusted EBIT (4) 546 395 467 547 631 676 711 789 870 900 946.0
Taxes 40% 218 158 187 219 252 270 284 316 348 360 378
Debt Free Net Income 328 237 280 328 379 406 427 473 522 540 568.0
less: Incremental Working Capital (1) 15 15 35 42 45 42 37 32 25 21 18.0
add: Depreciation (1) 184 372 387 412 441 500 557 558 540 562 581.0
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (1) 286 400 450 500 525 541 557 574 591 609 627.0
Debt Free Cash Flow 231 214 202 218 270 343 410 445 466 492 504.0
Residual Value (5) 7,200

PV Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV DFCF 220 185 159 156 176 203 221 218 207 199 2,911

Adjusted Entity Value 4,855

(1) From Adjusted Entity Value Exhibit A-4.

(2) Adjusted Entity Value amounts (Exhibit A-4), adjusted to reflect the favorable lease terms (see footnote 3). This exhibit assumes the PFI that the valuation specialist was
provided reflected the favorable lease expense amounts, and this adjusted EBIT is intended to reflect PFI to be used in the valuation. An alternative presentation would be to
adjust the EBITDA directly.
(3) The following is a calculation of the present value (before the TAB) of the favorable leases to demonstrate the reconciliation to the Adjusted Entity Value.

Favorable Leases Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Market lease expense (a) $ 50 $ 52 $ 54 $ 56 $ 58 $ 60 $ 62
Existing lease expense 30 31 32 33 34 35 36
Favorable lease terms 20 21 22 23 24 25 26
Taxes @ 40% 8 8 9 9 10 10 10
Debt-Free Net Income 12 13 13 14 14 15 16
Present Value Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382
PV Favorable Leases 11 11 10 10 9 9 8
Total PV - Favorable Leases 68

(a) Based on current market rates.

(4) Note that the adjusted EBIT is equivalent to the Adjusted Entity Value projections (Exhibit A-4).
(5) Based on a constant growth model assuming a 3% long-term growth rate.
(6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.

48 Copyright 2010 by The Appraisal Foundation. All rights reserved.

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EBITDA v. EBIT Comparison Exhibit D-3

Paragraph 3.4.03 in the CAC Monograph notes that there are methods that tax-effect EBITDA rather than EBIT in a CAC calculation. The following discussion addresses a method that
tax-effects EBITDA in the context of Technique B Level Payment.
In this method, the CACs are incorporated in the MPEEM, in any given year, as follows:
EBITDA
Less: Taxes
Debt free net income
Less: Level Payment CAC (return of and on the fixed assets excluding tax depreciation benefit)
Equals: Excess earnings
Using a method that tax-effects EBITDA assumes that the subject entity does not have the right to the tax benefit of depreciating the fixed assets and the CAC is applied to tax-effected
EBITDA. Because the tax benefit of depreciation is removed from the projections by tax-effecting EBITDA, it is necessary to calculate the CAC based on the fair value of the acquired
fixed assets and projected capital expenditures excluding the tax benefit of depreciation in order to be consistent. The following example demonstrates this reconciliation.

The waterfall payments used to represent the fixed asset CACs when applying Technique B are calculated below. Note that they are lower than those in Exhibit A-7 because the fixed
asset value on which the CAC is being taken excludes the tax benefit of depreciation:

Return On and Of Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

FV of Current or Acquired Fixed Assets (1)

1-year 23
2-years 25 25
3-years 27 27 27
4-years (2) 29 29 29 29
5-years 31 31 31 31 31
6-years 33 33 33 33 33 33
7-years 35 35 35 35 35 35 35
8-years - - - - - - - -

Capital Expenditures (3):

Year 1 (4) 35 35 35 35 35 35 35 35 - - -
Year 2 48 48 48 48 48 48 48 48 - -
Year 3 54 54 54 54 54 54 54 54 -
Year 4 60 60 60 60 60 60 60 60
Year 5 64 64 64 64 64 64 64
Year 6 65 65 65 65 65 65
Year 7 67 67 67 67 67
Year 8 69 69 69 69
Year 9 71 71 71
Year 10 74 74
Residual 76

