Blue plc is a relatively small company with only one SBU. It manufactures wire grilles for the consumer market for cooker manufacturers and for export. Following a thorough investigation by the finance department and the heads of the customer lines some facts emerged about the returns expected in each of the customer sectors. The consumer sector uses £lm of the firm's capital and is expected to produce a return of 18 per cent on this capital, for the next five years, after which it will return the same as its risk-adjusted cost of capital (WACC), 15 per cent.
The cooker sales sector uses £2m of capital and will return 14 per cent per annum for seven years when its planning horizon ends. Its WACC is 16 per cent.
The export sector has a positive performance spread of 2 per cent over WACC for the next six years. The required rate of return is 17 per cent. From Year 7 the performance spread becomes zero. This division uses £1.5m of capital.
Required
a. Calculate the annual (entity version) economic profit of each sector.
b. What is the total value creation from each if you assume profit numbers equate to cash flow numbers?
c. Display a value-creation profile chart and suggest possible action.