Total Return On & Of 237 262 292 325 360 395 429 464 501 526 547
% of Revenue 24% 25% 25% 25% 25% 25% 25% 25% 26% 27% 27%

(1) The level payment related to the current or acquired fixed assets is based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the prior
8 years. Thi
This waterfall
t f ll calculation
l l ti reflects
fl t iindividual
di id l llevell paymentt calculations
l l ti ffor each
h assett lif
life group. N
Note thatt th
t th the use off a pre-tax
t rate
t off return,
t as shown
h iin ffootnotes
t t
2 and 4, effectively removes the tax benefit from the fair value of the fixed assets. See the EBIT & EBITDA Reconciliation at the bottom of Exhibit D-3a for a demonstation of how
the use of a pre-tax rate of return removes the tax benefit from the fair value of the fixed assets.
(2) Sample calculation of the level payment for the acquired fixed assets with a remaining useful life of 4 years is as follows:
CAC = -PMT(Pre-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x ( 1- Tax Rate) x (1+Pre-tax Discount Rate)^.5
= -PMT(16.7%,4,143,0,1) x (1 - 40%) x (1 + 16.7%)^.5 = 29

(3) Individual level payment calculations for annual capital expenditures.

(4) Sample calculation of the level payment for the $286 of capital expenditures occurring in Year 1 with a remaining useful life of 8 years is as follows:
CAC = -PMT(Pre-Tax Rate of Return,RUL,Fair Value,Future Value,Type = beginning of period) x (1 - Tax Rate)
= -PMT(16.7%,8,286,0,1) x (1 - 40%) = 35

Copyright 2010 by The Appraisal Foundation. All rights reserved. 49

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation (Tax-effected EBITDA) Exhibit D-3a

This exhibit is similar to Exhibit C-3 except that it uses the revised level payments (excluding the tax benefit of depreciation). This analysis isolates the Level Payment fixed asset CAC in
the financial overlay provided in Section A. As in Section A, this analysis is performed in aggregate and applied in the context of an aggregate MPEEM (e.g., Adjusted Entity Value
projections and the fixed asset CAC based on the Level Payment technique only). The annual average balance of the fixed assets, consistent with the Adjusted Entity Value projections, is
calculated and the IRR/WACC 10% rate of return is applied to arrive at the annual CAC.
The outcome of this analysis demonstrates that when the CACs are applied to the Level Payment fixed assets in the context of the Adjusted Entity Value, no value is created or destroyed
in the context of the entity as a whole.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
EBITDA (1) 750 787 874 979 1,092 1,196 1,288 1,367 1,430 1,482 1,527
Depreciation - - - - - - - - - - -
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
EBITD 730 767 854 959 1,072 1,176 1,268 1,347 1,410 1,462 1,527
Taxes 40% 292 307 342 384 429 470 507 539 564 585 611
Debt Free Net Income 438 460 512 575 643 706 761 808 846 877 916
less: Incremental Working Capital (1) 30% 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation - - - - - - - - - - -
Amortization - AWF (1) 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures (2) - - - - - - - - - - -
Return On and Of Fixed Assets (3) 237 262 292 325 360 395 429 464 501 526 547
Excess Earnings (4) 206 203 205 228 258 289 315 332 340 350 351
Residual Value (5) 5,011

PV Factor (6) 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 197 176 162 163 168 171 169 163 151 142 2,026

Total PV Excess Earnings 3,688

Fair Value of Fixed Assets (7) 1,000
Total (8) 4,688

Adjusted Entity Value - Restated for Straight-Line Depreciation (9)

Debt Free Net Income 266 280 320 367 416 460 494 520 535 550 576
less: Incremental Working Capital 15 15 35 42 45 42 37 32 25 21 18
add: Depreciation (Straight-Line) 286 300 321 348 378 410 445 481 519 545 567
Amortization - AWF 20 20 20 20 20 20 20 20 20 20 -
less: Capital Expenditures 286 400 450 500 525 541 557 574 591 609 627
Debt Free Cash Flow 271 185 176 193 244 307 365 415 458 485 498
PV DFCF @ 10% 258 160 139 138 159 182 196 203 204 196 2,877

Adjusted Entity Value - S/L 4,712

(1) From Adjusted Entity Value Exhibit A

A-4.
4
(2) Capital expenditures are removed as they are captured in the level payment charge for the fixed assets. Therefore, the return on and of fixed assets also capture future
increases in fixed assets.
(3) See calculation above.
(4) As stated this is a limited-use excess earnings to demonstrate the CAC calculations for fixed assets. All other adjustments have been excluded to isolate the calculation of the
fixed asset CAC within the financial overlay process provided in Section A.
(5) Based on constant growth model assuming a 3% long-term growth rate.
(6) The 10% rate of return is consistent with the IRR/WACC and is applied during the financial overlay and reconciliation process.
(7) Exhibit A-6.
(8) Reconciles to within $24 of the restated Adjusted Entity Value below.
(9) The Adjusted Entity Value is restated to reflect straight-line depreciation to be consistent with the PMT function used in the CAC calculation. A comparison to the
Adjusted Entity Value based on MACRS (Exhibit A-4) results in a difference of $167.

50 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Fixed Asset CAC Based on Technique B - Level Payment and Reconciliation (Tax-effected EBITDA) (Continued) Exhibit D-3a

Note that this analysis also results in a reasonable reconciliation to the Adjusted Entity Value. Therefore, in principle this alternative method provides the expected outcome. However,
inherent in the application of this method is an adjustment to the fair value of the fixed assets equivalent to removing the tax depreciation benefit ("TDB").

In the calculation below, the present value of the CACs ($684) incorporated in the analysis above is less than the fair value of the fixed assets ($1,000). This difference of $316 consists of
(and approximates) the present value of the tax depreciation benefit of $319 (difference due to rounding). An alternative application of the Microsoft Excel PMT function may be based on
the fair value of the fixed assets excluding the tax benefit of depreciation and an after-tax discount rate which results in the same outcome as the formulas above.

EBIT & EBITDA Reconciliation Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Return On & Of Acquired Assets $ 202 $ 179 $ 154 $ 127 $ 99 $ 68 $ 35 -

PV Factor 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893

PV of CAC 193 155 122 91 64 40 19 -

Total PV of CAC 684

S/L Depr. of Current or Acquired Fixed Assets 250 214 179 143 107 71 36 -
Tax Depreciation Benefit 100 86 72 57 43 28 14 -

PV of TDB 95 74 56 41 28 17 8
Total PV of TDB 319

Total PV (rounding difference) 1,004

FV of Acquired Fixed Assets 1,000

The Working Group recognizes that this approach results in equivalent outcomes as those derived from tax-effecting EBIT. However, in order to arrive at such an outcome the CACs are
based on an adjusted fair value of the fixed assets. The Working Group believes that calculating the CACs on a measure other than fair value should not be considered a best practice.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 51

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Mid-Period Adjustment Exhibit D-4

A mid-period adjustment factor has been applied in the calculation of the return on contributory assets in this Toolkit. The Working Group recognizes that this adjustment is generally
minor and its application is based on the judgment of the valuation specialist.

CACs that are calculated on an average balance make the simplifying assumption that the subject contributory asset remains constant at the average balance over each respective year.
Where the beginning and ending balances are different this averaging assumption skews the present value impact of the CAC. Although a more precise calculation would recognize the
change in the asset over the year, such calculations would add an excessive level of precision in the analysis and are not warranted. The mid-period adjustment is a reasonable
alternative that adjusts for this effect.

The calculations below are applied to a single asset with a five year economic life. As discussed in the CAC Monograph, the PV of the CACs should equate to the FV of the contributory
asset so that value is neither created nor destroyed in the context of the MPEEM. Three calculations are provided: (1) an annual calculation without the adjustment, (2) an annual
calculation with the adjustment, and (3) a daily calculation without the adjustment. The daily adjustment reflects the changing nature of the contributory asset over the respective periods
and results in a PV equal to the FV. The use of the mid-period adjustment in the annual analysis provides for a PV of charges more closely approximating the FV than that without the
adjustment.

Excluding a Mid-Period Adjustment Including a Mid-Period Adjustment

Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 Year 3 Year 4 Year 5
Beginning Balance (1) $ 1,000 $ 800 $ 600 $ 400 $ 200 $ 1,000 $ 800 $ 600 $ 400 $ 200
Economic Depreciation 200 200 200 200 200 200 200 200 200 200
Ending Balance 800 600 400 200 - 800 600 400 200 -
Average Balance 900 700 500 300 100 900 700 500 300 100

Return On (2) 15% 135 105 75 45 15 126 98 70 42 14

Total CAC (3) 335 305 275 245 215 326 298 270 242 214

PV Period 0.5 1.5 2.5 3.5 4.5 0.5 1.5 2.5 3.5 4.5
PV Factor (3) 15% 0.9325 0.8109 0.7051 0.6131 0.5332 0.9325 0.8109 0.7051 0.6131 0.5332

PV of CAC 312.4 247.3 193.9 150.2 114.6 303.9 241.6 190.3 148.4 114.1

Total PV of CAC (4) 1,018 998

Fair Value of Acquired Fixed Assets 1,000 1,000

Day (5)
1 2 3 4 5 .. 1,796 1,797 1,798 1,799 1,800

Beginning Balance (1) $ 1,000 $ 999.4 $ 998.9 $ 998.3 $ 997.8 $ 2.8 $ 2.2 $ 1.7 $ 1.1 $ 0.6
Economic Depreciation 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56
Ending Balance 999.4 998.9 998.3 997.8 997.2 2.2 1.7 1.1 0.6 0.0

Average Balance 1,000 999 999 998 998 3 2 1 1 0

Return On (6) 15% 0.42 0.42 0.42 0.42 0.42 0.00 0.00 0.00 0.00 0.00
Total Daily CAC (3) 0.97 0.97 0.97 0.97 0.97 0.56 0.56 0.56 0.56 0.56

PV Factor (7) 15% 0.9996 0.9992 0.9988 0.9983 0.9979 0.4732 0.4730 0.4728 0.4726 0.4724

P
PVV of CAC
CAC 0.97
97 0.97
0 97 0
0.97
97 0
0.97
97 0
0.97
97 0.26
26 0.26
0 26 0.26
0 26 0.26
0 26 0
0.26
26

Total PV of CAC (8) 1,000

(1) In this exhibit, the assumed fair value of the fixed assets is $1,000 and declines linearly over its remaining 5 year economic life.
(2) A 15% rate of return is applied to the average annual balance and to discount the annual CACs. In the calculations on the right side, a mid-period adjustment factor of .9325 is
applied to the annual return on charges, as indicated in the heading.
(3) The CAC equals the sum of the economic depreciation (return of ) and return on the average balance.
(4) The present value of the CACs exceeds the fair value of the fixed assets absent a mid-period adjustment factor.
(5) The CACs are calculated based on a daily analysis (360 day year). Days 6-1795 are not displayed.
(6) A 15% rate of return applied on a daily basis.
(7) Calculated on a daily basis.
(8) Reconciles to the fair value of the fixed assets.

52 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Adjusted Entity Value in an Asset Transaction Exhibit D-5

Where the transaction is an asset acquisition, the tax benefit of amortization is applicable to all intangible value. The following example adds to the Adjusted Entity Value the additional tax
benefit related to all separately identified intangible assets and goodwill in excess of the AWF as the structure of the transaction will allow the acquirer to avail itself of these tax benefits.
As a result, in this exhibit's scenario, the purchase price is $5,765. The higher purchase price is justified by recognition of the TABs in the PFI.
An alternative to the approach provided in Section A would be to incorporate these incremental tax benefits into the respective assets and allocate the tax benefit to the respective assets
(including goodwill/excess purchase price). The outcome would be the same with a proper allocation of the tax amortization benefits as that resulting from the procedure provided in
Section A. However, in that the allocation of the tax benefit adds complexity to the analysis the Working Group believes that the procedure provided in Section A would be appropriate.

Adjusted Entity Value (1) 4,855

less: Working Capital (2) 285
Fixed assets (3) 1,000
Assembled Workforce 200
Implied other intangible value (4) 3,370
Tax Amortization Benefit (5) 910
Purchase Price (6) 5,765

Rate of
Return A B TAB % FV A FV B
Working Capital 10% $ 285 $ 285 n/a $ 285 $ 285
Fixed Assets 10% 1,000 1,000 n/a 1,000 1,000
Trade Name - Acquired Co. (7) 10% 63 63 27% 80 80
IP (Current) (8) 10% 154 154 27% 196 196
Customer Relationships (9) 10% 352 403 27% 447 512
Total Separately Identified Assets 1,854 1,905 2,008 2,073

AWF 10% 200 200 n/a 200 200

Goodwill/Excess Purchase Price (10) 10% 2,798 2,757 27% 3,553 3,501
Total - Components of Excess PP 2,998 2,957 3,753 3,701

Total 4,852 4,862 5,761 5,774

Adjusted Entity Value (11) 10% 4,855 5,765

(1) Entity Value and PFI per Exhibit A-4.

(2) Beginning working capital balance (Exhibit A-5).
(3) Fair value (Exhibit A-6).
(4) For the purposes of this example, it is assumed that the transaction is subject to U.S. tax law and Internal Revenue Code Section 197. As such, the separately identified
intangible assets and goodwill will be amortized (for tax purposes) over a 15 year period.
(5) Based on a 15 year period, 40% tax rate and a discount rate of 10%.
(6) Purchase price assuming an asset acquisition.
((7)) E
Exhibit A-10.
hibi A 10
(8) Exhibit A-11.
(9) Technique A: Exhibit A-12; Technique B: Exhibit A-13.
(10) Technique A: Exhibit A-14; Technique B: Exhibit A-15.
(11) Exhibit A-4 and purchase price above.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 53

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Negative Working Capital Exhibit D-6

When negative working capital is the norm for an industry, the timing of the cash receipts increases an entity's value due to the present value impact. In the context of a financial overlay,
the fair value of the assets should reconcile to the entity value. As such, the increase in the entity value due to the negative working capital must be reflected in the working capital CAC.
Therefore, where negative working capital is included in the PFI, a negative CAC should be applied, increasing the cash flows attributable to the subject intangible asset.

This analysis isolates the application of a CAC where there is negative working capital. For the purposes of this analysis, the margins were reduced and working capital is assumed to be
-50% of revenue to emphasize the relative impact of negative working capital. The Entity Value has been recalculated to exclude any depreciation, amortization and capital expenditures
for simplicity.
Negative working capital CACs are applied to the aggregate Entity Value based first on a rate of return consistent with the IRR/WACC to provide a reconciliation to the Entity Value in a
financial overlay (in the same manner as that presented in Exhibit C-1). A second calculation is then provided based on stratified rates. It is noteworthy here that when applying a lower
rate of return to the negative working capital, the implied rate of return for the aggregate excess earnings is reduced from 10% to 7.7%. This results from the reduced benefit attributable
to the negative CAC (return on declining from 10% to 3%) decreasing the aggregate prospective excess earnings, which must then be discounted at a lower rate to reconcile to the entity
value. This is consistent with the findings in Exhibit C-1a (although in reverse because in this exhibit the working capital is negative). The implied rate of return based on stratified rates
and a WARA are also calculated.

Entity Value Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 950 $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (2) 5% 50 53 58 65 73 80 86 91 95 99 102
Incremental Working Capital (3) -50% (25) (25) (58) (71) (75) (70) (61) (53) (42) (35) (30)
Debt Free Cash Flow 75 78 116 136 148 150 147 144 137 134 132
Residual Value 1,886

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV DFCF 72 68 91 97 96 89 79 70 61 54 763

Entity Value 1,540

Contributory Asset Charge Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 950 $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Beginning Balance Working Cap (4) (475) (500) (525) (583) (654) (729) (799) (860) (913) (955) (990)
Incremental Working Capital (3) -50% (25) (25) (58) (71) (75) (70) (61) (53) (42) (35) (30)
Ending Balance Working Cap. (500) (525) (583) (654) (729) (799) (860) (913) (955) (990) (1,020)

Average Balance Working Capital (488) (513) (554) (619) (692) (764) (830) (887) (934) (973) (1,005)

Mid-period Adjustment Factor (5) 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535 0.9535

Return On (6) 10% (46) (49) (53) (59) (66) (73) (79) (85) (89) (93) (96)
Return On (7) 3% (14) (15) (16) (18) (20) (22) (24) (25) (27) (28) (29)

54 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Negative Working Capital (Continued) Exhibit D-6

Excess Earnings - Consistent Rates Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 950 $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (2) 5% 50 53 58 65 73 80 86 91 95 99 102
Incremental Working Capital (8) 0% - - - - - - - - - - -
less: Return On Working Capital (6) 10% (46) (49) (53) (59) (66) (73) (79) (85) (89) (93) (96)
Excess Earnings 96 102 111 124 139 153 165 176 184 192 198
Residual Value 2,826
PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044
PV DFCF 92 88 87 89 90 90 89 86 82 78 1,143
Total PV Excess Earnings 2,014
Working Capital (4) (475)
Total (consistent with Entity Value) 1,539

Excess Earnings - Stratified Rates Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Revenue (1) $ 950 $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035
Debt Free Net Income (2) 5% 50 53 58 65 73 80 86 91 95 99 102
Incremental Working Capital (8) 0% - - - - - - - - - - -
less: Return On Working Capital (7) 3% (14) (15) (16) (18) (20) (22) (24) (25) (27) (28) (29)
Excess Earnings 64 68 74 83 93 102 110 116 122 127 131
Residual Value 2,775

PV Factor (9) 7.7% 0.9635 0.8946 0.8305 0.7710 0.7158 0.6646 0.6170 0.5728 0.5318 0.4938 0.4938
PV DFCF 62 61 61 64 66 68 68 67 65 63 1,370
Total PV Excess Earnings 2,015
Working Capital (4) (475)
Total (consistent with Entity Value) 1,540

WARA Present Fair Rate of Weighted

Value TAB % Value Return Return
Working Capital $ (475) - $ (475) 3.0% $ (14.3)
Goodwill/Excess Purchase Price (10) 2,015 29% 2,599 8.7% 227.4

Total 1,540 2,124 10.0% 213.1

(1) From Adjusted Entity Value Exhibit A-4.

(2) Assumed to be 5% of revenue, margin reduced to emphasize the relative impact of the negative working capital.
(3) Assumed to be (50%) of revenue to emphasize the relative impact of the negative working capital
(4) Prior year revenue of $950 x (50%) and decreased annually by incremental amounts.
(5) See Exhibit D-4 for discussion.
(6) Incorporated in consistent rates calculation (consistent with IRR/WACC).
(7) Incorporated in stratified rates calculation.
(8) Incremental (or decreasing) working capital is removed as it is captured in the average annual balance of the working capital. Therefore, the return on working capital also
captures future changes in working capital.
(9) Implied rate of return that reconciles the total asset values to the Entity Value.
(10) The TAB is calculated based on the weighted average rate of return of 8.7%.

Copyright 2010 by The Appraisal Foundation. All rights reserved. 55

CONTRIBUTORY ASSETS AND CALCULATION OF ECONOMIC RENTS TOOLKIT

Fixed Asset CAC Based on a Gross Lease Technique Exhibit D-7

A technique that has been described as the Gross Lease technique has been proposed by certain respondents as an alternative to the Average Annual Balance and Level Payment
techniques. The basis of the Gross Lease technique is that it provides for an arm's length economic rent for the hypothetical leasing of the contributory asset. It represents the lease
payment that the lessee would have to pay to the lessor to rent the contributory asset in lieu of its outright ownership. The Gross Lease technique considers the economic value of the
contributory asset, its economic life and both the return of and return on that a lessor would expect to receive to provide a market-based rate of return.
Under this technique, the valuation specialist would solve for the lease payment that provides the lessor both a return of the principal invested in the contributory asset and a return on the
investment for the opportunity cost of capital. In a manner similar to the Level Payment technique, the Gross Lease payments incorporate the annual beginning balance of the fixed assets
and a weighted remaining useful life of each respective balance. The CACs reflect an amount for each equivalent remaining useful life asset group (waterfall payment) for the acquired
fixed assets and capital expenditures. As such, the analysis requires the valuation specialist to solve for the lease payment for each of the respective age groups of the acquired fixed
assets as well as for each annual amount of capital expenditures. This waterfall and a sample of two of the calculations are provided below.
To demonstrate the application of the Gross Lease technique it has been applied to the customer relationship analysis. All other CACs and adjustments discussed in Exhibit B-12 remain
the same. The outcome of this technique ($714) is consistent with that of the Average Annual Balance technique ($719, Exhibit B-12) and the Level Payment technique ($737, Exhibit B-13).

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Total Revenue $ 1,000 $ 1,050 $ 1,165 $ 1,306 $ 1,456 $ 1,596 $ 1,718 $ 1,823 $ 1,907 $ 1,976 $ 2,035

Customer Relationship Revenue 900 855 770 616 431 259 130 65 33 - -
Gross Profit 90% 810 770 693 554 388 233 117 59 30 - -
Operating Expenses:
Maintenance R&D 0% - - - - - - - - - - -
R&D - Future IP 0% - - - - - - - - - - -
Trade name advertising 0% - - - - - - - - - - -
Current customer marketing 3% 27 26 23 18 13 8 4 2 1 - -
Future customer marketing - - - - - - - - - - -
Total marketing 27 26 23 18 13 8 4 2 1 - -
Total G&A 7% 63 60 54 43 30 18 9 5 2 - -
Total Operating Expenses 90 86 77 61 43 26 13 7 3 - -
EBITDA 720 684 616 493 345 207 104 52 27 - -
Depreciation (1) - - - - - - - - - - -
Gross Lease CAC (2) 313 304 269 211 145 87 44 23 12 - -
Amortization - AWF 18 16 13 9 6 3 2 1 - - -
EBIT 389 364 334 273 194 117 58 28 15 - -
less: Trade Name Royalty 5% 45 43 39 31 22 13 7 3 2 - -
IP Royalty 10% 90 86 77 62 43 26 13 7 3 - -
Adjusted EBIT 254 235 218 180 129 78 38 18 10 - -
Taxes 40% 102 94 87 72 52 31 15 7 4 - -
Debt Free Net Income 152 141 131 108 77 47 23 11 6 - -
add: Depreciation (1) - - - - - - - - - - -
Amortization - AWF 18 16 13 9 6 3 2 1 - -
AWF Growth Investment 10 9 16 14 9 5 2 1 - - -
less: Return On Working Capital 8 7 6 5 4 2 1 1 - - -
Return On AWF 18 17 15 12 8 5 2 1 1 - -
Excess Earnings 154 142 139 114 80 48 24 11 5 - -
Residual Value -

PV Factor 10% 0.9535 0.8668 0.7880 0.7164 0.6512 0.5920 0.5382 0.4893 0.4448 0.4044 0.4044

PV Excess Earnings 147 123 110 82 52 28 13 5 2 - -

Total PV Excess Earnings 562

Tax Amortization Benefit 152
Fair Value - Customer Relationships 714

(1) Depreciation is incorporated in the calculation of the Gross Lease payment (see below), therefore it is removed from the excess income calculation.
(2) The total Gross Lease payments calculated below are allocated to the customer relationships in proportion to revenue.

56 Copyright 2010 by The Appraisal Foundation. All rights reserved.

 THE APPRAISAL FOUNDATION THE MADISON BUILDING 1155 15TH STREET NW SUITE 1111 WASHINGTON, DC 20005

Fixed Asset CAC Based on a Gross Lease Technique (Continued) Exhibit D-7

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Acquired FV of Fixed Assets (1)

1-year 40
2-years 41 41
3-years 42 42 42
4-years (2) 43 43 43 43
5-years 44 44 44 44 44
6-years 45 45 45 45 45 45
7-years 46 46 46 46 46 46 46

Capital Expenditures (3):

Year 1 (4) 47 47 47 47 47 47 47 47
Year 2 66 66 66 66 66 66 66 66
Year 3 74 74 74 74 74 74 74 74
Year 4 82 82 82 82 82 82 82 82
Year 5 87 87 87 87 87 87 87
Year 6 89 89 89 89 89 89
Year 7 92 92 92 92 92
Year 8 95 95 95 95
Year 9 97 97 97
Year 10 102 102
Residual 106
Total Gross Lease Payments 348 373 407 448 491 536 583 632 682 718 750

(1) The Gross Lease payments related to the current or acquired fixed assets are based on the fair value of the fixed assets of $1,000 with an equal distribution of original cost over the
prior 8 years, similar to Exhibit B-7. This waterfall calculation reflects individual Gross Lease calculations for each asset life group.
(2) See below for a sample calculation of the Gross Lease payment for $143 of acquired (or current) fixed assets with a remaining useful life of 4 years.
(3) Individual Gross Lease calculations for annual capital expenditures. Capital expenditures from Exhibit B-1.
(4) See below for a sample calculation of the Gross Lease for the $286 of capital expenditures occurring in Year 1 with a remaining useful life of 8 years.

Acquired fixed assets with a RUL of 4 years Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Gross Lease Payment (1) $ 43 $ 43 $ 43 $ 43

less: Tax Depreciation 20 35 25 18 13 13 13 6
EBIT 23 8 18 25 (13) (13) (13) (6)
Taxes 40% 9 3 7 10 (5) (5) (5) (3)
Debt Free Net Income 14 5 11 15 (8) (8) (8) (4)

add: Tax Depreciation 20 35 25 18 13 13 13 6

Debt free cash flow 34 40 36 33 5 5 5 3
PV period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5
PV factor 5% 0.9759 0.9294 0.8852 0.8430 0.8029 0.7646 0.7282 0.6936
PV of cash flows 33 37 32 28 4 4 4 2
Total PV of cash flows = Fair Value (2) 143

(1) Annual payment calculated such that the present value of the cash flows equals the fair value.
(2) See Exhibit A-6, footnote 1, for the fair value of the asset group with a RUL of 4 years.

Capital Expenditures - Year 1 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Residual

Gross Lease Payment (1) $ 47 $ 47 $ 47 $ 47 $ 47 $ 47 $ 47 $ 47

less: Tax Depreciation 41 70 50 36 26 26 26 13
EBIT 6 (23) (3) 11 22 22 22 34
Taxes 40% 3 (9) (1) 5 9 9 9 14
Debt Free Net Income 4 (14) (2) 7 13 13 13 21
add: Tax Depreciation 41 70 50 36 26 26 26 13
Debt free cash flow 45 56 48 43 38 38 38 33
PV period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5
PV factor 5% 0.9759 0.9294 0.8852 0.8430 0.8029 0.7646 0.7282 0.6936
PV of cash flows 44 52 43 36 31 29 28 23

Total PV of cash flows = Year 1 CapEx. (2) 286

(1) Annual payment calculated such that the present value of the cash flows equals the Year 1 capital expenditure with an 8 year RUL.
(2) See Exhibit A-1, for the Year 1 capital expenditure.

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